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, 1997
Business Overview: The Company develops, markets, and supports the PROGRESS Application Development Environment, PROGRESS RDBMS, and PROGRESS Dataserver Architecture. It also markets WebSpeed for Internet transaction processing and tools for Visual Basic/Visual J++ developers through its Crescent Division.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended May 31, 1997 | 6 Months Ended May 31, 1997 | 3 Months Ended May 31, 1996 | 6 Months Ended May 31, 1996 |
|---|---|---|---|---|
| Total Revenue | $44,831 | $90,175 | $41,662 | $90,044 |
| Net Income | $2,042 | $4,020 | $155 | $4,574 |
| Income Per Share (Diluted) | $0.16 | $0.31 | $0.01 | $0.34 |
| Operating Income | $1,383 | $3,579 | $(789) | $5,066 |
| Cash and Equivalents (End of Period) | $25,086 | Balance Sheet Data | ||
| Short-term Investments | $70,873 | Balance Sheet Data | ||
| Total Current Assets | $139,927 | Balance Sheet Data | ||
| Total Current Liabilities | $62,206 | Balance Sheet Data | ||
| Long-term Debt | $0 | Balance Sheet Data | ||
| Net Cash from Operating Activities | N/A (6-month only) | $16,407 (6-month 1997) vs $13,862 (6-month 1996) |
Margins (3 Months Ended May 31, 1997):
- Operating Margin: 3.1%
- Net Profit Margin: 4.6%
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8% in the second quarter compared to the prior year, driven by an 11% increase in software license revenue. However, for the six-month period, total revenue remained flat (0% growth) compared to the prior year.
- Profitability: Net income for the quarter surged 1,217% year-over-year, primarily due to a $471,000 foreign currency gain in 1997 versus a loss in 1996, and improved operating margins. Operating income turned positive ($1.38M) from a loss ($0.79M) in the prior year quarter.
- Expense Management: Sales and marketing expenses decreased 3% year-over-year due to staff reductions. Conversely, product development expenses increased 16% due to higher personnel costs and new product efforts (WebSpeed and PROGRESS Version 8).
- Liquidity: Cash and short-term investments totaled $95.96 million at May 31, 1997, a decrease of $1.36 million from the prior fiscal year-end, largely due to stock repurchases and capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition: On June 27, 1997, the Company agreed to acquire Apptivity Corporation for approximately $3.8 million in cash, $1 million in assumed liabilities, and 400,000 shares of stock. A substantial portion of the purchase price will be allocated to in-process software development costs, resulting in a non-recurring charge in the third quarter.
- Stock Repurchases: The Company repurchased 839,200 shares for $14.4 million in the first six months of fiscal 1997. Approximately 2.1 million shares remain authorized for repurchase.
- Legal Proceedings:
- Newstar Technologies: A lawsuit seeking $200 million in damages regarding a purported contract dispute. A tentative settlement was reached in July 1997 to make Newstar an Application Partner; finalization is expected soon.
- Naf Naf S.A.: A proceeding in France regarding alleged product deficiencies. No specific damage claim has been filed; management does not expect a material adverse effect.
- Risks: Significant revenue concentration in international markets (59% of 6-month revenue) exposes the Company to foreign currency fluctuations. The Company relies heavily on the PROGRESS product line and faces intense competition. Future results depend on the timely release of product enhancements and market acceptance of WebSpeed.
- Accounting Changes: The Company plans to adopt SFAS 128 (Earnings Per Share) in the first quarter of fiscal 1998, which will require restating historical EPS data.
Investor Verification Checklist
- Verify the finalization of the Newstar Technologies settlement and any associated costs or terms.
- Monitor the impact of the Apptivity Corporation acquisition on Q3 1997 earnings due to the expected non-recurring charge for in-process R&D.
- Assess the sustainability of the 8% quarterly revenue growth given the flat six-month performance and competitive pressures.
- Review the effectiveness of foreign currency hedging strategies given the 59% exposure to international revenue.
- Confirm the timeline and market reception of WebSpeed Version 2.0 and PROGRESS Version 8.2 shipments.