Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto appearing in Part II, Item 8 of this Annual Report on Form 10‑K. In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10‑K.
All amounts presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, except share and per share amounts, are presented in thousands. Additionally, many of the amounts and percentages have been rounded for convenience of presentation.
Overview:
We are a leading global provider of software for infrastructure engineering, enabling the work of civil, structural, geotechnical, and plant engineering practitioners, their project delivery enterprises, and owner‑operators of infrastructure assets. We were founded in 1984 by the Bentley brothers and on September 25, 2020, we completed our IPO.
Our enduring commitment is to develop and support the most comprehensive portfolio of integrated software offerings across professional disciplines, project and asset lifecycles, infrastructure sectors, and geographies. Our software enables digital workflows across engineering disciplines, distributed project teams, from offices to the field, and across computing form factors, including desktops, on‑premises servers, cloud‑native services, mobile devices, and web browsers. We deliver our solutions via on‑premise, cloud, and hybrid environments. Our users engineer, construct, and operate projects and assets across the following infrastructure sectors:
•public works (including roads, rail, airports, ports, and water and wastewater networks)/utilities (including electric, gas, water, and communications). We estimate that this sector represents 51% of the net infrastructure asset value of the global top 500 infrastructure owners based on the 2020 edition of the Bentley Infrastructure 500 Top Owners, our annual compilation of the world’s largest infrastructure owners ranked by net depreciated value of their tangible fixed assets;
•industrial (including discrete and process manufacturing, power generation, and water treatment plants)/resources (including oil and gas, mining, and offshore). We estimate that this sector represents 37% of the global top 500 infrastructure owners’ net infrastructure asset value; and
•commercial/facilities (including office buildings, hospitals, and campuses). We estimate that this sector represents 12% of the global top 500 infrastructure owners’ net infrastructure asset value.
We offer solutions for enterprises and professionals across the infrastructure lifecycle. Our Project Delivery and Asset and Network Performance solutions are systems provided via cloud and hybrid environments, developed respectively to extend enterprise collaboration during project delivery, and to manage and leverage engineering information during operations and maintenance. Our Design Integration and Digital Cities solutions are primarily desktop applications and cloud‑provisioned solutions for professional practitioners and workgroups.
We continue to make substantial investments in research and development because we believe the infrastructure engineering software market presents compelling opportunities for the application of new technologies that advance our current solutions. Our research and development roadmap balances technology advances and new offerings with continuous enhancements to existing offerings. Our allocation of research and development resources is guided by management‑established priorities, input from product managers, and user and sales force feedback.
We bring our offerings to market primarily through direct sales channels that generated approximately 92% of our 2020 revenues.
Since its founding, Bentley Systems has remained focused on our mission to provide software in support of the professional needs of those responsible for creating and managing the world’s infrastructure. We have methodically grown through periods of global expansion, periods of expansion in our portfolio of solutions, and periods of rapid technological change. The following provides key corporate milestones over our 36‑year history:
Our sources of revenue growth, in order of magnitude, come from the recurrence of existing subscription revenues, additional revenue and growth from existing accounts using the same products, additional revenue and growth from existing accounts using new products, and growth from new accounts. For the year ended December 31, 2020, under Topic 6061, subscriptions represented 85% of our revenues, and together with certain professional services revenues that are recurring in nature and represented 2% of our revenues, bring the proportion of our recurring revenues to 87% of total revenues. The remaining 13% of our revenues were generated from the sale of perpetual licenses and the delivery of non‑recurring professional services. We have a highly‑diversified account base, with our largest account representing no more than 2.5% of total revenues in 2020. Our 2020 revenues were also diversified by account type, size, and geography. Additionally, we believe that we have a loyal account base, with 80% of our 2020 revenues from organizations that have been our accounts for over ten years. Between 2000 and 2020, our revenues had an approximately 8% compound annual growth rate.
1 On January 1, 2019, we adopted ASU No. 2014‑09, Revenue from Contracts with Customers, and related amendments (“Topic 606”), which superseded the guidance provided by Accounting Standards Codification (“ASC”) 985‑605, Software-Revenue Recognition, and Topic 605‑25, Revenue Recognition, Multiple-Element Arrangements. We refer to ASC 985‑605 and Topic 605‑25 collectively as “Topic 605.” We adopted Topic 606 using the modified retrospective method and applied the standard only to contracts that were not completed as of the date of initial application. See Note 3 to our consolidated financial statements for further information on the impact upon adoption of Topic 606 as of January 1, 2019.
Our Commercial Offerings:
Our solutions are made available to our accounts in a broad range of commercial offerings designed to accommodate the diverse preferences of our accounts, which range from owned versus subscribed, short‑term subscriptions versus longer term annual subscriptions, and fee‑certain arrangements versus variable or consumption‑based arrangements with consumption measurement durations of less than one year. We contract our commercial offerings under a single form of standard contract, which includes liability and other risk protections in our favor, and appropriate standard addendums to the primary contract, which specifically address the commercial offerings provided. Our standard commercial offerings are summarized in the below table, with further descriptions following the table:
SELECT Subscriptions. Our SELECT subscription is a prepaid annual recurring subscription that accompanies a new or previously purchased perpetual license. We believe that the SELECT benefits summarized below support our favorable rates of account retention and growth:
•Software upgrades;
•Comprehensive technical support;
•License pooling providing accounts with efficiency advantages;
•Portfolio balancing providing accounts the opportunity to exchange unused or under used licenses with other of our license offerings;
•Learning benefits, Azure‑based cloud collaboration services, and mobility advantages; and
•Access to our entire application portfolio with usage of licenses not previously purchased monetized quarterly in arrears based on consumption. See the section titled “—Term License Subscriptions” below.
Enterprise Subscriptions. Our Enterprise subscription offerings provide our largest accounts with complete and unlimited global access to our comprehensive portfolio of solutions.
•Enterprise License Subscriptions (“ELS”). Our ELS offering provides access to our comprehensive portfolio of solutions for a fixed annual fee. Subsequent annual renewals are based on the account’s usage of software in the preceding year, effectively resulting in an annual consumption‑based arrangement. The majority of our ELS subscribers were historically SELECT subscribers that have grown into a position to take full advantage of our ELS offering.
•Enterprise 365 (“E365”) Subscriptions. Under our E365 subscription, participating accounts have unrestricted access to our comprehensive software portfolio, similar to ELS, however they are charged based upon daily usage. The daily usage fee also includes a term license component, SELECT maintenance and support, hosting, and Success Plan services, which are designed to achieve business outcomes through more efficient and effective use of our software. The E365 subscription offering was introduced in 2018. Prospectively, we plan to prioritize efforts to transition ELS subscribers to E365 subscriptions, primarily to simplify pricing, more closely align consumption to monetization, and to establish Success Plan services as recurring to ensure better business outcomes for our users. To the extent we succeed in transitioning subscribers to E365, under Topic 606 we would recognize a greater proportion of our revenues on a quarterly basis rather than substantially upfront. See the section titled “—Key Factors Impacting Comparability and Performance.”
Term License Subscriptions
Annual Term Licenses (“ATL”) Subscription. Annual term licenses are generally prepaid annually for named user access to specific products and include our newly introduced Practitioner Licenses. ATL are also used to monetize site or enterprise wide access for certain of our AssetWise solutions within given usage bands.
Quarterly Term License (“QTL”) Subscription. Through quarterly term licenses, accounts pay quarterly in arrears for licenses they have used representing usage beyond their contracted quantities. Much like our Enterprise subscription programs, a QTL allows smaller and medium‑sized accounts to match usage to ongoing project requirements.
Monthly Term License (“MTL”) Subscription. Monthly term licenses are identical to QTL subscriptions, except for the term of the license, and the manner in which they are monetized. MTL subscriptions require a Cloud Services Subscription, which is discussed below.
Visas and Passports. Visas and Passports are quarterly or annual term licenses enabling users to access specific project or enterprise information and entitles our users to certain functionality of our ProjectWise and AssetWise systems. Generally, a Passport provides desktop, web, and mobile application access to project information and certain functions, and a Visa provides similar access, plus added functionality depending upon the product to which the Visa is aligned.
While certain legacy arrangements are supported, our standard offering requires Visas and Passports to be fulfilled and contracted via a CSS, which is discussed below.
Cloud Services Subscription (“CSS”). CSS is designed to streamline the procurement, administration, and payment process for us and our accounts. A CSS requires an upfront annual estimation of MTL, Visa and Passport consumption, and any Success Plan services expected for the upcoming year. A deposit for the annual estimated consumption is submitted in advance. Actual consumption is monitored and invoiced against the deposit on a calendar quarter basis. Accounts are charged only for what gets used and deposited amounts never expire.
Perpetual Licenses
We historically have sold perpetual licenses and continue to offer them to our accounts as an available option for most of our applications. Perpetual licenses are available for accounts that prefer to own their software licenses and may be sold with or without attaching a SELECT subscription. Historically, attachment and retention of the SELECT subscription has been high given the benefits of the SELECT subscription.
Professional Services
We offer professional services, including training, implementation, configuration, customization, and strategic consulting services for all types of projects as requested by our accounts. We perform projects on both a time and materials and a fixed fee basis. We also offer our services using contractual structures based on (i) delivery of the services in the form of subscription‑like, packaged offerings that are annually recurring in nature; and (ii) delivery of our growing portfolio of Success Plans in standard offerings that offer a level of subscription service over and above the standard technical support offered to all accounts as part of their SELECT or Enterprise agreement. Over time, we expect professional services revenues using subscription and subscription‑like contractual structures to make up a greater proportion of our professional services revenues.
Key Business Metrics:
We regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, and make strategic decisions.
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|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Last twelve-months recurring revenues (Topic 606)
|
$
|
696,662
|
|
|
$
|
631,097
|
|
|
$
|
586,466
|
|
Last twelve-months recurring revenues (Topic 605)
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$
|
700,406
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|
|
$
|
636,899
|
|
|
$
|
583,402
|
|
Constant Currency:
|
|
|
|
|
|
Annualized recurring revenues (“ARR”) growth rate
|
8
|
%
|
|
12
|
%
|
|
10
|
%
|
Account retention rate (Topic 606)
|
98
|
%
|
|
|
|
|
Account retention rate (Topic 605)
|
98
|
%
|
|
98
|
%
|
|
98
|
%
|
Recurring revenues dollar-based net retention rate (Topic 606)
|
107
|
%
|
|
|
|
|
Recurring revenues dollar-based net retention rate (Topic 605)
|
108
|
%
|
|
108
|
%
|
|
107
|
%
|
Last twelve‑months recurring revenues. Last twelve‑months recurring revenues is calculated as recurring revenues recognized over the preceding twelve‑month period. We define recurring revenues as subscriptions revenues that recur monthly, quarterly, or annually with specific or automatic renewal clauses and professional services revenues in which the underlying contract is based on a fixed fee and contains automatic annual renewal provisions.
Last twelve‑months recurring revenues is presented using revenues recognized pursuant to Topic 606, as well as Topic 605, for all periods in order to enhance comparability during our transition to Topic 606. The Topic 606 unaudited amount presented for the year ended December 31, 2018 gives effect to revenue adjustments as if the adoption of Topic 606 had occurred as of January 1, 2018 rather than January 1, 2019. For a reconciliation of the impact of adopting Topic 606 as if it had occurred as of January 1, 2018 on our audited consolidated statement of operations data for the year ended December 31, 2018, see the section titled “—Non‑GAAP Financial Measures.”
On an annual and trailing twelve‑month basis, we expect our recurring revenues recognized under Topic 606 to be comparable to such revenues recognized under Topic 605. This expectation is attributable to the annual, recurring nature of our subscription agreements. However, under Topic 606, the conversion of our existing subscription users to consumption‑based offerings with consumption measurement durations of less than one year, such as our E365 subscription offering, as well as the term start date of new annual term license subscriptions, does introduce some volatility between annual and trailing twelve‑month periods and impact period over period comparability. Specifically, in 2019, the conversion of existing ELS subscriptions to consumption‑based E365 subscriptions resulted in a reduction of Topic 606 Enterprise subscriptions revenues of $11,248 when compared to Topic 605. This impact was partially offset by higher annual term license subscriptions revenues under Topic 606 of $5,714 due to the upfront recognition of license revenues of new subscriptions. See the section titled “—Key Factors Impacting Comparability and Performance.”
We believe that last twelve‑months recurring revenues is an important indicator of our performance during the immediately preceding twelve‑month time period. We believe that we will continue to experience favorable growth in recurring revenues due to our strong account retention and recurring revenues dollar‑based net retention rates, as well as the addition of new accounts with recurring revenues. The last twelve‑months recurring revenues under Topic 606 for the periods ended December 31, 2020, 2019, and 2018 compared to the last twelve‑months of the preceding twelve‑month period increased by $65,565 (or $63,507 under Topic 605), $44,631 (or $53,497 under Topic 605), and $64,543 (or $59,900 under Topic 605), respectively. The increase was primarily due to growth in ARR, which is primarily the result of consistent performance in our account retention rate and in our recurring revenues dollar‑based net retention rate, as well as additional recurring revenues resulting from new accounts and acquisitions. For the twelve months ended December 31, 2020, 87% of our revenues under Topic 606 were recurring revenues. For the twelve months ended December 31, 2019, 86% of our revenues under Topic 606 (or 87% under Topic 605) were recurring revenues.
Constant currency metrics. In reporting period‑over‑period results, we calculate the effects of foreign currency fluctuations and constant currency information by translating current period results using prior period average foreign currency exchange rates. Our definition of constant currency may differ from other companies reporting similarly named measures, and these constant currency performance measures should be viewed in addition to, and not as a substitute for, our operating performance measures calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
ARR growth rate. Our ARR growth rate is the growth rate of our ARR, measured on a constant currency basis. Our ARR is defined as the sum of the annualized value of our portfolio of contracts that produce recurring revenue as of the last day of the reporting period, and the annualized value of the last three months of recognized revenues for our contractually recurring consumption‑based software subscriptions with consumption measurement durations of less than one year. We believe that the last three months of recognized revenues, on an annualized basis, for our recurring software subscriptions with consumption measurement period durations of less than one year is a reasonable estimate of the annual revenues, given our consistently high retention rate and stability of usage under such subscriptions. ARR resulting from the annualization of recurring contracts with consumption measurement durations of less than one year, as a percentage of total ARR, was 36%, 25%, and 15% as of December 31, 2020, 2019, and 2018, respectively. Within our consumption‑measured ARR, the successful uptake of our new E365 subscription offering has introduced daily consumption‑measured ARR, representing 25% of total ARR as of December 31, 2020. ARR is inclusive of the ARR of acquired companies as of the date they are acquired. We believe that ARR and ARR growth are important metrics indicating the scale and growth of our business. Furthermore, we believe ARR, considered in connection with our account retention rate and our recurring revenues dollar‑based net retention rate, is a leading indicator of revenue growth. Our ARR as of December 31, 2020 was $752,697, calculated using the spot foreign exchange rates as of December 31, 2020.
Our ARR growth rate was favorably impacted from acquisitions by 1% for both the years ended December 31, 2020 and 2019 and 3% for the year ended December 31, 2018.
Account retention rate. Our account retention rate for any given twelve-month period is calculated using the average currency exchange rates for the prior period, as follows: the prior period recurring revenues from all accounts with recurring revenues in the current and prior period, divided by total recurring revenues from all accounts during the prior period. The account retention rate for the year ended December 31, 2020 was calculated under Topic 606 and continues to be presented pursuant to Topic 605 for comparability purposes. Prior to the year ended December 31, 2020, the account retention rate was calculated using revenues recognized pursuant to Topic 605 for all periods in order to enhance comparability during our transition to Topic 606 as we did not have all information that was necessary to calculate account retention rate pursuant to Topic 606 for earlier periods. Our account retention rate is an important indicator that provides insight into the long‑term value of our account relationships and our ability to retain our account base. We believe that our consistent and high account retention rates illustrate our ability to retain and cultivate long‑term relationships with our accounts.
