Business context and reporting period
Progress Software Corporation’s unaudited Form 10-Q covers the second quarter and six months ended May 31, 2021. Progress sells software to develop, deploy and manage business applications, with revenue from licenses, maintenance and services. It began reporting as one operating segment in Q2 2021, rather than three previously. The Chef acquisition, completed in October 2020, is a significant factor in year-over-year comparisons.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $122.5 | $100.4 | $243.8 | $210.1 |
| Gross profit / margin | $103.2 / 84% | $86.1 / 86% | $206.5 / 85% | $180.9 / 86% |
| Operating income / margin | $22.3 / 18% | $25.3 / 25% | $49.7 / 20% | $56.0 / 27% |
| Net income | $13.6 | $17.0 | $32.5 | $38.1 |
| Diluted EPS | $0.30 | $0.37 | $0.73 | $0.84 |
- Revenue grew 22% in Q2 and 16% in the six-month period as reported (19% and 14% in constant currency). License revenue rose 53% in Q2; maintenance and services rose 14%.
- Net income declined 20% in Q2 and 15% for the six months. Operating income fell 12% and 11%, respectively, as revenue growth was outweighed by higher operating costs, acquired-intangible amortization and interest expense.
- Six-month operating cash flow was $99.4, versus $71.0 a year earlier. Management attributed the improvement primarily to strong receivables collections; DSO was 44 days, compared with 47 days in Q2 2020.
- Cash, cash equivalents and short-term investments totaled $362.7 at May 31, 2021, versus $106.0 at November 30, 2020. Current assets were $471.0 and current liabilities $266.1.
- Debt included $278.4 of term-loan principal and $360.0 principal amount of 1% convertible notes due 2026. The notes’ carrying value was $288.0; the term loan’s carrying value was $276.8 including unamortized costs. The $100 million revolver had no borrowings outstanding; $2.5 of letters of credit were outstanding. Term-loan interest was 1.75%, and the credit facility matures in April 2024.
- Six-month investing cash flow was $2.7; financing cash flow was $153.4, including note proceeds, debt repayments, $35.0 of share repurchases and $15.6 of dividends paid. The company declared a quarterly dividend of $0.175 per share.
Material changes and management commentary
- Chef contributed $12.4 of Q2 revenue and $24.3 for the six months. Management also cited growth in OpenEdge and Ipswitch, partly offset by lower DataDirect license revenue.
- Annual recurring revenue was $437 at May 31, up 22.9% year over year, primarily driven by Chef. Management reported net dollar retention rates generally between 97% and 100%.
- Acquisition-related costs, restructuring charges and acquired-intangible amortization affected results. Intangible amortization was $22.0 for the six months, compared with $11.6 in the prior-year period. Management expected additional Chef-related restructuring costs in fiscal 2021 but did not expect them to be material.
- Management said demand strengthened across almost all product lines in Q2 and expected demand to remain strong for the rest of fiscal 2021. No specific numerical revenue or earnings guidance is provided in the filing.
- Management expects existing cash, operating cash generation and credit availability to fund foreseeable needs, including operations, debt service, dividends and repurchases. The filing notes that acquisitions could reduce cash or require additional borrowing.
Risks, contingencies and unusual items
- COVID-19’s future effects remain uncertain; potential impacts include slower sales, renewal reductions or delays, customer payment deferrals and disruption to service providers.
- Other cited risks include competition and product development, dependence on OpenEdge and channel partners, cybersecurity and software defects, international and foreign-exchange exposure, acquisition integration, and customer collections.
- The new convertible notes carry potential dilution and cash-settlement, repurchase, covenant and counterparty risks. Capped calls, purchased for approximately $43.1, are intended to reduce potential dilution or offset certain conversion payments, subject to a cap.
- Progress plans to adopt ASU 2020-06 in fiscal 2022 using the full retrospective approach. Its preliminary estimate indicates changes to reported interest expense and balance-sheet classifications; the final impact is not yet determined.
- Management said ordinary-course legal matters are not expected to materially affect financial position, results or cash flows. No significant goodwill impairment trigger was identified in Q2; disclosure controls were deemed effective.
Important facts for investors to verify
- How much of reported growth and ARR expansion reflects Chef versus organic performance, and whether retention and demand remain durable.
- Whether profitability and margins recover as acquisition-related costs and amortization evolve, given their decline despite higher revenue.
- The company’s capacity to service and refinance its debt, including the 2024 credit-facility maturity and potential cash or share settlement of convertible notes.
- The final financial-statement effects of ASU 2020-06 and the potential dilution or cash obligations associated with note conversion.
- Whether COVID-19, foreign exchange, customer collections, channel performance or acquisition integration materially changes the stated liquidity outlook.