Progress Software Corporation — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended May 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Progress sells software licenses and related maintenance and services through direct and indirect channels. Its three segments are OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. The Ipswitch acquisition, completed in April 2019, contributed to year-over-year results and is reported within OpenEdge.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | First six months FY2020 | First six months FY2019 |
|---|---|---|---|---|
| Revenue | $100.4 | $100.0 | $210.1 | $189.5 |
| Operating income | $25.3 | $14.7 | $56.0 | $30.2 |
| Net income | $17.0 | $8.2 | $38.1 | $17.6 |
| Diluted EPS | $0.37 | $0.18 | $0.84 | $0.39 |
| Gross margin | 86% | 82% | 86% | 82% |
| Operating margin | 25% | 15% | 27% | 16% |
- Q2 revenue was essentially flat as reported (up 2% in constant currency). Software license revenue fell 34% to $19.7 million; maintenance and services rose 15% to $80.7 million and represented 80% of quarterly revenue.
- For the first six months, revenue increased 11% as reported (12% constant currency). Management attributed the increase primarily to Ipswitch; lower Data Connectivity and Integration license sales partly offset it.
- Q2 segment revenue: OpenEdge $77.7 million, up 15%; Data Connectivity and Integration $3.7 million, down 72%; Application Development and Deployment $19.0 million, down 1%. The company cited timing of OEM term-license renewals for the Data Connectivity and Integration decline.
- Higher gross profit and operating income reflected increased maintenance revenue, lower acquired-intangible amortization, and lower operating costs. Lower travel and in-person event spending during COVID-19 restrictions and reduced investment in cognitive application products also contributed to expense reductions.
- Six-month operating cash flow was $71.0 million, versus $65.1 million a year earlier. Cash and short-term investments totaled $203.6 million at May 31, 2020, up from $173.7 million at November 30, 2019. Investing cash flow was positive $7.3 million; financing cash flow was negative $35.3 million.
- Term-loan principal was $293.5 million; the balance-sheet carrying amount of long-term debt, including current portion, was about $291.2 million. The loan’s stated interest rate was 2.06%, and $15.1 million of principal was due within 12 months. No revolver borrowings were outstanding; $1.8 million of letters of credit were issued. The company reported compliance with its debt covenants.
- Current assets were $291.4 million and current liabilities $225.2 million. Deferred revenue was $173.3 million; remaining performance obligations totaled $180 million, with about 88% expected to be recognized within a year.
Changes, outlook and risks
- Profitability improved substantially versus the prior-year periods, while quarterly revenue remained flat and license revenue weakened. Six-month growth was materially supported by Ipswitch; management reported Ipswitch revenue of $17.3 million for Q2 and $32.5 million for the first six months of FY2020.
- The company said it had not experienced significant COVID-19 disruption through the filing period, but could not predict the full effect. It warned of possible lower demand, reduced revenue, delayed customer and partner payments, and operational disruption. No numerical financial guidance is provided in the supplied filing text.
- Management said existing cash, operating cash generation, and credit availability should cover foreseeable needs for at least 12 months, including debt payments, dividends, repurchases, leases, and potential acquisitions. The company also noted that this assessment could change as COVID-19 developments evolve.
- The board increased the share-repurchase authorization to $250 million in January 2020. The company repurchased $20 million of shares in the first six months, but none in Q2; $230 million remained authorized at May 31. The quarterly dividend was $0.165 per share.
- Unusual/comparability item: FY2019 tax expense included an error related to the tax treatment of an intercompany intellectual-property sale. The company said the error was not material to the first and second quarters of FY2019 and recorded a $3.6 million out-of-period tax benefit in the quarter ended August 31, 2019. It stated that, absent the error, the FY2019 Q2 and six-month effective tax rates would have been 14% and 18%, respectively.
- Other risks highlighted include foreign-exchange exposure, dependence on OpenEdge and channel partners, competition and product development, cybersecurity and privacy, acquisition integration, goodwill or intangible impairment, and debt covenant and repayment obligations. Management said ordinary-course legal matters were not expected to materially affect financial position, results, or cash flows.
- The company adopted lease accounting standard ASC 842 on December 1, 2019, recognizing operating lease right-of-use assets and liabilities; it said adoption had no material effect on operations, liquidity, or debt-covenant compliance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sharp decline in Data Connectivity and Integration licenses reflects only OEM renewal timing or a more persistent demand trend.
- How much future growth and margin performance depend on Ipswitch and the durability of OpenEdge and maintenance revenue.
- COVID-19 effects on bookings, renewals, collections, and customer payment timing; Q2 accounts-receivable DSO was 47 days, versus 42 days in Q2 FY2019.
- Debt repayment and covenant capacity, including the 2024 maturity, variable-rate exposure, and the interest-rate swap covering approximately half of variable-rate debt.
- The effect of the FY2019 tax-provision correction when comparing historical effective tax rates and earnings.