Business Context and Reporting Period
Company: Progress Software Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended May 31, 1999
Business Overview: The Company develops, markets, and supports application development, deployment, and management software. Core products include the Progress product set (ProVision, RDBMS, WebSpeed, Open AppServer, DataServers), Progress Apptivity, and the ISQ product line for network management.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended May 31, 1999 | Six Months Ended May 31, 1999 |
|---|---|---|
| Total Revenue | $70,750 | $137,895 |
| Net Income | $7,840 | $14,937 |
| Diluted EPS | $0.40 | $0.76 |
| Operating Cash Flow (6 mo) | $19,783 | |
| Cash & Equivalents (May 31, 1999) | $40,784 | |
| Short-term Investments (May 31, 1999) | $72,293 | |
| Total Current Liabilities | $100,819 | |
| Long-term Debt | None reported |
Margins (Six Months Ended May 31, 1999):
- Gross Margin (Total): Approximately 15% (Income from operations was 15% of revenue).
- Net Profit Margin: 11%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 24% year-over-year for both the quarter and the six-month period. Software license revenue grew 16% (quarter) and 18% (six months), while maintenance and services revenue grew 31% (quarter) and 30% (six months).
- Profitability: Net income increased 68% for the quarter and 82% for the six-month period compared to the prior year. Income from operations increased 75% (quarter) and 85% (six months).
- International Sales: Revenue outside North America increased 25% (quarter) and 31% (six months), representing 59% and 60% of total revenue, respectively. On a constant currency basis, growth was slightly higher (27% and 25%).
- Expense Trends: Sales and marketing expenses increased 23% (quarter) and 19% (six months) but decreased as a percentage of revenue due to improved productivity. Product development expenses increased 22% (quarter) and 26% (six months) to support new product lines.
- Cash Flow: Operating cash flow decreased to $19.8 million (six months) from $26.1 million in the prior year, primarily due to the timing of payments and a decrease in accounts payable.
Guidance, Outlook, and Risks
- Outlook: Management expects sales and marketing expenses to grow at a slower rate than revenue for the remainder of fiscal 1999 if planned revenue is achieved. Headcount for technical support, consulting, and education is expected to continue increasing.
- Capital Allocation: The Company repurchased 926,000 shares for $22.4 million in the first six months. Approximately 3.8 million shares remain available for repurchase under the current authorization.
- Year 2000 (Y2K): The Company believes current versions of its products are Y2K ready, though two Crescent products required patches. Internal systems are substantially ready. Risks include potential customer delays in purchasing due to their own Y2K remediation efforts and potential litigation regarding Y2K readiness.
- Market Risks: Significant competition, rapid technological changes, and reliance on the Progress product line. International operations expose the Company to foreign currency fluctuations, though hedging strategies are in place.
- Accounting Changes: The Company is evaluating SFAS No. 133 regarding derivative instruments, with adoption expected in fiscal 2001 if the effective date is deferred. No material effect is anticipated.
Investor Verification Checklist
- Verify the sustainability of the 24% revenue growth rate, particularly the contribution from new products like Progress Version 9 and Apptivity.
- Monitor the impact of Y2K remediation efforts on customer purchasing cycles and potential revenue deferrals.
- Assess the effectiveness of cost controls as headcount increases in sales, support, and development.
- Review the Company's exposure to foreign currency fluctuations given that ~60% of revenue is international.
- Confirm the status of the stock repurchase program and its impact on earnings per share.