Business context and reporting period
Progress Software Corporation filed this unaudited Form 10-Q for the quarter and nine months ended August 31, 2015. The company sells software licenses, maintenance and services, and is pursuing cloud and platform-as-a-service (PaaS) growth alongside its established businesses.
Results include Telerik, acquired in December 2014 for $262.5 million, and BravePoint, acquired in October 2014. Management said Telerik integration may disrupt fiscal 2015 results.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $94.6 million | $79.3 million | $264.8 million | $234.6 million |
| Gross profit / margin | $79.5 million / 84% | $71.4 million / 90% | $216.3 million / 81% | $211.5 million / 90% |
| Operating income (loss) | $8.6 million | $19.4 million | $(5.3) million | $53.7 million |
| Net income (loss) | $(4.1) million | $11.1 million | $0.7 million | $35.0 million |
| Diluted EPS | $(0.08) | $0.22 | $0.01 | $0.68 |
Revenue grew 19% in Q3 and 13% for the nine-month period at reported exchange rates; management reported constant-currency growth of 29% and 21%, respectively. Software license revenue rose 21% in Q3 and 12% year to date. Maintenance and services revenue grew 19% and 13%, with professional services growth largely reflecting BravePoint.
For the nine months, operating cash flow was $77.2 million, versus $68.5 million a year earlier. Investing activities used $259.1 million, principally reflecting $246.3 million of net cash paid for acquisitions. Cash and cash equivalents were $189.1 million, with short-term investments of $29.2 million, at August 31, compared with combined cash and investments of $283.3 million at November 30, 2014.
Debt was $144.4 million outstanding on the secured term loan, including $7.5 million due within 12 months; no revolving loans were outstanding. The revolving facility provides up to $150 million of additional borrowing capacity, subject to its terms. The average quarterly facility rate was 1.96%. Cash and investments exceeded reported debt by approximately $73.9 million; $77.2 million of cash and investments held by foreign subsidiaries was considered permanently reinvested. Management said available cash, operating cash generation and credit availability should fund foreseeable needs for at least 12 months. The company reported compliance with credit covenants.
Material changes and management commentary
- Q3 revenue growth reflected acquisitions and stronger North American and Asia Pacific results. North America revenue grew 40% and Asia Pacific 94% year over year; EMEA declined 7% and Latin America 19% at reported rates. The stronger U.S. dollar weighed on reported international revenue.
- Operating income fell 56% in Q3; the nine-month period shifted to an operating loss. Management cited higher acquisition-related staffing and operating costs, acquired-intangible amortization, restructuring, and increased maintenance and services costs. The Telerik acquisition also reduced acquired deferred revenue to fair value while Progress continued to incur costs to fulfill related obligations.
- Q3 net loss included an $11.6 million tax provision despite $7.4 million of pretax income. Management attributed the high effective tax rate to geographic profit mix and losses in Bulgaria, including purchase-accounting amortization, while earnings in other jurisdictions were taxed at higher rates.
- The company recorded $8.7 million of restructuring expense for the nine months, including a $4.0 million impairment after deciding to replace its prior cloud-based mobile development technology with Telerik technology. Management said further restructuring costs, potentially significant, could arise as integration continues.
- The board authorized a new $100 million repurchase program in September 2015, increasing total authorization to $114.5 million. The company repurchased $32.9 million of shares during the nine months and made no repurchases in Q3.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the filing. Management expects expenses as a percentage of revenue to improve in future periods as acquired Telerik deferred revenue is recognized, but does not quantify the expected effect. It also said Telerik would be profitable for fiscal 2015 absent purchase-accounting adjustments.
Key risks identified include successful Telerik integration and realization of expected benefits, competitive and pricing pressure, execution of cloud and subscription transitions, product acceptance and release timing, channel-partner relationships, economic conditions, international operations and foreign-exchange movements. The company noted ordinary-course legal claims; management did not expect them to materially affect financial position, results or cash flows. Standard customer indemnification obligations were described as immaterial based on historical experience.
Important facts for investors to verify
- Whether Telerik integration, revenue conversion and expected synergies progress as planned, and how acquired deferred revenue affects reported growth and margins.
- Whether revenue growth persists on an organic and constant-currency basis, particularly in OpenEdge and international markets.
- Whether margins and operating profitability recover as acquisition, amortization and restructuring costs evolve.
- Cash generation, debt amortization, covenant headroom and the availability and use of the revolving facility; also consider the permanently reinvested foreign cash balance.
- The level and timing of further restructuring charges and payments, and the effect of the new share repurchase authorization on liquidity.