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INFOR, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and result of
operations for the fiscal period ended November 30, 2012, should be read in
conjunction with the audited financial statements of Infor, Inc. for our fiscal
year ended May 31, 2012, which are included in the Registration Statement on
Form S-4 that we filed with the SEC on August 23, 2012, and related notes
thereto.
Basis of Financial Statement Presentation
The predecessor to Infor Global Solutions Intermediate Holdings Limited (IGS
Intermediate Holdings) was formed in 2002 with the acquisition of certain assets
of Systems & Computer Technology Corporation and completed through a series of
subsequent acquisitions. On June 7, 2006, IGS Intermediate Holdings was formed
as a Cayman Islands exempted company. The majority of IGS Intermediate Holdings'
stock is indirectly owned by Golden Gate Capital. IGS Intermediate Holdings
operates through a variety of direct and indirect wholly owned subsidiaries
throughout the world.
Infor, Inc. was formed on June 8, 2009, as Steel Holdings, Inc. (Steel Holdings,
now known as Infor, Inc.) by Golden Gate Capital. Steel Holdings acquired
SoftBrands, Inc. (SoftBrands) on August 13, 2009. Steel Holdings changed its
name to GGC Software Holdings, Inc. (GGC Holdings, now known as Infor, Inc.) on
April 25, 2011. GGC Holdings acquired Lawson Software, Inc. (Lawson) on July 5,
2011. Both SoftBrands and Lawson were publicly traded companies. We have
maintained the SoftBrands and Lawson brands.
On April 5, 2012, we completed the combination of GGC Holdings and its
subsidiaries with the operating subsidiaries of IGS Intermediate Holdings (such
subsidiaries prior to the combination defined here as Infor Global Solutions)
and the operations of these entities were merged together under GGC Holdings
(the Infor Combination). Both Infor Global Solutions and GGC Holdings were under
common control of Golden Gate Capital, and accordingly the financial statements
contained herein are presented on a consolidated basis as if Infor Global
Solutions and GGC Holdings were combined from the date of inception of common
control. Financial statements and financial information presented for prior
years have been retrospectively adjusted to furnish comparative information for
periods during which the entities were under common control. On April 26, 2012,
we formally changed the name of GGC Software Holdings, Inc. to Infor, Inc. In
addition, subsequent to year end, we changed the name of Lawson Software, Inc.
to Infor (US), Inc. Transactions between Infor, Inc. and its subsidiaries,
including subsidiaries obtained through the combining of GGC Holdings and Infor
Global Solutions, have been eliminated for presentation.
Hereafter, any reference to Infor, we, our, us or the Company refers to the
combined company and the consolidated financial statements thereof presented
under common control.
Management Overview
General
Infor is a global provider of enterprise business applications software and
services focused primarily on medium and large enterprises. We develop, market,
distribute and service enterprise software applications that help organizations
manage their businesses. We deliver integrated enterprise business solutions
including customer relationship management (CRM), enterprise asset management
(EAM), enterprise resource planning (ERP), financial management, human capital
management (HCM), performance management, product lifecycle management, property
management systems, central reservations systems, supplier relationship
management and supply chain management (SCM), including business specific
inventory management, transportation logistics, manufacturing and warehouse
management software. Infor also offers software license updates and product
support as well as other services including consulting, advanced product
services, hosting and education.
We offer a broad range of software applications and industry-specific solutions
that we believe help our customers improve their business processes and reduce
costs, resulting in better business or operational performance. Our solutions
help automate and integrate critical business processes which enable our
customers to better manage their suppliers, partners, customers and employees.
We specialize in and target specific industries (or verticals), and have
industry-specific business units that leverage our industry-oriented products
and teams. We provide industry-specific ERP software products to companies in
the manufacturing, distribution, healthcare, public sector, automotive, service
industries, equipment services, management and rental (ESM&R), consumer
products & retail and hospitality industries. Our industry-specific approach
distinguishes us from larger competing ERP vendors, whose primary focus is on
less specialized software programs that take more time and cost to tailor to our
target customers' specific needs.
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Augmenting our vertical-specific applications, we have leading horizontal
software applications, including our CRM, EAM, HCM, SCM and financial
application suites, which, through our proprietary light-weight middleware
solution ION®, are integrated with our enterprise software applications and sold
across verticals.
We generate revenue primarily by licensing software, providing product updates
and support and providing consulting services to our customers. We operate in
three segments: License, Maintenance and Consulting. We market and sell our
software and services primarily through a direct sales force, which is augmented
by systems integrators and resellers. In addition to providing software
products, we generate substantial recurring revenue by providing on-going
software support services to our customers through our maintenance and support
programs. The product updates and support we provide are valued by our customers
as evidenced by our high annual maintenance retention rates. We also help our
customers implement and use our applications effectively through our consulting
services offerings, including training, implementation and consulting services.
We serve customers across three geographic regions-the Americas, EMEA and APAC.
We have over 12,400 employees worldwide and have offices in 38 countries. We
have established a worldwide infrastructure for distribution, development and
support of our enterprise software. This worldwide coverage provides us with
both economies of scale and the ability to leverage our geographical expertise
to effectively enter new markets and segments. In the first six months of fiscal
2013, our Americas, EMEA and APAC regions generated approximately 57.0%, 33.7%
and 9.3% of our revenues, respectively. Though we have a considerable presence
outside of the U.S. today, we believe we have significant opportunities to
expand internationally and capture market share, especially in the EMEA and APAC
regions.
Acquisitions
An active acquisition program is another important element of our corporate
strategy. In recent years, we have invested billions of dollars to acquire a
number of complementary companies, products, services and technologies. We
believe our acquisition program strengthens our competitive position, enhances
the products and services that we can offer to customers, expands our customer
base, provides greater scale to accelerate innovation, grows our revenues and
earnings, and increases our overall value. We expect to continue to acquire
companies, products, services and technologies in furtherance of our corporate
strategy. See Note 3, Acquisitions, for additional information related to our
recent acquisitions.
We believe we can fund our pending and future acquisitions with our internally
available cash, cash equivalents and marketable securities, cash generated from
operations or additional borrowings. We estimate the financial impact of any
potential acquisition with regard to earnings, operating margin, cash flow and
return on invested capital targets before deciding to move forward with an
acquisition.
Fiscal 2013 Acquisitions
On December 3, 2012, we acquired strategic solution partner Orbis Global, a
privately held company located in San Francisco, California, for approximately
$15.3 million, net of cash acquired. In addition, in the first quarter of fiscal
2013, we made two acquisitions for an aggregate purchase price of $39.8 million,
net of cash acquired. Operating results of these entities have been included in
our results of operations since the applicable acquisition dates. These
acquisitions were not significant, either individually or in the aggregate.
