Progress Software Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended November 30, 2016. Progress sells application development and data software through perpetual, term and subscription licenses, plus maintenance and services. More than half of worldwide license revenue is generated through indirect partners and OEMs.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $405.3 million | $377.6 million |
| Gross profit / margin | $339.6 million / 84% | $313.8 million / 83% |
| Operating income (loss) / margin | $(29.7) million / (7)% | $14.8 million / 4% |
| Net income (loss) | $(55.7) million | $(8.8) million |
| Diluted earnings (loss) per share | $(1.13) | $(0.17) |
| Operating cash flow | $102.8 million | $104.5 million |
Revenue increased 7% as reported and 9% at constant currency. License revenue rose 4% to $134.9 million; maintenance and services rose 9% to $270.5 million. International markets contributed 43% of revenue, down from 45% in FY2015.
By segment, OpenEdge revenue fell 7% to $276.3 million; Data Connectivity and Integration grew 27% to $48.0 million; and Application Development and Deployment grew 86% to $81.1 million, primarily reflecting the Telerik acquisition. OpenEdge remained the largest segment and a significant source of risk and revenue.
Cash, cash equivalents and short-term investments totaled $249.8 million at year-end, compared with $241.3 million a year earlier. Total assets were $754.8 million and shareholders’ equity was $406.6 million. The current ratio was approximately 1.65, based on reported current assets of $336.1 million and current liabilities of $203.7 million.
Long-term debt, including the current portion, was $135.0 million, including $15.0 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’s year-end interest rate was 2.31%. The company reported compliance with its credit covenants.
Material changes and unusual items
- A $92.0 million non-cash goodwill impairment charge for Application Development and Deployment was the principal driver of FY2016 operating and net losses. Management cited reduced growth expectations following a review by the new CEO and board. The segment had $47.0 million of goodwill remaining at year-end.
- The company also recorded a $5.1 million impairment of Modulus-related intangible assets after deciding to abandon the technology.
- Revenue growth reflected the Telerik acquisition and the comparison with FY2015, when acquisition accounting reduced the fair value of acquired deferred revenue. Management said this effect on FY2016 was minimal.
- Operating cash flow was $102.8 million, down about 2% year over year. Cash generation remained substantial despite the reported net loss, which included significant non-cash impairment and amortization charges.
- Progress repurchased 3.1 million shares for $79.2 million in FY2016; $135.3 million remained authorized at year-end. It initiated a quarterly dividend of $0.125 per share, first paid after year-end.
- The effective tax rate was unusual because of the nondeductible goodwill impairment, tax jurisdiction mix, a $2.7 million out-of-period tax benefit, and a $2.7 million benefit from releasing a valuation allowance on state research credits.
Outlook, risks and contingencies
On January 16, 2017, Progress announced a new strategy centered on tools and platforms for “Cognitive Applications,” alongside a streamlined operating model. It discontinued investment in its Digital Factory offering, while retaining Sitefinity as a core product and incorporating Telerik Platform into the new strategy.
The company began a restructuring in FY2017, including plans to reduce headcount by approximately 450 employees—over 20% of the workforce—and consolidate facilities. It estimated pretax charges of $17 million to $20 million, mostly cash, primarily in the first and second quarters of FY2017, and expected approximately $20 million of net annual run-rate cost reductions by year-end FY2017 after investment in the new strategy. These are estimates, not reported FY2016 results.
Management stated existing liquidity, operating cash generation and available credit were expected to fund operations and foreseeable cash needs for at least 12 months. Contractual obligations included $17.6 million of operating lease payments and $135.0 million of debt principal. The company reported no off-balance-sheet arrangements and said ordinary-course legal matters were not expected to have a material effect.
Key risks include execution of the new strategy and restructuring, continued competition and rapid technology change, dependence on OpenEdge and indirect channels, uncertainty around large license transactions, cloud-business investment and adoption, foreign currency exposure, and potential customer spending weakness. A hypothetical 10% adverse currency movement was estimated to reduce reported revenue by about 3% ($12 million) and net income by about 1% ($1 million), excluding potential hedge offsets. Management also cautioned that subscription growth can shift revenue recognition and cash receipts.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management likewise concluded disclosure controls and internal financial reporting controls were effective as of November 30, 2016.
Most important facts for investors to verify
- Whether the new Cognitive Applications strategy gains customer adoption and produces growth, particularly in Application Development and Deployment after the goodwill impairment.
- Actual restructuring charges, cash costs, employee reductions, facility consolidations and realized run-rate savings versus the stated estimates and timetable.
- OpenEdge license and maintenance trends, partner/OEM renewals, and the timing and contribution of large direct license deals.
- Revenue growth and margins excluding acquisition-related comparison effects and the $92.0 million goodwill impairment; monitor any further impairment indicators.
- Cash generation, debt repayments, covenant headroom, share repurchases and the sustainability of the new dividend alongside restructuring and investment needs.
- Foreign exchange effects and hedging outcomes, as well as the eventual impact of adopting the new revenue-recognition standard.