Progress Software Corporation — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended May 31, 2018. Unaudited results; dollar amounts below are in millions unless noted. Progress sells software licenses and related maintenance and services through direct and partner channels.
Financial performance and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $96.1 | $93.2 | $190.1 | $184.2 |
| Gross profit | $79.5 | $75.8 | $156.6 | $151.1 |
| Income from operations | $21.8 | $20.3 | $39.6 | $21.5 |
| Net income | $15.4 | $10.3 | $28.3 | $9.8 |
| Diluted EPS | $0.33 | $0.21 | $0.61 | $0.20 |
- Revenue grew 3% as reported in both periods, but 1% on a constant-currency basis. Q2 license revenue rose 3% as reported; maintenance and services rose 3%, with services declining 5%. For the first six months, licenses rose 4% and maintenance and services rose 3% as reported.
- Gross margin was approximately 82.7% in Q2 versus 81.4% a year earlier; first-half gross margin was approximately 82.4% versus 82.0%. Operating margin was 22.7% in Q2 versus 21.8%, and 20.8% in the first half versus 11.7%.
- Operating cash flow was $73.7, up from $59.7 in the first half of FY2017. Investing used $0.7; financing used $103.5, including $90.0 of share repurchases and $13.1 of dividends. Cash and cash equivalents declined to $97.1 from $133.5 at November 30, 2017.
- Cash, cash equivalents and short-term investments totaled $144.2 at May 31, down $39.4 from fiscal year-end. The company reported $120.7 of term-loan principal outstanding, $6.2 due within 12 months, and no revolver borrowings; $1.3 of letters of credit were outstanding. The facility’s stated rate was 3.44%, and the company said it complied with its financial covenants.
- Current assets were $200.6 and current liabilities $194.9. Total deferred revenue was $147.8; revenue backlog, including multi-year licensing arrangements not on the balance sheet, was $164.4.
Material changes versus the prior comparable period
- OpenEdge revenue increased 6% in Q2 and 5% in the first half as reported, while Data Connectivity and Integration fell 18% and 4%, respectively. Application Development and Deployment grew 1% in both periods.
- EMEA revenue rose 15% in Q2 and 13% in the first half as reported, but growth was 7% and 4% on a constant-currency basis. Latin America declined 24% and 18%, respectively, as reported. North America was down 1% in Q2 and up 1% year to date.
- First-half operating income rose 84%, primarily reflecting substantially lower restructuring costs than in FY2017 ($2.2 versus $17.8). Q2 operating income increased 7%. Higher acquired-intangible amortization and stock-based compensation partly offset the improvement.
- Net income growth also reflected lower effective tax rates: 25% in Q2 and 23% for the first half, compared with 45% and 47%. The company cited U.S. tax reform and a $1.4 first-quarter discrete benefit from remeasuring deferred tax balances.
- Repurchases increased to $90.0 in the first half from $25.0 a year earlier. The company repurchased 2.1 million shares, and reported $130.0 remaining under its $250.0 authorization at May 31.
Outlook, management commentary and risks
- Management stated that cash, operating cash generation and available credit should be sufficient for operations and foreseeable needs for at least 12 months. It expected approximately $30 million of additional share repurchases in the remainder of FY2018 and said it expected to continue quarterly dividends of $0.14 per share, while noting either program could be changed or suspended.
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management said foreign exchange had favorably affected recent reported revenue and expects currency movements to continue affecting results. About 45% of first-half revenue came from outside North America.
- The FY2017 restructuring reduced the workforce by over 20% and lowered full-year expenses by over $30 million by the end of FY2017. Further facility-closure costs were expected in FY2018 but were not expected to be material; the remaining restructuring reserve was $1.2.
- Management planned to adopt ASC 606 on December 1, 2018 using the full retrospective approach. It anticipated changes to timing of revenue recognition for certain extended-payment term licenses and multi-element perpetual-license arrangements; the overall financial impact was still being assessed.
- Key risks discussed include dependence on OpenEdge and third-party channels, uncertain license and renewal demand, competition and product execution, transition to cloud and subscription models, foreign exchange, cybersecurity and privacy regulation, acquisitions, and debt covenant and capital-return requirements. The filing reported no material change in the company’s prior risk-factor assessment.
- The company had $315.0 of goodwill and $76.5 of net intangible assets. It reported no impairment trigger during the quarter. Ordinary-course legal proceedings were not expected by management to have a material effect.
Most important facts for investors to verify
- Whether underlying revenue momentum is improving: reported growth was 3%, but constant-currency growth was 1%, with weakness in Data Connectivity and Latin America.
- How much of earnings growth reflects sustainable operating performance versus lower prior-year restructuring charges and the reduced tax rate, including the provisional tax-reform accounting.
- Whether OpenEdge growth and maintenance renewals can offset Data Connectivity declines and services softness, and how ASC 606 will affect reported revenue and comparability.
- Whether cash generation can support planned repurchases and dividends alongside scheduled debt repayment, and whether the company remains within credit-facility covenants.
- Exposure to currency movements, international operations, cloud/subscription transition, cybersecurity and privacy risks, and the company’s reliance on partners and OpenEdge.