Acquisition of Lawson
On July 5, 2011, GGC Holdings (now known as Infor, Inc.) purchased 100% of the
outstanding voting shares of Lawson Software, Inc., a publicly traded company
located in St. Paul, MN, for approximately $1,958.2 million. Under the terms of
the merger agreement, stockholders of Lawson received $11.25 per share in cash.
We financed the merger, refinanced certain existing debt of Infor, and paid
related fees and expenses through a combination of cash, new debt and bonds.
Operating results of Lawson have been included in our results of operations
since the acquisition date.
Other Acquisitions - Fiscal 2012
During fiscal 2012 we completed four additional acquisitions for an aggregate
purchase price of $29.3 million, net of cash acquired. Operating results of
these entities have been included in our results of operations since the
applicable acquisition dates. These acquisitions were not significant, either
individually or in the aggregate.
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Financing Activities
In the second quarter of fiscal 2013, we entered into an amendment to our Credit
Agreement pursuant which we refinanced the outstanding principal balance of our
Tranche B Term Loan of $2,763.0 million with a new $2,793.1 million Tranche B-2
Term Loan and reduced the applicable interest rate margin by 1.0%. Proceeds from
the Tranche B-2 Term Loan were used to refinance the outstanding principal of
our Tranche B Term Loan, together with accrued and unpaid interest and
applicable fees, including a prepayment premium of 1.0% of the principal amount
thereof, in accordance with the terms of the Credit Agreement.
In the fourth quarter of fiscal 2012, we completed the Infor Combination. As
part of these transactions, investment funds affiliated with Golden Gate Capital
and Summit Partners invested $550.0 million in Infor Enterprise, of which $325.0
million was contributed as equity to Infor, and $225.0 million was used to repay
a portion of the Lux Bond Co PIK Term Loan. Additionally, $344.0 million owed to
Lux Bond Co by Infor was forgiven and contributed as capital. We also
successfully refinanced our debt structure by entering into a new credit
agreement under which we borrowed $3,170.0 million in U.S. Dollar-denominated
term loans and €250.0 million Euro-denominated term loans. In addition we issued
$1,015.0 million in U.S. Dollar-denominated 9.375% senior notes and
€250.0 million Euro-denominated 10.0% senior notes. We used the net proceeds
from the issuance of these notes, borrowings under our new credit facilities,
and the additional equity investments to repay certain of our existing debt
balances, pay related fees and expenses and for general corporate purposes.
In the first quarter of fiscal 2012, concurrent with the consummation of the
Lawson transaction, Lawson and SoftBrands entered into new senior secured credit
facilities under which Lawson and SoftBrands borrowed $1,040.0 million aggregate
principal Term Loan and issued $560.0 million in aggregate principal amount of
11.5% Infor Senior Notes. Proceeds from the new debt and notes were used to fund
the purchase of Lawson, to pay fees and expenses incurred in connection with the
merger, and to repay the previously existing debt as well as the Lawson senior
convertible notes assumed with the acquisition. With the Lawson transaction, we
also assumed the liability relating to Lawson's senior convertible notes
totaling $253.8 million. All of these notes were surrendered for purchase in the
first quarter of fiscal 2012 or settled upon maturity during the fourth quarter
of fiscal 2012. With the refinancing of our debt structure in the fourth quarter
of fiscal 2012, the remaining balance of the $1,040.0 million Term Loan was
repaid.
In the first quarter of fiscal 2012, certain of the Infor Global Solutions
subsidiaries entered into a refinancing amendment with respect to the Infor
Global Solutions Original First Lien Term Loan. The primary objective of the
Infor Global Solutions refinancing amendment was to extend the maturity date of
the Infor Global Solutions Original First Lien Term Loan. Under the terms of the
refinancing amendment, Infor Global Solutions refinanced $500.0 million, paid
off $446.8 million of the Infor Global Solutions Original First Lien Term Loan
and received $24.6 million in cash, net of transaction costs of $28.6 million.
The remaining balance of the Infor Global Solutions Original First Lien Term
Loan was also repaid in conjunction with our fourth quarter fiscal 2012
refinancing.
See, Liquidity and Capital Resources - Long-Term Debt, below for further
discussion of these financing activities.
Non-GAAP Financial Measures
Our results of operations in this Management's Discussion and Analysis are
presented in accordance with GAAP. In addition to reporting our financial
results in accordance with GAAP, we present certain non-GAAP financial measures
as well. Presentation of these non-GAAP measures allows users to review our
results of operations from the same perspective as management and our Board of
Directors. These non-GAAP measures include non-GAAP revenues, non-GAAP income
from operations and non-GAAP operating margin. See, Non-GAAP Financial Measure
Reconciliations, below for additional information regarding our use of these
non-GAAP financial measures and reconciliations to the corresponding GAAP
measures.
Foreign Currency
A significant portion of our business is conducted in currencies other than the
U.S. Dollar, particularly the Euro and British Pound. Our revenues and operating
expenses are affected by fluctuations in applicable foreign currency exchange
rates. Downward fluctuations in the value of the U.S. Dollar compared to a
foreign currency generally have the effect of increasing our revenues but also
increasing our operating expenses denominated in currencies other than the U.S.
Dollar. Similarly, strengthening in the U.S. Dollar compared to foreign currency
exchange rates generally has the effect of reducing our revenues but also
reducing our operating expenses denominated in currencies other than the U.S.
Dollar. In addition, we have certain intercompany transfer pricing transactions,
intercompany loans and other intercompany transactions that are not considered
permanent in nature. Fluctuations in applicable foreign currency exchange rates
on these intercompany balances may impact our results of operations.
For the second quarter of fiscal 2013, the average exchange rates for the
U.S. Dollar against the Euro strengthened by approximately 5.8% and weakened
against the British Pound by approximately 1.7% as compared to the average
exchange rates for second quarter of fiscal 2012. For the six months ended
November 30, 2012, the average exchange rates for the U.S. Dollar against the
Euro and British Pound strengthened by approximately 9.7% and 1.1%,
respectively, as compared to the average exchange rates for the similar period
of fiscal 2012.
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Our international operations have provided and will continue to provide a
significant portion of our total revenues and expenses. As a result, total
revenues and expenses will continue to be affected by changes in the U.S. Dollar
against major international currencies. In order to provide a framework for
assessing how our underlying businesses performed excluding the effect of
foreign currency fluctuations, we compare the percent change in the results from
one period to another period using constant currency disclosure. To present this
information, the most current period results for our entities reporting in
currencies other than the U.S. Dollar are converted into U.S. Dollars at
constant exchange rates (i.e. the average rates in effect in the prior
comparable period) rather than the actual exchange rates in effect during the
respective periods. In each of the tables below, we present the percent change
based on actual results in reported currency and in constant currency.
