PRGS

Business Context and Reporting Period

Company: Progress Software Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended February 28, 2003
Business Overview: The Company develops and distributes software for application development, deployment, integration, and management. Key operating units include the Progress Company (OpenEdge platform), Sonic Software (integration products), and PeerDirect (replication technology). In December 2002, the Company completed the acquisition of eXcelon Corporation, a provider of data management software.

Key Financial Metrics

Margins: Operating income margin improved to 7% in Q1 2003 from 5% in Q1 2002. Net income margin was 6% in Q1 2003 compared to 4% in Q1 2002.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 11% year-over-year. Software license revenue grew 13%, while maintenance and services revenue grew 10%. Growth was driven by the eXcelon acquisition, the Sonic product line, and favorable foreign exchange rates.
• Profitability: Net income increased 72% to $4.2 million. Operating income rose 61% to $5.3 million.
• Acquisition Impact: The acquisition of eXcelon resulted in a net cash outflow of $25.2 million for investing activities. It added $12.5 million in goodwill and $8.1 million in intangible assets to the balance sheet.
• Expense Increases: Sales and marketing expenses increased 13%, product development expenses increased 17%, and general and administrative expenses increased 24%, largely due to integration costs and headcount additions from the eXcelon acquisition.
• Foreign Exchange: Foreign currency losses decreased significantly from $0.8 million in Q1 2002 to $0.1 million in Q1 2003.

Guidance, Outlook, and Risks

Guidance: Management anticipates total revenue growth in the second quarter of fiscal 2003 in the range of 12% to 14% compared to the second quarter of fiscal 2002. The Company expects operating income to be approximately 11% of revenue for the full fiscal year 2003, assuming expenses occur as planned.

Management Commentary: The Company is integrating eXcelon's products (ObjectStore and XML technologies) into its existing portfolio. Revenue from the Sonic product line continues to grow. The Company expects its effective tax rate to remain at approximately 30% for fiscal 2003.

Risks and Contingencies:

• Geopolitical/Economic: Uncertainty regarding the war in Iraq and global economic conditions could impact customer spending.
• Currency: Approximately 61% of revenue is derived from outside North America. A strengthening U.S. dollar could negatively impact revenue.
• Acquisition Integration: Risks associated with assimilating eXcelon's operations and realizing the value of acquired assets.
• Taxation: Potential repeal of the Extraterritorial Income (ETI) exclusion due to WTO rulings could increase the effective tax rate by 4-6 percentage points.
• Product Market: Declining revenue trends in the ObjectStore product line and slower-than-expected market acceptance of XML standards.

Investor Verification Checklist

• Verify the integration progress and revenue contribution of the eXcelon acquisition (ObjectStore and XML products).
• Monitor the impact of foreign exchange rate fluctuations on the 61% of revenue generated outside North America.
• Assess the sustainability of the 12-14% revenue growth guidance for Q2 2003 amidst geopolitical uncertainty.
• Review the status of the Extraterritorial Income (ETI) tax provision and potential legislative changes affecting the effective tax rate.
• Track the Days Sales Outstanding (DSO), which increased to 64 days in Q1 2003 from 61 days at the end of fiscal 2002.