Progress Software Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended November 30, 2012. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Progress sells business application development, data connectivity and decision analytics software, together with maintenance and services. In April 2012, it announced a strategic shift to focus on its OpenEdge, DataDirect and Decision Analytics product lines and build a unified cloud application platform. It classified its ten non-Core product lines as discontinued operations and pursued their sale.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $335.2 million | $360.7 million |
| Software license revenue | $113.3 million | $126.0 million |
| Maintenance and services revenue | $221.9 million | $234.7 million |
| Gross profit / margin | $291.6 million / 87% | $315.4 million / 87% |
| Operating income / margin | $49.4 million / 15% | $101.2 million / 28% |
| Continuing-operations income | $32.6 million | $66.3 million |
| Net income | $47.4 million | $59.6 million |
| Diluted EPS from continuing operations | $0.51 | $0.98 |
| Operating cash flow | $104.1 million | $126.3 million |
- Revenue declined 7% as reported and 4% at constant currency. License revenue fell 10% as reported; maintenance and services revenue fell 5%. The maintenance renewal rate was approximately 90%.
- Gross margin held at 87%, but operating margin fell 13 percentage points as revenue weakened and sales and marketing, product development and restructuring costs rose.
- Net income included $14.8 million from discontinued operations, including after-tax gains on the FuseSource and Shadow sales, partly offset by an $8.6 million impairment of assets held for sale. Continuing-operations income is therefore a useful measure of the ongoing business.
- Cash, cash equivalents and short-term investments totaled $355.2 million, up from $261.4 million. Cash and equivalents were $301.8 million. Operating cash flow was $104.1 million; investing cash flow was $94.1 million and financing cash flow was negative $55.0 million.
- No revolving-credit borrowings were outstanding; $0.3 million of letters of credit were outstanding. The unsecured facility provides up to $150 million, with a conditional additional $75 million. Shareholders’ equity was $638.4 million. The filing reports no material conventional funded debt at year-end.
- Separately, $26.3 million of auction-rate securities was classified as long-term and lacked short-term liquidity; the filing recorded a $4.4 million temporary impairment in other comprehensive income. Management said available liquidity, operating cash flow and credit availability were adequate for foreseeable needs.
Material changes versus prior periods
- Revenue declined from FY2011 growth of 3% to a 7% contraction in FY2012. EMEA revenue fell 14% as reported; North America was approximately flat. Foreign exchange reduced reported revenue growth.
- Operating income fell 51%, from $101.2 million to $49.4 million. Core segment operating income declined to $111.3 million from $161.9 million; the reported consolidated result also reflects non-Core indirect costs and unallocated expenses.
- Operating cash flow fell from $126.3 million to $104.1 million, primarily due to lower profitability. Cash and investments nevertheless increased, supported by operations and divestiture proceeds, partly offset by share repurchases.
- Progress sold FuseSource and Shadow in FY2012 for net proceeds of $46.6 million. Subsequent sales included $60.5 million of consideration for five product lines, and the planned sale of Artix, Orbacus and Orbix was expected to yield $15 million. Total expected consideration for all divestitures was approximately $130 million, before applicable transaction costs.
- FY2012 restructuring expense was $19.0 million in total, including $10.9 million in discontinued operations; $16.4 million related to severance and employee benefits and the workforce reduction was approximately 11%. Additional restructuring costs were expected in the first half of FY2013.
Outlook, risks and unusual items
- Management expected macroeconomic uncertainty, particularly in EMEA, to continue into FY2013. It attributed delayed customer purchasing and deal slippage to both the strategic-plan disruption and weaker economic conditions. The filing provides no quantified FY2013 revenue or earnings guidance.
- Management expected Core investment and transition costs to pressure margins until investments took effect and remaining non-Core costs were absorbed by the Core business or reduced. It believed cash, operating cash flow, the credit facility and divestiture proceeds would cover foreseeable needs for at least twelve months.
- Key risks include execution of the cloud-platform strategy and divestitures, dependence on OpenEdge and indirect sales partners, competition, international and currency exposure, customer spending delays, and possible goodwill impairment as reporting structures evolve.
- Important control weakness: Management and Deloitte concluded internal control over financial reporting was ineffective because sales terms were not consistently documented and revenue was recognized improperly on certain transactions, which were immaterial to the financial statements. Management reported remediation steps, including centralized deal review and planned employee certifications and training. Deloitte gave an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- The filing notes immaterial corrections to prior-period tax and related balances and revised prior-period presentation for discontinued operations and segment changes. The ordinary-course legal matters were not expected by management to materially affect results; a patent dispute was settled for $0.9 million in FY2012.
Most important facts for investors to verify
- Whether the material weakness in revenue controls was fully remediated and tested, and whether any further revenue adjustments were required.
- Actual proceeds, transaction costs, closing conditions and continuing obligations for all non-Core divestitures, and the resulting ongoing revenue and cost base.
- Core revenue trends, maintenance renewals, license demand and EMEA performance, separating operating changes from foreign-exchange effects.
- Whether Core investment spending and stranded overhead after divestitures improved or further pressured operating margins and cash flow.
- Liquidity available after share repurchases, including the restricted liquidity of auction-rate securities and compliance with credit-facility covenants.
- Effects of the strategic reorganization on goodwill reporting units, impairment headroom and the comparability of segment results.