The following tables summarize the period-over-period change, both in U.S.
Dollars and percentages, in revenues and costs and expenses, isolating the
fluctuations in exchange rates from changes in activity and pricing on a
constant currency basis for the periods presented:
(in millions, except percentages) Change Due Change in
Total Change Due Change in Total
Three Months Ended November 30, to Currency Constant
Change to Currency Constant Change
2012 vs. 2011 Fluctuations Currency as Reported Fluctuations Currency as Reported
Revenues:
License fees $ (1.2 ) $ 2.3 $ 1.1 (1.0 )% 1.9 % 0.9 %
Product updates and support fees (2.9 ) 44.8 41.9 (1.0 ) 14.0 13.0
Software revenues (4.1 ) 47.1 43.0 (0.9 ) 10.7 9.8
Consulting services and other fees (3.4 ) 2.0 (1.4 ) (1.7 ) 1.0 (0.7 )
Total revenues $ (7.5 ) $ 49.1 $ 41.6 (1.2 )% 7.7 % 6.5 %
Total operating expenses $ (7.1 ) $ (27.7 ) $ (34.8 ) (1.2 )% (4.6 )% (5.8 )%
(in millions, except percentages) Change Due Change in
Total Change Due Change in Total
Six Months Ended November 30, to Currency Constant
Change to Currency Constant Change
2012 vs. 2011 Fluctuations Currency as Reported Fluctuations Currency as Reported
Revenues:
License fees $ (5.1 ) $ 14.1 $ 9.0 (2.4 )% 6.6 % 4.2 %
Product updates and support fees (17.7 ) 116.0 98.3 (2.9 ) 18.7 15.8
Software revenues (22.8 ) 130.1 107.3 (2.7 ) 15.6 12.9
Consulting services and other fees (14.8 ) 19.6 4.8 (4.0 ) 5.3 1.3
Total revenues $ (37.6 ) $ 149.7 $ 112.1 (3.2 )% 12.5 % 9.3 %
Total operating expenses $ (34.9 ) $ (22.4 ) $ (57.3 ) (3.0 )% (1.9 )% (4.9 )%
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with GAAP which
requires us to make certain estimates, judgments and assumptions. We believe
that these estimates, judgments and assumptions are reasonable based upon
information available to us at the time that the estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of our assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. To the extent there are material differences between these
estimates, judgments or assumptions and actual results, our financial statements
will be affected.
Our critical accounting policies are described in detail in our Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
provided in our Registration Statement on Form S-4 that we filed with the SEC on
August 23, 2012. These policies reflect those areas that require more
significant judgments, and use of estimates and assumptions in the preparation
of our financial statements and include the following:
• Revenue Recognition;
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• Business Combinations;
• Restructuring;
• Valuation of Accounts Receivable;
• Valuation of Goodwill and Intangible Assets;
• Income Taxes and Valuation of Deferred Tax Assets;
• Contingencies - Litigation Reserves; and
• Stock-Based Compensation
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
among available alternatives would not produce a materially different result.
Our senior management has reviewed our critical accounting policies and related
disclosures with the Audit Committee of our Board of Directors.
There have been no material changes to our critical accounting policies and
estimates during the first six months of fiscal 2013 other than those discussed
in Note 2, Summary of Significant Accounting Policies.
Results of Operations
The following tables set forth certain line items in our unaudited Condensed
Consolidated Statements of Operations as the amounts reported in conformity with
GAAP, the period-over-period actual percentage change (Actual) and the
period-over-period constant currency percentage change (Constant Currency), for
the periods indicated:
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency
Revenues:
License fees $ 120.6 $ 119.5 0.9 % 1.9 % $ 221.4 $ 212.4 4.2 % 6.6 %
Product updates and support fees 363.0 321.1 13.0 14.0 720.1 621.8 15.8 18.7
Software revenues 483.6 440.6 9.8 10.7 941.5 834.2 12.9 15.6
Consulting services and other fees 198.9 200.3 (0.7 ) 1.0 372.8 368.0 1.3 5.3
Total revenues 682.5 640.9 6.5 7.7 1,314.3 1,202.2 9.3 12.5
Operating expenses:
Cost of license fees 20.2 22.2 (9.0 ) (8.1 ) 37.8 40.7 (7.1 ) (4.7 )
Cost of product updates and support fees 63.6 66.2 (3.9 ) (2.6 ) 125.9 128.0 (1.6 ) 1.6
Cost of consulting services and other fees 150.0 153.3 (2.2 ) (0.3 ) 290.1 286.2 1.4 5.7
Sales and marketing 114.1 107.3 6.3 7.6 212.6 200.2 6.2 9.5
Research and development 85.1 83.3 2.2 3.4 167.8 150.2 11.7 14.8
General and administrative 50.7 68.8 (26.3 ) (25.9 ) 100.8 120.2 (16.1 ) (14.1 )
Amortization of intangible assets and depreciation 68.8 85.9 (19.9 ) (19.6 ) 141.8 162.4 (12.7 ) (10.8 )
Restructuring costs 4.1 11.5 (64.3 ) (63.5 ) 9.6 52.4 (81.7 ) (80.2 )
Acquisition related and other costs 12.7 5.6 126.8 126.8 14.6 18.0 (18.9 ) (18.9 )
Total operating expenses 569.3 604.1 (5.8 ) (4.6 ) 1,101.0 1,158.3 (4.9 ) (1.9 )
Income from operations 113.2 36.8 207.6 208.7 213.3 43.9 385.9 392.0
Interest expense, net 103.4 119.7 (13.6 ) (13.6 ) 211.6 236.7 (10.6 ) (10.6 )
Loss on extinguishment of debt 1.8 - NM NM 1.8 8.7 (79.3 ) (79.3 )
Other (income) expense, net 25.0 (45.9 ) NM NM 20.8 (28.9 ) NM NM
Loss before income tax (17.0 ) (37.0 ) (54.1 ) (56.8 ) (20.9 ) (172.6 ) (87.9 ) (90.4 )
Income tax provision (benefit) 5.7 10.9 (47.7 ) (47.7 ) 35.1 (25.8 ) NM NM
Net loss $ (22.7 ) $ (47.9 ) (52.6 )% (54.7 )% $ (56.0 ) $ (146.8 ) (61.9 )% (64.7 )%
* NM - Percentage not meaningful
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The discussion that follows relating to our results of operations for the
comparable three and six-month periods ended November 30, 2012 and 2011 should
be read in conjunction with the accompanying unaudited Condensed Consolidated
Financial Statements and related Notes and with the information presented in the
above table. This analysis addresses the actual changes in our results of
operations for the comparable fiscal periods as presented in accordance with
GAAP as well as changes excluding the impact of foreign currency fluctuations,
as reflected in the constant currency percentages in the above table and the
tables that follow. See the Foreign Currency discussion, above, for further
explanation of the impact on our results of operations.