Recurring revenues dollar‑based net retention rate. Our recurring revenues dollar‑based net retention rate is calculated using the average exchange rates for the prior period, as follows: the recurring revenues for the current period, including any growth or reductions from existing accounts, but excluding recurring revenues from any new accounts added during the current period, divided by the total recurring revenues from all accounts during the prior period. A period is defined as any trailing twelve months. The recurring revenues dollar‑based net retention rate for the year ended December 31, 2020 was calculated under Topic 606 and continues to be presented pursuant to Topic 605 for comparability purposes. Prior to the year ended December 31, 2020, the recurring revenues dollar‑based net retention rate was calculated using revenues recognized pursuant to Topic 605 for all periods in order to enhance comparability during our transition to Topic 606 as we did not have all information that was necessary to calculate recurring revenues dollar‑based net retention rate pursuant to Topic 606 for earlier periods. We believe our recurring revenues dollar‑based net retention rate is a key indicator of our success in growing our revenues within our existing accounts. Given that recurring revenues represented 87% of our total revenues under Topic 606 for the twelve months ended December 31, 2020, this metric helps explain our revenue performance as primarily growth into existing accounts. We believe that our consistent and high recurring revenues dollar‑based net retention rate illustrates our ability to consistently retain accounts and grow them.
As discussed above, we expect annual and trailing twelve‑month recurring revenues recognized under Topic 606 to be comparable to such revenues recognized under Topic 605 due to the annual, recurring nature of our subscription agreements. We, therefore, also expect, that our account retention rate and our recurring revenue dollar‑based net retention rate under Topic 606 will remain comparable to such metrics under Topic 605. However, under Topic 606, the conversion of our existing subscription users to consumption‑based offerings with consumption measurement durations of less than one year, such as our E365 subscription offering, as well as the term start date of new subscriptions, does introduce some volatility between annual, and trailing twelve-month periods and impact period over period comparability. See the section titled “—Key Factors Impacting Comparability and Performance.”
Our calculation of these metrics may not be comparable to other companies with similarly‑titled metrics.
Non-GAAP Financial Measures:
In addition to our results determined in accordance with U.S. GAAP, we also use the below non‑GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes.
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Year Ended December 31,
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2020
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|
2019
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|
2018
|
Topic 606 (1):
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|
Adjusted EBITDA
|
$
|
266,199
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|
|
$
|
188,129
|
|
|
$
|
171,120
|
|
Adjusted Net Income
|
$
|
192,678
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|
|
$
|
135,049
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|
|
$
|
131,697
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|
Topic 605 (2):
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|
|
|
Adjusted EBITDA
|
|
|
$
|
186,598
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|
|
$
|
171,768
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|
Adjusted Net Income
|
|
|
$
|
135,471
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|
|
$
|
132,246
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|
(1)The Topic 606 unaudited amounts presented for the year ended December 31, 2018 give effect to revenue adjustments as if the adoption of Topic 606 had occurred as of January 1, 2018 rather than January 1, 2019.
(2)The Topic 605 amounts presented for the year ended December 31, 2019 give effect to revenue adjustments as if the adoption of Topic 606 had not occurred on January 1, 2019. For a reconciliation of the impact of adopting Topic 606 on our audited consolidated financial statements for the year ended December 31, 2019, see Note 3 to our consolidated financial statements.
Adjusted EBITDA. We define Adjusted EBITDA as net income adjusted for interest expense, net, provision (benefit) for income taxes, depreciation and amortization, stock‑based compensation, acquisition expenses, realignment expenses, expenses associated with IPO, other non‑operating (income) and expense, net, and (income) loss from investment accounted for using the equity method, net of tax.
Adjusted Net Income. We define Adjusted Net Income as net income adjusted for the following: amortization of purchased intangibles and developed technologies, stock‑based compensation, acquisition expenses, realignment expenses, expenses associated with IPO, other non‑operating income and expense, net, the tax effect of the above adjustments to net income, non‑recurring income tax expense and benefit, and (income) loss from investment accounted for using the equity method, net of tax. The tax effect of adjustments to net income is based on the estimated marginal effective tax rates in the jurisdictions impacted by such adjustments.
Adjusted EBITDA and Adjusted Net Income are not presentations made in accordance with U.S. GAAP, and our use of the terms Adjusted EBITDA and Adjusted Net Income may vary from the use of similarly titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. We believe the presentation of Adjusted EBITDA and Adjusted Net Income provides useful information to management and investors regarding financial and business trends related to our results of operations and that when non‑GAAP financial information is viewed with U.S. GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance. We also use Adjusted EBITDA and Adjusted Net Income to compare our results to those of our competitors and to consistently measure our performance from period to period.
Adjusted EBITDA and Adjusted Net Income should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance. Adjusted EBITDA and Adjusted Net Income have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.
Reconciliation of net income to Adjusted EBITDA (Topic 606):
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|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net income (1)
|
$
|
126,521
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|
|
$
|
103,096
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|
|
$
|
141,563
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|
Interest expense, net
|
7,476
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|
|
8,199
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|
|
8,765
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|
Provision (benefit) for income taxes
|
38,625
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|
|
23,738
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|
|
(29,349)
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|
Depreciation and amortization (3)(a)
|
36,117
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|
|
32,160
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|
|
29,200
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|
Stock-based compensation (3)(c)
|
32,114
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|
|
8,091
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|
|
7,989
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|
Acquisition expenses (3)(d)
|
11,666
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|
|
6,597
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|
|
6,410
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|
Realignment expenses (3)(e)
|
10,022
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|
|
(584)
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|
|
6,778
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|
Expenses associated with IPO (3)(f)
|
26,130
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|
|
—
|
|
|
—
|
|
Other (income) expense, net (3)(g)
|
(24,946)
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|
|
5,557
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|
|
(236)
|
|
Loss from investment accounted for using the equity method, net of tax
|
2,474
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|
|
1,275
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|
|
—
|
|
Adjusted EBITDA
|
$
|
266,199
|
|
|
$
|
188,129
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|
|
$
|
171,120
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|
Reconciliation of net income to Adjusted Net Income (Topic 606):
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|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net income (1)
|
$
|
126,521
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|
|
$
|
103,096
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|
|
$
|
141,563
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|
Non-GAAP adjustments, prior to income taxes:
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|
|
|
|
|
Amortization of purchased intangibles and developed technologies (3)(b)
|
20,721
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|
|
18,731
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|
|
17,215
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|
Stock-based compensation (3)(c)
|
32,114
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|
|
8,091
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|
|
7,989
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|
Acquisition expenses (3)(d)
|
11,666
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|
|
6,597
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|
|
6,410
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|
Realignment expenses (3)(e)
|
10,022
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|
|
(584)
|
|
|
6,778
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|
Expenses associated with IPO (3)(f)
|
26,130
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|
|
—
|
|
|
—
|
|
Other (income) expense, net (3)(g)
|
(24,946)
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|
|
5,557
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|
|
(236)
|
|
Total non-GAAP adjustments, prior to income taxes
|
75,707
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|
|
38,392
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|
|
38,156
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|
Income tax effect of non-GAAP adjustments
|
(12,024)
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|
|
(7,714)
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|
|
(5,971)
|
|
Non-recurring income tax expense related to the JOBS Act (3)(h)
|
—
|
|
|
—
|
|
|
4,318
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|
Non-recurring income tax benefit related to intercompany transactions (3)(i)
|
—
|
|
|
—
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|
|
(46,369)
|
|
Loss from investment accounted for using the equity method, net of tax
|
2,474
|
|
|
1,275
|
|
|
—
|
|
Adjusted Net Income
|
$
|
192,678
|
|
|
$
|
135,049
|
|
|
$
|
131,697
|
|
Reconciliation of net income to Adjusted EBITDA (Topic 605):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Net income (2)
|
$
|
103,426
|
|
|
$
|
142,112
|
|
Interest expense, net
|
8,199
|
|
|
8,765
|
|
Provision (benefit) for income taxes
|
21,762
|
|
|
(29,250)
|
|
Depreciation and amortization (3)(a)
|
32,160
|
|
|
29,200
|
|
Stock-based compensation (3)(c)
|
8,091
|
|
|
7,989
|
|
Acquisition expenses (3)(d)
|
6,712
|
|
|
6,410
|
|
Realignment expenses (3)(e)
|
(584)
|
|
|
6,778
|
|
Expenses associated with IPO (3)(f)
|
—
|
|
|
—
|
|
Other (income) expense, net (3)(g)
|
5,557
|
|
|
(236)
|
|
Loss from investment accounted for using the equity method, net of tax
|
1,275
|
|
|
—
|
|
Adjusted EBITDA
|
$
|
186,598
|
|
|
$
|
171,768
|
|
Reconciliation of net income to Adjusted Net Income (Topic 605):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Net income (2)
|
$
|
103,426
|
|
|
$
|
142,112
|
|
Non-GAAP adjustments, prior to income taxes:
|
|
|
|
Amortization of purchased intangibles and developed technologies (3)(b)
|
18,731
|
|
|
17,215
|
|
Stock-based compensation (3)(c)
|
8,091
|
|
|
7,989
|
|
Acquisition expenses (3)(d)
|
6,712
|
|
|
6,410
|
|
Realignment expenses (3)(e)
|
(584)
|
|
|
6,778
|
|
Expenses associated with IPO (3)(f)
|
—
|
|
|
—
|
|
Other (income) expense, net (3)(g)
|
5,557
|
|
|
(236)
|
|
Total non-GAAP adjustments, prior to income taxes
|
38,507
|
|
|
38,156
|
|
Income tax effect of non-GAAP adjustments
|
(7,737)
|
|
|
(5,971)
|
|
Non-recurring income tax expense related to the JOBS Act (3)(h)
|
—
|
|
|
4,318
|
|
Non-recurring income tax benefit related to intercompany transactions (3)(i)
|
—
|
|
|
(46,369)
|
|
Loss from investment accounted for using the equity method, net of tax
|
1,275
|
|
|
—
|
|
Adjusted Net Income
|
$
|
135,471
|
|
|
$
|
132,246
|
|
(1)The Topic 606 unaudited amounts presented for the year ended December 31, 2018 give effect to revenue and income tax adjustments as if the adoption of Topic 606 had occurred as of January 1, 2018 rather than January 1, 2019. The most significant impact from the adoption of Topic 606 relates to timing of revenue recognition for perpetual licenses and the accounting for certain of our subscription arrangements that include term‑based software licenses bundled with support. Under prior guidance, revenue for perpetual licenses was recognized over a three‑year period, while revenue attributable to the term‑based software licenses was recognized ratably over the term. Under Topic 606, both perpetual license and prepaid term‑based software license revenue is recognized upfront upon delivery of the software license. Our revenue recognition for services, as well as our accounting for costs to obtain a contract with a customer, remained substantially unchanged and were not adjusted. See Note 3 to our consolidated financial statements for additional information regarding the adoption of Topic 606.
Reconciliation of Topic 605 to Topic 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Impact from
|
|
|
|
|
|
the Adoption of
|
|
|
|
As Reported
|
|
Topics 606
|
|
As Adjusted
|
|
Topic 605
|
|
and 340-40
|
|
Topic 606
|
Subscriptions
|
$
|
557,421
|
|
|
$
|
3,064
|
|
|
$
|
560,485
|
|
Perpetual licenses
|
61,065
|
|
|
(3,712)
|
|
|
57,353
|
|
Benefit for income taxes
|
29,250
|
|
|
99
|
|
|
29,349
|
|
Net income
|
$
|
142,112
|
|
|
$
|
(549)
|
|
|
$
|
141,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(2)The Topic 605 unaudited amounts presented for the years ended December 31, 2019 give effect to revenue adjustments as if the adoption of Topic 606 had not occurred on January 1, 2019. For a reconciliation of the impact of adopting Topic 606 on our audited consolidated financial statements for the year ended December 31, 2019, see Note 3 to our consolidated financial statements.
(3)Further explanation of certain of our adjustments in arriving at Adjusted EBITDA and Adjusted Net Income are as follows:
(a)Depreciation and amortization. Depreciation and amortization includes amortization of $4,699, $3,516, and $2,052 for the years ended December 31, 2020, 2019, and 2018, respectively, related to certain projects under our Accelerated Commercial Development Program (“ACDP”).
(b)Amortization of purchased intangibles and developed technologies. Amortization of purchased intangibles varies in amount and frequency and is significantly impacted by the timing and size of our acquisitions. Amortization of acquisition related developed technologies under our ACDP was $388, $723, and $375 for the years ended December 31, 2020, 2019, and 2018, respectively. Management finds it useful to exclude these variable charges from our operating expenses to assist in budgeting, planning, and forecasting future periods. The use of intangible assets and developed technologies contributed to our revenues earned during the periods presented and will also contribute to our revenues in future periods. Amortization of purchased intangible assets and developed technologies will recur in future periods.
(c)Stock‑based compensation. We exclude certain stock‑based compensation expenses from our non‑GAAP measures primarily because they are non‑cash expenses and management finds it useful to exclude certain non‑cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning, and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under ASC 718, Compensation—Stock Compensation, we believe excluding stock‑based compensation expenses allows investors to make meaningful comparisons between our recurring core business results of operations and those of other companies. For the year ended December 31, 2020, we recorded $15,102 of stock‑based compensation expense related to the restricted stock and RSUs that vested as a result of the IPO.
(d)Acquisition expenses. We incur expenses for professional services rendered in connection with business combinations, which are included in our U.S. GAAP presentation of general and administrative expense. Also included in our acquisition expenses are retention incentives paid to executives of the acquired companies, as well as adjustments related to deferred revenue from acquired companies. We exclude these acquisition expenses when we evaluate our continuing operational performance as we would not have otherwise incurred these expenses in the periods presented as part of our continuing operations. Acquired deferred revenue is recorded on the opening balance sheet at an amount that typically is lower than historical carrying value. The adjustment to acquired deferred revenue has no impact on our business or cash flow, but it does reduce reported U.S. GAAP revenue in the periods following an acquisition.
(e)Realignment expenses. These expenses are associated with realigning our business strategies to better serve our accounts and to better align resources with the evolving needs of the business. In connection with these actions, we recognize costs related to termination benefits for colleagues whose positions were eliminated. We exclude these charges because they are not reflective of our ongoing business and results of operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses. In the ordinary course of operating our business, we incur severance expenses that are not included in this adjustment.
