ASPEN TECHNOLOGY You should read the following discussion in conjunction with our unaudited consolidated financial statements and related notes thereto contained in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors" of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations. Our fiscal year ends onJune 30th , and references in this Quarterly Report to a specific fiscal year are to the twelve months endedJune 30th of such year (for example, "fiscal 2021" refers to the year ending onJune 30, 2021 ). Business Overview We are a global leader in asset optimization software that optimizes asset design, operations and maintenance in complex, industrial environments. We combine decades of process modeling and operations expertise with big data, artificial intelligence, and advanced analytics. Our purpose-built software improves the competitiveness and profitability of our customers by increasing throughput, energy efficiency, and production levels, reducing unplanned downtime, plant emissions, and safety risks, enhancing capital efficiency, and decreasing working capital requirements over the entire asset lifecycle to support operational excellence. Our software incorporates our proprietary mathematical and empirical models of manufacturing and planning processes and reflects the deep domain expertise we have amassed from focusing on solutions for the process and other capital-intensive industries for over 35 years. We have developed our applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. We are a recognized market and technology leader in providing process optimization and asset performance management software for each of these business areas. We have established sustainable competitive advantages based on the following strengths: •Innovative products that can enhance our customers' profitability and productivity; •Long-term customer relationships; •Large installed base of users of our software; and •Long-term license contracts. We have approximately 2,400 customers globally. Our customers consist of companies engaged in the process and other capital-intensive industries such as energy, chemicals, engineering and construction, as well as pharmaceuticals, food and beverage, transportation, power, metals and mining, pulp and paper, and consumer packaged goods. Business Segments We have two operating and reportable segments, which are consistent with our reporting units: (i) subscription and software and (ii) services and other. The subscription and software segment is engaged in the licensing of process optimization and asset performance management software solutions and associated support services, and includes our license and maintenance revenue. The services and other segment includes professional services and training, and includes our services and other revenue. Recent Events InDecember 2019 , the novel SARS-CoV-2 virus and associated COVID-19 disease ("COVID-19") were reported inChina , and inMarch 2020 theWorld Health Organization declared a pandemic. Since the beginning ofMarch 2020 , the sudden decrease in demand for oil due to the COVID-19 pandemic, compounded by the excess supply arising from producers' failure to agree on production cuts, resulted in a drop in oil prices. During the three and six months endedDecember 31, 2020 , our business was negatively impacted by these factors. Specifically, we saw a slowdown in closing customer contracts, a slight increase in our customer attrition rate due to non-renewals and renewals at lower entitlement level and, to a lesser extent, a slowdown in customer payments. We are continuing to assess the impact of these items on global markets and the various industries of our customers. The extent of the impact on our operational and financial performance going forward will depend on developments such as the duration and spread of the pandemic and other factors affecting oil prices, the impact of these items on our customers and our sales cycles, as well as on our employees, all of which are uncertain and cannot be predicted. We are continuing to monitor the potential impacts related to the current disruption of COVID-19 and uncertainty in the global 30 -------------------------------------------------------------------------------- Table of Contents markets on the various industries of our customers. These factors could potentially impact the signing of new agreements, as well as the recoverability of assets, including accounts receivable and contract costs. Key Components of Operations Revenue We generate revenue primarily from the following sources: License Revenue. We sell our software products to end users, primarily under fixed-term licenses, through a subscription offering which we refer to as our aspenONE licensing model. The aspenONE licensing model includes software maintenance and support, known as our Premier Plus SMS offering, for the entire term. Our aspenONE products are organized into three suites: 1) engineering; 2) manufacturing and supply chain; and 3) asset performance management. The aspenONE licensing model provides customers with access to all of the products within the aspenONE suite(s) they license. Customers can change or alternate the use of multiple products in a licensed suite through the use of exchangeable units of measurement, called tokens, licensed in quantities determined by the customer. This licensing system enables customers to use products as needed and to experiment with different products to best solve whatever critical business challenges they face. Customers can increase their usage of our software by purchasing additional tokens as business needs evolve. We also license our software through point product arrangements with our Premier Plus SMS offering included for the contract term. Maintenance Revenue. We provide customers technical support, access to software fixes and updates and the right to any new unspecified future software products and updates that may be introduced into the licensed aspenONE software suite. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website. Services and Other Revenue. We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers' plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, Internet-based and customized training. Cost of Revenue Cost of License. Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangibles, and (iii) distribution fees. Cost of Maintenance. Our cost of maintenance revenue consists primarily of personnel-related costs of providing Premier Plus SMS bundled with our aspenONE licensing and point product arrangements. Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing customers professional services and training. Operating Expenses Selling and Marketing Expenses. Selling expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to conduct market research to help us better understand our customers and their business needs. Research and Development Expenses. Research and development expenses consist primarily of personnel expenses related to the creation of new software products, enhancements and engineering changes to existing products. General and Administrative Expenses. General and administrative expenses include the costs of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources and corporate communications, and other costs, such as outside professional and consultant fees, amortization of intangibles, and provision for bad debts. Other Income and Expenses Interest Income. Interest income is recorded for financing components under Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). When a contract includes a significant financing component, we generally receive the majority of the customer consideration after the recognition of a substantial portion of the 31 -------------------------------------------------------------------------------- Table of Contents arrangement fee as license revenue. As a result, we decrease the amount of revenue recognized and increase interest income by a corresponding amount. Interest income also includes the accretion of interest on investments in short-term money market instruments. Interest Expense. Interest expense is primarily related to our Amended and Restated Credit Agreement. Other (Expense) Income, Net. Other (expense) income, net is comprised primarily of foreign currency exchange gains (losses) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units. Provision for Income Taxes. Provision for income taxes is comprised of domestic and foreign taxes. We record interest and penalties related to income tax matters as a component of income tax expense. Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the disposition of employee equity awards, settlements of tax audits and assessments and tax law changes. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ. Key Business Metrics Background We utilize key business measures to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business: •Annual spend •Total contract value •Bookings
We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:
•Free cash flow
•Non-GAAP operating income
We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.
Annual Spend
Annual spend is an estimate of the annualized value of our portfolio of term
license agreements, as of a specific date. Annual spend is calculated by summing
the most recent annual invoice value of each of our active term license
agreements. Annual spend also includes the annualized value of standalone SMS
agreements purchased with certain legacy term license agreements, which have
become an immaterial part of our business.
Comparing annual spend for different dates can provide insight into the growth
and retention rates of our business, because annual spend represents the
estimated annualized billings associated with our active term license
agreements. Management utilizes the annual spend business metric to evaluate the
growth and performance of our business as well as for planning and forecasting.
In addition, our corporate and executive bonus programs are based in part on the
company's success in meeting targets for growth in annual spend that are
approved by our board. We believe that annual spend is a useful business metric
to investors as it provides insight into the growth component of our term
licenses and to how management evaluates and forecasts the business.
Annual spend increases as a result of new term license agreements with new or
existing customers, renewals or modifications of existing term license
agreements that result in higher license fees due to contractually-agreed price
escalation or an increase in the number of tokens (units of software usage) or
products licensed, and escalation of annual payments in our active term license
agreements.
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Annual spend is adversely affected by term license and standalone SMS agreements
that are renewed at a lower entitlement level or not renewed and, to a lesser
extent, by customer agreements that become inactive during the agreement's term
because, in our determination, amounts due (or which will become due) under the
agreement are not collectible. Because the annual spend calculation includes all
of our active term license agreements, the reported balance may include
agreements with customers that are delinquent in paying invoices, that are in
bankruptcy proceedings, or where payment is otherwise in doubt.
As of December 31, 2020 , approximately 87% of our term license agreements (by
value) are denominated in U.S. dollars. For agreements denominated in other
currencies, the company uses a fixed historical exchange rate to calculate
annual spend in dollars rather than using current exchange rates, so that our
calculation of growth in annual spend is not affected by fluctuations in foreign
currencies.
Beginning in fiscal 2019 and for all future periods, for term license agreements
that contain professional services or other products and services, we have
included in the annual spend calculation the portion of the invoice allocable to
the term license under Topic 606 rather than the portion of the invoice
attributed to the license in the agreement. We believe that methodology more
accurately allocates any discounts or premiums to the different elements of the
agreement. We have not applied this methodology retroactively for agreements
entered into in prior fiscal years.
