PROGRESS SOFTWARE CORP annual report, FY2013

Business context and reporting period

Progress Software Corporation’s Form 10-K covers the fiscal year ended November 30, 2013; it is an annual filing, not a standalone fourth-quarter report. The company sells application development, data integration and business-rules software, with maintenance and services. In 2013 it launched Progress Pacific, a platform-as-a-service offering, and acquired Rollbase to support its cloud strategy. Following divestitures of non-core product lines and Apama, the company reported one operating segment. Prior-period results were recast for discontinued operations.

Financial performance and position

Revenue rose 5% reported (6% constant currency), primarily on stronger OpenEdge licenses; license revenue increased 15%. Maintenance and services were essentially flat. Gross margin improved by one percentage point, but operating income fell 6% as product development, restructuring and acquisition-related expenses increased. Net income included $35.1 million from discontinued operations, including gains on product-line sales; it should not be read as a measure of recurring operating earnings.

For the fourth quarter, revenue was $91.0 million versus $86.6 million a year earlier; operating income was $23.9 million versus $18.7 million; continuing-operations income was $14.6 million versus $12.5 million; and net income was $15.0 million versus $36.0 million. The prior-year quarterly net result included significant divestiture gains.

Operating cash flow dropped sharply, principally because of $69.9 million in net income-tax payments during FY2013, including taxes related to divestitures, and higher bonus payments. Investing cash flow was $118.8 million, including $111.1 million of divestiture proceeds; financing cash flow was negative $225.4 million, reflecting $276.5 million of share repurchases. The company had no revolving-credit borrowings and $0.8 million of letters of credit outstanding. Its $150 million revolving facility matures in 2016, with a potential $75 million increase subject to lender commitments. Shareholders’ equity was $513.7 million.

Material changes, outlook and risks

• The company repurchased 16.1 million shares for $357.9 million under its prior authorization through November 30, 2013. The board authorized a further $100 million program in January 2014.
• Management said it expects continued investment in products and cloud operations and cautioned that sustainable revenue increases may not be foreseeable in the near term. The filing provides no specific forward financial guidance.
• Management believed cash, operating cash flows and available credit would fund foreseeable needs for at least 12 months. However, cash and short-term investments declined $123.8 million year over year.
• About $24.8 million of auction-rate securities remained illiquid and classified as long-term investments; the company recorded a $4.0 million temporary impairment in accumulated other comprehensive loss. A separate $0.4 million realized loss followed acceptance of an 80% settlement on another security.
• Key risks include execution of the cloud/PaaS strategy, competition from larger providers, dependence on OpenEdge and third-party sales channels, foreign-currency exposure, customer and macroeconomic variability, and the possibility that subscription growth could pressure near-term license revenue and cash flows. A hypothetical 10% adverse currency move was estimated to reduce reported revenue by about 5% and net income by about 7%, before hedge offsets.
• Restructuring expenses were $12.0 million in FY2013. Management did not expect additional material costs for the 2013 or 2012 restructuring programs. Ordinary-course legal matters were not expected by management to have a material financial effect.
• The company reported that a material weakness in revenue-recognition controls identified in 2012 had been remediated; management and the independent auditor concluded internal control over financial reporting was effective as of November 30, 2013.

Important facts for investors to verify

• Whether growth in license sales and Progress Pacific subscriptions can offset flat maintenance revenue and the divestiture of legacy product lines.
• Recurring earnings and cash generation excluding disposal gains, unusually high tax payments, restructuring charges and share repurchases.
• The liquidity, valuation assumptions and potential impairment exposure of the remaining auction-rate securities.
• Progress against cloud investment plans, customer adoption, channel-partner retention and the effect of subscription pricing on revenue recognition and cash flow.
• Compliance with credit-facility covenants, planned capital allocation and the status of the January 2014 repurchase authorization.