Revenue
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency
Revenues:
License fees $ 120.6 $ 119.5 0.9 % 1.9 % $ 221.4 $ 212.4 4.2 % 6.6 %
Product updates and support fees 363.0 321.1 13.0 14.0 720.1 621.8 15.8 18.7
Software revenues 483.6 440.6 9.8 10.7 941.5 834.2 12.9 15.6
Consulting services and other fees 198.9 200.3 (0.7 ) 1.0 372.8 368.0 1.3 5.3
Total revenues $ 682.5 $ 640.9 6.5 % 7.7 % $ 1,314.3 $ 1,202.2 9.3 % 12.5 %
Total Revenues. We generate revenues from licensing software, providing product
updates and support related to our licensed products and providing consulting
services. We generally utilize written contracts as the means to establish the
terms and conditions by which our products, product updates and support and
consulting services are sold to our customers. As our product updates and
support and consulting services are primarily attributable to our licensed
products, growth in our product updates and support and consulting services is
generally tied to the level of our license contracting activity.
We recognize revenues pursuant to specific and detailed guidelines applicable to
the software industry. License fees revenues from end-users are generally
recognized when the software product has been shipped and certain conditions are
met. Revenues from customer product updates and support contracts are deferred
and recognized ratably over the term of the agreements. Revenues from consulting
services (including training and implementation services) are recognized as
services are provided to customers. See Note 2, Summary of Significant
Accounting Policies - Revenue Recognition, in our financial statements related
to our fiscal year ended May 31, 2012, for a more complete description of our
revenue recognition policy.
Total revenues increased by 7.7% in the second quarter of fiscal 2013 compared
to the similar period of fiscal 2012, excluding the unfavorable foreign currency
impact of 1.2%. On a constant currency basis, the increase was due to broad
growth of software licenses, including increased SaaS revenues, significant
growth in our product updates and support fees and growth in the volume of our
consulting services and other fees. Excluding the unfavorable foreign currency
rate impact of 3.2%, total revenues increased by 12.5% in the six-month period
ended November 30, 2012 compared to the six month period ended November 30,
2011. Our year-to-date results were positively impacted by our acquisitions,
particularly the impact of Lawson's business in the first quarter of fiscal
2012. The results of Lawson have been included in our results for the full
year-to-date period in fiscal 2013 compared to approximately five months in the
first six months of fiscal 2012.
License Fees. Our license fees primarily consist of fees resulting from products
licensed to customers on a perpetual basis. Product license fees result from a
customer's licensing of a given software product for the first time or with a
customer's licensing of additional users for previously licensed products.
License fees also include revenues related to our SaaS offerings.
Second quarter license fees revenues increased by 1.9%, excluding a 1.0%
unfavorable foreign currency rate impact, compared to the second quarter last
year. At constant currency, the increase was primarily due to additional
revenues of 4.4% related to increased SaaS revenues (which contributed 2.3%) and
a decrease in the purchase accounting revenue adjustments related to license
fees in the current quarter compared to the similar period last year primarily
as a result of our acquisition of Lawson in the first quarter last year. These
increases were somewhat offset by a 2.5% decrease related to license fees
revenues as a result of fewer licensing transactions in the current quarter
compared to the similar quarter last year.
Excluding the unfavorable foreign currency rate impact of 2.4%, license fees
increased by 6.6% in the six-month period ended November 30, 2012 compared to
the six-month period ended November 30, 2011. At constant currency, the
year-to-date increase was primarily due to additional revenues of 7.1% related
to increased SaaS revenues (which contributed 4.4%) and a decrease in the
purchase accounting revenue adjustments related to license fees in fiscal 2013
compared to the similar period last year resulting from our acquisition of
Lawson. These increases were somewhat offset by a 0.5% decrease related to
license fees revenues as a result of fewer licensing transactions in the first
six months of fiscal 2013 compared to the similar quarter last year.
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Product Updates and Support Fees. Our product updates and support fees revenues
represent the ratable recognition of fees to enroll and renew licensed products
in our maintenance programs. These fees are typically charged annually and are
based on the license fees initially paid by the customer. Product updates and
support revenues can fluctuate based on the number and timing of new license
contracts, renewal rates and price increases.
Product updates and support fees increased by 14.0%, excluding the unfavorable
foreign currency impact of 1.0%, in the current quarter compared to the second
quarter last year. At constant currency, the increase was primarily the result
of a decrease in the purchase accounting revenue adjustments related to Lawson
product updates and support fees in the current quarter compared to the similar
period last year which accounted for an increase of 12.4%. The remaining
increase was largely attributable to increases in revenues related to new
maintenance pull-through from new license transactions which more than offset
customer attrition.
Product updates and support fees increased by 18.7%, excluding the unfavorable
foreign currency impact of 2.9%, in the six-month period ended November 30, 2012
compared to the six-month period ended November 30, 2011. At constant currency,
the increase was primarily the result of our acquisition of Lawson the results
of which have been included in our results for the full year-to-date period in
fiscal 2013 compared to approximately five months in the first six months of
fiscal 2012 which accounted for an increase of 7.0%. In addition, the purchase
accounting revenue adjustments related to Lawson product updates and support
fees decreased in the current year-to-date period compared to the similar period
last year accounting for an increase of 10.7%. The remaining increase is
attributable to increases in revenues related to new maintenance pull-through
from new license sales and price increases offsetting customer attrition.
Consulting Services and Other Fees. Our consulting services and other fees
revenues consist primarily of software-related services, including systems
implementation and integration services, consulting, custom modification,
hardware education, hosting services, application managed services and
education and training services for customers who have licensed our products.
Consulting services and other fees revenues also includes revenues related to
hardware systems products.
Consulting services and other fees increased by 1.0%, excluding the unfavorable
foreign currency impact of 1.7% in the current quarter compared to the second
quarter last year. At constant currency, second quarter consulting services and
other fees increased primarily as a result of slightly higher volumes in our
EMEA region as compared to the second quarter last year.
Consulting services and other fees increased by 5.3%, excluding the unfavorable
foreign currency impact of 4.0% in the six-month period ended November 30, 2012
compared to the six month period ended November 30, 2011. At constant currency,
consulting services and other fees increased primarily as a result of our
acquisition of Lawson the results of which have been included in our results for
the full year-to-date period in fiscal 2013 compared to approximately five
months in the first six months of fiscal 2012.
