Progress Software Corporation — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended August 31, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. The company provides enterprise software for developing, deploying and managing applications.
Business context and performance
Progress completed its MarkLogic acquisition on February 7, 2023, for a base cash purchase price of $355 million. MarkLogic contributed approximately $20.4 million of Q3 revenue and $50.7 million for the nine-month period. Management attributed much of revenue growth to the acquisition, along with growth in products including OpenEdge and Kemp.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $175.0 | $151.2 | $517.5 | $444.9 |
| Gross profit | $142.1 | $127.4 | $424.6 | $373.9 |
| Income from operations | $29.4 | $32.0 | $88.0 | $101.7 |
| Net income | $19.1 | $21.8 | $54.9 | $71.4 |
| Diluted EPS | $0.42 | $0.50 | $1.23 | $1.61 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $140.8 | $152.0 |
Q3 revenue increased 16% year over year (14% constant currency); nine-month revenue increased 16% (16% constant currency). Q3 license revenue rose 6%, while maintenance and services rose 20%. For nine months, licenses rose 22% and maintenance and services rose 14%.
Margins, liquidity and capital
- Margins: Gross margin was approximately 81% in Q3 versus 84% a year earlier, and 82% for nine months versus 84%. Operating margin was approximately 17% in Q3 versus 21%, and 17% for nine months versus 23%. Higher service delivery costs and acquired-intangible amortization contributed to pressure.
- Earnings drivers: Operating income declined 8% in Q3 and 13% for nine months. Interest expense more than doubled year over year in both periods, reflecting debt used in part to fund MarkLogic. Net income fell 12% in Q3 and 23% for nine months. Lower effective tax rates—9% for Q3 and 16% year to date, versus 21% in both prior-year periods—partly offset the pressure; management cited stock-compensation tax benefits and temporary foreign-tax-credit relief.
- Cash and working capital: Cash and equivalents were $138.0 at August 31, down $118.3 from November 30, 2022. Current assets were $302.8 and current liabilities $324.7. Nine-month operating cash flow was $140.8; capital expenditures were $3.2, implying cash flow after capex of approximately $137.6.
- Debt: Balance-sheet debt comprised $11.4 current long-term debt, $389.4 long-term debt and $354.2 convertible notes, approximately $755.0 combined carrying value. The debt schedule reported $763.0 total face value before discounts and current maturities. The company issued $195.0 of debt and repaid $55.0 on its revolving line during the nine months.
- Shareholder returns: The company paid $23.7 in dividends and repurchased $30.0 of stock during the first nine months. The quarterly dividend remained $0.175 per share; $198.0 remained under the repurchase authorization at August 31.
Outlook, unusual items and risks
- Management gave no specific revenue or earnings guidance in the supplied filing. It stated that cash, operating cash generation and available Credit Facility capacity should fund operations and foreseeable needs for at least the next 12 months, including debt service, dividends, repurchases and potential acquisitions.
- ARR, a non-GAAP operating metric, was $577 million at August 31, up 18% year over year, primarily driven by MarkLogic. Net retention rates generally ranged from 100% to 102%. Management cautioned that ARR is not a forecast and may not be comparable across companies.
- MOVEit vulnerability: The vulnerability affected MOVEit Transfer and MOVEit Cloud, which together represented less than 4% of nine-month revenue. Two dedicated-cloud customers reported exploitation; one reported exfiltration of personally identifiable information. Progress said it had not found evidence of data exfiltration from public MOVEit Cloud instances. It reported 58 class-action lawsuits, claims or inquiries from 23 customers and others, and regulatory and law-enforcement inquiries. An SEC subpoena received October 2, 2023 sought information; the company described the inquiry as fact-finding and said it would cooperate.
- The company recorded $1.0 million of MOVEit-related costs for the quarter and nine months, net of approximately $1.9 million of recognized insurance recoveries. It had not accrued a loss contingency because potential losses could not be reasonably estimated; future legal, investigation and professional costs are expected. Cyber insurance coverage was $15 million, with $10.1 million remaining as of August 31, subject to a $0.5 million retention per claim.
- For the November 2022 cyber incident, nine-month costs were $4.2 million, net of approximately $3.0 million of insurance recoveries. The filing also identifies later WS_FTP vulnerabilities and potential customer, litigation and reputational impacts.
- MarkLogic-related restructuring included $6.2 million of nine-month expenses. Management expected additional employee and facility costs in FY2024 but did not expect them to be material. MarkLogic acquisition accounting remained preliminary and subject to measurement-period adjustments.
- Management concluded disclosure controls were effective, but excluded MarkLogic from its assessment of disclosure controls as of August 31, 2023.
Important facts for investors to verify
- How much of reported growth and ARR expansion is organic versus attributable to MarkLogic, and whether acquired revenue translates into durable profitability.
- Whether gross and operating margins stabilize as acquisition-related amortization, service costs and restructuring affect results.
- The maturity, terms and refinancing implications of the company’s debt, alongside cash generation and liquidity needs.
- Developments in MOVEit litigation, customer indemnification demands, the SEC and other inquiries, insurance recoveries, and any eventual loss estimate.
- Potential customer retention, sales or reputational effects from MOVEit and other product vulnerabilities, including WS_FTP.
- Whether the stated 12-month liquidity outlook remains appropriate if acquisitions, debt repayment or cybersecurity costs increase.