PRGS

Business Context and Reporting Period

Company: Progress Software Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended August 31, 2001
Business Overview: The Company develops, markets, and supports application development, deployment, and integration software. Operations are organized into two reportable segments: E-Business Solutions and Databases (including Progress, NuSphere, and PSC Labs) and E-Business Messaging (Sonic Software). The Company recently launched Progress Version 9.1c and SonicMQ 3.5.

Key Financial Metrics

Margins (9 Months 2001): Operating margin was 8% (down from 15% in the prior year period). Net income margin was 7% (down from 12%).

Material Changes vs. Prior Period

• Revenue: Total revenue increased 2% year-over-year for the quarter ($66.7M vs $65.4M) but decreased 6% for the nine-month period ($192.7M vs $204.9M). On a constant currency basis, the nine-month decline would have been only 1%.
• Profitability: Net income decreased 29% for the quarter and 51% for the nine-month period compared to the prior year. Operating income dropped 14% for the quarter and 51% for the nine-month period.
• Revenue Mix: Software license revenue declined 16% for the nine months due to reduced demand from end-users and Independent Software Vendors (ISVs). Maintenance and services revenue grew 1% for the nine months, driven by an expanding installed base.
• Foreign Currency: The strong U.S. dollar negatively impacted reported revenue, particularly in the EMEA region. Foreign currency losses replaced gains seen in the prior year, reducing other income by 68% for the quarter.
• Segment Performance: The E-Business Messaging segment (Sonic Software) reported an operating loss of $5.2M for the quarter and $16.9M for the nine months, offset by strong performance in the E-Business Solutions and Databases segment.

Guidance, Outlook, and Risks

Outlook: Management plans for fourth-quarter revenue to be approximately at the level of the same period one year ago. Operating margins are expected to be approximately 9% in the fourth quarter if revenue targets are met and expenses remain as planned.

Management Commentary: The Company is cautious regarding the fourth quarter due to a deteriorating global economic environment and the uncertain effects of the September 11, 2001 terrorist attacks. The Company is shifting sales focus toward the end-user community to offset declines in the ISV channel.

Risks and Contingencies:

• Economic Conditions: Potential recession and delayed customer decision-making post-September 11.
• ISV Channel: Continued decline in revenue from Independent Software Vendors.
• Competition: Intense competition in the e-business messaging and application development markets.
• Foreign Exchange: Approximately 57-58% of revenue is international; a 10% adverse movement in exchange rates could reduce annual net income by approximately 20%.
• Acquisitions: In June 2001, the Company acquired assets of Allegrix, Inc. for $2.5 million.

Investor Verification Checklist

• Revenue Stabilization: Verify if the shift in sales focus to end-users successfully offsets the decline in the ISV channel in the fourth quarter.
• Constant Currency Performance: Confirm if the 1% constant currency decline for the nine months indicates a stabilization of underlying demand despite the reported 6% drop.
• Segment Losses: Monitor the trajectory of operating losses in the E-Business Messaging segment (Sonic Software) and the timeline for profitability.
• Stock Repurchases: Note the authorization of a new $10 million share repurchase program (up to 10 million shares) effective October 1, 2001.
• Impact of September 11: Assess the actual impact of the terrorist attacks on order deferrals and the global economy in the fourth quarter results.