Deferred Revenue. Certain of our revenues are deferred when all conditions of
revenue recognition have not been met. Deferred revenue represents revenue that
is to be recognized in future periods when such conditions have been satisfied
related to certain license agreements, maintenance contracts and certain
consulting arrangements, as discussed above. We had total deferred revenues of
$691.8 million at November 30, 2012, compared to $870.6 million at May 31, 2012.
The following table sets forth the components of deferred revenue:
November 30, May 31,
(in millions) 2012 2012
License fees $ 32.7 $ 29.5
Product updates and support fees 592.7 766.1
Consulting services and other fees 66.4 75.0
Total deferred revenue 691.8 870.6
Less: current portion 673.2 851.9
Deferred revenue - non-current $ 18.6 $ 18.7
In general, changes in the balance of our deferred revenue are cyclical and
primarily driven by the timing of our maintenance services renewal cycles. Our
renewal dates primarily occur in the third and fourth quarters of our fiscal
year with revenues being recognized ratably over the applicable service periods.
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Operating Expenses
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency
Operating expenses:
Cost of license fees $ 20.2 $ 22.2 (9.0 )% (8.1 )% $ 37.8 $ 40.7 (7.1 )% (4.7 )%
Cost of product updates and support fees 63.6 66.2 (3.9 ) (2.6 ) 125.9 128.0 (1.6 ) 1.6
Cost of consulting services and other fees 150.0 153.3 (2.2 ) (0.3 ) 290.1 286.2 1.4 5.7
Sales and marketing 114.1 107.3 6.3 7.6 212.6 200.2 6.2 9.5
Research and development 85.1 83.3 2.2 3.4 167.8 150.2 11.7 14.8
General and administrative 50.7 68.8 (26.3 ) (25.9 ) 100.8 120.2 (16.1 ) (14.1 )
Amortization of intangible assets and depreciation 68.8 85.9
(19.9 ) (19.6 ) 141.8 162.4 (12.7 ) (10.8 )
Restructuring costs 4.1 11.5 (64.3 ) (63.5 ) 9.6 52.4 (81.7 ) (80.2 )
Acquisition related and other costs 12.7 5.6 126.8 126.8 14.6 18.0 (18.9 ) (18.9 )
Total operating expenses $ 569.3 $ 604.1 (5.8 )% (4.6 )% $ 1,101.0 $ 1,158.3 (4.9 )% (1.9 )%
Cost of License Fees. Cost of license fees includes royalties to third-parties,
channel partner commissions and other software delivery expenses. Our software
solutions may include embedded components of third-party vendors for which a fee
is paid to the vendor upon the sale of our products. In addition, we resell
third-party products in conjunction with the license of our software solutions,
which also results in a fee. We also resell our software solutions through our
third-party channel relationships which require us to pay applicable commissions
to our channel partners. The cost of license fees is generally higher, as a
percentage of revenues, when we resell products of third-party vendors. As a
result, license fees gross margins will vary depending on the proportion of
third-party product sales in our revenue mix.
Cost of license fees decreased by 8.1%, excluding the favorable foreign currency
impact of 0.9%, in the current quarter compared to the second quarter of fiscal
2012. At constant currency, this decrease was primarily due to lower third-party
costs which accounted for a decrease of 13.4%. This decrease was somewhat offset
by a 4.8% increase related to higher SaaS costs in-line with our higher SaaS
revenues in the quarter.
Cost of license fees for the first six months of fiscal 2013 decreased by 4.7%,
excluding the favorable foreign currency impact of 2.4%, compared to the first
six months of fiscal 2012. At constant currency, this decrease was primarily due
to lower third-party costs which accounted for a decrease of 9.7%. This decrease
was somewhat offset by a 5.5% increase related to higher SaaS costs again
in-line with our higher SaaS revenues in the first six months of fiscal 2012.
Cost of Product Updates and Support Fees. Cost of product updates and support
fees includes salaries, employee benefits, related travel, third-party
maintenance costs associated with embedded and non-embedded third-party
products, related channel partner commissions, and the overhead costs of
providing our customers product updates and support.
Cost of product updates and support fees decreased by 2.6%, excluding the
favorable foreign currency impact of 1.3%, in the current quarter compared to
the corresponding prior period. At constant currency, this decrease was
primarily due to a decrease in employee-related support costs in the quarter
which was somewhat offset by an increase in our channel partner commissions
compared to the second quarter last year.
For the first six months of fiscal 2013, cost of product updates and support
fees increased by 1.6%, excluding the favorable foreign currency impact of 3.2%,
compared to the corresponding prior period. At constant currency, this increase
was primarily due to an increase in our channel partner commissions and
third-party royalties. These increases were somewhat offset by decreased
employee-related support cost.
Cost of Consulting Services and Other Fees. Cost of consulting services and
other fees includes salaries, employee benefits, third-party consulting costs,
related travel, and the overhead costs of providing our customers systems
implementation and integration services, consulting, custom modification,
hardware education, hosting services, application managed services and
education and training services. Cost of consulting services and other fees also
includes costs associated with our hardware business.
Cost of consulting services and other fees decreased by 0.3%, excluding the
favorable foreign currency impact of 1.9%, in the current quarter compared to
the corresponding prior period. At constant currency, cost consulting services
and other fees was generally in-line with the prior quarter, with a slight
decrease.
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For the first six months of fiscal 2013, cost of consulting services and other
fees increased by 5.7%, excluding the favorable foreign currency impact of 4.3%,
compared to the corresponding prior period. At constant currency, cost of
consulting services and other fees increased primarily as a result of our
acquisition of Lawson the results of which have been included in our results for
the full year-to-date period in fiscal 2013 compared to approximately five
months in the first six months of fiscal 2012.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions, employee benefits, travel, trade show activities, advertising and
branding costs and overhead costs related to our sales and marketing personnel.
Sales and marketing expenses increased by 7.6%, excluding the favorable foreign
currency impact of 1.3%, in the current quarter compared to the corresponding
prior period. On a constant currency basis, sales and marketing expenses
increased primarily as a result of increased employee-related sales costs due to
an increase in headcount in our sales and marketing organizations in the current
quarter of approximately 109, or 5.5%, compared to the similar period last year.
Sales and marketing expenses increased by 9.5%, excluding the favorable foreign
currency impact of 3.3%, in the six-month period ended November 30, 2012
compared to the six-month period ended November 30, 2011. On a constant currency
basis, sales and marketing expenses increased primarily as a result of increased
employee-related sales costs due to the increase in headcount in our sales and
marketing organizations in fiscal 2013. In addition, the inclusion of Lawson for
the full year-to-date period of fiscal 2013 also contributed to the increase.
Research and Development. Research and development expenses consist primarily of
personnel related expenditures.
