Progress Software Corporation — Q1 FY2023 10-Q
Reporting period: Three months ended February 28, 2023; comparisons are with the three months ended February 28, 2022. Unaudited results. Progress sells software licenses and maintenance and services, operating as one software segment.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $164.2 million | $144.9 million | +13% reported; +15% constant currency |
| Software license revenue | $57.6 million | $42.8 million | +35% |
| Maintenance and services revenue | $106.7 million | $102.2 million | +4% |
| Gross profit / margin | $138.0 million / 84% | $121.7 million / 84% | Profit +13% |
| Operating income / margin | $35.6 million / 22% | $29.4 million / 20% | +21% |
| Net income / diluted EPS | $23.7 million / $0.53 | $20.5 million / $0.46 | Net income +16% |
| Operating cash flow | $46.8 million | $44.1 million | +$2.7 million |
Cash, cash equivalents and short-term investments totaled $122.9 million at quarter-end, down from $256.3 million at November 30, 2022. Cash and cash equivalents alone were $108.0 million. Balance-sheet debt carrying amounts totaled approximately $812.1 million, including $195.0 million outstanding on the revolving credit line; the debt schedule reports $821.4 million in total face value. Interest expense rose to $5.8 million from $3.7 million.
Deferred revenue was $301.8 million, up from $282.4 million at fiscal year-end. Remaining performance obligations were $309 million, with approximately 81% expected to be recognized within one year. ARR, a non-GAAP operating metric, was $569 million, up 20% year over year, primarily due to MarkLogic; management reported net retention rates generally between 101% and 102%.
Material changes and notable items
- Revenue growth reflected DataDirect products and the MarkLogic acquisition, partly offset by lower OpenEdge revenue and foreign-exchange pressure in EMEA. North America revenue rose 27%; EMEA declined 1% reported but grew 4% constant currency; Asia Pacific declined 16%.
- Progress acquired MarkLogic on February 7, 2023, for a base cash purchase price of $355 million. The acquisition drove $355.8 million of net acquisition cash outflow and was partly financed with $195 million drawn on the revolving credit facility. MarkLogic’s post-acquisition revenue and earnings included in the quarter were not material.
- Acquired intangibles increased to $440.9 million and goodwill to $811.9 million; the preliminary MarkLogic allocation included $141.0 million of goodwill, which is not tax deductible. The purchase accounting remains subject to change during the measurement period.
- Operating cash flow increased modestly; investing cash outflow was $371.1 million, primarily for MarkLogic. Financing cash inflow was $174.8 million, principally reflecting the revolver borrowing. The company repurchased $15.0 million of shares and paid $8.0 million in dividends.
- A cyber incident detected in December 2022 resulted in $2.7 million of response-related expense in the quarter. Restructuring expense was $1.4 million, primarily associated with MarkLogic-related workforce changes; management did not expect further costs from that action to be material.
Outlook, risks and contingencies
Management provided no specific quarterly or full-year revenue or earnings guidance in the supplied filing text. It stated that cash, operating cash generation and available credit are expected to fund operations and foreseeable requirements for at least the next 12 months. Management intends to continue pursuing acquisitions, dividends and share repurchases; future acquisitions could reduce cash and increase debt. The board declared a $0.175-per-share dividend payable June 15, 2023, subject to the stated record date.
Risks highlighted include market and credit volatility, foreign-exchange exposure, acquisition integration and changing cash needs. The company is subject to ordinary-course legal proceedings; management did not believe their outcomes would materially affect financial position, results or cash flows. Management concluded disclosure controls were effective, but excluded MarkLogic from its controls assessment. The filing reports no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether MarkLogic integration, acquired customer retention and expected growth support the acquisition’s valuation and goodwill.
- The final purchase-price allocation, including acquired intangible values and deferred tax effects.
- Post-acquisition leverage, interest costs, revolver availability and cash generation relative to debt maturities.
- The scope, costs and any continuing operational or financial effects of the cyber incident.
- ARR and net retention trends, noting ARR is non-GAAP, not a forecast and may not be comparable across companies.
- Foreign-exchange effects and regional performance, particularly in EMEA and Asia Pacific.