Business Context and Reporting Period
Company: Progress Software Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended August 31, 2009
Business Overview: Progress Software develops, markets, and distributes software for application development, deployment, integration, and management. The company operates through three reportable segments: OpenEdge, Enterprise Infrastructure, and Data Infrastructure. The reporting period was significantly impacted by the global economic crisis, resulting in delayed customer investments, and unfavorable foreign currency exchange rates (strengthening U.S. dollar).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Aug 31, 2009 |
9 Months Ended Aug 31, 2009 |
9 Months Ended Aug 31, 2008 |
|---|---|---|---|
| Total Revenue | $119,433 | $357,340 | $376,129 |
| Gross Profit | $96,907 | $287,842 | $308,088 |
| Income from Operations | $9,092 | $25,352 | $55,859 |
| Net Income | $5,521 | $16,079 | $39,844 |
| Diluted EPS | $0.13 | $0.39 | $0.92 |
| Cash & Short-term Investments | $186,517 | $186,517 | $118,529 |
| Operating Cash Flow (9mo) | N/A | $35,722 | $60,437 |
| Long-term Debt | $757 | $757 | $1,022 |
Margins (9 Months 2009): Gross Margin was 80.5%; Operating Margin was 7.1%; Net Margin was 4.5%.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 6% for the quarter and 5% for the nine-month period compared to the prior year. Excluding foreign currency impacts, revenue would have been flat for the quarter and up 3% for the nine-month period.
- OpenEdge Segment: Revenue declined 18% (quarter) and 19% (nine months) due to reduced sales.
- Enterprise Infrastructure: Revenue increased 63% (quarter) and 66% (nine months), driven by the IONA acquisition.
- Data Infrastructure: Revenue declined 17% (quarter) and 6% (nine months).
- Profitability Compression: Net income dropped 56% for the quarter and 60% for the nine-month period. Operating income fell 50% (quarter) and 55% (nine months).
- Cost Drivers: Increased amortization of acquired intangibles (up 73% for nine months) due to IONA and Mindreef acquisitions. Restructuring expenses of $5.2 million were incurred in the first nine months of 2009.
- Stock-Based Compensation: Increased significantly to $16.9 million for the nine months (vs. $11.6 million prior year), partly due to a separation agreement with the former CEO.
- Cash Flow: Operating cash flow decreased 41% to $35.7 million, driven by lower profitability and working capital changes. Accounts receivable days sales outstanding (DSO) increased to 63 days.
Outlook, Risks, and Unusual Items
- Guidance & Outlook: Management expects the economic environment to continue impacting the business in the near term. License revenue for the remainder of fiscal 2009 is expected to be below fiscal 2008 levels. No specific numerical guidance was provided in this text.
- Auction Rate Securities (ARS): The company holds $40.5 million in non-current ARS (municipal bonds and student loans) that lack short-term liquidity due to failed auctions. Management recorded a temporary impairment of $7.0 million in accumulated other comprehensive income but believes the impairment is temporary and does not expect it to affect operations.
- Internal Control Material Weakness: Management concluded that disclosure controls and procedures were not effective as of August 31, 2009. A material weakness was identified regarding the accumulation of data for the statement of cash flows. Remediation plans have been enacted, but sufficient evidence of effectiveness has not yet been gathered.
- Foreign Currency Risk: A strengthening U.S. dollar negatively impacted reported results. Further declines in foreign exchange rates (Euro, British Pound, Brazilian Real) are expected to adversely affect reported results.
- Legal Proceedings: The company is subject to various legal proceedings, including state tax examinations and historical stock option grant investigations, though management does not believe these will have a material adverse effect.
Investor Verification Checklist
- ARS Liquidity: Verify the status of the $40.5 million in illiquid Auction Rate Securities and the potential for further impairment charges if credit ratings deteriorate.
- Internal Controls: Monitor the remediation progress of the material weakness in cash flow reporting controls to ensure future financial statement reliability.
- Revenue Mix: Assess the sustainability of the Enterprise Infrastructure growth (IONA) versus the continued decline in the core OpenEdge segment.
- Restructuring Costs: Confirm the remaining cash outflows associated with the $1.1 million restructuring reserve balance.
- Foreign Exchange Sensitivity: Evaluate the impact of currency fluctuations on future earnings, given that ~55% of revenue is generated outside North America.