(f)Expenses associated with IPO. These expenses included certain non‑recurring costs relating to our IPO, consisting of the payment of underwriting discounts and commissions applicable to the sale of shares by the selling stockholders, professional fees, and other expenses. We exclude these charges because they are not reflective of our ongoing business and results of operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
(g)Other (income) expense, net. Primarily consists of foreign exchange (gains) losses of $(22,919), $5,591, and $418 for the years ended December 31, 2020, 2019, and 2018, respectively. The foreign exchange (gains) losses derive primarily from U.S. Dollar denominated cash and cash equivalents, accounts receivable, and intercompany balances held by foreign subsidiaries. In October 2018, we had intercompany sales of certain intangible operating assets between our foreign subsidiaries, which resulted in significant U.S. Dollar denominated intercompany liabilities at foreign subsidiaries with a non‑U.S. Dollar functional currency (mainly Euro). These U.S. Dollar denominated balances are being translated into their functional currencies at the rates in effect at the balance sheet date and are fully eliminated in consolidation. The gains and losses from such translations are included in Other income (expense), net in the consolidated statements of operations. Intercompany finance transactions denominated in U.S. Dollars resulted in unrealized foreign exchange (gains) losses of $(22,310) and $5,270 for the years ended December 31, 2020 and 2019, respectively. Other (income) expense, net also includes a gain from the change in fair value of our interest rate swap of $347 and a gain from the change in fair value of acquisition contingent consideration of $1,340 for the year ended December 31, 2020. We exclude these charges because they are not reflective of ongoing business and results of operations. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
(h)Non-recurring income tax expense related to the JOBS Act. The JOBS Act was enacted on December 22, 2017 and resulted in a provisional income tax expense of $30,273 in 2017 primarily due to the one‑time transition tax on accumulated foreign subsidiary earnings and deferred tax impacts. For the year ended December 31, 2018, we recorded a $4,318 increase to income tax expense related to provisional amounts recorded in 2017.
(i)Non-recurring income tax benefit related to intercompany transactions. For the year ended December 31, 2018, we had intercompany sales of certain intangible operating assets between our foreign subsidiaries, which resulted in a non‑recurring net tax benefit of $46,369.
Key Factors Impacting Comparability and Performance:
Highlights for the year ended December 31, 2020. In addition to our performance previously discussed in “—Key Business Metrics” and “—Non-GAAP Financial Measures,” and as discussed further below in “—Results of Operations” and “—Liquidity and Capital Resources,” our consolidated financial statements for the year ended December 31, 2020 were impacted by the following:
•On September 25, 2020, we completed our IPO. The selling stockholders sold 12,360,991 shares of Class B Common Stock at a public offering price of $22.00 per share. The Company did not sell any shares in the IPO and did not receive any of the proceeds from the sale of the Class B Common Stock sold by the selling stockholders;
•On November 17, 2020, we completed our follow‑on public offering of 11,500,000 shares of Class B Common Stock at a public offering price of $32.00 per share. We sold 9,603,965 shares of Class B Common Stock (inclusive of 1,500,000 shares sold upon the exercise by the underwriters of their option to purchase additional shares of our Class B Common Stock). The selling stockholders sold 1,896,035 shares of Class B Common Stock. We received net proceeds of $294,429 after deducting expenses of $12,898. We did not receive any of the proceeds from the sale of the Class B Common Stock sold by the selling stockholders;
•On August 28, 2020, our board of directors declared the Special Dividend of $1.50 per share of our common stock ($392,489 in the aggregate);
•For the year ended December 31, 2020, we recorded $15,102 of stock‑based compensation expense related to the restricted stock and RSUs that vested as a result of the IPO;
•During the third quarter of 2020, we initiated a strategic realignment program in order to better serve our users and to better align resources with the evolving needs of our business (the “2020 Program”). We incurred realignment costs of $10,046 for the year ended December 31, 2020 related to the aforementioned program, which represents termination benefits for colleagues whose positions were eliminated;
•On March 31, 2020, we entered into an interest rate swap with a notional amount of $200,000 and a ten‑year term to reduce the interest rate risk associated with our Credit Facility;
•Effective as of the beginning of the fourth quarter of 2020, participants in our Executive Bonus Plan may elect to receive any portion, or all, of such participants’ non‑deferred incentive bonus in the form of shares of fully vested Class B Common Stock instead of cash payments and subject to a combined quarterly limit of $7,500. During the fourth quarter of 2020, we recorded $6,524 of stock‑based compensation expense related to this plan; and
•The COVID‑19 pandemic has had a modest impact on the usage of our solutions by our users. Throughout 2020, usage rates as compared to comparable periods in the prior year have fluctuated between modest increases to modest decreases. Usage declines have had a minimal impact on our recurring revenues, which are comprised primarily of longer term contracts where short‑term usage rate declines do not adversely impact revenues. However, to the extent declines in usage have also occurred within our recurring revenue contracts with shorter term resets, as is the case with our E365 contracts, the usage declines have modestly impacted revenues. The growth of our revenues from perpetual licenses and professional services has also been impacted as certain accounts have shifted spend to subscription solutions or delayed new projects. Overall, while our rate of growth has been impacted, our revenues have continued to grow given the mission critical nature of our solutions. As a precaution in the COVID-19 environment, we have actively managed our spending. Actions have included efforts to minimize employee travel, curtail variable compensation plans, and reduce and recharacterize promotional spending with a shift to virtual events. These actions have resulted in substantial cost savings during the pandemic, which are unlikely to be fully sustainable prospectively.
Impact of Topics 606 and 340‑40. On January 1, 2019, we adopted Topic 606, which superseded substantially all existing revenue recognition guidance under U.S. GAAP. We adopted Topic 606 using the modified retrospective method, under which the cumulative effect of initially applying Topic 606 was recorded as a reduction to the opening balance of Accumulated deficit of $125,464 ($101,489, net of tax) as of January 1, 2019. We applied the standard only to contracts that were not completed as of the date of initial application. The comparative information for the year ended December 31, 2018 has not been adjusted and continues to be reported under Topic 605.
The most significant impact from the adoption of Topic 606 relates to timing of revenue recognition for perpetual licenses and the accounting for certain of our subscription arrangements that include term‑based software licenses bundled with support. Under Topic 605, revenue for perpetual licenses was recognized over a three‑year period, while revenue attributable to the term‑based software licenses was recognized ratably over the term. Under Topic 606, both perpetual license and prepaid term‑based software license revenue is recognized upfront upon delivery of the software license. Revenue recognition related to support, hosting, usage-based offerings, and services is substantially unchanged, with support and hosting revenue recorded ratably over the contract term, usage‑based revenue recognized upon usage or delivery, and services revenue as delivered.
On an annual and trailing twelve‑month basis, we expect our subscriptions revenues recognized under Topic 606 to be comparable to such revenues recognized under Topic 605. This expectation is attributable to the annual, recurring nature of our subscription agreements. However, quarterly subscription revenue and profitability trends will be impacted by the subscription term as well as the term start date of new and renewals subscriptions, due to the upfront revenue recognition of the associated term‑license component.
Under Topic 605, our perpetual licenses revenues were recognized over a three‑year period due to the portfolio balancing feature users obtain through their SELECT subscriptions. Under Topic 606, our perpetual licenses revenues are recognized upon delivery and will closely align with the respective license sales of the period.
Further, under Topic 606, the conversion of our existing subscription users to consumption‑based offerings with consumption measurement durations of less than one year, such as our E365 subscription offering, does introduce some volatility between annual, quarterly, and trailing twelve‑month periods and impact period over period comparability. This effect is because the term‑based software license is recognized upfront upon delivery for prepaid subscription‑based offerings, but upon usage for consumption‑based offerings. For example, if an account renewed an annual ELS at the beginning of July 2019, then we would recognize in 2019 the term‑based software license of the annual subscription upon renewal for the twelve‑month period from July 1, 2019 to June 30, 2020. However, if such account instead switched from our ELS offering to our consumption based E365 offering, then we would only recognize the distinct license component for the consumption period from July 1, 2019 to December 31, 2019 in 2019.
See Note 3 to our consolidated financial statements for further information on the impact upon adoption of Topics 606 and 340‑40 as of January 1, 2019.
Impact of foreign currency. A portion of our revenues and operating expenses were derived from outside the United States and as such, were denominated in various foreign currencies, including most significantly: Euros, British Pounds, Australian Dollars, Canadian Dollars, and Chinese Yuan Renminbi. Our financial results are therefore affected by changes in foreign currency rates. In 2020, 43% of our revenues were denominated in various foreign currencies. Correspondingly, in 2020, 47% of our operating expenses were denominated in various foreign currencies. Other than the natural hedge attributable to matching revenues and expenses in the same currencies, we do not currently hedge foreign currency exposure. Accordingly, our results of operations have been, and in the future will be, affected by changes in foreign exchange rates.
We identify the effects of foreign currency on our operations and present constant currency growth rates and fluctuations because we believe exchange rates are an important factor in understanding period to period comparisons and enhance the understanding of our results and evaluation of our performance. In reporting period to period results, we calculate the effects of foreign currency fluctuations and constant currency information by translating current period results using prior period average foreign currency exchange rates. Our definition of constant currency may differ from other companies reporting similarly named measures, and these constant currency performance measures should be viewed in addition to, and not as a substitute for, our operating performance measures calculated in accordance with U.S. GAAP.
Acquisitions. Historically, we have enhanced our business with acquisitions of businesses, software solutions, and technologies. Going forward, we plan to selectively acquire adjacent software solutions that can be sold broadly across our account base, as well as to acquire new technologies that we can leverage across our existing software solution portfolio. We completed six, four, and seven acquisitions for the years ended December 31, 2020, 2019, and 2018, respectively.
Income taxes. The JOBS Act was enacted on December 22, 2017 and resulted in a provisional income tax expense primarily due to the one‑time transition tax on accumulated foreign subsidiary earnings and deferred tax impacts. We completed the accounting for the effects of the JOBS Act in the year ended December 31, 2018 and recorded a $4,318 increase to income tax expense related to provisional amounts recorded in 2017. In October 2018, we had intercompany sales of certain intangible operating assets between our foreign subsidiaries, which resulted in a non‑recurring net tax benefit of $46,369.
Impact of COVID‑19. In March 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of the disease COVID‑19, caused by a novel strain of coronavirus, SARS‑CoV‑2. The COVID‑19 outbreak and certain preventative or protective actions that governments, businesses, and individuals have taken in respect of COVID‑19 have resulted in global business disruptions.
In response to the COVID‑19 pandemic, we implemented a number of initiatives to ensure the safety of our colleagues and enable them to move to a work from home environment seamlessly and continue working effectively. These initiatives included providing our colleagues with necessary equipment, making certain that all colleagues had means of video and audio communications online, and guaranteeing that our network bandwidth was sufficient. Our business model is such that we had minimal disruption to our ability to deliver our solutions to accounts, and we believe we did not have any significant loss of productivity during this transition. Almost all of our colleagues have been working from home since March 16, 2020, with a minority of our colleagues working in our office environments on a voluntary basis and abiding by appropriate distancing and sanitary regulations for their region. We communicated regularly and provided on‑demand learning and support to our colleagues throughout the transition period. Based on a May 2020 internal survey, a majority of our colleagues are confident in the decisions that Bentley leadership is making regarding employee well‑being and safety during this pandemic, and a majority of our colleagues believe that Bentley’s response to and communication regarding COVID‑19 has been timely and helpful.
The impact of the pandemic on our financial performance has been modest; our revenues have continued to grow given the mission critical nature of our solutions. When compared to levels from the same periods in 2019, our accounts’ usage of our applications was down approximately 3-5% for the months of March and April 2020, showed improvement to be nearly equivalent to past usage during May and June 2020, modestly declined approximately 2‑3% for the months of July through November 2020, and improved to reflect usage growth of approximately 2-3% during December 2020 relative to the same period in the prior year. The most recent pattern of decline in usage follows capital projects within sectors, as opposed to the initial 2020 declines which we observed to follow the geographic spread of the pandemic. The modest, yet persisting, decline in usage has had limited impact on our recurring revenues, which are comprised primarily of longer term contracts. To the extent declines in usage have also occurred within our recurring revenue contracts with shorter term resets, as is the case with our E365 contracts, the usage declines have modestly impacted revenues, notably in those accounts also exposed to capital projects in the industrial and resources sectors, and to a lesser extent, commercial and facilities sectors. The growth of our revenues from perpetual licenses and professional services has been impacted as selected accounts have shifted spend to subscription solutions or delayed new projects.
Moreover, we were quick to find ways to support our accounts and users, including the launch of a “Bentley Has Your Back” campaign to help our accounts take full advantage of their Bentley software. This campaign included producing over 50 self‑help documents, 20 webinars, and several messages guiding users on various topics including how Bentley’s solutions should be configured when working with limited bandwidth, how to use a SmartTV as a monitor, and how to leverage specific offerings such as ProjectWise to facilitate collaboration in their own businesses in remote working environments. This guidance and assistance was well received by accounts and we believe helped maximize usage during the pandemic.
We have also taken measures to reduce selected operating expenses, including various costs associated with travel and facilities.
Our business benefits from a resilient business model backed by industry tailwinds and a strong financial profile. We believe that significant public and private investment will continue to drive spend for infrastructure globally, which will continue to drive demand for our solutions. Additionally, we do not have any material account concentration; no single account or group of affiliated accounts represented more than 2.5% of our revenues for the year ended December 31, 2020. As of December 31, 2020, we had $122,006 of cash and cash equivalents, and $253,850 was available under our Credit Facility. Subsequent to December 31, 2020, the Company refinanced its Credit Facility and completed an offering of convertible debt. For further detail, see Note 25 to our consolidated financial statements.
Components of Results of Operations:
We manage our business globally within one operating segment, the development and marketing of computer software and related services, which is consistent with how our chief operating decision maker reviews and manages our business.
Revenues:
We generate revenues from subscriptions, perpetual licenses, and professional services.
Subscriptions
SELECT subscriptions: We provide annual recurring subscriptions that accounts can elect to add to a new or previously purchased perpetual license. SELECT provides accounts with benefits, including upgrades, comprehensive technical support, pooled licensing benefits, annual portfolio balancing exchange rights, learning benefits, certain Azure‑based cloud collaboration services, mobility advantages, and access to other available benefits. SELECT subscriptions revenues are recognized as distinct performance obligations are satisfied.
Enterprise subscriptions: We provide Enterprise subscription offerings that provides our largest accounts with complete and unlimited global access to our comprehensive portfolio of solutions. ELS provides access for a prepaid annual fee. Our E365 subscription, which was introduced during the fourth quarter of 2018, provides unrestricted access to our comprehensive software portfolio, similar to ELS, however is charged based upon daily usage. The daily usage fee also includes a term license component, SELECT maintenance and support, hosting, and Success Plan services, which are designed to achieve business outcomes through more efficient and effective use of our software. The ELS and E365 offerings both contain a distinct term license component. ELS revenue is recognized as the distinct performance obligations are satisfied. E365 revenue is recognized based upon usage incurred by the account.
Term license subscriptions: We provide annual, quarterly, and monthly term licenses for our software products. ATL subscriptions are generally prepaid annually for named user access to specific products. QTL subscriptions allow accounts to pay quarterly in arrears for licenses usage that is beyond their SELECT contracted quantities. MTL subscriptions are identical to QTL subscriptions, except for the term of the license, and the manner in which they are monetized. MTL subscriptions require a CSS, which is described below.
Visas and Passports are quarterly or annual term licenses enabling accounts to access specific project or enterprise information and entitles our users to certain functionality of our ProjectWise and AssetWise systems. Our standard offerings are usage based with monetization through our CSS program. Annual, quarterly, and monthly term licenses revenues are recognized as the distinct performance obligations for each are satisfied. Billings in advance are recorded as Deferred revenues in the consolidated balance sheets. QTL, MTL, Visas and Passports subscriptions are recognized based upon usage incurred by the account.
CSS is a program designed to streamline the procurement, administration, and payment process. The program requires an estimation of annual usage for CSS eligible offerings and a deposit of funds in advance. Actual consumption is monitored and invoiced against the deposit on a calendar quarter basis. CSS balances not utilized for eligible products or services may roll over to future periods or are refundable. Paid and unconsumed CSS balances are recorded in Accruals and other current liabilities in the consolidated balance sheets. Software and services consumed under CSS are recognized pursuant to the applicable revenue recognition guidance for the respective software or service and classified as subscriptions or services based on their respective nature.
