PROGRESS SOFTWARE CORP quarterly report, Q1 FY2015

Business context and reporting period

Progress Software Corporation’s unaudited fiscal 2015 first quarter covered the three months ended February 28, 2015; comparisons are with the three months ended February 28, 2014. The company sells business application software and related maintenance and services, with products delivered on-premise and in the cloud.

Progress acquired application-development tools provider Telerik on December 2, 2014, for total consideration of $262.5 million. The acquisition supports its cloud and platform-as-a-service strategy and materially affected revenue, expenses, assets and financing. Telerik contributed approximately $4.5 million of quarterly revenue and a $10.9 million pretax loss before approximately $6.2 million of acquired-intangible amortization.

Key financial metrics

Revenue rose 9% as reported and 15% at constant currency. Software-license revenue increased 13%; maintenance revenue declined 2% as reported but increased 4% at constant currency; services revenue increased 230%, primarily reflecting BravePoint. OpenEdge revenue grew 4%, Data Connectivity and Integration fell 7%, and Application Development and Deployment revenue was $4.8 million, versus $0.2 million, largely due to Telerik.

Operating expenses rose to $74.9 million from $52.7 million. The quarter included $2.3 million of restructuring expense, $1.5 million of acquisition-related expense, and $7.8 million of acquired-intangible amortization across cost of revenue and operating expenses. The income-tax benefit was $9.3 million; management cited the geographic mix of profits and losses and a $0.8 million benefit from the reinstated R&D credit. The reported effective tax rate was 91%.

Operating cash flow improved, aided by working-capital changes, including higher deferred revenue and collections; DSO was 56 days versus 63 at fiscal year-end. Investing cash flow was a $248.5 million outflow, including $246.3 million net cash paid for acquisitions. Financing cash flow was a $142.1 million inflow, including $146.4 million net debt proceeds and $7.8 million of share repurchases.

At February 28, 2015, cash, cash equivalents and short-term investments totaled $211.2 million, down from $283.3 million at November 30, 2014. Total assets were $889.6 million and shareholders’ equity was $538.1 million. Term-loan debt was approximately $148.1 million, including $7.5 million current; the $150 million revolving facility had no borrowings and $0.6 million of letters of credit outstanding. The credit facility’s average quarterly interest rate was 1.94%. The company reported compliance with its financial covenants. Cash and investments included $94.9 million held by foreign subsidiaries and considered permanently reinvested.

Material changes, outlook and risks

• Revenue growth reflected Telerik and BravePoint acquisitions and OpenEdge growth; foreign-exchange movements reduced reported international results. Management said approximately 40% of revenue is denominated in foreign currency.
• Gross margin declined 11 percentage points. Management attributed pressure principally to higher service-delivery costs and acquisition-related amortization; acquired deferred revenue was written down to fair value while related fulfillment costs continued.
• Management expected current cash, operating cash generation and available credit to meet foreseeable needs for at least 12 months. The filing provides no specific revenue or earnings guidance.
• The company incurred $1.0 million of Telerik-related restructuring expense and said further costs, including facility costs or asset impairment, could arise as integration continued. It did not expect additional material costs from the 2014 restructuring.
• Revenue backlog was $145.3 million, comprising $125.9 million deferred revenue and $19.4 million of multi-year licensing arrangements. Management cautioned that backlog is not subject to normal accounting controls and may not be comparable across companies.
• Key disclosed risks include Telerik integration and realizing expected benefits, competition and pricing pressure, execution of cloud and subscription strategies, channel relationships, international exposure and currency changes. Management said ordinary-course legal matters were not expected to have a material effect.

Important facts for investors to verify

• Whether Telerik integration delivers expected strategic benefits and whether its reported losses and acquired-revenue accounting effects diminish.
• Whether revenue growth persists excluding acquisitions and constant-currency adjustments, particularly in maintenance and services.
• Whether gross margins and operating results recover as acquisition-related amortization, restructuring and integration costs evolve.
• Debt repayment, covenant headroom and liquidity, including the availability and terms of the secured revolving facility.
• Foreign-exchange exposure and the location and practical availability of the company’s cash and investments.
• Potential additional Telerik-related restructuring costs, impairment charges and the timing and conversion of reported backlog into recognized revenue.