Progress Software Corporation — Q1 FY2021 Form 10-Q
Reporting period: Three months ended February 28, 2021; comparisons are with the three months ended February 29, 2020. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Progress sells software for developing, deploying and managing business applications, with revenue from software licenses, maintenance and services. It operates through OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. The October 2020 Chef acquisition contributed approximately $12.0 million of Q1 revenue and is included in Application Development and Deployment.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change / context |
|---|---|---|---|
| Total revenue | $121.3 million | $109.7 million | Up 11% reported; up 9% constant currency |
| Software license revenue | $33.3 million | $30.6 million | Up 9% reported |
| Maintenance and services | $88.0 million | $79.1 million | Up 11% reported |
| Gross profit / margin | $103.3 million / 85% | $94.8 million / 86% | Gross profit up 9%; margin declined |
| Operating income / margin | $27.4 million / 23% | $30.7 million / 28% | Down 11%; margin declined |
| Net income / margin | $19.0 million / 16% | $21.1 million / 19% | Down 10% |
| Diluted EPS | $0.42 | $0.46 | Down 9% |
| Operating cash flow | $44.7 million | $33.0 million | Up $11.7 million |
Revenue by segment: OpenEdge was $84.6 million, up 10%; Data Connectivity and Integration was $5.5 million, down 60%; Application Development and Deployment was $31.1 million, up 65%. Management attributed the latter increase principally to Chef, and the Data Connectivity and Integration decline to the timing of term-license renewals by certain OEM partners.
Operating expenses rose to $75.9 million from $64.1 million, including higher personnel costs and acquired-intangible amortization following Chef. Acquired-intangible amortization totaled $10.4 million versus $5.8 million. The effective tax rate was 23% in both periods.
Cash, debt and liquidity
- Cash, cash equivalents and short-term investments were $114.4 million at February 28, 2021, up from $106.0 million at November 30, 2020.
- Debt carrying value was $363.9 million: $282.2 million outstanding on the term loan and $83.5 million on the revolving facility. The term loan had $20.7 million due within 12 months; the credit facility matures in April 2024. The stated interest rate was 1.75% at quarter-end.
- Operating cash flow was $44.7 million. Investing activities provided $2.3 million; financing activities used $39.0 million, including $18.8 million of principal payments, $15.0 million of share repurchases and $7.9 million of dividends.
- The company reported compliance with its credit-facility financial covenants. It said cash, operating cash generation and available credit should be sufficient for foreseeable requirements through at least the next 12 months.
- Approximately $30.6 million of cash, cash equivalents and short-term investments was held by foreign subsidiaries and was not intended to fund domestic operations.
Material changes, outlook and risks
- Annual recurring revenue (ARR), newly reported for this period, was $432 million versus $355 million a year earlier, up 21.7%; management said Chef was the primary driver. Net dollar retention was 98.8%, versus 99.1% a year earlier.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expected liquidity to cover foreseeable cash needs and anticipated beginning to operate as one reportable segment in fiscal Q2 2021 following changes to internal resource allocation and performance assessment.
- The board declared a quarterly dividend of $0.175 per share payable June 15, 2021. The company repurchased 352,885 shares in January for $15.0 million; $175.0 million remained under the authorization at quarter-end.
- Management said COVID-19 could delay sales, affect renewals and payments, and adversely affect results, but its full impact was uncertain. Other highlighted risks include foreign-exchange exposure, competition and product development, reliance on OpenEdge and partner channels, cybersecurity and software defects, acquisition integration and realization of Chef benefits, privacy regulation, and debt covenants.
- Chef-related restructuring expense was approximately $0.9 million in the quarter, with a $1.9 million remaining reserve. Additional fiscal 2021 costs for employee matters and facility closures were expected but not expected to be material. No goodwill impairment trigger was identified during the quarter.
- Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Assess whether recurring revenue growth and Chef integration can be sustained, given ARR growth alongside 98.8% net dollar retention.
- Track Data Connectivity and Integration renewals and whether the sharp year-over-year segment decline was limited to renewal timing.
- Monitor operating-margin pressure, including acquired-intangible amortization and higher operating expenses.
- Verify debt reduction, cash generation, covenant compliance and capacity for dividends, repurchases and potential acquisitions.
- Follow COVID-19 effects, foreign-currency movements, customer renewals and payment timing, and the risks from cybersecurity and privacy requirements.