Perpetual licenses
Perpetual licenses may be sold with or without attaching a SELECT subscription. Historically, attachment and retention of the SELECT subscription has been high given the benefits of the SELECT subscription discussed above. Perpetual licenses revenues are recognized upon delivery of the license to the user.
Services
We provide professional services including training, implementation, configuration, customization, and strategic consulting services. We perform projects on both a time and materials and a fixed fee basis. Our recent and preferred contractual structures for delivering professional services include (i) delivery of services in the form of subscription‑like, packaged offerings that are annually recurring in nature, and (ii) delivery of our growing portfolio of Success Plans. Success Plans are standard offerings that offer a level of subscription service above the standard technical support offered to all accounts as part of their SELECT or Enterprise agreement. Revenues are recognized as services are performed.
Headcount-related costs
For the year ended December 31, 2020, 80% of our aggregate cost of revenues, research and development, selling and marketing, and general and administrative costs were represented by what we refer to herein as “headcount-related” costs. These costs include the salary costs of our colleagues (our employees) and the corresponding incentives, benefits, employment taxes, and travel‑related costs. Our headcount‑related costs are variable in nature. We actively manage these costs to align to our trending run rate of revenue performance, with the objective of enhancing visibility and predictability of resulting operating profit margins.
Cost of subscriptions, licenses, and services
Cost of subscriptions and licenses. Cost of subscriptions and licenses includes salaries and other related costs, including the depreciation of property and equipment and the amortization of capitalized software costs associated with servicing software subscriptions, the amortization of intangible assets associated with acquired software and technology, channel partner compensation for providing sales coverage to subscribers, as well as cloud‑related costs incurred for servicing our accounts using cloud deployed hosted solutions and our license administration platform.
Cost of services. Cost of services includes salaries for internal and third‑party personnel and related overhead costs, including depreciation of property and equipment, for providing training, implementation, configuration, and customization services to accounts, amortization of capitalized software costs, and related out‑of‑pocket expenses incurred.
Operating expenses
Research and development. Research and development expenses, which are generally expensed as incurred, primarily consist of personnel and related costs of our research and development staff, including salaries, benefits, bonuses, stock‑based compensation, and costs of certain third‑party contractors, as well as allocated overhead costs. We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external accounts, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
We capitalize certain development costs related to certain projects under our ACDP (our structured approach to an in‑house business incubator function) once technological feasibility is established. Technological feasibility is established when a detailed program design has been completed and documented; we have established that the necessary skills, hardware, and software technology are available to produce the product; and there are no unresolved high‑risk development issues. Once the software is ready for its intended use, amortization is recorded over the software’s estimated useful life (generally three years). Total costs capitalized under the ACDP were $7,809, $6,060, and $5,735 for the years ended December 31, 2020, 2019, and 2018, respectively. Additionally, total ACDP related amortization recorded in Costs of subscriptions and licenses was $4,699, $3,516, and $2,052 for the years ended December 31, 2020, 2019, and 2018, respectively.
Certain costs related to the creation of foreign language translations are capitalized and amortized over the economic life of the software. For the years ended December 31, 2020, 2019, and 2018, total costs capitalized related to the creation of foreign language translations were $951, $835, and $877, respectively. Additionally, for the years ended December 31, 2020, 2019, and 2018, amortization related to the creation of foreign language translations recorded in Costs of subscriptions and licenses in the consolidated statements of operations was $919, $823, and $1,008, respectively.
Selling and marketing. Selling and marketing expenses include salaries, benefits, bonuses, and stock‑based compensation expense for our selling and marketing colleagues, the expense of travel, entertainment, and training for such personnel, online marketing, product marketing and other brand‑building activities, such as advertising, trade shows, and expositions, various sales and promotional programs, and costs of computer equipment and facilities used in selling and marketing activities. We anticipate that we will continue to make strategic investments in our global business systems and methods to enhance major account sales activities and to support our worldwide sales and marketing strategies, and the business in general. We capitalize certain incremental costs of obtaining a contract and recognize these expenses over the period of benefit associated with these costs, resulting in a deferral of certain contract costs each period. The contract costs are amortized based on the economic life of the goods and services to which the contract costs relate. We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain channel partner sales incentive programs for which the annual compensation is commensurate with annual sales activities.
General and administrative. General and administrative expenses include salaries, bonuses, benefits, and stock‑based compensation expense for our finance, human resources, and legal colleagues, the expense of travel, entertainment, and training for such personnel, professional fees for legal and accounting services, and costs of computer equipment and facilities used in general and administrative activities. Following the completion of the IPO, we expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a U.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC. In addition, as a public company, we expect to incur increased expenses in the areas of insurance, investor relations, and professional services. As a result, we expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. We expect, however, that our general and administrative expenses will decrease as a percentage of our revenues over time, although the percentage may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our general and administrative expenses.
Amortization of purchased intangibles. Amortization of purchased intangibles includes the amortization of acquired non‑product related intangible assets, primarily customer relationships, trademarks, and non‑compete agreements recorded in connection with completed acquisitions.
Expenses associated with IPO. These expenses included certain non‑recurring costs relating to our IPO, consisting of the payment of underwriting discounts and commissions applicable to the sale of shares by the selling stockholders, professional fees, and other expenses. We completed our IPO on September 25, 2020. These fees were expensed in the period incurred.
Interest expense, net. Interest expense, net primarily represents interest associated with the Credit Facility, amortization of deferred financing costs, and interest income from our investments in money market funds.
Other income (expense), net. Other income (expense), net primarily consists of foreign currency translation results derived primarily from U.S. Dollar denominated cash and cash equivalents, accounts receivable, and intercompany balances held by foreign subsidiaries with non‑U.S. Dollar functional currencies.
(Provision) benefit for income taxes. (Provision) benefit for income taxes includes the aggregate consolidated income tax expense for U.S. domestic and foreign income taxes.
Loss from investment accounted for using the equity method, net of tax. Loss from investment accounted for using the equity method includes our proportional share of loss in a joint venture.
Results of operations:
The following table sets forth selected consolidated statements of operations data for each of the periods indicated:
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Year Ended December 31,
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2020
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2019
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2018
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Revenues:
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|
|
|
|
Subscriptions
|
$
|
679,273
|
|
|
$
|
608,300
|
|
|
$
|
557,421
|
|
Perpetual licenses
|
57,382
|
|
|
59,693
|
|
|
61,065
|
|
Subscriptions and licenses
|
736,655
|
|
|
667,993
|
|
|
618,486
|
|
Services
|
64,889
|
|
|
68,661
|
|
|
73,224
|
|
Total revenues
|
801,544
|
|
|
736,654
|
|
|
691,710
|
|
Cost of revenues:
|
|
|
|
|
|
Cost of subscriptions and licenses
|
95,803
|
|
|
71,578
|
|
|
55,113
|
|
Cost of services
|
71,352
|
|
|
72,572
|
|
|
76,211
|
|
Total cost of revenues
|
167,155
|
|
|
144,150
|
|
|
131,324
|
|
Gross profit
|
634,389
|
|
|
592,504
|
|
|
560,386
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
185,515
|
|
|
183,552
|
|
|
175,032
|
|
Selling and marketing
|
143,791
|
|
|
155,294
|
|
|
160,635
|
|
General and administrative
|
113,451
|
|
|
97,580
|
|
|
89,328
|
|
Amortization of purchased intangibles
|
15,352
|
|
|
14,213
|
|
|
14,000
|
|
Expenses associated with initial public offering
|
26,130
|
|
|
—
|
|
|
—
|
|
Total operating expenses
|
484,239
|
|
|
450,639
|
|
|
438,995
|
|
Income from operations
|
150,150
|
|
|
141,865
|
|
|
121,391
|
|
Interest expense, net
|
(7,476)
|
|
|
(8,199)
|
|
|
(8,765)
|
|
Other income (expense), net
|
24,946
|
|
|
(5,557)
|
|
|
236
|
|
Income before income taxes
|
167,620
|
|
|
128,109
|
|
|
112,862
|
|
(Provision) benefit for income taxes
|
(38,625)
|
|
|
(23,738)
|
|
|
29,250
|
|
Loss from investment accounted for using the equity method, net of tax
|
(2,474)
|
|
|
(1,275)
|
|
|
—
|
|
Net income
|
126,521
|
|
|
103,096
|
|
|
142,112
|
|
Less: Net income attributable to participating securities
|
(234)
|
|
|
(8)
|
|
|
(4)
|
|
Net income attributable to Class A and Class B common stockholders
|
$
|
126,287
|
|
|
$
|
103,088
|
|
|
$
|
142,108
|
|
Per share information:
|
|
|
|
|
|
Net income per share, basic
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
0.50
|
|
Net income per share, diluted
|
$
|
0.42
|
|
|
$
|
0.35
|
|
|
$
|
0.49
|
|
Weighted average shares outstanding, basic
|
289,863,272
|
|
|
284,625,642
|
|
|
285,805,096
|
|
Weighted average shares outstanding, diluted
|
299,371,129
|
|
|
293,796,707
|
|
|
292,624,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In reporting period‑over‑period results, we calculate the effects of foreign currency fluctuations and constant currency information by translating current period results using prior period average foreign currency exchange rates. Our definition of constant currency may differ from other companies reporting similarly named measures, and these constant currency performance measures should be viewed in addition to, and not as a substitute for, our operating performance measures calculated in accordance with U.S. GAAP.
Comparison of the Years Ended December 31, 2020 and 2019
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
Year Ended
|
|
|
|
|
|
Constant
|
|
December 31,
|
|
|
|
|
|
Currency
|
|
2020
|
|
2019
|
|
Amount
|
|
%
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
$
|
679,273
|
|
|
$
|
608,300
|
|
|
$
|
70,973
|
|
|
11.7
|
%
|
|
11.0
|
%
|
Perpetual licenses
|
57,382
|
|
|
59,693
|
|
|
(2,311)
|
|
|
(3.9)
|
%
|
|
(4.6)
|
%
|
Subscriptions and licenses
|
736,655
|
|
|
667,993
|
|
|
68,662
|
|
|
10.3
|
%
|
|
9.6
|
%
|
Services
|
64,889
|
|
|
68,661
|
|
|
(3,772)
|
|
|
(5.5)
|
%
|
|
(5.7)
|
%
|
Total revenues
|
$
|
801,544
|
|
|
$
|
736,654
|
|
|
$
|
64,890
|
|
|
8.8
|
%
|
|
8.2
|
%
|
Total revenues increased by $64,890, or 8.8%, to $801,544 for the year ended December 31, 2020. For the year ended December 31, 2020, the increase was driven by improvements in our organic performance of $26,757, the impact from acquisitions of $33,463, and the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $4,670. On a constant currency basis, our revenues increased by 8.2% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
•Subscriptions. For the year ended December 31, 2020, subscriptions revenues increased by $70,973, or 11.7%, as compared to the year ended December 31, 2019. This increase was driven primarily by improvements in our organic performance of $52,012, and to a lesser extent, the impact from acquisitions of $14,841, as well as the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $4,120. On a constant currency basis, our subscriptions revenues increased by 11.0% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
For the year ended December 31, 2020, the increase in organic performance was primarily due to expansion within our existing accounts, as reflected by our recurring revenues dollar‑based net retention rate of 107% and approximately 2% of the increase was attributed to new accounts. Approximately 50% of our organic performance expansion was driven by ProjectWise and civil design products for the year ended December 31, 2020.
•Perpetual licenses. For the year ended December 31, 2020, perpetual licenses revenues decreased by $2,311, or 3.9%, as compared to the year ended December 31, 2019. This decrease was driven by a reduction in our organic performance of $4,427, partially offset by the impact from acquisitions of $1,706, as well as the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $410. On a constant currency basis, our perpetual licenses revenues decreased by 4.6% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
We observed a decrease in organic performance for the year ended December 31, 2020 as certain accounts delayed purchase decisions or shifted spend to subscription solutions due to COVID‑19.
•Services. For the year ended December 31, 2020, services revenues decreased by $3,772, or 5.5%, as compared to the year ended December 31, 2019. This decrease was driven primarily by a reduction in our organic performance of $20,828, partially offset by the impact from acquisitions of $16,916, as well as the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $140. On a constant currency basis, our services revenues decreased by 5.7% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
For the year ended December 31, 2020, the decrease in organic performance was primarily due to the winding down or completion of several larger services projects during 2019 and 2020, COVID‑19 related delays of new projects while social distancing measures are in place, the inclusion of learning benefits in our subscription offerings, and the partial redeployment of our services colleagues to support Success Plan services of our E365 subscription offering.
Revenues by Geographic Area
Revenues are allocated to individual countries based upon the location of the users. Revenues by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
Year Ended
|
|
|
|
|
|
Constant
|
|
December 31,
|
|
|
|
|
|
Currency
|
|
2020
|
|
2019
|
|
Amount
|
|
%
|
|
%
|
Revenues by geographic area:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
395,746
|
|
|
$
|
356,331
|
|
|
$
|
39,415
|
|
|
11.1
|
%
|
|
11.3
|
%
|
EMEA
|
254,036
|
|
|
236,602
|
|
|
17,434
|
|
|
7.4
|
%
|
|
5.8
|
%
|
APAC
|
151,762
|
|
|
143,721
|
|
|
8,041
|
|
|
5.6
|
%
|
|
4.4
|
%
|
Total revenues by geographic area
|
$
|
801,544
|
|
|
$
|
736,654
|
|
|
$
|
64,890
|
|
|
8.8
|
%
|
|
8.2
|
%
|
•Americas. For the year ended December 31, 2020, revenues from the Americas increased by $39,415, or 11.1%, as compared to the year ended December 31, 2019. This increase was driven primarily by improvements in our organic performance of $18,002 and the impact from acquisitions of $22,226, partially offset by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $813. On a constant currency basis, our revenues from the Americas increased by 11.3% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
The increase in organic performance was primarily due to expansion of our recurring subscription revenues from our existing accounts in the United States and Canada. Approximately 30% of our subscription‑related organic performance expansion was driven by ProjectWise for the year ended December 31, 2020.
•EMEA. For the year ended December 31, 2020, revenues from EMEA increased by $17,434, or 7.4%, as compared to the year ended December 31, 2019. This increase was driven by improvements in our organic performance of $3,168, the impact from acquisitions of $10,554, and the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $3,712. On a constant currency basis, our revenues from EMEA increased by 5.8% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
The increase in organic performance was primarily due to expansion of our recurring subscription revenues throughout the region. Approximately 50% of our subscription‑related organic performance expansion was driven by ProjectWise for the year ended December 31, 2020.
