Progress Software Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended November 30, 2020. The filing also reports unaudited fourth-quarter results. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
Progress sells software and related maintenance and services for developing, deploying and managing business applications. It reports three segments: OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment (AD&D). More than half of worldwide license revenue comes through indirect channels. In October 2020, Progress acquired infrastructure-automation provider Chef for a base cash purchase price of $220 million.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $442.2 million | $413.3 million | +7% |
| Software license revenue | $115.2 million | $122.6 million | -6% |
| Maintenance and services revenue | $326.9 million | $290.7 million | +12% |
| Gross profit / gross margin | $380.0 million / 86% | $338.1 million / 82% | Margin +4 percentage points |
| Operating income / margin | $107.7 million / 24% | $40.1 million / 10% | +169% |
| Net income / margin | $79.7 million / 18% | $26.4 million / 6% | +202% |
| Diluted earnings per share | $1.76 | $0.58 | — |
| Cash from operating activities | $144.8 million | $128.5 million | +13% |
Revenue growth reflected Ipswitch and Chef acquisitions, partly offset by weaker DCI license sales. Maintenance represented 65% of revenue, compared with 63% in FY2019; professional services contributed $38.0 million, up 20%. Gross-profit growth also benefited from lower acquired-intangible amortization. Operating income improved substantially in part because FY2019 included $24.1 million of impairment charges, including a $22.7 million write-down tied primarily to Kinvey and DataRPM; FY2020 had no such impairment charge.
Segments and fourth-quarter results
- OpenEdge: Revenue of $326.4 million, up 10%; operating contribution of $250.1 million, up 18%. Growth was primarily associated with Ipswitch.
- DCI: Revenue of $34.2 million, down 14%; operating contribution of $25.8 million, down 19%. Management cited timing of term-license renewals by OEM partners.
- AD&D: Revenue of $81.5 million, up 7%; operating contribution of $44.8 million, down 15%. Growth included Chef and higher professional-services revenue.
- Q4 FY2020: Revenue was $122.4 million versus $117.0 million in Q4 FY2019; operating income was $18.5 million versus an operating loss of $6.0 million; net income was $17.7 million versus a net loss of $4.7 million. The filing does not provide a clear explanation of all quarter-to-quarter drivers in this summary data.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $106.0 million at year-end, down from $173.7 million. The decline primarily reflected acquisition spending, repurchases, dividends and debt payments.
- Net carrying value of long-term debt, including the current portion, was $382.5 million; contractual debt obligations were $384.5 million. This included a $286.0 million term-loan balance and $98.5 million drawn on the revolving facility. The facility matures April 30, 2024; $18.8 million of term-loan principal was due within 12 months. The company was in compliance with its financial covenants.
- Management said cash, operating cash generation and available credit were expected to cover foreseeable requirements for at least the next 12 months. The filing provides no specific FY2021 revenue or earnings guidance.
- Investing cash outflow was $207.3 million, including $213.1 million of acquisition payments net of cash acquired. Financing cash inflow was $3.1 million. Capital expenditures were $6.5 million.
- Progress repurchased and retired 1.4 million shares for $60.0 million and paid $29.9 million in dividends in FY2020. The quarterly dividend was raised 6% to $0.175 per share; $190.0 million remained under the repurchase authorization.
Outlook, risks and notable items
- COVID-19 had not materially adversely affected FY2020 financial results, according to the company, but management warned that effects could become material. Risks include delayed sales and renewals, requests for concessions or deferred payments, and customer or partner disruption.
- Progress expects to continue pursuing acquisitions that meet its financial criteria. Acquisition integration, realization of anticipated benefits, added debt and goodwill or intangible-asset impairment are important risks.
- Other significant exposures include dependence on OpenEdge and indirect channels, OEM renewal timing, intense software competition, cybersecurity and product-security risks, privacy regulation, foreign-exchange movements and variable-rate debt. A hypothetical 10% adverse currency movement was estimated to reduce revenue by about 3% ($12 million) and net income by about 5% ($4 million), before potential hedging offsets.
- FY2020 included $5.9 million of restructuring expense and $3.6 million of acquisition-related expense. Chef integration restructuring costs were expected to continue into FY2021, though management did not expect them to be material. Ordinary-course legal matters were not considered likely to have a material effect.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Chef’s internal controls were excluded from the year-end assessment under the recently acquired business provision.
Most important facts for investors to verify
- How much of FY2020 growth and operating-income improvement is durable, versus attributable to acquisitions, lower amortization and the absence of FY2019 impairment charges?
- Whether DCI OEM license renewals recover, and whether OpenEdge remains resilient given its importance to revenue and earnings.
- Chef’s post-acquisition growth, retention, integration progress and contribution to profitability and cash flow.
- Debt reduction capacity and covenant headroom alongside dividends, repurchases and any further acquisitions.
- COVID-19 effects on renewals, sales cycles and collections, plus foreign-exchange and cybersecurity exposures.