Progress Software Corporation (NASDAQ: PRGS) — FY2019 Form 10-K
Reporting period: Fiscal year ended November 30, 2019; filed January 27, 2020. The filing is an annual report, not a standalone fourth-quarter filing. Prior-year comparisons reflect retrospective adoption of ASC 606.
Business context
Progress sells application-development, data-connectivity, integration, content-management, secure file-transfer and network-monitoring software. Revenue comes primarily from licenses and recurring maintenance; more than half of worldwide license revenue is generated through indirect partners. The company reports OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment (AD&D) segments.
Financial highlights
| Metric | FY2019 | FY2018 | Change / note |
|---|---|---|---|
| Revenue | $413.3 million | $379.0 million | Up 9% reported; up 11% constant currency |
| Software license revenue | $122.6 million | $99.8 million | Up 23%; 30% of revenue |
| Maintenance and services | $290.7 million | $279.2 million | Up 4%; 70% of revenue |
| Gross profit / margin | $338.1 million / 82% | $312.0 million / 82% | Margin approximately flat |
| Operating income / margin | $40.1 million / 10% | $67.8 million / 18% | Down 41% |
| Net income | $26.4 million | $49.7 million | Down 47% |
| Diluted EPS | $0.58 | $1.08 | Down from prior year |
| Cash from operations | $128.5 million | $121.4 million | Up; lower tax payments contributed |
| Cash, equivalents and short-term investments | $173.7 million | $139.5 million | At November 30 |
| Long-term debt, including current portion | $294.7 million | $116.1 million | Higher following Ipswitch financing |
Segments and quarterly results
- OpenEdge: Revenue of $296.9 million, up 7%; operating contribution of $211.7 million, up 1%.
- DCI: Revenue of $39.9 million, up 73%, principally reflecting OEM renewal timing and higher license sales; operating contribution was $31.9 million, up 106%.
- AD&D: Revenue of $76.5 million, down 2%; operating contribution was $52.5 million, up 3%.
- Fiscal Q4: Revenue was $117.0 million, gross profit $96.3 million, operating loss $6.0 million and net loss $4.7 million. The quarter included substantial impairment and restructuring charges.
Material changes and unusual items
- Progress acquired Ipswitch on April 30, 2019, for approximately $225 million in cash. Ipswitch contributed $28.2 million of FY2019 revenue. The company funded the transaction with cash and additional term borrowing; the acquisition added $117.9 million of goodwill.
- FY2019 operating results included a $22.7 million impairment of DataRPM and Kinvey-related intangible assets after Progress reduced investment in its cognitive application products, plus a $1.4 million impairment related to abandoned property assets. Total impairment expense was $24.1 million.
- Restructuring expense was $6.3 million, including $3.1 million related to Ipswitch and $2.5 million for the cognitive-product investment reduction. Additional Ipswitch integration and facility-closure costs were expected in FY2020, though management did not expect them to be material.
- Interest expense rose to $9.9 million from $5.1 million, mainly due to debt used for Ipswitch. The effective tax rate was 7%, versus 18% in FY2018.
- ASC 606 was adopted retrospectively. The company reported that adoption reduced previously reported FY2018 revenue by $18.2 million and FY2018 net income by $13.8 million; it did not change total cash flows.
Liquidity, capital allocation and outlook
- Operating cash flow was $128.5 million. Investing cash flow was negative $208.4 million, primarily due to the Ipswitch acquisition; financing cash flow was positive $130.3 million, including $185.0 million of debt proceeds.
- The term-loan balance was $297.2 million at year-end, with $11.3 million due within 12 months. The $100 million revolving facility had no borrowings outstanding, with $1.8 million in letters of credit. The facility matures in April 2024; Progress reported compliance with its financial covenants.
- Progress entered an interest-rate swap covering approximately half its variable-rate debt; the year-end notional was $148.1 million. The reported rate on the credit facility was 3.38% at year-end.
- Management said cash, operating cash generation and available credit were sufficient for foreseeable needs for at least 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- FY2019 dividends paid were $27.8 million; the quarterly dividend was raised to $0.165 per share. Share repurchases were $25.0 million, then suspended for the remainder of FY2019 after the acquisition. The board increased the repurchase authorization to $250 million in January 2020.
Risks, contingencies and governance
- Key risks include dependence on OpenEdge and indirect channels, competition and rapid technology shifts, acquisition integration and impairment, foreign-exchange exposure, cybersecurity and privacy obligations, and revenue and quarterly-results variability.
- A hypothetical 10% adverse currency move was estimated to reduce reported revenue by approximately 3% ($13 million) and net income by approximately 8% ($2 million), before potential hedging offsets.
- Ordinary-course legal proceedings were disclosed; management did not expect them to materially affect financial position, results or cash flows. The filing reports no off-balance-sheet arrangements.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition and Ipswitch intangible-asset valuation were identified as critical audit matters.
Important facts for investors to verify
- How much FY2020 growth and cash generation comes from Ipswitch versus organic performance, and whether integration delivers expected benefits.
- Whether the reduced investment in DataRPM and Kinvey affects future revenue, customer retention or further impairment risk.
- Whether license growth and the $186 million of remaining performance obligations convert into recognized revenue as expected; management estimated about 90% would be recognized within one year.
- Debt repayment, variable-rate exposure, covenant headroom and the effect of dividends and resumed repurchases on liquidity.
- Foreign-exchange sensitivity, accounts-receivable collection trends (DSO rose to 56 days from 47), and the sustainability of operating cash flow.