Progress Software Corporation — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended May 31, 2011. The company provides enterprise software, application development platforms, and enterprise data solutions. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $134.7M | $127.7M | $268.9M | $255.2M |
| Gross profit / margin | $108.5M / 80.6% | $102.4M / 80.3% | $218.6M / 81.3% | $206.0M / 80.7% |
| Operating income / margin | $27.2M / 20.2% | $22.7M / 17.8% | $55.5M / 20.7% | $18.4M / 7.2% |
| Net income | $18.0M | $19.1M | $38.5M | $18.1M |
| Diluted EPS | $0.26 | $0.29 | $0.55 | $0.28 |
| Operating cash flow | Not provided for quarter alone | $89.0M | $50.9M |
Revenue grew 6% in Q2 and 5% for the first half. Management said constant-currency growth would have been flat for Q2 and 3% for the first half. Cash and short-term investments were $389.0M at May 31, up $66.6M from November 30, 2010. Total debt was approximately $0.5M; current assets were $518.8M versus current liabilities of $231.1M. Shareholders’ equity was $716.9M.
Changes and drivers versus prior periods
- Maintenance and services revenue rose 7% in Q2; software license revenue rose 3%. For the first half, the respective increases were 5% and 6%.
- Enterprise Business Solutions revenue increased 37% in Q2 and 36% in the first half, while Application Development Platforms revenue declined 1% and 2%, respectively. Enterprise Data Solutions revenue declined 12% and 7%, respectively.
- Q2 net income declined despite higher operating income, as other income fell to $0.2M from $3.9M, primarily reflecting prior-year foreign-currency-related gains and an insurance settlement. First-half operating income improved substantially, chiefly because prior-year results included $26.0M of restructuring expense, alongside revenue growth and efficiencies.
- First-half operating cash flow increased to $89.0M from $50.9M, primarily due to higher profitability and working-capital improvements, particularly accounts receivable. Receivables fell $27.5M from fiscal year-end; DSO was 61 days.
- The company repurchased 2.19M shares for $64.9M in the first half, compared with 0.60M shares for $11.5M a year earlier.
Outlook, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects existing cash and operating cash generation to fund foreseeable needs for at least 12 months. It expects $3M–$4M of additional restructuring charges and nonrecurring transition expenses during the remaining six months of FY2011, mainly for severance, transition, and facilities consolidation. The company planned to continue shifting development and administrative operations toward India and said it expected to pursue acquisitions, without assurance of completing any.
- Backlog: Aggregate backlog was approximately $177M at May 31, 2011, versus $165M a year earlier. Of the current total, $155M was recorded as deferred revenue; the company cautions that unrecorded backlog is not subject to normal financial-statement controls and is not necessarily a reliable performance indicator.
- Investment liquidity: $34.8M of auction-rate securities were classified as long-term because failed auctions restrict access; the securities had a $5.2M temporary unrealized impairment. Management said available liquidity and expected cash flows should permit it to hold them, but deterioration in issuer or insurer credit could require an impairment charge.
- Restructuring: The company had $8.0M of restructuring reserves at May 31, 2011, including $4.9M short-term and $3.1M long-term.
- Contingency: JuxtaComm alleges patent infringement involving products in the Sonic, Fuse, DataDirect Connect, and DataServices lines and seeks unspecified damages and injunctive relief. The company denies the claims, intends to defend itself, and cannot estimate potential loss; trial was scheduled for January 3, 2012.
- Other risks and items: Management cited macroeconomic uncertainty, foreign-exchange exposure, competitive and pricing pressures, and execution and market acceptance risks for its Progress RPM product initiative. The board authorized an additional $100M share-repurchase capacity in June 2011, bringing the stated remaining balance to $135M through May 31, 2012. A $2.0M R&D tax-credit benefit was recorded in the first half.
Important facts for investors to verify
- Whether growth in Enterprise Business Solutions and Progress RPM sales can continue, and whether declining revenue in the other two segments stabilizes.
- How much reported growth reflects currency movements; Q2 revenue would have been flat at constant exchange rates.
- Whether cash generation and backlog convert to sustainable revenue, and the quality and timing of backlog not recorded as deferred revenue.
- Whether auction-rate securities regain liquidity or incur further impairment, and the outcome and potential exposure from the JuxtaComm litigation.
- Actual restructuring and transition costs, progress of the India operating shift, and the use of the expanded repurchase authorization.