Progress Software Corporation — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended May 31, 2012; comparative periods ended May 31, 2011. Amounts below are in millions of dollars except per-share data.
Business context and strategy
Progress develops software for building, deploying and managing business applications. On April 25, 2012, it announced a strategic shift to combine OpenEdge, DataDirect Connect and Decision Analytics into a cloud-oriented application development and deployment platform, while divesting ten non-core product lines. At quarter-end, the company still reported its historical three segments and had not classified the non-core businesses as held for sale or discontinued operations.
Financial results
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $114.6 | $134.7 | $239.0 | $268.9 |
| Gross profit / margin | $88.8 / 78% | $108.5 / 80% | $187.8 / 79% | $218.6 / 81% |
| Operating income (loss) | $(3.8) | $27.2 | $8.1 | $55.5 |
| Net income (loss) | $(1.9) | $18.0 | $5.6 | $38.5 |
| Diluted EPS | $(0.03) | $0.26 | $0.09 | $0.55 |
| Operating cash flow | Not separately stated | Not separately stated | $53.7 | $89.0 |
Q2 revenue fell 15% reported (12% constant currency); first-half revenue fell 11% reported (9% constant currency). Q2 license revenue declined 35% to $29.7 million, maintenance and services declined 5% to $84.9 million. First-half license revenue declined 26%, while maintenance and services declined 3%. Management attributed weakness to delayed purchasing and deal slippage during the strategic-plan transition, weaker macroeconomic conditions—especially in Europe—and comparison with large non-recurring license deals in the prior year.
Q2 operating expenses rose to $92.6 million from $81.3 million, including $8.5 million of restructuring expense. First-half operating expenses were $179.7 million versus $163.1 million. The Q2 operating margin was approximately negative 3%; the first-half margin was approximately 3% versus 21% in the prior year. The Enterprise Business Solutions segment reported operating losses of $21.9 million for Q2 and $42.6 million for the first half; Application Development Platforms remained profitable but operating income declined.
Balance sheet, cash flow and liquidity
- At May 31, 2012, cash and cash equivalents were $241.9 million and short-term investments were $86.4 million, totaling $328.2 million, up $66.8 million from November 30, 2011.
- Six-month operating cash flow was $53.7 million, down from $89.0 million, primarily due to lower profitability. Investing activities provided $13.0 million and financing activities provided $18.9 million; cash and equivalents increased $80.8 million.
- Total assets were $899.3 million; shareholders’ equity was $659.5 million. Current liabilities were $230.4 million, including $146.9 million of short-term deferred revenue.
- Debt was minimal: $0.1 million current debt and no borrowings on the $150 million revolving facility; $0.2 million of letters of credit were outstanding. The company reported covenant compliance by a significant margin.
- Approximately $34.1 million of auction-rate securities lacked short-term liquidity; their $5.5 million unrealized impairment was considered temporary. Management said cash, operating cash flow and credit availability were sufficient for foreseeable needs.
Material changes, outlook and risks
- The company recorded $8.5 million of Q2 restructuring charges, including $7.0 million for employee severance and benefits. The announced workforce reduction had reached 8% by the filing; the plan contemplated a reduction of approximately 10%–15%. Total 2012 restructuring costs were estimated at about $19.5 million, with further charges expected through the first half of FY2013.
- Management targeted $55 million of annual run-rate cost reductions, or $40 million net of additional investment, by FY2012-end, but gave no assurance of achieving the target. It expected disruption to continue through the remainder of FY2012 and operating margins to remain pressured while investments and restructuring take effect.
- The board authorized $350 million of share repurchases through FY2013. No shares had been repurchased in the first half of FY2012; management intended up to $150 million by FY2012-end and a further $200 million in FY2013.
- On June 27, 2012, after quarter-end, Progress signed an agreement to sell FuseSource to Red Hat, with closing expected in Q3 subject to customary conditions. It aimed to divest all ten non-core product lines before FY2013-end, but warned that buyers, timing and completion were uncertain and that non-core revenue could continue to decline.
- Goodwill was $257.6 million. An interim Q2 impairment test found no impairment, but the fair-value cushion for Enterprise Business Solutions had narrowed; another test was planned in Q3 as goodwill was reassigned to new reporting units.
- Other risks included continued economic uncertainty and customer delays, particularly in EMEA; foreign-currency weakness; execution and customer-retention risks from the strategic change and divestitures; and potential future goodwill or intangible-asset impairment. The $0.9 million JuxtaComm patent dispute was settled in March 2012 with a release and product license. Management said other legal matters were not expected to materially affect results.
The filing did not provide specific revenue or earnings guidance. Management stated that existing resources, operating cash flow, the credit facility and anticipated divestiture proceeds were expected to cover operations and foreseeable requirements, including planned repurchases, for at least twelve months.
Important facts for investors to verify
- Whether revenue and license-sales declines stabilize, and whether deal slippage improves as the strategy transition progresses.
- Execution and timing of the ten divestitures, including FuseSource, and the proceeds ultimately received.
- Progress toward the cost-reduction targets, total restructuring costs and resulting sustainable margins.
- Whether the narrowed Enterprise Business Solutions goodwill cushion or the planned reporting-unit changes lead to impairment.
- Timing and funding of the $350 million repurchase plan, given cash held overseas and the illiquidity and valuation sensitivity of auction-rate securities.