Research and development expense increased by 3.4%, excluding the favorable
foreign currency impact of 1.2%, in the current quarter compared to the second
quarter last year. On a constant currency basis, research and development
expenses increased primarily as a result of higher employee-related costs due to
a net increase of 110, or 3.3%, in our developer headcount in the second quarter
of fiscal 2013 as compared to last year as we continue to make significant
investment in our development capacity.
Research and development expense, excluding the favorable foreign currency
impact of 3.1%, increased by 14.8% in the six-month period ended November 30,
2012 compared to the six-month period ended November 30, 2011. On a constant
currency basis, research and development expenses increased primarily as a
result of higher employee-related costs and overhead allocations due to
increased headcount as well as an increase in professional fees. In addition,
the inclusion of Lawson for the full year-to-date period of fiscal 2013 also
contributed to the increase.
General and Administrative. General and administrative expenses consist
primarily of personnel related expenditures for information technology, finance,
legal and human resources support functions.
General and administrative expenses decreased by 25.9%, excluding the favorable
foreign currency impact of 0.4%, in the current quarter compared to the
corresponding quarter last year. On a constant currency basis, general and
administrative expenses decreased 14.9% primarily as a result of a decrease in
our consulting expenses due to lower legal costs related to certain patent
litigation matters. In addition, general and administrative expenses decreased
7.7% due to a decrease in employee-related costs as a result of a net decrease
of 213, or 12.4%, in our administrative functions' headcount in the second
quarter of fiscal 2013 as compared to last year primarily due to our
restructuring activities.
General and administrative expenses decreased by 14.1%, excluding the favorable
foreign currency impact of 2.0%, in the six-month period ended November 30, 2012
compared to the six-month period ended November 30, 2011. On a constant currency
basis, general and administrative expenses decreased 6.9% primarily as a result
of lower professional fees including legal costs related to certain patent
litigation matters. In addition, general and administrative expenses decreased
2.6% and 2.1%, respectively, due to a decrease in bad debt expense and a
decrease in employee-related costs as a result of lower administrative headcount
primarily due to our restructuring activities.
Amortization of Intangible Assets and Depreciation. Amortization of intangibles
assets primarily relates to the on-going amortization of intangible assets
acquired in acquisitions. Depreciation expense relates primarily to our computer
equipment and purchased software, furniture and fixtures as well as amortization
of leasehold improvements.
Amortization of intangibles assets and depreciation decreased by 19.6%,
excluding the favorable impact of foreign currency of 0.3%, in the current
quarter compared to the second quarter last year. This decrease was primarily a
result of certain assets being fully amortized /depreciated in fiscal 2012 with
no corresponding expense recorded in the second quarter of fiscal 2013.
Amortization of intangible assets and depreciation decreased by 10.8% in the
six-month period ended November 30, 2012 compared with the six-month period
ended November 30, 2011 excluding the favorable impact of foreign currency of
1.9%. The year-to-date decrease resulted primarily from certain assets being
fully amortized /depreciated in fiscal 2012 with no corresponding expense
recorded in the first six months of fiscal 2013. The decrease was somewhat
offset by the increase in intangible asset amortization related to the inclusion
of Lawson for the full period of fiscal 2013.
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Restructuring. We have recorded restructuring charges related to our
acquisitions and in the ordinary course of business to eliminate redundancies,
improve our operational efficiency and reduce our operating costs. These cost
reduction measures included workforce reductions relating to restructuring our
workforce, the exiting of certain leased facilities and the consolidation of
space in certain other facilities. These restructuring charges represent
severance associated with redundant positions and costs related to redundant
office locations. See Note 10, Restructuring Charges.
We recorded restructuring charges of $4.1 million in the current quarter
compared to restructuring charges of $11.5 million in the second quarter last
year.
We incurred restructuring charges of $9.6 million in the six-month period ended
November 30, 2011 compared with $52.4 million in the six-month period ended
November 30, 2010.
The restructuring charges recorded in the three and six months ended
November 30, 2012, were primarily for employee severance costs related to
actions taken in connection with the combination of certain of our operations
including GGC Holdings and Infor Global Solutions. The restructuring charges
recorded in the corresponding periods last year were primarily for employee
severance costs related to our acquisition of Lawson.
Acquisition Related and Other Costs. Acquisition related and other costs include
transaction and integration costs related to our acquisitions primarily
professional services fees and certain employee costs related to transitional
and certain other employees. Acquisition related and other costs also include
certain costs incurred in financing our acquisitions, reorganizing our
operations and other debt financing activities.
Second quarter fiscal 2013 acquisition related and other costs of $12.7 million
increased by approximately $7.1 million compared to $5.6 million in the second
quarter last year.
For the first six months of fiscal 2013 acquisition related and other costs of
$14.6 million decreased by approximately $3.4 million compared to $18.0 million
in the comparable period last year.
For the three and six-months ended November 30, 2012, acquisition related and
other costs include costs related primarily to our refinancing activities. The
fiscal 2012 costs were primarily related to our acquisition of Lawson, the
integration of Lawson's operations into Infor and cost incurred for related
financing activities.
Non-Operating Income and Expenses
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2012 vs. 2011
Constant Constant(in millions, except percentages) 2012 2011 Actual
Currency 2012 2011 Actual Currency
Interest expense, net
$ 103.4 $ 119.7 (13.6 )% (13.6 )% $ 211.6 $ 236.7 (10.6 )% (10.6 )%
Loss on extinguishment of debt 1.8 - NM NM 1.8 8.7 (79.3 ) (79.3 )
Other (income) expense, net 25.0 (45.9 ) NM NM 20.8 (28.9 ) NM NM
Total non-operating expenses $ 130.2 $ 73.8 76.4 % 75.6 % $ 234.2 $ 216.5 8.2 % 7.4 %
* NM - Percentage not meaningful
Interest Expense, Net. Interest expense, net consists of the interest expense
related to our debt less the interest income on cash, marketable securities, and
other investments.
Interest expense, net decreased by $16.3 million, or 13.6% to $103.4 million in
the current quarter compared to $119.7 million in the corresponding prior
period. The decrease in interest expense was due to a decrease in outstanding
debt balances as a result of the recapitalization of our debt structure in the
fourth quarter of last year and the refinancing of our Tranche B Term Loan at
favorable interest rates in the second quarter of fiscal 2013. As a result of
these financing transactions, interest expense decreased by $6.6 million due to
lower interest rates and $3.3 million due to lower amortization of deferred
financing fees and debt discounts. In addition, we had a $4.8 million decrease
in interest expense related to affiliate loans as the outstanding balance on
these loans was contributed as equity as part of the recapitalization of our
debt structure in fiscal 2012 and a $1.3 million increase in interest income in
the current quarter as compared to the similar period last year.