We estimate that annual spend grew by approximately 1.3% during the second
quarter of fiscal 2021, from
Total Contract Value
Total Contract Value ("TCV") is the aggregate value of all payments received or
to be received under all active term license agreements, including maintenance
and escalation. TCV was $2.8 billion as of June 30, 2020 . TCV is an annual
metric and will be included in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2021 .
Bookings
Bookings is the total value of customer term license contracts signed in the
current period, less the value of such contracts signed in the current period
where the initial licenses are not yet deemed delivered, plus term license
contracts signed in a previous period for which the initial licenses are deemed
delivered in the current period.
Bookings increased from $112.3 million during the three months ended
December 31, 2019 to $274.4 million during the three months ended December 31,
2020 . Bookings increased from $247.2 million during the six months ended
December 31, 2019 to $373.2 million during the six months ended December 31,
2020 . The change in bookings is due to the timing of renewals.
Free Cash Flow
We use a non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the Amended and Restated Credit Agreement, and it is a basis for comparing our performance with that of our competitors. The presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.
Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition related receipts and payments.
The following table provides a reconciliation of GAAP net cash provided by operating activities to free cash flow for the indicated periods:
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Six Months Ended
December 31,
2020 2019
(Dollars in Thousands)
Net cash provided by operating activities (GAAP) $ 74,290 $ 62,207
Purchases of property, equipment, and leasehold improvements (522) (968)
Payments for capitalized computer software development costs (895) (70)
Acquisition related payments 907 1,264
Free cash flow (non-GAAP) $ 73,780 $ 62,433
Total free cash flow on a non-GAAP basis increased by $11.3 million during the
six months ended December 31, 2020 as compared to the same period of the prior
fiscal year primarily due to changes in working capital. See additional
commentary in the "Liquidity and Capital Resources" section below.
Non-GAAP Income from Operations
Non-GAAP income from operations excludes certain non-cash and non-recurring
expenses, and is used as a supplement to income from operations presented on a
GAAP basis. We believe that non-GAAP income from operations is a useful
financial measure because removing certain non-cash and other items provides
additional insight into recurring profitability and cash flow from operations.
The following table presents our income from operations, as adjusted for stock-based compensation expense, amortization of intangibles, and other items, such as the impact of acquisition related fees, for the indicated periods:
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
GAAP income from operations
248.1 % $ 183,623 $ 96,329 $ 87,294 90.6 %
Plus:
Stock-based compensation 9,096 7,559 1,537 20.3 % 15,364 16,834 (1,470) (8.7) % Amortization of intangibles 1,865 1,682 183 10.9 % 3,610 2,877 733 25.5 % Acquisition related fees 1,821 (40) 1,861 (4,652.5) % 2,384 78 2,306 2,956.4 % Non-GAAP income from operations$ 162,235 $ 52,140 $ 110,095 211.2 %$ 204,981 $ 116,118 $ 88,863 76.5 %
Critical Accounting Estimates and Judgments
Note 2, "Significant Accounting Policies," to the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 , and include the following:
•Revenue recognition
See Note 3, "Revenue from Contracts with Customers," to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for more information on our accounting policies related to revenue recognition.
