Business Context and Reporting Period
Company: Progress Software Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended August 31, 2008
Business Overview: Progress Software develops, markets, and distributes software for application development, deployment, integration, and management. The company operates globally with significant revenue derived from international markets (59% of total revenue in the nine months ended August 31, 2008).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2007 |
|---|---|---|---|
| Total Revenue | $126,620 | $376,129 | $356,675 |
| Gross Profit | $103,885 | $308,088 | $293,486 |
| Gross Margin | 82% | 82% | 82% |
| Operating Income | $18,107 | $55,859 | $41,445 |
| Net Income | $12,537 | $39,844 | $30,176 |
| Diluted EPS | $0.30 | $0.92 | $0.69 |
| Cash & Equivalents | $212,269 | $212,269 | $50,486 |
| Short-term Investments | $19,194 | $19,194 | $134,496 (Sales/Maturities) |
| Long-term Debt | $1,431 | $1,431 | $1,657 |
| Operating Cash Flow (9mo) | N/A | $60,437 | $71,836 |
Note: Long-term debt includes current portion ($324k) and non-current portion ($1,107k).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4% in the quarter and 5% in the nine-month period compared to the prior year. Growth was driven by Enterprise Infrastructure (+12% Q/Q, +16% 9mo/9mo) and DataDirect (+18% Q/Q, +9% 9mo/9mo) product lines, partially offset by a 1% decline in the OpenEdge product line for the quarter.
- Profitability: Net income decreased 4% in the quarter ($12.5M vs $13.0M) but increased 32% in the nine-month period ($39.8M vs $30.2M). Operating income increased 35% year-over-year for the nine-month period.
- Expense Trends: Cost of software licenses increased 53% in the quarter due to higher royalty expenses. General and administrative expenses decreased 8% for the nine-month period, largely due to lower stock-based compensation and legal fees related to past option-granting investigations.
- Cash Position: Cash and equivalents increased significantly to $212.3M from $53.9M at the end of the prior fiscal year, driven by operating cash flows and the sale of investments, offset by $108.3M in stock repurchases.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions:
- Completed: Acquired Xcalia ($5.7M) and Mindreef ($6.0M) in fiscal 2008.
- Subsequent Event: Completed acquisition of IONA Technologies PLC on September 12, 2008, for approximately $123 million. Management anticipates a restructuring charge of approximately $12 million in the fourth quarter related to this integration.
- Auction Rate Securities (ARS): Approximately $51.5 million of ARS investments were reclassified as non-current due to failed auctions. A temporary impairment charge of $2.9 million was recorded in accumulated other comprehensive income. Management does not anticipate this will adversely affect liquidity but notes the funds are inaccessible until auctions succeed or securities are sold.
- Legal Proceedings:
- SEC Investigation: Ongoing formal investigation into option-granting practices (1995–present). No prediction of consequences can be made.
- Shareholder Derivative Lawsuits: A settlement agreement was reached on September 5, 2008, to resolve pending lawsuits regarding stock option backdating. The settlement involves corporate governance changes, reimbursement of approximately $7.0 million by individual defendants, and up to $1.9 million in legal fees.
- Stock Repurchases: The Board authorized a new $10 million share repurchase program in September 2008. The company repurchased 3.75 million shares for $108.3 million in the first nine months of fiscal 2008.
- Foreign Exchange: A weakening U.S. dollar positively impacted reported revenue. Without currency fluctuations, revenue would have been flat or slightly down for the nine-month period.
Investor Verification Checklist
- ARS Liquidity Risk: Verify the status of the $51.5 million in illiquid Auction Rate Securities and potential for further impairment charges if credit ratings deteriorate.
- IONA Integration Costs: Monitor the fourth quarter for the anticipated $12 million restructuring charge and integration expenses related to the IONA acquisition.
- Legal Settlement Finalization: Confirm the judicial approval of the shareholder derivative lawsuit settlement and any potential additional liabilities from the ongoing SEC investigation.
- Revenue Mix: Assess the sustainability of growth in Enterprise Infrastructure and DataDirect segments versus the decline in the core OpenEdge product line.
- Effective Tax Rate: Review the increase in the effective tax rate to 38% (from 35% prior year) due to the expiration of R&D credits and changes in foreign income estimates.