Progress Software Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended August 31, 2010. Amounts below are in millions of dollars, except per-share data and percentages. The company provides enterprise software, including application development, business solutions and data solutions.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $128.7 | $119.4 | $383.9 | $357.3 |
| Software license revenue | $44.7 | $39.2 | $136.1 | $123.5 |
| Maintenance and services | $84.0 | $80.3 | $247.8 | $233.8 |
| Gross profit | $104.0 | $96.9 | $310.0 | $287.8 |
| Income from operations | $16.5 | $9.1 | $34.8 | $25.4 |
| Net income | $9.2 | $5.5 | $27.3 | $16.1 |
| Diluted EPS | $0.21 | $0.13 | $0.62 | $0.39 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $70.5 | $35.7 |
- Revenue increased 8% in Q3 and 7% year to date. Gross margin was approximately 81% in both comparable periods. Operating margin was approximately 13% in Q3 versus 8%, and 9% year to date versus 7%.
- Q3 revenue by segment: Application Development Platforms $77.2 (down 3%); Enterprise Business Solutions $35.1 (up 77%, including $6.4 from Savvion; organic growth 45%); Enterprise Data Solutions $16.5 (down 18%).
- Year-to-date net income included a $2.5 nonrecurring tax benefit. The company reported a 31.4% effective tax rate versus 38.0% in the prior-year period.
Liquidity, debt and cash flows
- At August 31, cash and equivalents were $255.0, short-term investments $14.2, and combined cash and short-term investments $269.2, up $45.1 from fiscal year-end 2009. Current assets were $394.4 and current liabilities $213.5.
- Total debt was approximately $0.8. The company stated that cash balances and operating cash flows should cover foreseeable requirements for at least 12 months.
- Nine-month operating cash flow rose to $70.5 from $35.7, primarily reflecting improved collections and lower payments of liabilities than in the prior-year period. Investing cash outflow was $20.7, including $49.2 for the Savvion acquisition; financing cash inflow was $41.0, including $67.8 from stock issuance and $29.3 of share repurchases.
- Accounts receivable decreased $13.9 from fiscal year-end; DSO was 59 days. The company held $39.7 of illiquid auction-rate securities (ARS) classified as long-term, with a $6.5 temporary unrealized impairment. Management said the position was manageable given available liquidity, while noting further credit deterioration could require an impairment charge.
Changes, outlook and risks
- Results benefited from revenue growth and restructuring-related cost savings. Q3 restructuring expense was $11.5; total restructuring expense for the first nine months was $37.5. The company had reduced its workforce by approximately 13% in Q1 and 7% in Q3.
- Management expected another $10–$20 of restructuring charges and nonrecurring transition expenses over the following 15 months, including costs tied to shifting development and administrative operations to India and consolidating facilities. No specific revenue or earnings guidance was provided.
- Savvion was acquired for approximately $49.2 in January 2010; its results are included from the acquisition date. The acquisition contributed to Enterprise Business Solutions growth and increased goodwill.
- Management expected a stronger U.S. dollar to weigh on reported results in Q4. Other risks cited include uncertain economic conditions, competition and pricing pressure, product acceptance, acquisition integration, restructuring execution, and foreign exchange movements.
- JuxtaComm patent litigation seeks unspecified damages and injunctive relief. Progress denied the claims and said it would defend the case; an adverse outcome could materially affect financial position or results.
- The board authorized up to $100 of additional share repurchases for October 2010–September 2011. Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Enterprise Business Solutions growth continues after separating Savvion’s contribution, and whether weakness in Enterprise Data Solutions persists.
- Actual restructuring and transition costs versus the expected $10–$20, and whether the planned cost savings and India expansion improve profitability.
- Collections, deferred revenue and operating cash flow trends, including the sustainability of the working-capital improvement.
- ARS recovery prospects and any change in valuation, liquidity classification or impairment assessment.
- Developments in the JuxtaComm litigation and the financial or operational impact of any resolution.
- Foreign-exchange effects and the use of the newly authorized repurchase capacity relative to acquisition and operating needs.