Progress Software Corporation — Q3 2017 Form 10-Q
Business context and reporting period: The unaudited quarter and nine months ended August 31, 2017 (fiscal Q3 and year to date), compared with the corresponding 2016 periods. Progress sells software licenses and related maintenance and services across OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. It reported 47.8 million shares outstanding as of September 27, 2017.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $97.3 million | $102.0 million | $281.5 million | $287.6 million |
| Gross profit / margin | $79.2 million / 81% | $84.8 million / 83% | $230.3 million / 82% | $238.4 million / 83% |
| Operating income / margin | $20.3 million / 21% | $13.6 million / 13% | $41.8 million / 15% | $32.7 million / 11% |
| Net income | $11.2 million | $7.6 million | $21.0 million | $18.1 million |
| Diluted EPS | $0.23 | $0.15 | $0.43 | $0.36 |
- Revenue mix: Q3 software license revenue was $28.5 million, down 15%; maintenance and services were $68.8 million, up 1%. For the nine months, licenses declined 9% to $78.4 million, while maintenance and services rose 1% to $203.1 million.
- Cash flow: Nine-month operating cash flow was $73.2 million, compared with $68.9 million. Investing used $81.0 million, including $77.1 million net for acquisitions; financing used $68.1 million, including $43.9 million of repurchases, $18.2 million of dividends and $11.3 million of debt repayment. Cash and cash equivalents declined $62.3 million to $144.8 million; cash, equivalents and short-term investments totaled $191.3 million.
- Liquidity and debt: Current assets were $261.6 million and current liabilities $206.1 million. Term-loan principal was $123.8 million, including $15.0 million due within 12 months; the variable rate was 3.00%. The $150 million revolving facility had no borrowings and $1.4 million of letters of credit. The company reported compliance with credit-facility covenants.
- Other metrics: Deferred revenue was $140.7 million; reported total revenue backlog, including multi-year licensing arrangements, was $160.5 million. Goodwill was $315.9 million and net intangible assets were $101.8 million.
Changes versus the comparable period
- Q3 revenue fell 5%, chiefly because of lower license sales in Data Connectivity and Integration; the prior-year quarter included a multi-million-dollar OEM deal. Nine-month revenue declined 2%.
- Q3 Data Connectivity and Integration revenue fell 37% to $9.0 million; nine-month revenue fell 26% to $22.9 million. OpenEdge revenue was broadly flat year to date, while Application Development and Deployment revenue increased 3% to $60.0 million.
- Operating income increased despite lower revenue, reflecting lower compensation, facilities and marketing costs following restructuring. Nine-month results also include $18.7 million of restructuring charges; the prior-year period included a $5.1 million intangible-asset impairment.
- The effective tax rate was 41% in Q3 and 44% year to date, versus 38% and 36%, respectively. Management attributed the year-to-date comparison in part to a $2.7 million out-of-period tax benefit recorded in 2016 after identifying an error in the prior-year tax provision; it said the error and correction were not material to the respective financial statements.
Outlook, commentary, risks and unusual items
- Management said restructuring was intended to reduce annual costs by approximately $28 million by fiscal year-end, after investments in core and acquired businesses. The company reduced its global workforce by approximately 20%; most reductions were completed by the end of Q2. Additional facility-closure costs were expected, but not expected to be material.
- Management believed cash, operating cash generation and credit availability would fund foreseeable needs for at least 12 months, including debt service, dividends, repurchases, restructuring and potential acquisitions. This is a liquidity outlook, not formal revenue or earnings guidance.
- Progress acquired DataRPM in March for approximately $30.0 million and Kinvey in June for approximately $49.2 million. Both acquisitions were funded with cash, and preliminary purchase-price allocations included goodwill. Management said acquired-company results and pro forma information were not significant enough to disclose separately.
- In September 2017, the board increased the remaining share-repurchase authorization to $250 million. It also raised the quarterly dividend 12%, from $0.125 to $0.14 per share, for the dividend payable in December 2017. Future repurchases remain subject to management and board decisions.
- Management identified risks including volatile and difficult-to-forecast license sales and OEM renewals, reliance on channel partners and OpenEdge, foreign-exchange exposure, competition and execution of its cloud/subscription and cognitive-application strategy. It also cited acquisition integration, cybersecurity, privacy and regulatory risks. Approximately 44% of nine-month revenue came from outside North America; foreign-currency movements can affect reported results.
- Revenue backlog is not subject to the company’s normal accounting controls and depends on estimates and timing of order fulfillment; comparisons with other companies may be misleading. The filing reported no material changes to previously disclosed risk factors, no material expected effect from ordinary-course legal matters, and effective disclosure controls.
- Progress planned to adopt the new revenue standard (ASC 606) on December 1, 2018 using the full retrospective approach. Management expected changes to timing of license revenue recognition in certain term-license and multi-element arrangements, but had not yet quantified the overall financial-statement impact.
Important facts for investors to verify
- Whether license revenue and OEM renewals stabilize, particularly in Data Connectivity and Integration, and whether maintenance growth continues.
- Whether cost reductions improve ongoing profitability without impairing product development, customer support or growth initiatives.
- Integration and commercial progress from DataRPM and Kinvey, and whether acquisition-related goodwill and intangible assets remain supportable.
- Cash generation and capital allocation relative to debt repayments, the enlarged repurchase authorization and the higher dividend.
- The eventual quantified effects of ASC 606, and exposure to currency movements, channel concentration, cloud-strategy execution and cybersecurity or privacy events.