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Results of Operations
Comparison of the Three and Six Months Ended
The following table sets forth the results of operations and the
period-over-period percentage change in certain financial data for the three and
six months ended
Increase / Increase /
Three Months Ended (Decrease) Six Months Ended (Decrease)
December 31, Change December 31, Change
2020 2019 % 2020 2019 %
(Dollars in Thousands)
Revenue:
License $ 180,170 $ 72,436 148.7 % $ 242,029 $ 160,155 51.1 %
Maintenance 46,818 44,547 5.1 % 93,676 88,219 6.2 %
Services and other 6,730 9,029 (25.5) % 12,984 17,815 (27.1) %
Total revenue 233,718 126,012 85.5 % 348,689 266,189 31.0 %
Cost of revenue:
License 2,238 2,009 11.4 % 4,374 3,669 19.2 %
Maintenance 4,128 4,584 (9.9) % 8,892 9,561 (7.0) %
Services and other 7,949 8,933 (11.0) % 16,515 17,514 (5.7) %
Total cost of revenue 14,315 15,526 (7.8) % 29,781 30,744 (3.1) %
Gross profit 219,403 110,486 98.6 % 318,908 235,445 35.4 %
Operating expenses:
Selling and marketing 26,575 28,500 (6.8) % 51,747 57,692 (10.3) %
Research and development 22,172 22,625 (2.0) % 44,702 45,118 (0.9) %
General and administrative 21,203 16,422 29.1 % 38,836 36,306 7.0 %
Total operating expenses 69,950 67,547 3.6 % 135,285 139,116 (2.8) %
Income from operations 149,453 42,939 248.1 % 183,623 96,329 90.6 %
Interest income 9,304 8,428 10.4 % 17,973 16,404 9.6 %
Interest (expense) (2,049) (3,161) (35.2) % (4,144) (6,161) (32.7) %
Other (expense) income, net (333) (997) (66.6) % (1,802) 135 (1,434.8) %
Income before income taxes 156,375 47,209 231.2 % 195,650 106,707 83.4 %
Provision for income taxes 27,223 7,408 267.5 % 33,787 13,392 152.3 %
Net income $ 129,152 $ 39,801 224.5 % $ 161,863 $ 93,315 73.5 %
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Table of Contents The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the three and six months endedDecember 31, 2020 and 2019: Three Months Ended Six Months Ended December 31, December 31, 2020 2019 2020 2019 (% of Revenue) Revenue: License 77.1 % 57.5 % 69.4 % 60.2 % Maintenance 20.0 35.4 26.9 33.1 Services and other 2.9 7.1 3.7 6.7 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: License 1.0 1.6 1.3 1.4 Maintenance 1.8 3.6 2.6 3.6 Services and other 3.4 7.1 4.7 6.6 Total cost of revenue 6.1 12.3 8.5 11.5 Gross profit 93.9 87.7 91.5 88.5 Operating expenses: Selling and marketing 11.4 22.6 14.8 21.7 Research and development 9.5 18.0 12.8 16.9 General and administrative 9.1 13.0 11.1 13.6 Total operating expenses 29.9 53.6 38.8 52.3 Income from operations 63.9 34.1 52.7 36.2 Interest income 4.0 6.7 5.2 6.2 Interest (expense) (0.9) (2.5) (1.2) (2.3) Other (expense) income, net (0.1) (0.8) (0.5) 0.1 Income before income taxes 66.9 37.5 56.1 40.1 Provision for income taxes 11.6 5.9 9.7 5.0 Net income 55.3 % 31.6 % 46.4 % 35.1 % Revenue Total revenue increased by$107.7 million during the three months endedDecember 31, 2020 as compared to the corresponding period of the prior fiscal year. The increase of$107.7 million during the three months endedDecember 31, 2020 was comprised of an increase in license revenue of$107.7 million and an increase in maintenance revenue of$2.3 million , partially offset by a decrease in services and other revenue of$2.3 million , as compared to the corresponding period of the prior fiscal year. Total revenue increased by$82.5 million during the six months endedDecember 31, 2020 as compared to the corresponding period of the prior fiscal year. The increase of$82.5 million during the six months endedDecember 31, 2020 was comprised of an increase in license revenue of$81.9 million and an increase in maintenance revenue of$5.5 million , partially offset by a decrease in services and other revenue of$4.8 million , as compared to the corresponding period of the prior fiscal year. License Revenue Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) License revenue$ 180,170 $ 72,436 $ 107,734 148.7 %$ 242,029 $ 160,155 $ 81,874 51.1 % As a percent of total revenue 77.1 % 57.5 % 69.4 % 60.2 % 36
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The period-over-period increase of$107.7 million and$81.9 million in license revenue during the three and six months endedDecember 31, 2020 , respectively, was primarily attributable to an increase in bookings related to the timing of renewals. Maintenance Revenue Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) Maintenance revenue$ 46,818 $ 44,547 $ 2,271 5.1 %$ 93,676 $ 88,219 $ 5,457 6.2 % As a percent of total revenue 20.0 % 35.4 % 26.9 % 33.1 % We expect maintenance revenue to increase as a result of: (i) having a larger base of arrangements recognized on a ratable basis; (ii) increased customer usage of our software; (iii) adding new customers; and (iv) escalating annual payments. The period-over-period increase of$2.3 million and$5.5 million in maintenance revenue during the three and six months endedDecember 31, 2020 , respectively, was primarily due to growth of our base of arrangements, which include maintenance, being recognized on a ratable basis. Services and Other Revenue Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) Services and other revenue$ 6,730 $ 9,029 $ (2,299)
(25.5) %
(27.1) %
As a percent of total
revenue 2.9 % 7.1 % 3.7 % 6.7 %
We recognize professional services revenue for our time-and-materials ("T&M")
contracts based upon hours worked and contractually agreed-upon hourly rates.
