Progress Software Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended August 31, 2014. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context
Progress sells software for application development, deployment, data integration and analysis, through perpetual, term and subscription models. It is transitioning toward cloud and platform-as-a-service offerings, including Progress Pacific, and operates as one reportable segment in this filing. The company said it expected to begin reporting three business units as segments in Q4 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $79.3 | $77.6 | $234.6 | $243.0 |
| Software license revenue | $26.4 | $25.7 | $76.6 | $84.9 |
| Maintenance and services revenue | $52.9 | $51.9 | $158.0 | $158.1 |
| Gross profit / margin | $71.4 / 90% | $69.1 / 89% | $211.5 / 90% | $216.1 / 89% |
| Operating income / margin | $19.4 / 24% | $9.7 / 12% | $53.7 / 23% | $39.8 / 16% |
| Continuing-operations income | $11.1 | $7.2 | $35.0 | $25.2 |
| Diluted EPS from continuing operations | $0.22 | $0.13 | $0.68 | $0.45 |
| Net income | $11.1 | $24.8 | $35.0 | $59.9 |
- Revenue and earnings: Q3 revenue rose 2% reported, but was flat at constant currency. Nine-month revenue fell 3% reported and 4% at constant currency. Q3 license revenue increased 3%; nine-month license revenue declined 10%, principally due to weaker DataDirect sales and an earlier-year pipeline shortfall. Maintenance revenue was broadly flat year to date.
- Profitability: Operating income improved as operating expenses fell, including lower sales and marketing, general and administrative, and restructuring costs. Product development expense rose as the company invested in Pacific and its cloud strategy. Net income comparisons are affected by discontinued operations: 2013 included gains from divestitures of $17.6 in Q3 and $34.7 for the nine months; 2014 had none.
- Cash flow: Nine-month operating cash flow was $68.5, versus cash used of $13.3 in 2013. Management attributed much of the improvement to prior-year tax payments related to divestitures and higher restructuring payments. Investing cash flow was $20.0, compared with $125.2 in 2013, which included $111.1 of divestiture proceeds. Financing cash use was $44.8, including $52.6 of share repurchases.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $261.3 at August 31, 2014, up from $231.4 at November 30, 2013. Current assets were $352.7 and current liabilities $148.2. No revolving borrowings were outstanding under the $150.0 credit facility; $0.7 of letters of credit were outstanding. The facility matures in 2016, and the company said it was in covenant compliance by a significant margin. Deferred revenue was $95.3; total reported revenue backlog, including multi-year licensing arrangements, was $103.8, down from $111.3 a year earlier.
- Capital allocation: The company repurchased 2.3 million shares for $52.6 during the first nine months under its $100.0 program, leaving $47.4 available at quarter end. It reported 50.1 million shares outstanding on the balance sheet date.
Material changes, outlook and risks
- Management described the company as early in its transition to cloud-based PaaS and said continued product and cloud-operations investment is needed. It cautioned that sustainable revenue increases may not be foreseeable in the near term; the filing provides no specific financial guidance.
- Effective September 1, 2014, Progress reorganized into OpenEdge, Application Development and Deployment, and Data Connectivity and Integration units, with dedicated functions. The restructuring included $1.5 of employee-related costs; no material additional costs were expected, and no facilities were to close.
- In May 2014, Progress acquired Modulus, a PaaS provider, for $15.0 total stated consideration, including $12.5 cash and contingent consideration. The acquisition added $6.4 of goodwill and $7.3 of purchased technology intangibles; acquired results were described as not significant to the statements.
- After quarter end, on October 1, Progress acquired BravePoint for $12.0 cash. Initial purchase accounting was incomplete at filing issuance.
- Progress sold its remaining auction-rate securities for $26.2 during Q3 and recorded a $2.6 realized loss, contributing to reported other expense. Foreign currency exposure remains meaningful: international operations generated more than half of revenue, and currency movements affected reported results.
- Management believed cash, operating cash generation and available credit would cover foreseeable requirements for at least 12 months. It identified strategy execution, competition and pricing, cloud-market acceptance, acquisitions, international operations and foreign-exchange changes among risks. Ordinary-course legal claims were not expected by management to materially affect financial position, results or cash flows. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether license-revenue trends, particularly DataDirect performance and the sales pipeline, improve after the nine-month decline.
- Progress in monetizing Pacific, cloud subscriptions and the Modulus acquisition, alongside ongoing product-development investment.
- Whether margin gains are sustainable and how restructuring, stock-based compensation and acquisition-related costs affect results.
- Cash generation and liquidity after share repurchases, acquisitions and any further capital returns; also monitor the credit-facility covenants.
- The effect of the new business-unit structure, BravePoint integration, currency movements and adoption of the new revenue-recognition standard, whose impact was still under evaluation.