Progress Software Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended February 28, 2017; comparative period ended February 29, 2016. Unaudited results. Progress provides application development and deployment technologies and reports three segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $91.0 million | $89.5 million | +2% reported; +3% constant currency |
| Gross profit / margin | $75.2 million / 83% | $73.7 million / 82% | Margin up about 1 percentage point |
| Operating income / margin | $1.2 million / 1% | $6.7 million / 7% | Down 82% |
| Net income (loss) | $(0.5) million | $3.2 million | EPS $(0.01), versus $0.06 |
| Operating cash flow | $37.3 million | $22.5 million | Up $14.8 million |
- Revenue was 27% software licenses and 73% maintenance and services. License revenue rose 2%; maintenance and services rose 2% reported and 3% constant currency.
- Segment revenue: OpenEdge $64.5 million (+1%); Data Connectivity and Integration $6.8 million (+4%); Application Development and Deployment $19.6 million (+5%).
- Cash, cash equivalents and short-term investments were $264.2 million at February 28, versus $249.8 million at November 30, 2016. Operating cash flow benefited from working-capital changes, including lower receivables and higher deferred revenue; DSO was 48 days versus 59 days in the prior-year quarter.
- Cash used in investing activities was $4.9 million, primarily reflecting net investment maturities; cash used in financing was $23.4 million, including $15.2 million of share repurchases, $6.1 million of dividends and $3.8 million of debt repayment.
- Term-loan principal was $131.3 million, including $15.0 million due within 12 months; the variable rate was 2.56%. No revolver borrowings were outstanding, and $0.5 million of letters of credit were issued. The company reported compliance with credit-facility covenants.
- Total revenue backlog was $170.3 million, compared with $163.5 million a year earlier. This includes $147.0 million of deferred revenue and $23.4 million of multi-year licensing arrangements not on the balance sheet.
Material changes versus the prior-year quarter
- Revenue increased modestly, while operating income fell sharply and the company reported a net loss. The principal unusual item was $17.1 million of restructuring expense, compared with a $0.1 million restructuring credit in Q1 FY2016.
- Sales and marketing, product development, and general and administrative expenses declined 13%, 20%, and 15%, respectively, primarily reflecting lower compensation costs following workforce reductions. Stock-based compensation fell to $1.6 million from $6.9 million, partly due to restructuring-related forfeitures.
- Net cash from operations increased, mainly from working-capital movements and a shorter collection cycle; it should not be assumed to represent a similar improvement in underlying earnings.
- North America revenue rose 3%; EMEA fell 4% reported but grew 1% constant currency; Latin America rose 36% reported; and Asia Pacific rose 5%.
- The effective tax rate was reported as (322)% versus 34% in the prior-year quarter. The company cited foreign-jurisdiction losses for which no tax benefit was recognized, as well as a prior-year benefit from reinstatement of the R&D credit.
Outlook, management commentary and risks
- A new strategic plan focuses on customer and partner retention for core products, selected growth products, and a “Cognitive Applications” platform incorporating machine learning, application development tools, cloud capabilities, and data integration.
- The company reduced its global workforce by approximately 20% (about 400 employees); reductions were expected to be substantially completed by the end of Q2 FY2017. It expects additional restructuring charges of $1.0–$3.0 million during the rest of FY2017 and approximately $20 million of net annual run-rate cost reductions by fiscal year-end, after investment in the new strategy. Restructuring cash payments are expected to continue through Q3 FY2018.
- Management said cash, operating cash generation and available credit should fund foreseeable requirements for at least 12 months, including debt service, dividends, repurchases, capital expenditures and restructuring. It stated that $35.3 million of foreign cash and investments was considered permanently reinvested and unavailable for domestic operations without repatriation.
- The board declared a quarterly dividend of $0.125 per share, payable June 15, 2017. At quarter-end, $117.3 million remained under the share-repurchase authorization.
- On March 1, 2017, after quarter-end, Progress acquired DataRPM for $30.0 million, including approximately $1.7 million in restricted stock units. Initial purchase accounting was incomplete at filing; DataRPM results would be included in OpenEdge from acquisition.
- Key risks include execution of the restructuring and strategic pivot, product and cloud/subscription adoption, reliance on OpenEdge and indirect channels, unpredictable large license transactions, international and foreign-exchange exposure, competition, cybersecurity and privacy matters, and acquisition integration. Management cited no material change in its risk-factor assessment and no legal matter expected to materially affect financial position, results or cash flows.
- Management provided no specific revenue or earnings guidance in the filing. Revenue standard ASC 606 adoption was planned for December 1, 2018 using the full retrospective approach; management expected changes to the timing of revenue recognition for certain term-license and multi-element arrangements.
Important facts for investors to verify
- Whether restructuring delivers the stated approximately $20 million net annual run-rate savings by FY2017 year-end, and the total cash and non-cash costs required.
- Whether modest revenue growth can continue and how the strategic shift affects license, maintenance, cloud and subscription revenue and margins.
- How much of the operating-cash-flow increase was driven by temporary working-capital timing, and whether collections and deferred revenue remain favorable.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and the funding impact of dividends, buybacks and acquisitions.
- DataRPM’s purchase accounting, integration progress and contribution to results, along with the eventual quantified effect of ASC 606 adoption.