Progress Software Corporation — Q1 FY2022 10-Q
Business context and reporting period: Progress provides software to develop, deploy and manage business applications. This unaudited quarter covers the three months ended February 28, 2022; comparisons are with the three months ended February 28, 2021. The company reports as one operating segment. Results include Kemp, acquired November 1, 2021.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $144.9 million | $121.3 million | +19% reported; +21% constant currency |
| Software license revenue | $42.8 million | $33.3 million | +28% |
| Maintenance and services | $102.2 million | $88.0 million | +16% |
| Gross profit / margin | $121.7 million / 84% | $103.3 million / 85% | +18%; margin down about 1 percentage point |
| Operating income / margin | $29.4 million / 20% | $27.4 million / 23% | +7%; margin down about 3 points |
| Net income / margin | $20.5 million / 14% | $19.0 million / 16% | +8%; margin down about 2 points |
| Diluted EPS | $0.46 | $0.42 | +10% |
| Cash from operations | $44.1 million | $44.7 million | Down $0.6 million |
Revenue growth was attributed primarily to the Kemp acquisition and increased sales in Chef, OpenEdge and DevTools. EMEA revenue rose 34% reported and Asia Pacific rose 53%; North America increased 9%. International revenue represented 46% of the quarter’s total.
ARR was $479 million at February 28, up 12% year over year, primarily due to Kemp. Management reported net dollar retention generally ranging from 100% to 102% for periods presented.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $173.3 million, up from $157.4 million at November 30, 2021. Operating cash flow was $44.1 million; investing activities used $0.5 million and financing activities used $28.0 million.
- Current assets were $342.6 million and current liabilities were $283.7 million. Deferred revenue totaled $261.5 million; remaining performance obligations were $276 million, with about 78% expected to be recognized within one year.
- Debt carrying value was approximately $621.2 million: $270.1 million under the term loan and $351.0 million in convertible notes. The term loan’s reported rate was 1.79%; the $300 million revolving facility had no borrowings and $2.2 million of letters of credit outstanding. Cash less debt was approximately $447.8 million.
- Operating cash flow was nearly flat year over year; management cited higher compensation payments, partly offset by Kemp-related cash generation and strong receivables collections. DSO was 52 days, versus 53 days in the prior-year quarter.
- The company repurchased 551,471 shares for $25.0 million, paid $7.8 million in dividends and had $130.0 million remaining under its repurchase authorization. The quarterly dividend declared was $0.175 per share.
Material changes, outlook and risks
- Operating expenses rose, including acquired-intangible amortization (up 70% in operating expenses), contributing to lower operating and net margins despite revenue growth. Interest expense increased 47%, mainly due to the convertible notes issued in April 2021.
- Progress adopted ASU 2020-06 on December 1, 2021, recombining the convertible notes’ liability and equity components. The opening-balance adjustment reduced additional paid-in capital by $47.5 million, increased retained earnings by $4.9 million and reduced long-term deferred tax liabilities by $13.4 million; prior-year figures were not restated.
- The January 2022 amended credit agreement provides a $275 million secured term loan and a $300 million secured revolving facility, with scheduled term-loan amortization and financial covenants. The agreement has a January 2027 stated maturity and a springing-maturity provision tied to the 2026 notes.
- Management said existing cash, operating cash generation and available credit should be sufficient for foreseeable needs, including debt service, dividends, repurchases and acquisitions. The filing provides no specific revenue or earnings guidance.
- Key disclosed risks include economic and geopolitical disruption, including Russia’s invasion of Ukraine; COVID-19 uncertainty; foreign-exchange exposure; cyberattacks and technology-system failures; competition and product innovation; dependence on channel partners and OpenEdge; acquisition integration and goodwill or intangible impairment; and debt, covenant and refinancing risks. Management did not expect ordinary-course legal proceedings to materially affect financial position, results or cash flows.
- Kemp-related restructuring continued; management expected some additional FY2022 costs but did not expect them to be material. The filing also notes that actual results may differ from interim results and estimates.
Important facts for investors to verify
- How much of reported and constant-currency growth reflects Kemp versus organic performance, and whether ARR growth translates into recognized revenue and cash flow.
- Whether margins stabilize as acquisition-related amortization and operating costs evolve, and whether recurring revenue retention remains within management’s stated historical range.
- Debt repayment capacity, compliance with credit-facility covenants, and refinancing or liquidity needs ahead of the convertible notes’ maturity and springing-maturity conditions.
- The effects of currency movements and geopolitical, pandemic, cybersecurity and economic developments on international demand and collections.
- Progress on Kemp integration and restructuring, and the finalization of Kemp’s purchase-price allocation; management said the net-working-capital valuation remained preliminary.