Revenue from fixed-price engagements is recognized using the proportional
performance method based on the ratio of costs incurred to the total estimated
project costs.
Services and other revenue decreased $2.3 million and $4.8 million during the
three and six months ended December 31, 2020 , respectively, as compared to the
corresponding period of the prior fiscal year primarily due to the timing and
volume of professional services engagements.
Cost of Revenue
Cost of License Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Cost of license revenue $ 2,238 $ 2,009 $ 229 11.4 %
19.2 % As a percent of license revenue 1.2 % 2.8 % 1.8 % 2.3 % Cost of license revenue increased$0.2 million and$0.7 million for the three and six months endedDecember 31, 2020 , respectively, as compared to the corresponding period of the prior fiscal year primarily due to increased amortization of intangible assets from acquisitions. License gross profit margin remained consistent at 98.8% and 97.2% for the three months endedDecember 31, 2020 and 2019, respectively, and 98.2% and 97.7% for the six months endedDecember 31, 2020 and 2019, respectively, due to the low cost of license revenue. 37 --------------------------------------------------------------------------------
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Cost of Maintenance Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Cost of maintenance revenue $ 4,128 $ 4,584 $ (456) (9.9) % $ 8,892 $ 9,561 $ (669) (7.0) %
As a percent of maintenance
revenue 8.8 % 10.3 % 9.5 % 10.8 %
Cost of maintenance revenue decreased $0.5 million and $0.7 million for the
three and six months ended December 31, 2020 , respectively, as compared to the
corresponding period of the prior fiscal year. Maintenance gross profit margin
was 91.2% and 89.7% for the three months ended December 31, 2020 and 2019,
respectively, and 90.5% and 89.2% for the six months ended December 31, 2020 and
2019, respectively.
Cost of Services and Other Revenue
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Cost of services and other
revenue $ 7,949 $ 8,933 $ (984) (11.0) % $ 16,515 $ 17,514 $ (999) (5.7) %
As a percent of services and
other revenue 118.1 % 98.9 % 127.2 % 98.3 %
The timing of revenue and expense recognition on professional service
arrangements can impact the comparability of cost and gross profit margin of
professional services revenue from year to year. For example, revenue from
fixed-price engagements is recognized using the proportional performance method
based on the ratio of costs incurred to the total estimated project costs.
Cost of services and other revenue decreased $1.0 million and $1.0 million for
the three and six months ended December 31, 2020 , respectively, as compared to
the corresponding period of the prior fiscal year. Gross profit margin on
services and other revenue was (18.1)% and 1.1% for the three months ended
December 31, 2020 and 2019, respectively, and (27.2)% and 1.7% for the six
months ended December 31, 2020 and 2019, respectively.
Gross Profit
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Gross profit $ 219,403 $ 110,486 $ 108,917 98.6 % $ 318,908 $ 235,445 $ 83,463 35.4 %
As a percent of revenue 93.9 % 87.7 % 91.5 % 88.5 %
For further discussion of subscription and software gross profit and services
and other gross profit, please refer to the "Cost of License Revenue," "Cost of
Maintenance Revenue," and "Cost of Services and Other Revenue" sections above.
Gross profit increased by $108.9 million and $83.5 million for the three and six
months ended December 31, 2020 , respectively, as compared to the corresponding
period of the prior fiscal year. Gross profit margin remained consistent at
93.9% and 87.7% for the three months ended December 31, 2020 and 2019,
respectively, and 91.5% and 88.5% for the six months ended December 31, 2020 and
2019, respectively.
