Progress Software Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended August 31, 2016. Unaudited results. Progress sells application development and data software through perpetual and term licenses, maintenance and services, and cloud subscriptions; it reports OpenEdge, Data Connectivity and Integration, and Application Development and Deployment segments.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $102.0 million | $94.6 million | $287.6 million | $264.8 million |
| Operating income (loss) | $13.6 million | $8.6 million | $32.7 million | $(5.3) million |
| Net income (loss) | $7.6 million | $(4.1) million | $18.1 million | $0.7 million |
| Diluted EPS | $0.15 | $(0.08) | $0.36 | $0.01 |
| Operating cash flow | Not separately reported | Not separately reported | $68.9 million | $77.2 million |
- Revenue grew 8% in Q3 and 9% year to date as reported; constant-currency growth was 9% and 11%, respectively. Maintenance and services drove most of the increase: up 9% in Q3 and 12% year to date.
- Gross margin was 83% in Q3 versus 84% a year earlier, and 83% year to date versus 81%. Operating margin was 13% in Q3 versus 9%, and 11% year to date versus negative 3%.
- Cash, cash equivalents and short-term investments totaled $232.7 million at period-end, down $8.6 million from November 30, 2015. Current assets were $309.0 million and current liabilities $196.0 million.
- Long-term debt was $136.9 million, including $13.1 million due within 12 months. The $150 million revolving facility had no borrowings outstanding; $0.5 million of letters of credit were issued. The term loan rate was 2.25%, and the company reported compliance with its financial covenants.
Changes versus prior comparable periods
- OpenEdge revenue declined 8% in both Q3 and the first nine months, reflecting weaker customer sales and fewer large license deals. Its segment contribution also fell 10% in Q3 and 8% year to date.
- Data Connectivity and Integration revenue rose 72% in Q3 and 36% year to date, primarily from OEM agreement renewals and expansions. Application Development and Deployment revenue rose 56% and 112%, respectively, largely reflecting the Telerik acquisition and its comparison-period effects.
- Year-to-date operating income improved from a loss to profit. Lower restructuring, acquisition-related, sales and marketing, and general and administrative costs contributed, alongside higher revenue. Prior-year results also reflected purchase-accounting effects from Telerik.
- Operating cash flow decreased by $8.3 million year over year, mainly because prior-year working-capital benefits were not repeated; the company also cited higher tax and compensation payments. Share repurchases were $71.5 million year to date, compared with $32.9 million in the prior-year period.
Outlook, commentary and notable items
- Management did not provide specific revenue or earnings guidance in the supplied filing text. It said cash, operating cash generation and available credit should fund operations and foreseeable needs, including the new dividend, for at least 12 months.
- The board approved a quarterly dividend of $0.125 per share, with the first payment scheduled for December 15, 2016. The company had $143.0 million remaining under its $202.8 million share-repurchase authorization at August 31, 2016.
- A $5.1 million Q3 impairment charge fully wrote off Modulus-related technology intangibles after the company decided to abandon the assets. A separate $2.7 million out-of-period tax benefit was recorded in the first half of 2016 to correct an immaterial prior-year tax-provision error.
- Telerik contributed $19.4 million of Q3 revenue and $56.0 million year to date, but reported pretax losses of $7.0 million and $20.2 million, respectively. Those losses included acquired-intangible amortization and, in 2016, stock-based compensation.
- Management highlighted risks from unpredictable large OpenEdge transactions, foreign-exchange movements and Brexit-related uncertainty, weak economic conditions (including Brazil), dependence on channel partners, competition, cloud/subscription strategy execution, cybersecurity and product development. Approximately one-third of revenue is denominated in foreign currencies. The IRS was examining the 2013 and 2014 federal tax returns; management did not expect disclosed legal matters to have a material effect.
- The company appointed Kurt J. Abkemeier as CFO effective September 28, 2016. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether OpenEdge sales stabilize, especially given dependence on large, difficult-to-forecast license transactions.
- How much reported growth in newer segments reflects durable organic demand versus Telerik acquisition and deferred-revenue comparison effects.
- Whether maintenance renewals, backlog and deferred revenue continue to support recurring revenue; reported revenue backlog was $169.0 million, including $31.1 million of multi-year licensing arrangements not recorded on the balance sheet.
- The sustainability of cash generation and the effects of continued buybacks, the new dividend and scheduled debt repayments on liquidity.
- Potential impacts of foreign-exchange changes, Brexit, subscription/cloud execution and the $5.1 million impairment on future results.