Business Combinations

6 Months Ended

May 31, 2016

Business Combinations [Abstract]

Business Combinations

Business Combinations

Telerik Acquisition

On December 2, 2014, we completed the acquisition of all of the outstanding securities of Telerik AD (Telerik), a leading provider of application development tools based in Sofia, Bulgaria, for total consideration of $262.5 million. Approximately $10.5 million of the total consideration was paid to Telerik’s founders and certain other key employees in restricted stock units, subject to a vesting schedule and continued employment. Under the Securities Purchase Agreement, 10% of the total consideration was deposited into an escrow account to secure certain indemnification and other obligations of the sellers to Progress. The full amount of the escrow was released by the escrow agent in June 2016.

Through this acquisition, we now provide comprehensive cloud and on-premise platform offerings that enable developers to rapidly create applications, driven by data for any web, desktop or mobile platform. We funded the acquisition through a combination of existing cash resources and a $150 million term loan (Note 7).

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred, but are required to be expensed as incurred. We incurred $0.3 million of acquisition-related costs during the three and six months ended May 31, 2016 and approximately $1.1 million and $1.9 million during the three and six months ended May 31, 2015, respectively, which are included in acquisition-related expenses in our condensed consolidated statement of operations.

In connection with the acquisition of Telerik, we agreed to provide retention bonuses to certain Telerik employees as an incentive for those employees to remain with Telerik for at least one year following the acquisition. We concluded that the retention bonuses for these individuals, which totaled approximately $2.2 million, are compensation arrangements and recognized these costs over the one-year service period. During the three and six months ended May 31, 2015, we incurred $0.6 million and $1.2 million of expense related to the retention bonuses, respectively, which is included in the acquisition-related expenses in our consolidated statement of operations. There were no additional expenses related to the retention bonuses incurred during the three and six months ended May 31, 2016 and the entire amount accrued during fiscal year 2015 was paid during December 2015.

The operations of Telerik are included in our operating results as part of the Application Development and Deployment segment from the date of acquisition. The amount of revenue of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2016 was $18.5 million and $36.6 million, respectively. The amount of revenue of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2015 was $9.2 million and $13.7 million, respectively. The revenue from sales of Telerik products and maintenance is primarily recognized ratably over the maintenance period, which is generally one year, as vendor specific objective evidence of fair value cannot be established for such maintenance. The amount of pretax losses of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2016 was $7.6 million and $13.0 million, respectively. The amount of pretax losses of Telerik included in our condensed consolidated statement of operations during the three and six months ended May 31, 2015 was $14.0 million and $31.0 million, respectively. The pretax losses in each three and six month period includes the amortization expense of approximately $6.2 million and $12.3 million, respectively, related to the acquired intangible assets discussed above. In addition, the pretax losses in the three and six months ended May 31, 2016 includes stock-based compensation expense of approximately $2.1 million and $4.2 million, respectively.