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Interest expense decreased by $25.1 million, or 10.6% to $211.6 million in the
six-month period ended November 30, 2012 compared to $236.7 million in the
six-month period ended November 30, 2011. Year-to-date interest expense, net
decreased as a result of our recapitalization and refinancing transactions
including a decrease of $14.9 million due to lower amortization of deferred
financing fees and debt discounts and a $9.7 million decrease in interest
expense related to affiliate loans.
Loss on Extinguishment of Debt. The $1.8 million loss on extinguishment of debt
recorded in the second quarter of fiscal 2013 represented the net book value of
deferred financing fees written off in the three-month period ended November 30,
2012, and other costs incurred in connection with our refinancing transactions
during the period for those lenders treated as an extinguishment rather than a
modification of debt. There was no similar activity in the second quarter of
fiscal 2012.
For the first six months of fiscal 2012, the $8.7 million loss on extinguishment
of debt recorded represented the net book value of deferred financing fees and
the remaining debt discount written off in the first quarter of fiscal 2012 in
connection with our debt transactions during the period.
Other (Income) Expense, Net. Other (income) expense, net consists of the effects
of foreign currency fluctuations, gain/loss on the sale of fixed assets, and
other costs.
Other (income) expense, net was net expense of $25.0 million in the current
quarter compared to $45.9 million net gain in the corresponding prior period.
The change in other (income) expense, net was primarily due to fluctuations in
foreign currency exchange rates.
For the first six months of fiscal 2013, other (income) expense, net was a net
expense of $20.8 million compared to net income of $28.9 million in the
six-month period ended November 30, 2011. The decrease in other (income)
expense, net was primarily due to fluctuations in foreign currency exchange
rates.
Income Tax Provision (Benefit)
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency
Income tax provision (benefit) $ 5.7 $ 10.9 (47.7 )% (47.7 )% $ 35.1 $ (25.8 ) NM % NM %
Effective income tax rate (33.5 )% (29.5 )% (167.9 )% 14.9 %
* NM - Percentage not meaningful
Our quarterly income tax expense or benefit is measured using an estimated
annual effective tax rate for the period. We estimate our annual effective tax
rate on a quarterly basis and make any necessary changes to adjust the rate for
the applicable year-to-date period based upon the annual estimate. The estimated
annual tax rate may fluctuate due to changes in forecasted annual operating
income, acquisitions, changes in the jurisdictional mix of the forecasted annual
operating income, positive or negative changes to the valuation allowance for
net deferred tax assets, changes to actual or forecasted permanent book to tax
differences, impacts from future tax settlements with state, federal or foreign
tax authorities or impacts from enacted tax law changes. We identify items which
are unusual and nonrecurring in nature and treat these as discrete events. The
tax effect of discrete items is recorded entirely in the quarter in which the
discrete event occurs.
The change in the effective tax rate for the three months ended November 30,
2012, compared to the similar periods last year was primarily due to the change
in earnings levels as a result of the acquisition of Lawson, a shift in the
jurisdictional mix of operating income in the respective periods, current year
Subpart F inclusions, the establishment of a valuation allowance for
nondeductible interest under IRC Section 163(j) in the previous year period, tax
law changes in Sweden and the United Kingdom in the current year, the change in
recorded liabilities for unrecognized tax benefits related to uncertain tax
positions in various jurisdictions, changes in various withholding taxes, and
changes in the valuation allowances recorded for various foreign subsidiary net
operating losses. The items accounting for the difference between income taxes
computed at the statutory rate and the expense from income taxes primarily
relate to Subpart F income inclusions, tax law changes in Sweden and the United
Kingdom, losses not providing benefits, nondeductible expenses, foreign
withholding taxes, differences in foreign statutory rates, state income taxes
and unrecognized tax benefits.
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The change in the effective tax rate for the first six months of fiscal 2012,
compared to the similar periods last year was primarily due to the change in
earnings levels as a result of the acquisition of Lawson, a shift in the
jurisdictional mix of operating income in the respective periods, the
establishment of a valuation allowance for nondeductible interest under IRC
Section 163(j), Subpart F inclusions, a tax law change in Australia, Sweden and
the United Kingdom, the change in recorded liabilities for unrecognized tax
benefits related to uncertain tax positions in various jurisdictions, changes in
various withholding taxes, and changes in the valuation allowances recorded for
various foreign subsidiary net operating losses.
Following the Infor combination transaction that occurred on April 5, 2012, the
Company is evaluating various tax structuring alternatives to rationalize
various legal entities and reduce our overall global tax liability. While the
Company has not finalized any specific plans at this time, we expect to finalize
such plans during the second half of fiscal 2013. At that time, the Company
expects to evaluate the impact of any restructuring actions on the realizability
of available deferred tax assets in the various jurisdictions in which we
operate.
The American Taxpayer Relief Act of 2012 was signed into law by President Obama
on January 2, 2013 and included retroactive extensions through December 31, 2013
of certain business tax provisions that had expired, including the controlled
foreign corporation look-through exception to the U.S. subpart F anti-deferral
rules. As the exception had not been signed into law as of November 30, 2012,
our estimated annual effective tax rate for the period presented does not
reflect the benefit of the controlled foreign corporation look-through
exception. As a result, the legislation will be treated as a type 2 subsequent
event and the related tax benefit will be recorded in our fiscal third quarter.
We are in the process of measuring the impact of the legislation on both the
third quarter and full year fiscal 2013 tax expense. While this analysis is
expected to be completed in the third quarter, we expect that the application of
the controlled foreign corporation look-through exception may materially affect
our tax expense for the third quarter and full year fiscal 2013.
Non-GAAP Financial Measure Reconciliations
We believe our presentation of non-GAAP revenues, operating income and operating
margin provide meaningful insight into our operating performance and an
alternative perspective of our results of operations. We use these non-GAAP
measures to assess our operating performance, to develop budgets, to serve as a
measurement for incentive compensation awards and to manage expenditures.
Presentation of these non-GAAP measures allows users to review our results of
operations from the same perspective as management and our Board of Directors.
We believe these non-GAAP financial measures provide users an enhanced
understanding of our operations, facilitate analysis and comparisons of our
current and past results of operations, facilitate comparisons of our operating
results with those of our competitors and provide insight into the prospects of
our future performance. We also believe that the non-GAAP measures are useful to
users because they provide supplemental information that research analysts
frequently use to analyze software companies including those that have recently
made significant acquisitions. Additionally, certain non-GAAP disclosures are
required and/or permitted by our lenders in our reporting to them.