•APAC. For the year ended December 31, 2020, revenues from APAC increased by $8,041, or 5.6%, as compared to the year ended December 31, 2019. This increase was driven by improvements in our organic performance of $5,587 and, to a lesser extent, the impact from acquisitions of $683 and the positive foreign currency effects due to a weaker U.S. Dollar relative to our other functional currencies of $1,771. On a constant currency basis, our revenues from APAC increased by 4.4% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
For the year ended December 31, 2020, the increase in organic performance was primarily due to expansion of our recurring subscription revenues from our existing accounts in Australia, China, and South East Asia. Approximately 40% of our subscription‑related organic performance expansion was driven by ProjectWise and Offshore Structural Analysis products.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
Year Ended
|
|
|
|
|
|
Constant
|
|
December 31,
|
|
|
|
|
|
Currency
|
|
2020
|
|
2019
|
|
Amount
|
|
%
|
|
%
|
Cost of subscriptions and licenses
|
$
|
95,803
|
|
|
$
|
71,578
|
|
|
$
|
24,225
|
|
|
33.8
|
%
|
|
32.9
|
%
|
Cost of services
|
71,352
|
|
|
72,572
|
|
|
(1,220)
|
|
|
(1.7)
|
%
|
|
(1.5)
|
%
|
Total cost of revenues
|
$
|
167,155
|
|
|
$
|
144,150
|
|
|
$
|
23,005
|
|
|
16.0
|
%
|
|
15.6
|
%
|
For the year ended December 31, 2020, cost of revenues increased by $23,005, or 16.0%, to $167,155. This increase was driven primarily by an increase in cost of subscriptions and licenses, partially offset by lower cost of services relative to the prior period. On a constant currency basis, total cost of revenues increased by 15.6% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
For the year ended December 31, 2020, cost of subscriptions and licenses increased 33.8%, or 32.9% in constant currency, as compared to the year ended December 31, 2019. On a constant currency basis, this increase was primarily due to an increase in headcount‑related costs, excluding stock‑based compensation expense, of approximately $8,500, an increase in stock‑based compensation expense of approximately $800, an increase in hosting costs of approximately $8,000, an increase in amortization expense for software and technology of approximately $2,200, and an increase in facility‑related costs of approximately $600.
For the year ended December 31, 2020, cost of services decreased by 1.7%, or 1.5% in constant currency, as compared to the year ended December 31, 2019. On a constant currency basis, the decrease was primarily due to a decrease in headcount‑related costs, excluding stock‑based compensation expense and incremental realignment costs from the 2020 Program, of approximately $1,500 and a decrease in amortization of previously capitalized costs related to certain professional services projects of approximately $4,600, partially offset by an increase in stock‑based compensation expense of approximately $2,400, incremental realignment costs from the 2020 Program of approximately $1,400, and an increase in facility‑related costs of approximately $1,400.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
Year Ended
|
|
|
|
|
|
Constant
|
|
December 31,
|
|
|
|
|
|
Currency
|
|
2020
|
|
2019
|
|
Amount
|
|
%
|
|
%
|
Research and development
|
$
|
185,515
|
|
|
$
|
183,552
|
|
|
$
|
1,963
|
|
|
1.1
|
%
|
|
1.0
|
%
|
Selling and marketing
|
143,791
|
|
|
155,294
|
|
|
(11,503)
|
|
|
(7.4)
|
%
|
|
(7.3)
|
%
|
General and administrative
|
113,451
|
|
|
97,580
|
|
|
15,871
|
|
|
16.3
|
%
|
|
16.0
|
%
|
Amortization of purchased intangibles
|
15,352
|
|
|
14,213
|
|
|
1,139
|
|
|
8.0
|
%
|
|
7.3
|
%
|
Expenses associated with initial public offering
|
26,130
|
|
|
—
|
|
|
26,130
|
|
|
*
|
|
*
|
Total operating expenses
|
$
|
484,239
|
|
|
$
|
450,639
|
|
|
$
|
33,600
|
|
|
7.5
|
%
|
|
7.4
|
%
|
*Not meaningful
Research and development. For the year ended December 31, 2020, research and development expenses increased 1.1%, or 1.0% in constant currency, as compared to the year ended December 31, 2019. On a constant currency basis, the increase was primarily due to an increase in stock‑based compensation expense of approximately $8,900 and incremental realignment costs from the 2020 Program of approximately $800, partially offset by a decrease in headcount-related costs, excluding stock‑based compensation expense and incremental realignment costs from the 2020 Program, of approximately $7,300 due to COVID‑19 related modification to employee travel and variable compensation plans.
Selling and marketing. For the year ended December 31, 2020, selling and marketing expenses decreased 7.4%, or 7.3% in constant currency, as compared to the year ended December 31, 2019. On a constant currency basis, this decrease was primarily due to a decrease in headcount-related costs, excluding stock‑based compensation expense and incremental realignment costs from the 2020 Program, of approximately $16,700 due to COVID‑19 related modification to employee travel and variable compensation plans and a reduction in promotional costs of $5,000, substantially from rationalizing our marketing spend and shifting to virtual events given the evolving business environment as a result of COVID‑19, partially offset by an increase in stock‑based compensation expense of approximately $4,400 and incremental realignment costs from the 2020 Program of approximately $6,000.
General and administrative. For the year ended December 31, 2020, general and administrative expenses increased 16.3%, or 16.0% in constant currency, as compared to the year ended December 31, 2019. On a constant currency basis, the increase was primarily due to an increase in headcount-related costs, excluding stock‑based compensation expense and incremental realignment costs from the 2020 Program, of approximately $4,000, an increase in stock‑based compensation expense of approximately $8,100, incremental realignment costs from the 2020 Program of approximately $1,800, and an increase in acquisition and integration costs and other corporate initiatives of $2,300.
Amortization of purchased intangibles. For the year ended December 31, 2020, amortization of purchased intangibles increased by 8.0%, or 7.3% in constant currency, as compared to the year ended December 31, 2019. The increase was primarily attributable to acquisitions that closed in 2020.
Expenses associated with initial public offering. For the year ended December 31, 2020, expenses associated with IPO included certain non‑recurring costs relating to our IPO, consisting of the payment of underwriting discounts and commissions applicable to the sale of shares by the selling stockholders, professional fees, and other expenses. We completed our IPO on September 25, 2020. These fees were expensed in the period incurred.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2020
|
|
2019
|
Interest expense
|
$
|
(7,913)
|
|
|
$
|
(9,731)
|
|
Interest income
|
437
|
|
|
1,532
|
|
Total interest expense, net
|
$
|
(7,476)
|
|
|
$
|
(8,199)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2020
|
|
2019
|
Bank credit facility
|
$
|
(6,878)
|
|
|
$
|
(8,971)
|
|
Amortization of deferred financing costs
|
(553)
|
|
|
(553)
|
|
Other, net
|
(45)
|
|
|
1,325
|
|
Total interest expense, net
|
$
|
(7,476)
|
|
|
$
|
(8,199)
|
|
For the year ended December 31, 2020, net interest expense decreased from the year ended December 31, 2019 primarily due to a lower average interest rate, partially offset by a higher outstanding average balance under the Credit Facility, which includes the new term loan of $125,000 we entered into on September 2, 2020 via the First Amendment to the Credit Facility (the “Term Loan”) and subsequently repaid in November 2020.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2020
|
|
2019
|
Foreign exchange gain (loss)
|
$
|
22,919
|
|
|
$
|
(5,591)
|
|
Other income (expense), net
|
2,027
|
|
|
34
|
|
Total other income (expense), net
|
$
|
24,946
|
|
|
$
|
(5,557)
|
|
For the years ended December 31, 2020 and 2019, other income (expense), net primarily consists of foreign exchange gains (losses) of $22,919 and $(5,591), respectively. The foreign exchange gains (losses) derive primarily from U.S. Dollar denominated cash and cash equivalents, accounts receivable, and intercompany balances held by foreign subsidiaries. For the years ended December 31, 2020 and 2019, intercompany finance transactions denominated in U.S. Dollars resulted in unrealized foreign exchange gains (losses) of $22,310 and $(5,270), respectively. These U.S. Dollar denominated balances are being translated into their functional currencies at the rates in effect at the balance sheet date and fully eliminate in consolidation. The gains and losses from such translations are included in Other income (expense), net.
For the year ended December 31, 2020, other income (expense), net also includes a gain from the change in fair value of our interest rate swap of $347 and a gain from the change in fair value of acquisition contingent consideration of $1,340.
(Provision) Benefit for Income Taxes
The income tax provisions for the years ended December 31, 2020 and 2019 were based on the effective income tax rates applicable for those periods. For the years ended December 31, 2020 and 2019, we recognized an aggregate consolidated income tax expense of $38,625 and $23,738, respectively, for U.S. domestic and foreign income taxes. For the years ended December 31, 2020 and 2019, we recorded a discrete tax benefit of $8,644 and $2,940, respectively, associated with stock‑based compensation. The effective income tax rate of 23.0% for the year ended December 31, 2020 was higher than the effective income tax rate of 18.5% for the year ended December 31, 2019 primarily due to officer compensation limitation provisions resulting from our IPO, which went effective during the third quarter of 2020, and the non‑deductibility of expenses associated with our IPO, partially offset by increased discrete windfall tax benefits from stock‑based compensation.
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2020
|
|
2019
|
Net income
|
$
|
126,521
|
|
|
$
|
103,096
|
|
For the year ended December 31, 2020, net income increased by $23,425, or 22.7%, compared to the year ended December 31, 2019. The changes are due to the factors stated above.
Adjusted EBITDA and Adjusted Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2020
|
|
2019
|
Adjusted EBITDA
|
$
|
266,199
|
|
|
$
|
188,129
|
|
Adjusted Net Income
|
$
|
192,678
|
|
|
$
|
135,049
|
|
For the year ended December 31, 2020, Adjusted EBITDA increased by $78,070 compared to the year ended December 31, 2019. For the years ended December 31, 2020 and 2019, Adjusted EBITDA as a percentage of revenue was 33.2% and 25.5%, respectively.
For the year ended December 31, 2020, Adjusted Net Income increased by $57,629 compared to the year ended December 31, 2019. For the years ended December 31, 2020 and 2019, Adjusted Net Income as a percentage of revenue was 24.0% and 18.3%, respectively.
For additional information, including the limitations of using non‑GAAP financial measures, and reconciliations of the non‑GAAP financial measures to the most directly comparable financial measures stated in accordance with U.S. GAAP, see the section titled “—Non‑GAAP Financial Measures.”
Comparison of the Years Ended December 31, 2019 and 2018
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
|
|
|
|
|
|
|
|
Impact
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Adoption
|
|
|
|
|
|
Constant
|
|
As Reported
|
|
As Reported
|
|
|
|
|
|
of Topic
|
|
Remaining
|
|
|
|
Currency
|
|
Topic 606
|
|
Topic 605
|
|
Amount
|
|
%
|
|
606
|
|
Difference
|
|
%
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
$
|
608,300
|
|
|
$
|
557,421
|
|
|
$
|
50,879
|
|
|
9.1
|
%
|
|
$
|
(5,625)
|
|
|
$
|
56,504
|
|
|
10.1
|
%
|
|
12.9
|
%
|
Perpetual licenses
|
59,693
|
|
|
61,065
|
|
|
(1,372)
|
|
|
(2.2)
|
%
|
|
7,174
|
|
|
(8,546)
|
|
|
(14.0)
|
%
|
|
(11.1)
|
%
|
Subscriptions and licenses
|
667,993
|
|
|
618,486
|
|
|
49,507
|
|
|
8.0
|
%
|
|
1,549
|
|
|
47,958
|
|
|
7.8
|
%
|
|
10.5
|
%
|
Services
|
68,661
|
|
|
73,224
|
|
|
(4,563)
|
|
|
(6.2)
|
%
|
|
256
|
|
|
(4,819)
|
|
|
(6.6)
|
%
|
|
(4.8)
|
%
|
Total revenues
|
$
|
736,654
|
|
|
$
|
691,710
|
|
|
$
|
44,944
|
|
|
6.5
|
%
|
|
$
|
1,805
|
|
|
$
|
43,139
|
|
|
6.2
|
%
|
|
8.9
|
%
|
For the year ended December 31, 2019, revenues as reported under Topic 606 increased by $44,944, or 6.5%, to $736,654 as compared to $691,710 under Topic 605 for the year ended December 31, 2018, with subscriptions revenues increasing by 9.1%, perpetual licenses revenues decreasing by 2.2%, and services revenues decreasing by 6.2%.
The change in revenues was significantly impacted by the adoption of Topic 606, which impacted the timing, allocation, and presentation of subscriptions, perpetual licenses, and services revenues. The most significant impact from the adoption of Topic 606 relates to timing of revenue recognition for perpetual licenses and the accounting for certain of our subscription arrangements that include term‑based software licenses bundled with support. Under Topic 606, both perpetual license and prepaid term‑based software license revenues are recognized upfront upon delivery of the software license. Under Topic 605, revenue for perpetual licenses was recognized over a three‑year period, while revenue attributable to the term‑based software licenses was recognized ratably over the term. Revenue recognition related to support, hosting, usage‑based offerings, and services is substantially unchanged, with support and hosting revenue recorded ratably over the contract term, usage‑based revenue recognized upon usage or delivery, and services revenue recognized as delivered. The adoption of Topic 606 resulted in a net reduction in subscriptions revenues of $5,625, and a net increase in perpetual licenses revenues of $7,174 for the year ended December 31, 2019. Our services revenues have not been significantly impacted by the adoption of Topic 606. On an annual basis, we expect our subscriptions revenues recognized under Topic 606 to be comparable to such revenues recognized under Topic 605. This expectation is attributable to the annual, recurring nature of our subscription agreements. However, under Topic 606, the conversion of our existing subscription users to consumption‑based offerings with consumption measurement durations of less than one year, such as our E365 subscription offering, as well as the term start date of new annual term license subscriptions, introduces some volatility between periods and impacts period‑over‑period comparability. For additional information, see the section titled “—Key Factors Impacting Comparability and Performance.” For additional information on the impact of adoption of Topic 606 on our results, see Note 3 to the consolidated financial statements.
Net of the impact from adopting Topic 606 of $1,805, total revenues increased by $43,139, or 6.2%, for the year ended December 31, 2019. This increase was driven primarily by improvements in our organic performance of $53,827, and to a lesser extent, the impact from acquisitions of $7,597, partially offset by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $18,285. On a constant currency basis and net of the impact from adopting Topic 606, our revenues increased by 8.9% for the year ended December 31, 2019 as compared to the prior period.
•Subscriptions. Net of the decrease from adopting Topic 606 of $5,625, subscriptions revenues increased by $56,504, or 10.1%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was driven primarily by improvements in our organic performance of $61,325, and to a lesser extent, the impact from acquisitions of $10,448, partially offset by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $15,269. On a constant currency basis and net of the impact from adopting Topic 606, our subscriptions revenues increased by 12.9% for the year ended December 31, 2019 as compared to the prior period.
The increase in organic performance was primarily due to expansion within our existing accounts, as reflected by our recurring revenues dollar‑based net retention rate of 108%. Approximately 2% of the increase was attributed to new accounts. Approximately 50% of our organic performance expansion was driven by ProjectWise and civil design products.
•Perpetual licenses. Net of the increase from adopting Topic 606 of $7,174, perpetual licenses revenues decreased by $8,546, or 14.0%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This decrease was driven by a reduction in our organic performance of $2,735, the net negative impact from acquisitions and acquisition integration of $4,069, as well as by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $1,742. On a constant currency basis and net of the impact from adopting Topic 606, our perpetual licenses revenues decreased by 11.1% for the year ended December 31, 2019 as compared to the prior period.
The negative impact from acquisition integration of $4,498 relates to a 2018 acquisition. In 2018 we recognized perpetual license revenues from this acquisition of $4,061. License revenues were recognized upon delivery. Upon completing acquisition integration and beginning in 2019, such license sales were subject to our SELECT subscription program, including the portfolio balancing performance obligation. As a result, beginning in 2019 we would have recognized such license revenues ratably over a three‑year period under Topic 605. In connection with this acquisition, we sold $6,317 of licenses in 2019, of which $823 was ratably recognized in 2019 and the balance of $5,494 was deferred under Topic 605. For comparison purposes, under Topic 606, revenue of $6,317 was recognized upon delivery in 2019.
•Services. Net of the increase from adopting Topic 606 of $256, services revenues decreased by $4,819, or 6.6%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This decrease was driven primarily by a reduction in our organic performance of $4,763, as well as by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $1,274, partially offset by the impact from acquisitions of $1,218. On a constant currency basis and net of the impact from adopting Topic 606, our services revenues decreased by 4.8% for the year ended December 31, 2019 as compared to the prior period.
