Progress Software Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended February 28, 2018. Progress provides software for developing and deploying business applications, with three reportable segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Revenue | $94.0 million | $91.0 million |
| Gross profit / margin | $77.1 million / 82% | $75.2 million / 83% |
| Operating income / margin | $17.8 million / 19% | $1.2 million / 2% |
| Net income (loss) | $12.9 million | ($0.5 million) |
| Diluted EPS | $0.27 | ($0.01) |
| Cash from operations | $31.6 million | $37.3 million |
| Capital expenditures | $1.4 million | $0.4 million |
Revenue increased 3% as reported but was flat at constant currency. License revenue rose 4% reported (1% constant currency); maintenance and services rose 3% reported (flat constant currency). Maintenance increased, while services declined 4%. Segment revenue was $66.4 million for OpenEdge, $7.6 million for Data Connectivity and Integration, and $20.0 million for Application Development and Deployment.
Operating income improved primarily because restructuring charges fell to $1.8 million from $17.1 million in the prior-year quarter. The improvement also reflects lower sales and marketing expense; product development and general and administrative expense increased, partly due to higher stock-based compensation. Gross margin declined one percentage point, in part due to higher acquired-intangible amortization.
Liquidity, debt and capital allocation
At February 28, 2018, cash, cash equivalents and short-term investments totaled $167.5 million, down from $183.6 million at November 30, 2017. Cash and cash equivalents were $117.1 million. The balance sheet reported $120.5 million of current and long-term debt carrying value; the term-loan principal was $122.2 million. No revolving credit borrowings were outstanding, and $1.4 million of letters of credit were issued. The term loan matures in November 2022, and its stated rate was 3.125%. The company reported compliance with its financial covenants.
Financing cash outflows included $45.0 million of share repurchases, $6.6 million of dividends and $1.5 million of debt payments. The company had $175.0 million remaining under its $250.0 million repurchase authorization and expected to repurchase $120.0 million of shares in FY2018. Its capital-allocation target was to return about 50% of annual operating cash flow through repurchases and 25–30% through dividends. Management believed available cash, operating cash flow and credit availability would cover foreseeable needs for at least 12 months.
Deferred revenue was $154.2 million, and disclosed total revenue backlog was $171.8 million, compared with $170.3 million a year earlier. Backlog includes multi-year licensing arrangements not recorded on the balance sheet and is subject to estimation and comparability limitations.
Material changes, outlook and risks
- Foreign exchange materially affected reported growth: EMEA revenue increased 11% reported but 2% at constant currency; OpenEdge revenue increased 3% reported but declined 1% at constant currency. Approximately 45% of revenue came from outside North America.
- The U.S. Tax Cuts and Jobs Act lowered the federal corporate tax rate. The quarter included a provisional $1.4 million tax benefit from remeasuring U.S. deferred tax balances; the company had not completed its accounting for the law. The effective tax rate was 20%.
- The company continued its FY2017 restructuring, which reduced its workforce by over 20%. It expected additional facility-closure costs in FY2018, not expected to be material; cash payments on existing restructuring obligations were expected through Q4 FY2018.
- Progress reported $1.3 million of shareholder-activist-related fees in the quarter and said it did not expect additional fees. The activist had reported selling all but 1,000 shares in March 2018.
- Management highlighted risks including revenue and license forecasting variability, currency movements, reliance on OpenEdge and indirect channel partners, competition, execution of cloud and subscription strategies, new-product investment returns, cybersecurity and privacy, acquisitions, and debt covenant and cash-flow demands.
- Progress planned to adopt ASC 606 on December 1, 2018 using the full retrospective approach. Management anticipated changes to revenue timing for certain extended-payment term licenses and multi-element license-and-maintenance arrangements; the overall impact was still under assessment.
Important facts for investors to verify
- How much of reported revenue and segment growth reflects currency effects versus underlying demand, particularly for OpenEdge.
- Whether operating profitability and cash generation persist after the prior-year restructuring comparison benefit, while factoring in current restructuring, activist fees and stock-based compensation.
- The final tax effects of the Tax Cuts and Jobs Act and the revenue, balance-sheet and comparative-period effects of adopting ASC 606.
- Execution of the planned FY2018 repurchases and dividend policy relative to operating cash flow, debt repayments, acquisition needs and covenant limits.
- Whether backlog converts to recognized revenue on schedule; backlog is not fully subject to the company’s normal financial-statement controls and is not directly comparable across companies.