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Operating Expenses
Selling and Marketing Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Selling and marketing
expense $ 26,575 $ 28,500 $ (1,925) (6.8) % $ 51,747 $ 57,692 $ (5,945) (10.3) %
As a percent of total
revenue 11.4 % 22.6 % 14.8 % 21.7 %
The period-over-period decrease of $1.9 million in selling and marketing expense
during the three months ended December 31, 2020 was primarily attributable to
lower travel and event related costs of $2.2 million .
The period-over-period decrease of
Research and Development Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Research and development
expense $ 22,172 $ 22,625 $ (453) (2.0) % $ 44,702 $ 45,118 $ (416) (0.9) %
As a percent of total revenue 9.5 % 18.0 % 12.8 % 16.9 %
The period-over-period decrease of
The period-over-period decrease of
General and Administrative Expense
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
General and administrative
expense $ 21,203 $ 16,422 $ 4,781 29.1 % $ 38,836 $ 36,306 $ 2,530 7.0 %
As a percent of total revenue 9.1 % 13.0 % 11.1 % 13.6 %
The period-over-period increase of
The period-over-period increase of$2.5 million in general and administrative expense during the six months endedDecember 31, 2020 was primarily attributable to higher bad debt expense of$3.5 million and higher acquisition costs of$2.3 million , partially offset by lower compensation costs of$1.4 million and lower professional fees of$1.6 million . 39 -------------------------------------------------------------------------------- Table of Contents Non-Operating Income (Expense) Interest Income Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) Interest income$ 9,304 $ 8,428 $ 876 10.4 %$ 17,973 $ 16,404 $ 1,569 9.6 % As a percent of total revenue 4.0 % 6.7 % 5.2 % 6.2 % The period-over-period increase of$0.9 million and$1.6 million in interest income during the three and six months endedDecember 31, 2020 , respectively, was a result of: (i) increased customer usage of our software; (ii) adding new customers; and (iii) escalating annual payments. Interest Expense Three Months Ended (Increase) / Decrease Six Months Ended (Increase) / Decrease December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) Interest expense$ (2,049) $ (3,161) $ 1,112 (35.2) %$ (4,144) $ (6,161) $ 2,017 (32.7) % As a percent of total revenue (0.9) % (2.5) % (1.2) % (2.3) % The period-over-period decrease of$1.1 million and$2.0 million in interest expense during the three and six months endedDecember 31, 2020 , respectively, was primarily due to lower interest expenses related to our Amended and Restated Credit Agreement. Other (Expense) Income, Net Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease) December 31, Change December 31, Change 2020 2019 $ % 2020 2019 $ % (Dollars in Thousands) Other (expense) income, net$ (333) $ (997) $ 664 (66.6) %$ (1,802) $ 135 $ (1,937) (1,434.8) % As a percent of total revenue (0.1) % (0.8) % (0.5) % 0.1 % Other (expense) income, net is comprised primarily of unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities. During the three months endedDecember 31, 2020 and 2019, other (expense) income, net was primarily comprised of$(0.6) million and$(1.0) million of currency losses, respectively.
During the six months ended
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Provision for Income Taxes
Three Months Ended Increase / (Decrease) Six Months Ended Increase / (Decrease)
December 31, Change December 31, Change
2020 2019 $ % 2020 2019 $ %
(Dollars in Thousands)
Provision for income
taxes $ 27,223 $ 7,408 $ 19,815 267.5 % $ 33,787 $ 13,392 $ 20,395 152.3 %
Effective tax rate 17.4 % 15.7 % 17.3 % 12.6 %
The effective tax rate for the periods presented is primarily the result of
income earned in the U.S. taxed at U.S. federal and state statutory income tax
rates, income earned in foreign tax jurisdictions taxed at the applicable rates,
as well as the impact of permanent differences between book and tax income,
primarily the Foreign Derived Intangible Income ("FDII") deduction. Assuming
certain requirements are met, the FDII deduction is a benefit for U.S. companies
that sell their products or services to customers outside the U.S.
Our effective tax rate was 17.4% and 15.7% during the three months ended
December 31, 2020 and 2019, respectively, and 17.3% and 12.6% during the six
months ended December 31, 2020 and 2019, respectively. Our effective tax rate
was lower in the three and six months ended December 31, 2019 as a result of the
tax contingency reversal due to settling an IRS audit.
