Progress Software Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended February 29, 2020; comparisons are with the three months ended February 28, 2019. Progress sells software licenses and related maintenance and services across OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. Its April 2019 Ipswitch acquisition contributed materially to the reported year-over-year growth.
Financial performance
| Metric | Q1 FY2020 | Prior period | Change or context |
|---|---|---|---|
| Revenue | $109.7 million | $89.5 million | Up 22% reported; 23% constant currency |
| Software license revenue | $30.6 million | $22.8 million | Up 34% reported; 35% constant currency |
| Maintenance and services revenue | $79.1 million | $66.7 million | Up 18% reported |
| Gross profit / margin | $94.8 million / 86% | $73.5 million / 82% | Margin improved, partly due to lower acquired-intangible amortization |
| Operating income / margin | $30.7 million / 28% | $15.4 million / 17% | Operating income up 99% |
| Net income | $21.1 million | $9.4 million | Up 125%; diluted EPS was $0.46 versus $0.21 |
| Operating cash flow | $33.0 million | $24.4 million | Increase primarily reflected higher operating income |
Revenue by segment was $77.1 million for OpenEdge (up 18%), $13.7 million for Data Connectivity and Integration (up 128%), and $18.9 million for Application Development and Deployment (up 3%). Management attributed growth principally to Ipswitch and higher Data Connectivity and Integration license sales, including the timing of OEM term-license renewals. Ipswitch contributed approximately $15.2 million of Q1 revenue.
Cash, cash equivalents and short-term investments totaled $177.1 million at February 29, 2020, versus $173.7 million at November 30, 2019. Cash and cash equivalents were $161.1 million. Operating cash flow funded, among other uses, $20.0 million of share repurchases, $7.5 million of dividends, $1.9 million of debt principal payments and $1.1 million of capital expenditures.
Term-loan principal was $295.4 million, with $13.2 million due within 12 months; the facility matures April 30, 2024. The reported interest rate was 3.31%. No revolving borrowings were outstanding, with $1.8 million of letters of credit; Progress reported compliance with its financial covenants. The company had $27.2 million of cash and investments at foreign subsidiaries that it did not expect to repatriate for domestic needs.
Material changes and notable items
- Reported growth reflects the Ipswitch acquisition, completed in April 2019; it should not be treated as wholly organic growth. Data Connectivity and Integration revenue also benefited from the timing of certain OEM renewals.
- Interest expense rose to $2.8 million from $1.4 million, primarily because of the debt used to fund Ipswitch. Acquired-intangible amortization in cost of revenue fell to $1.6 million from $5.4 million, contributing to gross-margin improvement.
- Q1 restructuring expense was $1.0 million, including a $0.9 million impairment of operating-lease right-of-use assets related to Ipswitch integration. Management did not expect further material costs for the cited restructuring actions. Separately, a $22.7 million impairment of DataRPM and Kinvey-related intangibles was recorded in Q4 FY2019 after the company reduced investment in those product lines.
- Progress adopted lease accounting standard ASC 842 on December 1, 2019, recognizing approximately $28.9 million of operating-lease right-of-use assets and $29.9 million of lease liabilities at adoption. The company said adoption did not materially affect earnings, cash flows, liquidity or debt-covenant compliance.
- The reported prior-year effective tax rate was 30%; management said it would have been 22% absent a prior-period tax-provision error, corrected through a $3.6 million out-of-period tax benefit in Q3 FY2019. The Q1 FY2020 effective rate was 23%.
Outlook, risks and contingencies
The filing provides no quantified full-year financial guidance. Management said existing cash, operating cash generation and credit availability should meet foreseeable cash needs for at least 12 months, including planned debt payments, dividends, repurchases, acquisitions and other obligations. The board raised the share-repurchase authorization to $250 million in January 2020; $230 million remained at quarter-end. The quarterly dividend was $0.165 per share, and the board declared the same amount for payment in June 2020.
COVID-19 had not materially affected Q1 results, but the pandemic was declared in March 2020 and its subsequent effects were uncertain. Management identified potential revenue reductions and delayed customer or partner payments, and noted that a stronger U.S. dollar could pressure fiscal 2020 results because approximately one-third of revenue is denominated in foreign currencies. Principal risks also include quarterly sales variability, reliance on channel partners and OpenEdge, competition and product execution, cybersecurity and privacy, acquisition integration and impairment, foreign-exchange exposure, customer credit and debt-covenant requirements.
Progress reported ordinary-course legal proceedings and said it did not expect their outcomes to materially affect financial position, results or cash flows. It reported no off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- How much of revenue and earnings growth is sustainable organically after separating Ipswitch contributions and OEM renewal timing.
- The pace and financial impact of COVID-19, including customer payment delays, demand changes and foreign-currency translation.
- Debt repayment capacity, covenant headroom and the 2024 maturity, alongside continued dividends and share repurchases.
- Whether DataRPM and Kinvey investment reductions, restructuring and prior impairment signal further product or asset risks.
- The effect of the prior-period tax correction when comparing reported effective tax rates across periods.