The decrease in organic performance was primarily due to the completion of several larger services projects during 2018 and the partial redeployment of our services colleagues to support Success Plan services of our E365 subscription offering.
Revenues by Geographic Area
Revenues are allocated to individual countries based upon the location of the users. Revenues by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
|
|
|
|
|
|
|
|
Impact
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Adoption
|
|
|
|
|
|
Constant
|
|
As Reported
|
|
As Reported
|
|
|
|
|
|
of Topic
|
|
Remaining
|
|
|
|
Currency
|
|
Topic 606
|
|
Topic 605
|
|
Amount
|
|
%
|
|
606
|
|
Difference
|
|
%
|
|
%
|
Revenues by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
356,331
|
|
|
$
|
328,749
|
|
|
$
|
27,582
|
|
|
8.4
|
%
|
|
$
|
(4,603)
|
|
|
$
|
32,185
|
|
|
9.8
|
%
|
|
10.8
|
%
|
EMEA
|
236,602
|
|
|
231,486
|
|
|
5,116
|
|
|
2.2
|
%
|
|
1,348
|
|
|
3,768
|
|
|
1.6
|
%
|
|
6.0
|
%
|
APAC
|
143,721
|
|
|
131,475
|
|
|
12,246
|
|
|
9.3
|
%
|
|
5,060
|
|
|
7,186
|
|
|
5.5
|
%
|
|
9.1
|
%
|
Total revenues by geographic area
|
$
|
736,654
|
|
|
$
|
691,710
|
|
|
$
|
44,944
|
|
|
6.5
|
%
|
|
$
|
1,805
|
|
|
$
|
43,139
|
|
|
6.2
|
%
|
|
8.9
|
%
|
For the year ended December 31, 2019, revenues reported under Topic 606 for our Americas, EMEA and APAC geographic areas, as compared to the revenues reported under Topic 605 for the year ended December 31, 2018, increased by $27,582, or 8.4%, $5,116, or 2.2%, and $12,246, or 9.3%, respectively.
•Americas. Net of the decrease from adopting Topic 606 of $4,603, revenues from the Americas increased by $32,185, or 9.8%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was driven primarily by improvements in our organic performance of $30,993 and, to a lesser extent, the impact from acquisitions of $4,527, partially offset by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $3,335. On a constant currency basis and net of the impact from adopting Topic 606, our revenues from the Americas increased by 10.8% for the year ended December 31, 2019 as compared to the prior period.
The increase in organic performance was primarily due to expansion of our recurring revenues from our existing accounts in the United States and Canada. Approximately 50% of our organic performance expansion was driven by ProjectWise and civil design products.
•EMEA. Net of the increase from adopting Topic 606 of $1,348, revenues from EMEA increased by $3,768, or 1.6%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was driven primarily by improvements in our organic performance of $11,665 and, to a lesser extent, the impact from acquisitions of $6,818, partially offset by the negative impact from acquisition integration of $4,498 and by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $10,217. On a constant currency basis and net of the impact from adopting Topic 606, our revenues from EMEA increased by 6.0% for the year ended December 31, 2019 as compared to the prior period.
The increase in organic performance was primarily due to expansion of our recurring revenues throughout the region. Approximately 50% of our organic performance expansion was driven by ProjectWise and Offshore Structural Analysis products.
The negative impact from acquisition integration relates to a 2018 acquisition. In 2018 we recognized perpetual license revenues from this acquisition of $4,061. License revenues were recognized upon delivery. Upon completing acquisition integration and beginning in 2019, such license sales were subject to our SELECT subscription program, including the portfolio balancing performance obligation. As a result, beginning in 2019 we would have recognized such license revenues ratably over a three‑year period under Topic 605. In connection with this acquisition, we sold $6,317 of licenses in 2019, of which $823 was ratably recognized in 2019 and the balance of $5,494 was deferred under Topic 605. For comparison purposes, under Topic 606, revenue of $6,317 was recognized upon delivery in 2019.
•APAC. Net of the increase from adopting Topic 606 of $5,060, revenues from APAC increased by $7,186, or 5.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was driven primarily by improvements in our organic performance of $11,169 and, to a lesser extent, the impact from acquisitions of $750, partially offset by negative foreign currency effects due to a stronger U.S. Dollar relative to our other functional currencies of $4,733. On a constant currency basis and net of the impact from adopting Topic 606, our revenues from APAC increased by 9.1% for the year ended December 31, 2019 as compared to the prior period.
The increase in organic performance was primarily due to expansion of our recurring revenues from our existing accounts in Australia and China. Approximately 50% of our organic performance expansion was driven by ProjectWise and civil design products.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
|
|
|
|
|
|
|
|
Impact
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Adoption
|
|
|
|
|
|
Constant
|
|
As Reported
|
|
As Reported
|
|
|
|
|
|
of Topic
|
|
Remaining
|
|
|
|
Currency
|
|
Topic 606
|
|
Topic 605
|
|
Amount
|
|
%
|
|
606
|
|
Difference
|
|
%
|
|
%
|
Cost of subscriptions and licenses
|
$
|
71,578
|
|
|
$
|
55,113
|
|
|
$
|
16,465
|
|
|
29.9
|
%
|
|
$
|
139
|
|
|
$
|
16,326
|
|
|
29.6
|
%
|
|
32.8
|
%
|
Cost of services
|
72,572
|
|
|
76,211
|
|
|
(3,639)
|
|
|
(4.8)
|
%
|
|
—
|
|
|
(3,639)
|
|
|
(4.8)
|
%
|
|
(2.2)
|
%
|
Total cost of revenues
|
$
|
144,150
|
|
|
$
|
131,324
|
|
|
$
|
12,826
|
|
|
9.8
|
%
|
|
$
|
139
|
|
|
$
|
12,687
|
|
|
9.7
|
%
|
|
12.5
|
%
|
For the year ended December 31, 2019, cost of revenues reported under Topic 606 increased by $12,826, or 9.8%, to $144,150 as compared to cost of revenues reported under Topic 605 for the year ended December 31, 2018. This increase was driven primarily by an increase in cost of subscriptions and licenses, partially offset by lower cost of services relative to the prior period. Cost of revenues has not been significantly impacted by the adoption of Topic 606.
Net of the increase from adopting Topic 606 of $139, cost of subscriptions and licenses increased 29.6%, or 32.8% in constant currency, as compared to the year ended December 31, 2018. On a constant currency basis, this increase was primarily due to an increase in hosting costs of approximately $6,600, an increase in headcount‑related costs of approximately $6,000, an increase in amortization expense of approximately $1,500 related to certain projects under our ACDP, an increase in reseller costs of approximately $1,900 and an increase in amortization expense of approximately $1,000 for software and technology.
Cost of services decreased by 4.8%, or 2.2% in constant currency, as compared to the year ended December 31, 2018. On a constant currency basis, the decrease was primarily due to a decrease in headcount‑related costs of approximately $1,100 as well as a decrease in the recognition of previously capitalized costs related to certain professional services projects of approximately $500.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
|
|
|
|
|
|
|
|
|
|
Impact
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Adoption
|
|
|
|
|
|
Constant
|
|
As Reported
|
|
As Reported
|
|
|
|
|
|
of Topic
|
|
Remaining
|
|
|
|
Currency
|
|
Topic 606
|
|
Topic 605
|
|
Amount
|
|
%
|
|
606
|
|
Difference
|
|
%
|
|
%
|
Research and development
|
$
|
183,552
|
|
|
$
|
175,032
|
|
|
$
|
8,520
|
|
|
4.9
|
%
|
|
$
|
—
|
|
|
$
|
8,520
|
|
|
4.9
|
%
|
|
7.2
|
%
|
Selling and marketing
|
155,294
|
|
|
160,635
|
|
|
(5,341)
|
|
|
(3.3)
|
%
|
|
20
|
|
|
(5,361)
|
|
|
(3.3)
|
%
|
|
(1.0)
|
%
|
General and administrative
|
97,580
|
|
|
89,328
|
|
|
8,252
|
|
|
9.2
|
%
|
|
—
|
|
|
8,252
|
|
|
9.2
|
%
|
|
10.6
|
%
|
Amortization of purchased intangibles
|
14,213
|
|
|
14,000
|
|
|
213
|
|
|
1.5
|
%
|
|
—
|
|
|
213
|
|
|
1.5
|
%
|
|
4.4
|
%
|
Total operating expenses
|
$
|
450,639
|
|
|
$
|
438,995
|
|
|
$
|
11,644
|
|
|
2.7
|
%
|
|
$
|
20
|
|
|
$
|
11,624
|
|
|
2.6
|
%
|
|
4.8
|
%
|
Research and development. Research and development expenses increased 4.9%, or 7.2% in constant currency, as compared to the year ended December 31, 2018. On a constant currency basis, the increase was primarily due to an increase in headcount‑related costs of approximately $8,800, as well as an increase in facility‑related costs of approximately $3,300.
Selling and marketing. Selling and marketing expenses decreased 3.3%, or 1.0% in constant currency, as compared to the year ended December 31, 2018. The decrease is primarily caused by a reduction in sales incentives, which were at an elevated level for the year ended December 31, 2018.
General and administrative. General and administrative expenses increased 9.2%, or 10.6% in constant currency, as compared to the year ended December 31, 2018. On a constant currency basis, the increase was primarily caused by an increase in headcount‑related costs of approximately $8,600, as well as approximately $900 related to incremental accounting costs associated with the IPO.
Amortization of purchased intangibles. Amortization of purchased intangibles increased by 1.5%, or 4.4% in constant currency, as compared to the year ended December 31, 2018. The increase was primarily attributable to acquisitions that closed in 2018.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2019
|
|
2018
|
Interest expense
|
$
|
(9,731)
|
|
|
$
|
(9,607)
|
|
Interest income
|
1,532
|
|
|
842
|
|
Total interest expense, net
|
$
|
(8,199)
|
|
|
$
|
(8,765)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2019
|
|
2018
|
Bank credit facility
|
$
|
(8,971)
|
|
|
$
|
(8,800)
|
|
Amortization of deferred financing costs
|
(553)
|
|
|
(552)
|
|
Other, net
|
1,325
|
|
|
587
|
|
Total interest expense, net
|
$
|
(8,199)
|
|
|
$
|
(8,765)
|
|
Our net interest expense for the year ended December 31, 2019 decreased from the prior year period primarily due to an offsetting increase in interest income from our investments in money market funds.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2019
|
|
2018
|
Foreign exchange loss
|
$
|
(5,591)
|
|
|
$
|
(418)
|
|
Other income, net
|
34
|
|
|
654
|
|
Total other income (expense), net
|
$
|
(5,557)
|
|
|
$
|
236
|
|
Other income (expense), net for the years ended December 31, 2019 and 2018 primarily consists of foreign exchange losses of $5,591 and $418, respectively. The foreign exchange losses derive primarily from U.S. Dollar denominated intercompany balances, cash and cash equivalents, and accounts receivable held by foreign subsidiaries with non‑U.S. Dollar functional currencies. In October 2018, we had intercompany sales of certain intangible operating assets between our foreign subsidiaries, which resulted in significant U.S. Dollar denominated intercompany liabilities at foreign subsidiaries with a non‑U.S. Dollar functional currency (mainly Euro). These U.S. Dollar denominated balances are being translated into their functional currencies at the rates in effect at the balance sheet date and fully eliminate in consolidation. The gains and losses from such translations are included in Other income (expense), net. For the year ended December 31, 2019, such intercompany balances resulted in unrealized foreign exchange losses of $5,270.
(Provision) Benefit for Income Taxes
The income tax provisions for the years ended December 31, 2019 and 2018 were based on the effective income tax rates applicable for those periods. For the years ended December 31, 2019 and 2018, we recognized an aggregate consolidated income tax expense (benefit) of $23,738 and $(29,250), respectively, for U.S. domestic and foreign income taxes. The effective income tax rate of 18.5% for the year ended December 31, 2019 was primarily a result of the timing and mix of U.S. and foreign income. The effective income tax rate of (25.9)% for the year ended December 31, 2018 was primarily impacted by a non‑recurring tax benefit of $46,369 resulting from an intercompany sale of certain intangible operating assets. The provision for income tax under Topic 605 would have been $21,762 for the year ended December 31, 2019.
Loss from Investment Accounted for Using the Equity Method, Net of Tax
In September 2019, we and Topcon Positioning Systems, Inc. formed DCW, a joint venture which operates as a digital integrator of software and cloud services for the construction industry. DCW’s focus is to transform the construction industry from its legacy document‑centric paradigm by simplifying and enabling digital automated workflows and processes, technology integration, and digital twinning services for infrastructure.
We have a 50% ownership in DCW and apply the equity method of accounting for our investment in DCW as we do not have the ability to exercise significant influence over operating and financial policies. Under the equity method, we recognized our initial investment at cost and subsequently adjust it by our proportional share of income or losses from the investment. For the year ended December 31, 2019, the loss from investment accounted for using the equity method, net of tax, related to the investment was $1,275.
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
As Reported
|
|
As Reported
|
|
As Reported
|
|
Topic 606
|
|
Topic 605
|
|
Topic 605
|
Net income
|
$
|
103,096
|
|
|
$
|
103,426
|
|
|
$
|
142,112
|
|
For the year ended December 31, 2019, net income under Topic 606 decreased by $39,016, or 27.5% ($38,686, or 27.2%, under Topic 605), compared to the year ended December 31, 2018 under Topic 605. The change is due to the factors stated above.
Adjusted EBITDA and Adjusted Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
As Reported
|
|
As Reported
|
|
As Reported
|
|
Topic 606
|
|
Topic 605
|
|
Topic 605
|
Adjusted EBITDA
|
$
|
188,129
|
|
|
$
|
186,598
|
|
|
$
|
171,768
|
|
Adjusted Net Income
|
$
|
135,049
|
|
|
$
|
135,471
|
|
|
$
|
132,246
|
|
For the year ended December 31, 2019, Adjusted EBITDA under Topic 606 increased by $16,361 (or $14,830 under Topic 605) compared to the year ended December 31, 2018 under Topic 605. These increases were primarily due to an increase in income from operations, net of adjustments discussed in the section titled “Selected Consolidated Financial Data.” The larger increase under Topic 606 is primarily driven by the upfront recognition of perpetual license revenue under Topic 606 as compared to ratable recognition over a three‑year period under Topic 605, partially offset by lower subscription revenue due to ELS to E365 conversions. For additional information, see the section titled “—Key Factors Impacting Comparability and Performance.”
Under Topic 605, Adjusted EBITDA as a percentage of revenue was 25.4% and 24.8% for the years ended December 31, 2019 and 2018, respectively. Under Topic 606, Adjusted EBITDA as a percentage of revenue was 25.5% for the year ended December 31, 2019.
For the year ended December 31, 2019, Adjusted Net Income under Topic 606 increased by $2,803 (or $3,225 under Topic 605) compared to the year ended December 31, 2018 under Topic 605. These increases were primarily due to an increase in income from operations net of adjustments. The increase in Adjusted Net Income under Topic 606, when compared to Topic 605, was positively impacted by the upfront recognition of perpetual license revenue as compared to ratable recognition over a three‑year period under Topic 605. This increase was offset by lower subscription revenue due to ELS to E365 conversions and a slightly higher provision for income taxes under Topic 606 when compared to Topic 605.
Under Topic 605, Adjusted Net Income as a percentage of revenue was 18.4% and 19.1% for the years ended December 31, 2019 and 2018, respectively. Under Topic 606, Adjusted Net Income as a percentage of revenue was 18.3% for the year ended December 31, 2019.