We recognized an income tax expense of $27.2 million and $7.4 million during the
three months ended December 31, 2020 and 2019, respectively, and $33.8 million
and $13.4 million during the six months ended December 31, 2020 and 2019,
respectively. Our income tax expense was driven primarily by pre-tax
profitability in our domestic and foreign operations and the impact of permanent
items. The permanent items are predominantly the FDII deduction, stock-based
compensation expense and tax credits for research expenditures.
Liquidity and Capital Resources
Resources
In recent years, we have financed our operations with cash generated from
operating activities. As of
We believe our existing cash and cash equivalents, together with our cash flows from operating activities, will be sufficient to meet our anticipated cash needs for at least the next twelve months. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to effect a receivable, equity or debt financing on terms acceptable to us or at all. Credit Agreement InDecember 2019 , we entered into an Amended and Restated Credit Agreement withJPMorgan Chase Bank, N.A ., as administrative agent, joint lead arranger and joint bookrunner,Silicon Valley Bank , as joint lead arranger, joint bookrunner and syndication agent, and the lenders and co-documentation agents named therein (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement, which amends and restates the Credit Agreement we entered into as ofFebruary 26, 2016 with the same lenders (the "Prior Credit Agreement"), provides for a$200.0 million secured revolving credit facility and a$320.0 million secured term loan facility. The indebtedness under the revolving credit facility matures onDecember 23, 2024 . Prior to the maturity of the Amended and Restated Credit Agreement, any amounts borrowed under the revolving credit facility may be repaid and, subject to the terms and conditions of the Amended and Restated Credit Agreement, borrowed again in whole or in part without penalty. As ofDecember 31, 2020 , our current borrowings of$16.0 million consist of the term loan facility. Our non-current borrowings of$284.8 million consist of$288.0 million of our term loan facility, net of$3.2 million in debt issuance costs. We had current borrowings of$135.2 million and non-current borrowings of$292.4 million as ofJune 30, 2020 .
For a more detailed description of the Amended and Restated Credit Agreement, see Note 12, "Credit Agreement," to our Unaudited Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.
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Cash Equivalents and Cash Flows
Our cash equivalents of $1.0 million and $1.0 million as of December 31, 2020
and June 30, 2020 , respectively, consisted of money market funds. The objective
of our investment policy is to manage our cash and investments to preserve
principal and maintain liquidity.
The following table summarizes our cash flow activities for the periods
indicated:
Six Months Ended
December 31,
2020 2019
(Dollars in Thousands)
Cash flow provided by (used in):
Operating activities $ 74,290 $ 62,207
Investing activities (17,526) (75,257)
Financing activities (128,175) 21,708
Effect of exchange rates on cash balances 1,104 (98)
Increase (decrease) in cash and cash equivalents
Operating Activities Our primary source of cash is from the annual installments associated with our software license arrangements and related software support services, and to a lesser extent from professional services and training. We believe that cash inflows from our term license business will grow as we benefit from the continued growth of our portfolio of term license contracts.
Cash from operating activities provided
Non-cash items during the six months endedDecember 31, 2020 consisted primarily of stock-based compensation expense of$15.4 million , depreciation and amortization expense of$4.9 million , reduction in the carrying amount of right-of-use assets of$4.8 million , provision for bad debts of$4.7 million , and net foreign currency losses of$2.1 million . Cash used by working capital of$120.0 million during the six months endedDecember 31, 2020 was primarily attributable to cash used by increases in contract assets of$123.4 million , decreases in accounts payable, accrued expenses and other current liabilities of$7.1 million , and decreases in lease liabilities of$5.2 million , partially offset by decreases in accounts receivable of$8.4 million , increases in deferred revenue of$7.0 million , and decreases in contract costs of$0.3 million .
Investing Activities
During the six months ended
Financing Activities
During the six months endedDecember 31, 2020 , we used$128.2 million of cash for financing activities. This amount resulted from$119.2 million of cash used for the repayment of the outstanding balance under our revolving credit facility,$8.0 million of cash used for maturities of amounts borrowed under our term loan facility, and$4.1 million of cash used for withholding taxes on vested and settled restricted stock units, partially offset by$3.1 million for cash provided by the exercise of employee stock options.
Contractual Obligations
Standby letters of credit for
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