Progress Software Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended November 30, 2018. This is an annual filing; selected fourth-quarter results are also summarized below. Amounts are U.S. dollars.
Business context
Progress sells software for application development and deployment, data connectivity and integration, and related maintenance and services. Its three segments are OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. The company reports more than 1,700 independent software vendors, 100,000 enterprise customers, and 2 million developers relying on its products. More than half of worldwide license revenue comes through indirect partners, including application partners and OEMs.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $397.2 million | $397.6 million |
| Software license revenue | $122.1 million | $124.4 million |
| Maintenance and services revenue | $275.0 million | $273.2 million |
| Gross profit / margin | $330.2 million / 83% | $328.4 million / 83% |
| Operating income / margin | $86.0 million / 22% | $70.6 million / 18% |
| Net income | $63.5 million | $37.4 million |
| Diluted earnings per share | $1.38 | $0.77 |
| Cash from operations | $121.4 million | $105.7 million |
Revenue was essentially flat year over year; reported license revenue fell 2%, while maintenance revenue rose 1% and professional services revenue fell 5%. OpenEdge revenue increased 1% to $278.3 million; Data Connectivity and Integration declined 5% to $39.0 million; Application Development and Deployment declined 1% to $79.9 million. Outside North America generated 45% of revenue, up from 44%.
Operating income improved 22%, with lower restructuring, sales and marketing, and acquisition expenses, partly offset by higher product development and general and administrative costs and a $5.1 million loss on assets held for sale. Net income also benefited from a lower effective tax rate: 20% versus 43% in FY2017, including the effects of U.S. tax reform.
At year-end, cash, cash equivalents and short-term investments were $139.5 million, down from $183.6 million. Total debt carrying value, including the current portion, was approximately $116.1 million. The company had no revolving-credit borrowings and $1.3 million of letters of credit; it reported compliance with its debt covenants. The credit facility matures in November 2022. Deferred revenue, primarily maintenance and support, was $148.3 million, versus $142.3 million.
Capital returned in FY2018 included $120.0 million of share repurchases and $25.8 million of dividends. The quarterly dividend was increased 11% to $0.155 per share. Management targets returning approximately 75–80% of annual operating cash flow to shareholders.
Fourth-quarter results
FY2018 fourth-quarter revenue was $111.3 million, compared with $116.1 million in FY2017. Operating income was $24.3 million versus $28.8 million; net income was $18.4 million versus $16.4 million. Diluted EPS was $0.41 versus $0.34.
Material changes, outlook and risks
- Accounting change: Progress adopted ASC 606 on December 1, 2018 using full retrospective application. Its preliminary estimate was that restating FY2018 would reduce revenue by about $18 million, net income by about $14 million, and diluted EPS by $0.30; FY2017 revenue and net income would each fall about $8 million and diluted EPS about $0.17. The company said these estimates were preliminary and would be finalized in FY2019 filings.
- Management outlook: No quantified revenue or earnings guidance is provided in this filing. Management expected existing cash, operating cash flow and available credit to fund foreseeable needs for at least 12 months, and intended to repurchase $100 million of shares in FY2019, subject to market conditions and management discretion. A $0.155 quarterly dividend was declared for payment in March 2019.
- Tax and unusual items: The U.S. Tax Cuts and Jobs Act produced a $1.7 million tax benefit from deferred-tax remeasurement; no one-time repatriation tax was expected because foreign subsidiaries were in a net accumulated deficit position. GILTI provisions were expected to create incremental U.S. tax beginning in FY2019. The company recorded a $5.1 million impairment on corporate land and buildings classified as held for sale and was actively marketing the properties.
- Key business risks: Dependence on OpenEdge and indirect partners; OEM renewal timing; intense competition and changing technology; execution and returns from cloud and cognitive-application investments; revenue and quarter-end forecasting volatility; foreign exchange and international exposure; cybersecurity and privacy regulation; and debt covenant and cash-flow constraints on capital returns. Approximately one-third of revenue is denominated in foreign currencies; management estimated a hypothetical adverse 10% currency move could reduce revenue by about 3% and net income by about 5%, excluding hedge offsets.
- Other notable matters: The company continued implementing a new financial systems platform and identified implementation disruption as a risk. In FY2017 it had reduced its global workforce by more than 20%; remaining restructuring costs were expected to be immaterial. Management said ordinary-course legal matters were not expected to materially affect results or financial condition. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Check FY2019 filings for finalized ASC 606 comparative restatements and the resulting revenue, earnings, deferred-revenue and receivables effects.
- Assess whether maintenance growth can offset pressure in licenses and services, particularly in DCI and Application Development and Deployment, and track OEM renewals.
- Compare operating cash flow with the planned $100 million buyback, dividends, debt repayments and other investment needs; verify covenant headroom.
- Track the sale of the held-for-sale properties and any additional impairment or proceeds disclosed after year-end.
- Monitor the effective tax rate and incremental tax effects from GILTI, alongside foreign-currency movements and hedge results.
- Review progress on the financial systems implementation and cloud strategy, and watch for evidence that acquisitions and cognitive-application investments are generating expected returns.