Progress Software Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended August 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Progress sells software for developing, deploying and managing business applications. Its new strategic plan focuses investment on the Core product lines—OpenEdge, DataDirect Connect and Decision Analytics—and aims to combine them into a cloud-oriented application platform. The company is divesting ten non-Core product lines and restructuring its operations. Segment results were recast as Core and non-Core.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $107.2 | $124.5 | $337.2 | $386.4 |
| Gross profit | $86.9 | $99.7 | $270.4 | $314.8 |
| Operating income | $14.0 | $14.3 | $24.1 | $70.6 |
| Continuing-operations income | $8.0 | $9.6 | $14.9 | $48.5 |
| Net income | $5.8 | $9.1 | $11.4 | $47.5 |
| Diluted EPS | $0.09 | $0.13 | $0.18 | $0.69 |
| Gross margin | 81% | 80% | 80% | 81% |
| Operating margin | 13% | 11% | 7% | 18% |
- Revenue declined 14% in Q3 and 13% for the nine-month period as reported; constant-currency declines were 9% and 10%, respectively. License revenue fell 20% and 25%; maintenance and services fell 11% and 6%.
- For the first nine months, operating cash flow was $75.7, down from $118.1. Investing cash flow was $38.8, compared with an outflow of $63.2; financing cash flow was $22.6, compared with an outflow of $92.1. Cash and cash equivalents increased to $294.4 from $161.1 at November 30, 2011.
- Cash, cash equivalents and short-term investments totaled $352.2 at August 31, 2012. The company also held $31.3 of auction-rate securities classified as long-term and subject to limited liquidity.
- No borrowings were outstanding on the $150.0 revolving credit facility; $0.2 of letters of credit were outstanding. The company reported covenant compliance with significant margin. Current liabilities were $217.5 and shareholders’ equity was $679.4.
- Accounts receivable was $75.8; deferred revenue totaled $135.0. DSO was 63 days, within the company’s stated 60–80-day target range.
Material changes versus the prior comparable period
- Nine-month operating income fell 66% and net income fell 76%. Management attributed weaker results to lower revenue, strategic-plan disruption, restructuring costs and the prior-year comparison, which included savings from earlier restructuring.
- Q3 Core revenue decreased 12% as reported (6% constant currency); non-Core revenue decreased 19% (16% constant currency). Nine-month declines were 9% and 22%, respectively, as reported.
- Q3 sales and marketing expense declined 24%, while product development expense rose 16%. Nine-month restructuring expense was $11.2, versus $4.6 a year earlier.
- The company reported a $3.4 net loss from discontinued operations for the first nine months, primarily relating to FuseSource; the prior-year loss was $1.0.
Outlook, management commentary, risks and unusual items
- Management said the plan and macroeconomic uncertainty—particularly in Europe—delayed purchasing decisions and increased deal slippage. It expected disruption to continue in Q4 2012, with weaker EMEA currencies also a potential headwind.
- The plan targets a $55.0 reduction in budgeted 2012 expense run rate, net $40.0 after additional investments, and a workforce reduction of approximately 10%–15%. The company reported an 11% reduction and $13.7 of restructuring expense through August; expected total 2012 restructuring costs were approximately $19.5. Further costs were expected through fiscal 2013.
- Management expected existing cash, operating cash flows, credit availability and potential divestiture proceeds to fund foreseeable needs for at least 12 months, including planned repurchases. A $350.0 share-repurchase authorization runs through fiscal 2013; no shares were repurchased in the first nine months of 2012.
- FuseSource was sold to Red Hat in September 2012 for $21.3, after quarter-end. In October, Progress agreed to sell Shadow to Rocket Software, subject to customary closing conditions. The company gave no assurance that the remaining planned divestitures would be completed or on what timetable.
- CEO Jay H. Bhatt announced plans to step down on December 7, 2012; management expected the transition to disrupt the business and strategic-plan execution. A successor search had begun.
- Unrealized losses on auction-rate securities were $5.7; management considered the impairment temporary, but deterioration in issuers’ or insurers’ credit could require an earnings charge. An interim goodwill test following reporting-unit changes found no impairment.
- Prior-period tax-related errors were described as immaterial to periods previously presented; comparative figures were corrected in this filing, with further historical corrections planned in future filings. The company also recorded a $0.9 litigation settlement in Q1 2012 and disclosed ongoing tax examinations.
Most important facts for investors to verify
- Whether Core revenue, license sales and operating margins stabilize as the strategic plan proceeds, and how divestitures affect reported results and allocated costs.
- Actual delivery of the targeted cost savings, total restructuring charges and cash payments, and progress against the $350.0 repurchase authorization.
- Closing and proceeds for planned divestitures, including Shadow, and the effect on deferred revenue and continuing operations.
- Liquidity and valuation developments for auction-rate securities, goodwill impairment assumptions, and any material outcomes from tax examinations.
- CEO succession, customer and employee retention, and any further effects of the transition or macroeconomic and foreign-exchange conditions.
- The scope and presentation of the remaining prior-period tax corrections in future filings.