Progress Software Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended February 28, 2014; unaudited. Comparisons are with the three months ended February 28, 2013, unless otherwise noted. Progress is a global business software company focused on application development, data integration and analytics, with a strategic push into cloud-based platform-as-a-service (PaaS). It reports one operating segment following product-line divestitures.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change / context |
|---|---|---|---|
| Total revenue | $74.5 million | $83.7 million | Down 11% reported; down 10% at constant currency |
| Software license revenue | $22.3 million | $29.9 million | Down 26% |
| Maintenance and services revenue | $52.3 million | $53.8 million | Down 3%; maintenance down 2%, professional services down 12% |
| Gross profit / margin | $66.7 million / 89% | $73.9 million / 88% | Gross profit down 10%; margin improved 1 percentage point |
| Operating income / margin | $14.0 million / 18% | $15.8 million / 19% | Down 11% |
| Income from continuing operations | $11.1 million | $9.8 million | Up 13% |
| Net income | $11.1 million | $31.1 million | Prior-year result included $21.3 million from discontinued operations, including a divestiture gain |
| Diluted EPS | $0.21 | $0.53 | Continuing-operations diluted EPS was $0.21 versus $0.17 |
| Operating cash flow | $25.4 million | $(25.1) million | Prior-year cash flow included substantial tax and restructuring payments |
Margins and expenses: Continuing-operations net income was approximately 15% of revenue versus 12% a year earlier. Operating expenses declined 9% to $52.7 million, but product development expense increased 11% to $15.1 million as the company invested in Progress Pacific. The effective tax rate fell to 21% from 36%, primarily reflecting a $2.1 million tax benefit associated with an expected foreign-subsidiary distribution.
Liquidity, balance sheet and cash flow
- Cash and cash equivalents were $219.4 million; short-term investments were $28.7 million, for total cash, cash equivalents and short-term investments of $248.0 million, up from $231.4 million at November 30, 2013.
- Total assets were $690.4 million and shareholders’ equity was $524.7 million at February 28, 2014. The filing reports no borrowings under the $150 million revolving credit facility; $0.8 million of letters of credit was outstanding. The company stated it was in covenant compliance by a significant margin.
- Operating cash flow of $25.4 million was partly offset by $5.7 million of property and equipment purchases, $0.8 million of capitalized software development costs, and $9.8 million of share repurchases. Net cash increased $20.5 million during the quarter.
- Approximately $102.7 million of cash, cash equivalents and short-term investments was held by foreign subsidiaries; a significant portion was considered permanently reinvested and not available for domestic operations.
- An additional $25.1 million was invested in auction rate securities (ARS), classified as long-term because of limited liquidity. Their fair value reflected a $3.6 million unrealized loss. Management considered the impairment temporary and said available liquidity and operating cash flows should mitigate the restriction.
Material changes and management commentary
- The principal operating pressure was the 26% decline in license revenue, primarily from lower DataDirect and Corticon sales in North America and EMEA, and to a lesser extent lower OpenEdge sales to direct end users. Management was changing sales coverage for DataDirect and Corticon, but said the changes could take time to affect results.
- Maintenance revenue was affected by a distributor-model transition in certain Latin American markets and non-renewing customers; new-license-related maintenance growth, primarily in EMEA, partly offset the decline. Lower professional-services revenue reflected engagement timing.
- Management described the company as early in its transition to cloud PaaS, with continued product-development and cloud-operations investment required. It cautioned that sustainable revenue increases may not be foreseeable in the near term.
- Revenue backlog was $117.9 million versus $141.7 million a year earlier. The comparison is affected by the prior-year inclusion of Apama deferred revenue; the company also cautioned that backlog is not a standardized or necessarily reliable predictor of future performance.
- The company repurchased 0.4 million shares for $9.8 million under a new $100 million authorization. It recorded $0.9 million of acquisition-related expense for Rollbase employee earn-out compensation; approximately $5.0 million of maximum earn-out compensation is expected to be accrued over the two-year performance period if the criteria are met.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided in the filing. Management expected existing cash, operating cash generation and the available credit facility to fund operations and foreseeable cash requirements for at least the next 12 months. It also expected continued investment in products and cloud operations and noted potential disruption from strategic and go-to-market changes.
Risks highlighted include order timing and product acceptance, competition and pricing pressure, economic uncertainty, international operations and foreign-exchange movements, execution and integration of acquisitions, and the ability to realize benefits from divestitures and strategic changes. The company also cited ARS liquidity and possible future impairment if issuer or insurer credit quality deteriorates. Ordinary-course legal proceedings were disclosed; management did not expect them to have a material effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether DataDirect and Corticon sales coverage changes improve license pipeline conversion, particularly in North America and EMEA.
- Whether maintenance renewals stabilize and the PaaS investment produces adoption and revenue sufficient to offset continued license weakness.
- The quality and comparability of backlog trends, given divestitures and the filing’s cautions about backlog as a performance indicator.
- Liquidity and valuation developments for the $25.1 million of illiquid ARS, including any change in impairment assumptions or credit conditions.
- The effects of the $2.1 million tax benefit, Rollbase earn-out charges, ongoing repurchases and investment spending on future earnings and cash generation.