Progress Software Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended February 29, 2016; comparatives are the three months ended February 28, 2015. Progress sells software licenses, maintenance and services, including cloud-based offerings, through direct sales and channel partners. The Telerik acquisition materially affects year-over-year comparisons.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Revenue | $89.5 million | $81.4 million | Up 10% reported; up 14% constant currency |
| Software license revenue | $24.0 million | $25.2 million | Down 5% reported; down 1% constant currency |
| Maintenance and services | $65.5 million | $56.2 million | Up 17% reported; maintenance grew 18% |
| Gross profit / margin | $73.7 million / 82% | $63.8 million / 78% | Higher, principally reflecting maintenance growth and prior-year acquisition accounting effects |
| Operating income (loss) / margin | $6.7 million / 7% | $(11.2) million / (14)% | Improved by $17.9 million |
| Net income (loss) / diluted EPS | $3.2 million / $0.06 | $(1.0) million / $(0.02) | Returned to profitability |
| Cash from operations | $22.5 million | $37.1 million | Down $14.6 million, chiefly because prior-year working-capital inflows were unusually strong |
Operating expenses were $67.0 million, down from $74.9 million. Other expense was $1.8 million, including a $0.9 million foreign-currency loss, versus $0.9 million of other income in the prior-year quarter. The effective tax rate was 34%, compared with 91%; the current quarter included a $0.6 million benefit from reinstatement of the U.S. R&D credit.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $251.5 million at quarter-end, up $10.2 million from November 30, 2015. Of this, $54.0 million was held by foreign subsidiaries and considered permanently reinvested.
- Term-loan principal was $140.6 million, including $9.4 million due within 12 months; the rate was 2.19%. No revolving borrowings were outstanding, and $0.5 million of letters of credit were issued. The company reported compliance with credit-facility covenants.
- Operating cash flow was offset by $20.5 million of investing outflows and $9.5 million of financing outflows. The quarter included $9.0 million of cash-flow-statement share repurchases; the company separately reported repurchasing 0.5 million shares for $11.7 million, with $2.645 million unsettled at quarter-end.
- In March 2016, the board added $100 million to the repurchase authorization, bringing total authorization to $202.8 million. Management intended to use the full authorization by November 30, 2016.
- Total revenue backlog was $163.5 million, including $144.7 million of deferred revenue and $18.8 million of multi-year licensing arrangements not included on the balance sheet. The filing cautions that backlog is not subject to normal accounting controls and may not be comparable across companies.
Material changes and management commentary
- Revenue growth was led by maintenance and services. Management attributed much of the maintenance increase and the sharp rise in Application Development and Deployment revenue to Telerik and to the prior-year reduction in acquired deferred revenue under purchase accounting.
- OpenEdge revenue fell 8% to $64.1 million, primarily from lower license sales to direct enterprise customers. Data Connectivity and Integration revenue fell 7% to $6.6 million. Application Development and Deployment revenue rose to $18.8 million from $4.8 million, largely reflecting Telerik.
- Management said large OpenEdge direct-enterprise license transactions are difficult to predict and that delays or fewer such sales could hurt results. Brazil’s difficult economic conditions affected Latin American revenue; foreign-exchange rates also weighed on reported revenue.
- Management expects cash, operating cash generation and available credit to fund foreseeable needs for at least 12 months. No specific revenue or earnings guidance is provided in this filing.
Risks, contingencies and unusual items
- Key risks include unpredictable large license deals, foreign-exchange exposure, economic weakness (including Brazil and Europe), dependence on OpenEdge and indirect channel partners, and execution of the cloud and subscription strategy. Cloud investment may pressure profitability if demand fails to develop; subscription growth could also affect near-term license revenue and cash flows.
- The credit agreement is secured and includes financial and operating covenants, restrictions on certain actions, and scheduled term-loan repayments. Failure to comply could limit borrowing or accelerate amounts due.
- The IRS was examining federal income tax returns for fiscal 2013 and 2014. Management did not believe ordinary-course legal matters would materially affect financial position, results or cash flows.
- Restructuring expense was a $66,000 credit in the quarter; management said further costs could arise from the fiscal 2015 organizational restructuring. The filing also reports foreign-currency derivative losses, substantially offset by gains on offsetting positions.
- Revenue recognition guidance (Topic 606) was expected to take effect for Progress on December 1, 2018; management was assessing the impact. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
- On March 30, 2016, the company announced that CFO Chris E. Perkins planned to retire after a transition period while a successor search began.
Investor verification priorities
- Whether maintenance growth persists as the Telerik purchase-accounting comparison effect fades, and whether license sales—especially OpenEdge enterprise deals—recover.
- How much operating cash flow is repeatable, given the year-over-year decline and the working-capital and compensation factors described by management.
- Execution and funding of the announced $202.8 million repurchase authorization, including the quarter-end unsettled repurchase and scheduled debt repayments.
- Foreign-exchange exposure, performance in Brazil and other international markets, and the impact of the $140.6 million term loan and its covenants.
- The CFO succession, the IRS examination outcome, and progress in assessing the future revenue-recognition standard.