For additional information, including the limitations of using non‑GAAP financial measures, and reconciliations of the non‑GAAP financial measures to the most directly comparable financial measures stated in accordance with U.S. GAAP, see the section titled “—Non‑GAAP Financial Measures.”
Liquidity and Capital Resources:
Our primary source of cash is generated from the delivery of subscriptions, perpetual licenses, and services. Our primary use of cash is payment of our operating costs, which consist primarily of colleague-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities, and overhead costs. In addition to operating expenses, we also use cash to fund growth initiatives, which include acquisitions of software assets and businesses.
Our cash and cash equivalent balances are concentrated in a few locations around the world, with substantial amounts held outside of the United States. As of December 31, 2020 and 2019, 94% and 98%, respectively, of our total cash and cash equivalents were located outside of the United States. Under the JOBS Act, we are subject to U.S. taxes for the deemed repatriation of certain cash balances held by foreign corporations. We intend to continue to permanently reinvest these funds outside of the United States and current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We expect to meet our U.S. liquidity needs through ongoing cash flows or external borrowings including available liquidity under the Credit Facility described below. We regularly review our capital structure and consider a variety of potential financing alternatives and planning strategies to ensure that we have the proper liquidity available in the locations in which it is needed and to fund our operations and growth investments with cash that has not been permanently reinvested outside the United States.
We believe that existing cash and cash equivalent balances, together with cash generated from operations and liquidity under the Credit Facility, will be sufficient to meet our domestic and international working capital and capital expenditure requirements through the next twelve months. However, our future capital requirements may be materially different than those currently planned in our budgeting and forecasting activities and depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development, the expansion of our sales and marketing activities, the timing of new product introductions, currency fluctuations, market acceptance of our products, competitive factors, and overall economic conditions, globally. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders, while the incurrence of debt financing, including convertible debt, would result in debt service obligations. Such debt instruments also could introduce covenants that might restrict our operations. We cannot assure you that we could obtain additional financing on favorable terms or at all.
Cash and cash equivalents. We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our cash and cash equivalents consisted of cash held in checking accounts and money market funds maintained at various financial institutions. The following table presents our foreign and domestic holdings of cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Cash and cash equivalents:
|
|
|
|
Held domestically
|
$
|
7,861
|
|
|
$
|
2,291
|
|
Held by foreign subsidiaries
|
114,145
|
|
|
118,810
|
|
Total cash and cash equivalents
|
$
|
122,006
|
|
|
$
|
121,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of cash and cash equivalents held by foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period, the offset to which is recorded in Accumulated other comprehensive loss on our consolidated balance sheets.
Bank Credit Facility. On December 19, 2017, we entered into the Credit Facility, which matures on December 18, 2022. Upon entry into the Credit Facility, we obtained a $500,000 senior secured revolving facility and refinanced all indebtedness outstanding under our prior facility.
On September 2, 2020, we entered into the First Amendment to the Credit Facility, which provided the Term Loan of $125,000 with a maturity of December 18, 2022 and included certain other amendments, including the addition of a mandatory prepayment provision requiring us to prepay borrowings under the Credit Facility in an aggregate amount equal to the net proceeds from any underwritten public offering by us, which prepayment shall be applied, first, to the Term Loan and, second, to any borrowings outstanding under the revolving facility under the Credit Facility without reducing the revolving commitments thereof. We used borrowings under the Term Loan and under the revolving facility under the Credit Facility to pay a special dividend of $1.50 per share of our common stock (approximately $389,300 in the aggregate) (the “Special Dividend”) and a regular quarterly dividend of $0.03 per share of our common stock. The Special Dividend was declared by our board of directors on August 28, 2020. In November 2020, we used a portion of the net proceeds from the Follow‑On Offering to repay the $125,000 Term Loan. See Notes 10 and 13 to our consolidated financial statements.
In addition to the revolving line of credit, the Credit Facility also provides up to $50,000 of letters of credit and other incremental borrowings subject to availability, including a $50,000 multi‑currency swing‑line sub‑facility and a $100,000 incremental “accordion” sub‑facility. We had $150 and $546 of letters of credit and surety bonds outstanding as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, we had $253,850 and $265,704, respectively, available under the Credit Facility.
Under the Credit Facility, we may make either Euro currency or non‑Euro currency interest rate elections. Interest on the Euro currency borrowings is at the one‑month LIBOR plus a spread ranging from 100 basis points (“bps”) to 225 bps as determined by our net leverage ratio. Under the non‑Euro currency elections, Credit Facility borrowings bear a base interest rate of the greater of (i) the prime rate, (ii) the overnight bank funding effective rate plus 50 bps, or (iii) LIBOR plus 100 bps, plus a spread ranging from 0 bps to 125 bps as determined by our leverage ratio. In addition, a commitment fee for the unused Credit Facility ranges from 15 bps to 30 bps as determined by our net leverage ratio.
Borrowings under the Credit Facility are guaranteed by all of our first tier domestic subsidiaries and are secured by a first priority security interest in substantially all of our and the guarantors’ U.S. assets and 65% of the stock of their directly owned foreign subsidiaries. The Credit Facility contains both affirmative and negative covenants, including maximum leverage ratios. As of December 31, 2020 and 2019, we were in compliance with all covenants in our debt agreements.
Interest rate risk associated with the Credit Facility is managed through an interest rate swap which we executed on March 31, 2020. The swap has an effective date of April 2, 2020 and a termination date of April 2, 2030. Under the terms of the swap, we fixed our LIBOR borrowing rate at 0.73% on a notional amount of $200,000. The interest rate swap is not designated as a hedging instrument for accounting purposes. We account for the swap as either an asset or a liability on the consolidated balance sheet and carry the derivative at fair value. Gains and losses from the change in fair value are recognized in Other income (expense), net, in the consolidated statements of operations. As of December 31, 2020, we recorded a swap related asset at fair value of $347.
The weighted average interest rate under the Credit Facility was 1.92%, 3.47%, and 3.28% for the years ended December 31, 2020, 2019, and 2018, respectively. There were no accrued interest or fees as of December 31, 2020 and 2019. Interest expense was $6,878, $8,971, and $8,800 for the years ended December 31, 2020, 2019, and 2018, respectively.
For the year ended December 31, 2020, we incurred $432 of debt issuance costs related to the Term Loan. In addition, interest expense includes amortization of deferred financing costs of $553 for both the years ended December 31, 2020 and 2019 and $552 for the year ended December 31, 2018.
The agreement governing the Credit Facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenants defaults, cross-defaults to certain other indebtedness in excess of $10,000, certain events of bankruptcy and insolvency, judgment defaults in excess of $10,000, failure of any security document supporting the Credit Facility to be in full force and effect, and a change of control.
Voluntary prepayments of amounts outstanding under the Credit Facility, in whole or in part, are permitted at any time, so long as we give notice as required by the Credit Facility. However, if prepayment is made with respect to a LIBOR‑based loan and the prepayment is made on a date other than an interest payment date, we must pay customary breakage costs.
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our cash flow activities for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Net Cash Provided By (Used In):
|
|
|
|
Operating activities
|
$
|
258,340
|
|
|
$
|
170,773
|
|
Investing activities
|
(117,333)
|
|
|
(53,693)
|
|
Financing activities
|
(136,511)
|
|
|
(77,048)
|
|
Operating activities
Net cash provided by operating activities was $258,340 for the year ended December 31, 2020. Compared to the prior year comparative period, net cash from operating activities was higher by $87,567 due to an increase in net income of $23,425, a net increase in non‑cash adjustments of $11,254, and an increase in net cash flows from the change in operating assets and liabilities of $52,888. The net increase in non‑cash adjustments primarily related to a $3,957 increase in depreciation and amortization, an increase of $15,514 in deferred income taxes, an increase of $24,023 in stock‑based compensation expense, partially offset by an increase of $29,813 related to foreign currency remeasurement gains. The net increase in cash flows from changes in operating assets and liabilities of $52,888 was due to increased cash flows related to the collection of accounts receivable of $33,540, an increase from the change in prepaid and other assets of $12,373, an increase from the change in accounts payable, accruals and other liabilities of $5,776, and an increase from the change in income taxes payable of $1,496, partially offset by a decrease from the change in deferred revenues of $297.
For the year ended December 31, 2019, net cash provided by operating activities was $170,773 due to net income of $103,096 increased by $53,199 of non‑cash adjustments and $14,478 from changes in operating assets and liabilities.
Investing activities
Net cash used in investing activities was $117,333 for the year ended December 31, 2020, primarily due to $15,496 related to purchases of property and equipment and investment in capitalized software and $93,032 in acquisition related payments, net of cash acquired.
For the year ended December 31, 2019, net cash used in investing activities was $53,693, primarily due to $15,804 related to purchases of property and equipment and investment in capitalized software and $34,054 in acquisition related payments, net of cash acquired.
Financing activities
Net cash used in financing activities was $136,511 for the year ended December 31, 2020. Compared to the prior year comparative period, net cash used in financing activities increased by $59,463, primarily due to an increase in payments for dividends of $397,657, partially offset by an increase in net borrowings of $37,250 under the Credit Facility, $294,429 of proceeds from our Follow‑On Offering, net of expenses, and a decrease in the payment of acquisition debt and other consideration of $7,604.
For the year ended December 31, 2019, net cash used in financing activities was $77,048, primarily due to net payments under the Credit Facility of $25,000, payment of a contingent acquisition liability of $11,029, payments of dividends of $24,989, and net payments for shares acquired of $19,656.
Subsequent Events After December 31, 2020
Bank Credit Facility — On January 25, 2021, we entered into an amended and restated credit agreement, which matures on November 15, 2025 (the “New Credit Facility”). Upon entry into the New Credit Facility, we obtained a $850,000 senior secured revolving facility and refinanced all indebtedness outstanding under our Credit Facility. As of February 28, 2021, the Company had $849,850 available under the Credit Facility.
Convertible Debt — On January 26, 2021, we completed an offering of $690,000 of 0.125% convertible senior notes due 2026. Interest will accrue from January 26, 2021 and will be payable twice a year with the first payment due on July 15, 2021. We used $25,530 of the net proceeds from the sale of the 2026 Notes to pay the cost of the capped call transactions and approximately $250,500 to repay outstanding indebtedness under the Credit Facility and to pay related fees and expenses. We intend to use the remainder of the net proceeds from the sale of the 2026 Notes for general corporate purposes, which may include funding future acquisitions. We may apply all or a portion of the net proceeds for the acquisition of businesses, software solutions, and technologies that we believe are complementary to our own, although we have no agreements, commitments, or understandings with respect to any specific material acquisition at this time. We have not allocated any specific portion of the net proceeds to any particular purpose and our management will have the discretion to allocate the proceeds as it determines. For further detail, see Note 25 to our consolidated financial statements.
Acquisition — In February 2021, we completed the acquisition of E7. The acquisition is not expected to be material to the our consolidated statements of operations and financial position.
Contractual Obligations and Other Commitments:
The following table represents our contractual commitments as of December 31, 2020. The information presented in the table below reflects management’s estimates of the contractual maturities of our obligations. These maturities may differ from the actual maturities of these obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
Within
|
|
|
|
|
|
After
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
Long-term debt (1)
|
$
|
246,000
|
|
|
$
|
—
|
|
|
$
|
246,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest on long-term debt (1)
|
20,086
|
|
|
5,890
|
|
|
6,902
|
|
|
2,334
|
|
|
4,960
|
|
Operating lease obligations (2)
|
50,552
|
|
|
17,666
|
|
|
22,660
|
|
|
8,243
|
|
|
1,983
|
|
Purchase obligations (3)
|
82,810
|
|
|
37,875
|
|
|
44,935
|
|
|
—
|
|
|
—
|
|
Deferred compensation obligations (4)
|
2,591
|
|
|
169
|
|
|
394
|
|
|
496
|
|
|
1,532
|
|
Contingent obligations (5)
|
4,299
|
|
|
2,884
|
|
|
1,415
|
|
|
—
|
|
|
—
|
|
Non-contingent obligations (6)
|
2,459
|
|
|
685
|
|
|
1,774
|
|
|
—
|
|
|
—
|
|
Total contractual obligations
|
$
|
408,797
|
|
|
$
|
65,169
|
|
|
$
|
324,080
|
|
|
$
|
11,073
|
|
|
$
|
8,475
|
|
(1)Long‑term debt represents the outstanding balance of $246,000 related to the Credit Facility with a weighted average interest rate of 1.92%. Interest on long‑term debt includes our interest rate swap which fixed our LIBOR borrowing rate at 0.73% on a notional amount of $200,000. As our debt has variable interest rates, we projected future interest payments based on market interest rates and the balance outstanding as of December 31, 2020.
(2)Operating lease obligations include non‑cancelable operating lease commitments for our domestic and international office facilities, office equipment, and vehicles.
(3)Purchase obligations include the non‑cancelable future cash purchase commitment for services related to the provisioning of our hosted software solutions.
(4)Deferred compensation obligations relate to the deferred portion of bonus compensation of certain former colleagues.
(5)Contingent consideration from acquisitions.
(6)Non‑contingent consideration from acquisitions.
Critical Accounting Policies and Use of Estimates:
Our consolidated financial statements are prepared in conformity with U.S. GAAP. In preparing our consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in the consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments, and estimates. Our significant accounting policies are described in Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10‑K.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
On January 1, 2019, we adopted Topic 606, using the modified retrospective method, under which the cumulative effect of initially applying Topic 606 of $125,464 ($101,489 net of tax) was recorded as a reduction to the opening balance of Accumulated deficit in the consolidated balance sheet. The impact from adoption was primarily derived from the timing of revenue recognition of perpetual licenses and the accounting for certain of our subscription arrangements that include term‑based software licenses bundled with support. Under the prior guidance, revenue for perpetual licenses was recognized over a three‑year period, while revenue attributable to the term‑based software licenses was recognized ratably over the term. Under Topic 606, both perpetual license and prepaid term‑based software license revenue is recognized upfront upon delivery of the software license. The comparative information for the year ended December 31, 2018 has not been adjusted and continues to be reported under Topic 605. See Note 3 in our consolidated financial statements for a qualitative and quantitative discussion of the adoption impact.
Topic 606 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services.
We generate revenues from subscriptions, perpetual licenses, and professional services.
Subscriptions
SELECT subscriptions. We provide prepaid annual recurring subscriptions that accounts can elect to add to a new or previously purchased perpetual license. SELECT provides accounts with benefits, including upgrades, comprehensive technical support, pooled licensing benefits, annual portfolio balancing exchange rights, learning benefits, certain Azure‑based cloud collaboration services, mobility advantages, and access to other available benefits. Under Topic 606, SELECT subscription revenues are recognized as distinct performance obligations are satisfied. The performance obligations within the SELECT offering, outside of the portfolio balancing exchange right, are concurrently delivered and have the same pattern of recognition. These performance obligations are accounted for ratably over the term as a single performance obligation. Under Topic 605, SELECT subscriptions revenue was recognized on a ratable basis, over the subscription term.
Enterprise subscriptions: We provide Enterprise subscription offerings which provide our largest accounts with complete and unlimited global access to our comprehensive portfolio of solutions. ELS provides access for a prepaid annual fee. ELS contains a term license component, SELECT maintenance and support, hosting, and performance consulting days. The SELECT maintenance and support benefits under ELS do not include a portfolio balancing feature. Revenue is allocated to the various performance obligations based on their respective standalone selling prices. Revenue allocated to the term license component is recognized upon delivery at the start of the subscription term while revenues for the SELECT maintenance and support and the performance consulting days are recognized as delivered over the subscription term. Billings in advance are recorded as Deferred revenues in the consolidated balance sheets. Under Topic 605, ELS revenue was recognized on a ratable basis, over the subscription term.