The method we use to produce non-GAAP results is not in accordance with GAAP and
may differ from the methods used by other companies. These non-GAAP results
should not be regarded as a substitute for corresponding GAAP measures but
instead should be utilized as a supplemental measure of operating performance in
evaluating our business. Non-GAAP measures do have limitations in that they do
not reflect certain items that may have a material impact upon our reported
financial results. As such, these non-GAAP measures should be viewed in
conjunction with both our financial statements prepared in accordance with GAAP
and the reconciliation of the supplemental non-GAAP financial measures to the
comparable GAAP results provided for each period presented below.
Non-GAAP Revenues
Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change
November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency
GAAP revenues $ 682.5 $ 640.9 6.5 % 7.7 % $ 1,314.3 $ 1,202.2 9.3 % 12.5 %
Non-GAAP revenue adjustments:
Purchase accounting impact on license fees 3.5 5.4 8.3 12.5
Purchase accounting impact on product updates and
support fees 0.5 40.3 1.1 67.8
Purchase accounting impact on consulting services
and other fees 1.5 0.7 2.9 1.8
Total non-GAAP revenue adjustments 5.5 46.4 12.3 82.1
Non-GAAP revenues $ 688.0 $ 687.3 0.1 % 1.2 % $ 1,326.6 $ 1,284.3 3.3 % 6.2 %
48
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Non-GAAP Income from Operations
Quarterly Six Months
Three Months Ended Change Ended Year-to-Date Change
Fiscal 2013 vs.
November 30, 2012 November 30, Fiscal 2013 vs. 2012
Constant Constant
(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual
Currency
GAAP income from operations $ 113.2 $ 36.8 207.6 % 208.7 % $ 213.3 $ 43.9 385.9 % 392.0 %
GAAP operating margin 16.6 % 5.7 % 16.2 % 3.7 %
Non-GAAP revenue adjustments 5.5 46.4 12.3 82.1
Non-GAAP costs and operating expense adjustments:
Purchase accounting impact on deferred costs (0.4 ) (1.3 ) (0.8 ) (2.3 )
Amortization 60.2 73.6 126.4 141.6
Stock-based compensation 1.5 0.2 2.8 0.3
Acquisition related and other costs 12.7 5.6 14.6 18.0
Restructuring costs 4.1 11.5 9.6 52.4
Total non-GAAP costs and operating expense adjustments 78.1 89.6
152.6 210.0
Non-GAAP income from operations $ 196.8 $ 172.8 13.9 % 14.3 % $ 378.2 $ 336.0 12.6 % 14.4 %
Non-GAAP operating margin 28.6 % 25.1 % 28.5 % 26.2 %
The non-GAAP adjustments we make to our reported GAAP results are primarily
related to purchase accounting and other acquisition matters, significant
non-cash accounting charges and restructuring charges. Our primary non-GAAP
reconciling items are as follows:
Purchase Accounting Impact on Revenue. Our non-GAAP financial results include
pro forma adjustments to increase license fees, product updates and support
fees, and consulting services and other fees that we would have recognized if we
had not adjusted acquired deferred revenues to their fair values as required by
GAAP. Certain deferred revenue for license fees, product updates and support
fees, and consulting services and other fees on the acquired entity's balance
sheet, at the time of the acquisition, were eliminated from our GAAP results as
part of the purchase accounting for the acquisition as they do not reflect the
fair value of performance obligations to us. As a result, our GAAP results do
not, in management's view, reflect all of our license fees, product updates and
support fees, and consulting services and other fees. We believe the inclusion
of the pro forma revenue adjustment provides users a helpful alternative view of
our operations.
Amortization of Intangibles. We have excluded amortization of
acquisition-related intangible assets including purchased technology and
customer relationships from our non-GAAP results. The fair value of the
intangible assets, which was allocated to these assets through purchase
accounting, is amortized using accelerated or straight-line methods which
approximate the proportion of future cash flows estimated to be generated each
period over the estimated useful lives of the applicable assets. While these
non-cash amortization charges are recurring in nature and the underlying assets
benefit our operations, this amortization expense can fluctuate significantly
based on the nature, timing and size of our past acquisitions and may be
affected by future acquisitions. This makes comparisons of our current and
historic operating performance difficult. Therefore, we exclude such expenses
when analyzing the results of our operations including those of acquired
entities. We believe that the exclusion of the amortization expense of acquired
intangible assets provides users helpful information facilitating comparison of
our results period-over-period and with other companies in the software industry
as they each have their own acquisition histories and related non-GAAP
adjustments.
Stock-Based Compensation. Expenses related to stock-based compensation have been
excluded from our non-GAAP results of operations. These charges consist of the
estimated fair value of stock-based awards. While the charges for stock-based
compensation are of a recurring nature, as we grant stock-based awards to
attract and retain quality employees and as an incentive to help achieve
financial and other corporate goals, we exclude them from our results of
operations in assessing our operating performance. These charges are typically
non-cash and are often the result of complex calculations using an option
pricing model that estimates stock-based awards' fair value based on factors
such as volatility and risk-free interest rates that are beyond our control. As
such, we do not include such charges in our operating plans that we use to
manage our business. In addition, we believe the exclusion of these charges
facilitates comparisons of our operating results with those of our competitors
who may have different policies regarding the use of stock-based awards.
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Acquisition Related and Other Costs. We have incurred various transaction and
integration costs related to our acquisitions as well as costs associated with
our debt financing. The costs of acquiring and integrating the operations of
acquired businesses as well as costs associated with our debt financing are
incremental to our historical costs and are charged to our GAAP results of
operations in the periods incurred. We do not consider these costs in our
assessment of our operating performance. While these costs are not recurring
with respect to our past acquisitions and debt activities, we may incur similar
costs in the future if we pursue other acquisitions and debt activities. These
costs are primarily reflected in acquisition related and other costs in our
Consolidated Statements of Operations. Included in these costs are certain costs
incurred in financing our acquisitions, reorganizing our operations and other
debt financing activities. We believe that the exclusion of the non-recurring
acquisition related and other costs provides users a useful alternative view of
our results of operations and facilitates comparisons of our results
period-over-period.
Restructuring. We have recorded various restructuring charges related to actions
taken to reduce our cost structure to enhance operating effectiveness, improve
profitability and to eliminate certain redundancies in connection with
acquisitions. These restructuring activities impacted different functional areas
of our operations in different locations and were undertaken to meet specific
business objectives in light of the facts and circumstances at the time of each
restructuring event. These charges include costs related to severance and other
termination benefits as well as costs to exit leased facilities. These
restructuring charges are excluded from management's assessment of our operating
performance. We believe that the exclusion of the restructuring charges provides
users an alternative view of the cost structure of our operations and
facilitates comparisons with the results of other periods that may not reflect
such charges or may reflect different levels of such charges.
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