Progress Software Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended November 30, 2015. The filing also reports fourth-quarter results. Unless otherwise stated, financial amounts below are in millions of U.S. dollars.
Business context
Progress sells software for application development and deployment, data connectivity and integration, and OpenEdge applications. Products are sold through perpetual and term licenses, maintenance and services, and cloud subscriptions. More than half of worldwide license revenue comes through indirect partners and OEMs. The December 2014 Telerik acquisition added application-development tools and cloud offerings; Telerik revenue is included from its acquisition date.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $377.6 | $332.5 |
| Gross profit / margin | $313.8 / 83% | $298.3 / 90% |
| Operating income / margin | $14.8 / 4% | $80.7 / 24% |
| Net income (loss) | $(8.8) | $49.5 |
| Diluted EPS | $(0.17) | $0.96 |
| Operating cash flow | $104.5 | $107.7 |
- Revenue grew 14% as reported and 21% at constant currency. License revenue was $130.3 million (+11%); maintenance and services were $247.3 million (+15%).
- Cash, cash equivalents and short-term investments totaled $241.3 million at year-end, down from $283.3 million. Long-term debt, including its current portion, was $144.4 million; no revolving loans were outstanding. Approximate cash and investments net of debt: $96.9 million.
- Current assets were $323.4 million and current liabilities $199.9 million. Deferred revenue was $134.1 million, versus $96.2 million a year earlier.
- Investing cash outflow was $260.2 million, primarily reflecting $246.3 million of net cash paid for Telerik. Financing cash inflow was $118.3 million, including debt proceeds, and included $32.9 million of share repurchases.
- OpenEdge revenue was $295.9 million, Data Connectivity and Integration $37.9 million, and Application Development and Deployment $43.7 million. OpenEdge generated $218.8 million in segment contribution margin; AppDev generated $4.3 million.
Changes and unusual items
- Compared with FY2014, revenue increased $45.0 million, but operating income declined 82% and net income turned to a loss. Acquisition-related costs, acquired-intangible amortization, higher development and sales costs, and restructuring contributed to the decline.
- Gross margin fell seven percentage points to 83%. Management attributed pressure in part to higher service costs and acquired-intangible amortization. Telerik purchase accounting reduced acquired deferred revenue, while Progress continued to incur costs to fulfill related obligations.
- The effective tax rate was 171%, with a $21.2 million tax provision on $12.4 million of pretax income. Management cited the geographic mix of earnings and Telerik-related losses and purchase-accounting effects.
- FY2015 restructuring expense was $13.0 million. The company also recorded $5.0 million of asset impairment, principally after replacing its prior mobile-development technology with Telerik technology. It expected no additional material costs for the Telerik-related restructuring, but said further costs could arise from the fourth-quarter organizational restructuring.
- Fourth-quarter revenue was $112.7 million, compared with $97.9 million in the prior-year quarter. Fourth-quarter net loss was $9.5 million, compared with net income of $14.5 million.
Outlook, commentary and risks
Management stated that cash balances, operating cash generation and credit-facility availability should fund operations and foreseeable requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance. It describes continued investment in cloud offerings and professional services, and the company authorized an additional $100 million share-repurchase program in September 2015.
- Key risks include competition and rapid technology shifts; dependence on OpenEdge and indirect channels; uncertain adoption and near-term economics of subscription and cloud offerings; acquisition integration and returns; foreign-currency exposure; and privacy, security and regulatory requirements.
- Approximately 45% of FY2015 revenue was generated outside North America, and approximately 35% was denominated in foreign currencies. Management estimated that a hypothetical 10% adverse currency move would reduce reported revenue by about 4% and net income by about 20%, excluding hedging offsets.
- The credit facility matures in December 2019 and includes financial covenants and restrictions. The company reported compliance as of November 30, 2015; $9.4 million of term-loan principal was due within 12 months.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. Management said ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- How much FY2015 revenue growth reflects Telerik and BravePoint acquisitions versus organic growth, and how the stronger U.S. dollar affected regional results.
- Whether the lower gross and operating margins normalize as acquired deferred revenue is recognized and integration and restructuring costs subside.
- The trajectory of Telerik/AppDev revenue, profitability and goodwill impairment headroom; its reporting unit’s fair value exceeded carrying value by approximately 16% at the annual test date.
- Cash-flow sustainability, deferred-revenue conversion, debt repayments and covenant headroom, alongside the planned use of the expanded repurchase authorization.
- The assumptions and potential financial effects of the 171% effective tax rate, uncertain tax positions and future cloud/subscription investment.