E365 subscriptions, which were introduced during the fourth quarter of 2018, provide unrestricted access to our comprehensive software portfolio, similar to ELS, however are charged based upon daily usage. The daily usage fee includes a term license component, SELECT maintenance hosting, and support, hosting, and Success Plan services, which are designed to achieve business outcomes through more efficient and effective use of our software. E365 revenues are recognized based upon usage incurred by the account under both Topics 606 and 605. Usage is defined as distinct user access on a daily basis. The term of E365 subscriptions aligns with calendar quarters and revenue is recognized based on actual usage.
Term license subscriptions: We provide annual, quarterly, and monthly term licenses for our software products. Term license subscriptions contain a term license component and SELECT maintenance and support. Revenue is allocated to the various performance obligations based on their standalone selling price (“SSP”). ATL are generally prepaid annually for named user access to specific products. QTL subscriptions allow accounts to pay quarterly in arrears for license usage that is beyond their prepaid subscriptions. MTL subscriptions are identical to QTL subscriptions, except for the term of the license, and the manner in which they are monetized. MTL subscriptions require a CSS, which is described below. For ATL, revenue allocated to the term license component is recognized upon delivery at the start of the subscription term while revenue for the SELECT maintenance and support is recognized as delivered over the subscription term. Billings in advance are recorded as Deferred revenues in the consolidated balance sheets. Under Topic 605, ATL revenues were recognized on a ratable basis, over the subscription term. For usage‑based QTL and MTL subscriptions, revenues are recognized based upon usage incurred by the account under both Topics 606 and 605. Usage is defined as peak usage over the respective terms. The terms of QTL and MTL subscriptions align with calendar quarters and calendar months, respectively, and revenue is recognized based on actual usage.
Visas and Passports are quarterly or annual term licenses enabling users to access specific project or enterprise information and entitles our users to certain functionality of our ProjectWise and AssetWise systems. Our standard offerings are usage based with monetization through our CSS program.
CSS is a program designed to streamline the procurement, administration, and payment process. The program requires an estimation of annual usage for CSS eligible offerings and a deposit of funds in advance. Actual consumption is monitored and invoiced against the deposit on a calendar quarter basis. CSS balances not utilized for eligible products or services may roll over to future periods or are refundable. Paid and unconsumed CSS balances are recorded in Accruals and other current liabilities in the consolidated balance sheets. Software and services consumed under CSS are recognized pursuant to the applicable revenue recognition guidance for the respective software or service and classified as subscriptions or services based on their respective nature.
Perpetual licenses
Perpetual licenses may be sold with or without attaching a SELECT subscription. Historically, attachment and retention of the SELECT subscription has been high given the benefits of the SELECT subscription. Perpetual license revenue is recognized upon delivery of the license to the user under Topic 606. Under Topic 605, we recognized perpetual licenses revenue ratably over a three-year term due to the portfolio balancing feature users obtain through their SELECT subscriptions.
Services
We provide professional services including training, implementation, configuration, customization, and strategic consulting services. We perform projects on both a time and materials and a fixed fee basis. Our recent and preferred contractual structures for delivering professional services include (i) delivery of the services in the form of subscription-like, packaged offerings which are annually recurring in nature, and (ii) delivery of our growing portfolio of Success Plans. Success Plans are standard offerings which offer a level of subscription service above the standard technical support offered to all accounts as part of their SELECT or Enterprise agreement. Revenues are recognized as services are performed under both Topics 606 and 605.
Significant Judgments and Estimates:
Revenue recognition. Our contracts with customers may include promises to transfer licenses (perpetual or term‑based), maintenance, and services to a user. Judgment is required to determine if the promises are separate performance obligations, and if so, the allocation of the transaction price to each performance obligation. When an arrangement includes multiple performance obligations which are concurrently delivered and have the same pattern of transfer to the customer, we account for those performance obligations as a single performance obligation. For contracts with more than one performance obligation, the transaction price is allocated among the performance obligations in an amount that depicts the relative SSP of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that should be allocated based on the relative SSP of the various products and services.
Our SELECT agreement provides users with perpetual licenses a right to exchange software for other eligible perpetual licenses on an annual basis upon renewal. We refer to this option as portfolio balancing and concluded that the portfolio balancing feature represents a material right resulting in the deferral of the associated revenue. Judgment is required to estimate the percentage of users who may elect to portfolio balance and considers inputs such as historical user elections. This feature is available once per term and must be exercised prior to the respective renewal term. We recognize the associated revenue upon election or when the portfolio balancing right expires. This right is included in the initial and subsequent renewal terms and we reestablish the revenue deferral for the material right upon the beginning of the renewal term. Portfolio balancing exchange rights are included in Deferred revenues in the consolidated balance sheets.
Business combinations. We allocate the fair value of the consideration transferred to the assets acquired and liabilities assumed, including trademarks, customer relationships, in‑process research and development, and acquired software and technology, based on their estimated fair values at the acquisition date. Any residual purchase price is recorded as goodwill. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets and deferred revenue obligations.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from sales, maintenance agreements, and acquired developed technologies;
•the acquired company’s trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in our product portfolio;
•expected costs to develop the in-process research and development into commercially viable software and estimated cash flows from the projects when completed; and
•discount rates used to determine the present value of estimated future cash flows.
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and, if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.
Goodwill and other intangible assets. Intangible assets arise from acquisitions and principally consist of goodwill, trademarks, customer relationships, and acquired software and technology. Intangibles, other than goodwill, are amortized on a straight‑line basis over their estimated useful lives, which range from three to ten years.
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Goodwill is not amortized. Instead, it is tested annually for impairment, or more frequently if events occur or circumstances change that would more likely than not reduce its fair value below its carrying amount. We operate as a single reporting unit.
The initial step in evaluating goodwill for impairment requires us to determine the reporting unit’s fair value and compare it to the carrying value, including goodwill, of such reporting unit. As part of the assessment, an entity may first qualitatively assess whether it is more likely than not (a likelihood of more than 50 percent) that a goodwill impairment exists. In evaluating whether it is more likely than not that a goodwill impairment exists, we consider the factors identified in ASC 350, Intangibles—Goodwill and Other. We also consider whether there are significant differences between the carrying amount and the estimated fair value of our assets and liabilities, and the existence of significant unrecognized intangible assets. Based upon our most recent annual impairment assessment completed as of October 1, 2020, it is not more likely than not that a goodwill impairment exists. There was no impairment of goodwill as a result of our annual impairment assessments conducted for the years ended December 31, 2020, 2019, and 2018.
Property and equipment. Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight‑line method over the estimated useful lives of the assets, which range from three to 25 years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the leasehold improvements or the lease term. Land is not depreciated. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for their intended use.
Cost of maintenance and repairs is charged to expense as incurred. Upon retirement or other disposition, the cost of the asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right‑of‑use assets, Operating lease liabilities, and Long‑term operating lease liabilities in our consolidated balance sheet. Operating lease right‑of‑use assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right‑of‑use assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate, if our leases do not provide an implicit rate, based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is determined based on our estimated credit rating, the term of the lease, economic environment where the asset resides, and full collateralization. The operating lease right‑of‑use assets also include any lease payments made and are reduced by any lease incentives. Options to extend or terminate the lease are considered in determining the lease term when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight‑line basis over the lease term. Our operating leases are primarily for office space, automobiles, and office equipment. Finance leases are included in Property and equipment, net, Accruals and other current liabilities, and Other liabilities in our consolidated balance sheet.
Allowance for doubtful accounts. We establish an allowance for doubtful accounts for expected losses during the accounts receivable collection process. The allowance for doubtful accounts is presented separately in the consolidated balance sheet and reduces the accounts receivable balance to the net realizable value of the outstanding accounts and installment receivables. The development of the allowance for doubtful accounts is based on an expected loss model which considers historical write‑off and recovery experience, aging trends affecting specific accounts, and general operational factors affecting all accounts. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
We consider current economic trends and take into account reasonable and supportable forecasts of future conditions when evaluating the adequacy of the allowance for doubtful accounts. If circumstances relating to specific customers change or unanticipated changes occur in the general business environment, our estimate of the recoverability of receivables could be further adjusted.
Derivatives not designated as hedging instruments. On March 31, 2020, we entered into an interest rate swap with a notional amount of $200,000 and a ten‑year term to reduce the interest rate risk associated with our Credit Facility. The interest rate swap is not designated as a hedging instrument for accounting purposes. We account for the swap as either an asset or a liability on the consolidated balance sheet and carry the derivative at fair value. Gains and losses from the change in fair value are recognized in Other income (expense), net and payments related to the swap are recognized in Interest expense, net in the consolidated statements of operations. The bank counterparty to the derivative potentially exposes us to credit‑related losses in the event of nonperformance. To mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. We monitor counterparty risk on at least a quarterly basis and adjust our exposure as necessary. We do not enter into derivative instrument transactions for trading or speculative purposes.
Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, credit carryforwards, and temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the items are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date.
We record net deferred tax assets to the extent we believe the assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. In the event we determine that we will not be able to realize deferred income tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would be recorded that would increase the provision for income taxes.
On December 22, 2017, the JOBS Act was enacted. This act, among other things, reduces the U.S. federal income tax rate to 21% from 35% in 2018, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings, and creates a new U.S. minimum tax on earnings of foreign subsidiaries. We completed our accounting for the effects of this legislation in 2018 and have included those effects in (Provision) benefit for income taxes in the consolidated statements of operations.
We perform a quarterly assessment of the recoverability of the net deferred tax assets and believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize the net deferred tax assets. Our judgment regarding future profitability may change due to future market conditions and other factors, including intercompany transfer pricing adjustments. Any change in future profitability may require material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determination is made. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional tax authorities and may have a significant impact on our effective tax rate.
We are subject to income taxes in the United States and in numerous foreign jurisdictions. As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations about which the ultimate tax outcome is uncertain. As a result, our calculations involve estimates by management. Some of these uncertainties arise as a consequence of revenue‑sharing, cost‑reimbursement, and transfer pricing arrangements among related entities, and the differing tax treatment of revenue and cost items across various jurisdictions. If we were compelled to revise or to account differently for our arrangements, that revision could affect our tax liability. While we believe the positions we have taken are appropriate, we record reserves for taxes to address potential exposures involving tax positions that we believe could be challenged by taxing authorities. We record a benefit on a tax position when we determine that it is more likely than not that the position is sustainable upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. We follow the applicable guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition with respect to uncertain tax positions. We recognize interest and penalties related to income taxes within the (Provision) benefit for income taxes line in the consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
Stock-based compensation. We record all stock‑based compensation as an expense in the consolidated statements of operations measured at the grant date fair value of the award and is recognized ratably over the requisite service period, which is generally the vesting period. The fair value of stock option awards is determined using the Black-Scholes option pricing model. For all other stock-based arrangements, the stock‑based compensation expense is based on the share price at the grant date.
The determination of the fair value of stock‑based payment awards using an option pricing model is affected by our stock price, as well as assumptions regarding a number of subjective variables. These variables include the fair value of our common stock, expected volatility, expected dividend yield, risk‑free interest rate, and expected term. The expected stock price volatility for our common stock is estimated by using the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available. The expected dividend yield is calculated by dividing our annual dividend, based on the most recent quarterly dividend rate, by our common stock price (as described below) on the grant date. The risk‑free interest rate is based on the U.S. Treasury yield curve with a remaining term equal to the expected life assumed at grant date. The expected term is based on the simplified method, which represents the average period from vesting to the expiration of the award.
Fair value of common stock. We have historically been a privately held company with no active public market of our common stock. We were required to estimate the fair value of the common stock underlying our stock‑based awards. The fair value of the common stock underlying our stock‑based awards was determined by our board of directors, with input from management and contemporaneous third‑party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock.
Prior to the IPO, and given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants practice guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock, including:
•contemporaneous independent valuations performed by an unrelated third-party valuation specialist;
•the nature of our business and its history;
•our operating and financial performance and forecast;
•present value of estimated future cash flows;
•the likelihood of achieving a liquidity event, such as an initial public offering, listing, or sale of our Company, given prevailing market condition and the nature and history of our business;
•any adjustment necessary to recognize a lack of marketability for our common stock;
•the market performance of comparable publicly traded companies; and
•the U.S. and global capital market conditions.
In valuing our common stock, our board of directors determined the equity value of our business generally using the income approach and the market comparable approach valuation methods.
The income approach estimates value based on the expectation of future cash flows that a company will generate such as cash earnings, cost savings, tax deductions, and proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in our cash flows.
The market comparable approach estimates value based on a comparison of the Company to comparable public companies in a similar line of business. To determine our peer group of companies, we considered public enterprises with similar operations and selected those that are similar to our size, stage of life cycle, and financial leverage. From the comparable companies, a representative market value multiple is determined and applied to our results of operations to estimate the value of the Company.
Application of these approaches involves the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future cash flows, cost savings and expenses, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impacts our valuations as of each valuation date.
Emerging Growth Company:
Section 107 of the JOBS Act provides that an “emerging growth company” can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, as amended by Section 102(b)(1) of the JOBS Act, for complying with new or revised accounting standards. This permits an “emerging growth company” to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). As a result, our consolidated financial statements may not be comparable to those of companies that comply with public company effective dates.
Off-Balance Sheet Arrangements:
We do not have any off‑balance sheet arrangements, as defined by applicable SEC regulations.
Recent Accounting Pronouncements:
For information regarding recent accounting guidance and the impact of this guidance on our consolidated financial statements, see Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10‑K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency rates, although we also have exposure due to potential changes in interest rates. We do not hold financial instruments for trading purposes.
Foreign currency exchange risk. Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates. We regularly evaluate our foreign currency positions in the context of the natural hedging of revenues and expenses and corresponding exposure. We have concluded that our naturally hedged positions support our strategy and no incremental hedging strategies have been deployed. The primary currencies for which we have exchange rate exposure are the U.S. Dollar versus Euros, British Pounds, Australian Dollars, Canadian Dollars, and Chinese Yuan Renminbi. For the year ended December 31, 2020, approximately 57% of our revenues are derived from outside of the United States and approximately 43% of our revenues are denominated in foreign currencies. In 2020, 57%, 12%, 7%, and 24% of our revenues were denominated in U.S. Dollars, Euros, British Pounds, and other currencies, respectively, and 54%, 17%, 8%, and 21% of our expenses were denominated in U.S. Dollars, Euros, British Pounds, and other currencies, respectively. Financial results therefore are affected by changes in foreign currency rates. We estimate that a 10% strengthening of the U.S. Dollar versus our other currencies would have lowered our 2020 annual operating income by approximately $7.7 million.
Interest rate risk. We had cash and cash equivalents of $122.0 million and $121.1 million as of December 31, 2020 and 2019, respectively, which consisted of bank deposits and money market funds maintained at various financial institutions. The cash and cash equivalents are held primarily for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. The interest rates on our Credit Facility also fluctuate based on various market conditions that affect LIBOR, the prime rate, or the overnight bank funding effective rate. The cost of borrowing thereunder may be impacted as a result of our interest rate risk exposure. Interest rate risk associated with the Credit Facility is managed through an interest rate swap which we executed on March 31, 2020. Under the terms of the swap, we fixed our LIBOR borrowing rate at 0.73% on a notional amount of $200.0 million and for a period of ten years. We do not enter into investments or derivative instruments for trading or speculative purposes. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Inflation risk. We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.