Business context and reporting period
Progress Software Corporation (Nasdaq: PRGS) filed this unaudited Form 10-Q for the fiscal third quarter and nine months ended August 31, 2022. Progress provides software to develop, deploy and manage business applications and reports as one operating segment. Its portfolio includes perpetual and term licenses, maintenance, services and cloud subscriptions. Kemp, acquired in November 2021, contributed to year-over-year comparisons.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $151.2 | $147.4 | $444.9 | $391.2 |
| Gross profit / margin | $127.4 / 84% | $127.3 / 86% | $373.9 / 84% | $333.8 / 85% |
| Operating income / margin | $32.0 / 21% | $46.0 / 31% | $101.7 / 23% | $95.7 / 24% |
| Net income / margin | $21.8 / 14% | $31.0 / 21% | $71.4 / 16% | $63.5 / 16% |
| Diluted EPS | $0.50 | $0.70 | $1.61 | $1.43 |
Q3 revenue grew 3% as reported and 6% in constant currency; nine-month revenue grew 14% and 16%, respectively. Maintenance and services represented 69% of Q3 revenue and 70% for the nine-month period. Software license revenue declined 8% in Q3 but rose 17% for the nine months.
For the nine months, operating cash flow was $152.0 million, versus $134.6 million. Capital spending was $3.1 million; operating cash flow less capital spending was approximately $148.9 million, a calculated measure. Investing cash flow included $26.0 million of net proceeds from selling long-lived assets. Financing cash flow was negative $93.5 million, including $75.5 million of share repurchases and $23.4 million of dividends. Cash and cash equivalents were $224.1 million at August 31, 2022, with another $0.7 million of short-term investments.
At August 31, cash, cash equivalents and short-term investments totaled $224.9 million. Debt carrying values were $612.9 million for long-term debt and $352.1 million for convertible notes, or approximately $965.0 million combined; these amounts exclude lease liabilities. The term loan balance was $269.8 million, bearing 3.81% interest, and the $300 million revolving facility had no borrowings outstanding. The $360 million principal amount of 1% convertible notes is due April 2026. The company reported $279.7 million of current liabilities and $364.4 million of current assets.
Material changes versus the prior period
- Q3 operating income fell 30% and net income fell 30%, despite revenue growth; operating margin contracted to 21% from 31%. The filing attributes the decline to higher costs of revenue and operating expenses, including acquisition-related staffing and increased amortization of acquired intangibles.
- Nine-month operating income increased 6% and net income increased 12%. Results included a $10.8 million gain on the sale of corporate property in Q2 2022, which contributed to the reported operating-income increase.
- Maintenance revenue rose 10% in Q3 and 14% for the nine months, while Q3 license revenue fell 8%. Management cited Kemp and Chef contributions, partly offset by declines in OpenEdge and DataDirect and currency headwinds.
- Cash and short-term investments rose $67.5 million from November 30, 2021. Operating cash generation and property-sale proceeds were partly offset by repurchases, dividends and adverse foreign-exchange effects on cash.
- The company adopted ASU 2020-06 on December 1, 2021. The adoption changed convertible-note accounting and reduced opening equity by a net $42.6 million; prior-period financial statements were not retrospectively adjusted.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said existing cash, expected operating cash generation and available credit should be sufficient for foreseeable needs, including operations, debt service, dividends, repurchases, acquisitions and other commitments. It reported ARR of $495 million at August 31, up 12.7% year over year, primarily due to Kemp; net dollar retention generally ranged from 101% to 102%. ARR is a company-defined metric, not a forecast.
Management highlighted foreign-exchange exposure, especially as approximately one-third of revenue is denominated in foreign currencies; economic and capital-market uncertainty, inflation and geopolitical disruption related to Russia’s invasion of Ukraine; execution and integration risks from acquisitions; cybersecurity risks; and possible disruption or costs from organizational realignment. The company is centralizing and realigning teams to pursue efficiencies, with no assurance the expected benefits will be achieved. It also noted that the credit agreement contains financial covenants and customary events of default. Ordinary-course legal claims were not expected by management to have a material effect.
Unusual or notable items include the property-sale gain, acquisition-related amortization and costs, foreign-currency impacts, and continued restructuring obligations. The filing states that $56.5 million of cash and investments was held by foreign subsidiaries and was not available to fund domestic operations without repatriation-related consequences.
Important facts for investors to verify
- Whether the Q3 decline in operating income and margin persists, and how much ongoing expense reflects acquired intangible amortization, acquisition integration or realignment.
- How much reported growth depends on Kemp and other acquisitions versus underlying organic performance, particularly given Q3 license-revenue weakness and currency effects.
- The sustainability of operating cash flow and the effect of share repurchases, dividends, future acquisitions and debt repayments on liquidity and leverage.
- The terms, covenant headroom and maturity interaction of the secured credit facility and 2026 convertible notes, including the facility’s earlier-maturity provisions.
- Progress against the stated ARR and retention trends, recognizing that ARR is not a GAAP measure or a forecast.
- Whether foreign-exchange, geopolitical, cybersecurity and realignment risks materially affect results, and whether the expected realignment efficiencies are realized.