Progress Software Corporation — Q1 FY2011 10-Q
Reporting period: Three months ended February 28, 2011; comparisons are to the three months ended February 28, 2010 unless stated otherwise. Progress provides enterprise software, including application development platforms, business solutions, and data solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change / context |
|---|---|---|---|
| Revenue | $134.2 | $127.5 | Up 5% (6% at constant currency) |
| Software license revenue | $51.3 | $47.1 | Up 9%; indirect-channel revenue grew 18% |
| Maintenance and services revenue | $82.9 | $80.4 | Up 3%; professional services grew 18% |
| Gross profit / margin | $110.1 / 82% | $103.5 / 81% | Margin improved 1 percentage point |
| Operating income (loss) / margin | $28.3 / 21% | $(4.4) / (3%) | Improved substantially, notably as prior-year restructuring expense declined |
| Net income (loss) | $20.5 | $(1.0) | Diluted EPS: $0.29 vs. $(0.02) |
| Cash from operations | $50.2 | $34.2 | Increase attributed primarily to higher profitability |
| Investing cash flow | $(25.9) | $(33.1) | Included $26.3 of investment purchases; no acquisition spending this quarter |
| Financing cash flow | $(3.5) | $11.8 | Included $25.0 of share repurchases and $18.9 of stock issuance proceeds |
Liquidity, debt, and balance sheet
- Cash and short-term investments totaled $370.8 at February 28, 2011, up $48.4 from November 30, 2010. The company said these funds and expected operating cash flows should cover foreseeable needs for at least 12 months.
- Total debt was approximately $0.6, including $0.4 current and $0.2 long-term. Total current assets were $517.2 and current liabilities $239.0.
- Accounts receivable was $104.4; DSO was 70 days, within the company’s stated 60–80-day target range.
- Deferred revenue was $162.9, comprising $158.1 short-term and $4.8 long-term. Reported revenue backlog was approximately $180: $163 included in deferred revenue and $17 not on the balance sheet.
Material changes and management commentary
- Revenue growth was led by Enterprise Business Solutions, up 34% to $37.2. Application Development Platforms declined 3% to $79.1; Enterprise Data Solutions declined 2% to $18.0.
- North American revenue increased 12% to $64.5; revenue outside North America was approximately flat at $69.8. Currency movements reduced reported growth.
- Operating expenses fell 24% to $81.8. The largest year-over-year factor was restructuring expense declining to $2.1 from $25.8; product development and general and administrative costs also decreased following prior-year restructuring.
- Enterprise Business Solutions’ operating loss narrowed to $6.8 from $11.0; Enterprise Data Solutions moved from a $4.8 operating loss to $1.5 operating income. Application Development Platforms operating income decreased 4% to $46.7.
- The effective tax rate was 27.4%. The company recorded a $2.0 tax benefit related to retroactive reinstatement of the U.S. research and development credit.
- Management expects $3–$6 of additional pretax restructuring charges and non-recurring transition expenses during the remaining nine months of FY2011. The plan shifts and expands development and administrative operations in India, while reducing headcount in other geographies.
- No specific revenue or earnings guidance was provided. Management cited macroeconomic uncertainty, including events in Japan, foreign-exchange effects, customer spending and payment delays, competition, product acceptance, and execution of acquisitions as risks.
Risks, contingencies, and unusual items
- The company held $39.8 of illiquid auction-rate securities, classified as long-term, with a $6.2 unrealized temporary impairment recorded in accumulated other comprehensive loss. Management said it could hold the securities, but deterioration in issuer or insurer credit could require an impairment charge to earnings.
- JuxtaComm patent litigation alleges infringement by certain Sonic, Fuse, DataDirect Connect, and DataServices products and seeks unspecified damages and injunctive relief. Progress denied the claims, said it would defend the case, and could not estimate a loss range; trial was scheduled for January 3, 2012.
- Progress repurchased approximately 847,000 shares for $25.0 during the quarter. About $75.0 remained under the board’s $100.0 authorization through September 30, 2011.
- Foreign-exchange movements affected reported results; the quarter included a $0.6 foreign-currency loss in other income/expense. The filing also describes economic hedging contracts and related mark-to-market changes.
- The annual goodwill impairment test found no impairment as of December 15, 2010. The filing states that interim operating results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Enterprise Business Solutions’ growth and narrowing operating loss continue, and whether the other segments stabilize.
- Progress and total costs of the India expansion and restructuring, including the expected $3–$6 of remaining FY2011 charges and transition expenses.
- Liquidity and valuation developments for the $39.8 of auction-rate securities, including any change in impairment assessment.
- Developments in the JuxtaComm litigation, for which the company reported no estimable loss range.
- Revenue backlog composition and conversion: the $17 not recorded as deferred revenue is subject to less robust accounting controls, and the company cautions that backlog may not reliably indicate future performance.
- Effects of currency changes, customer demand, and any acquisitions on future results and cash requirements.