Progress Software Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended May 31, 2013. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Progress is shifting its focus to a cloud and mobile application development platform (aPaaS), investing in OpenEdge and DataDirect and integrating acquired Rollbase technology. After completing divestitures of its non-core product lines, the company now reports one operating segment. Results for divested businesses and Apama are presented as discontinued operations, so some comparisons with prior periods are affected by changes in business scope.
Key financial results
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $81.7 | $74.1 | $165.4 | $156.6 |
| Gross profit / margin | $73.2 / 89% | $65.5 / 88% | $147.1 / 89% | $139.4 / 89% |
| Operating income / margin | $14.4 / 17% | $12.8 / 18% | $30.2 / 19% | $37.8 / 25% |
| Continuing-operations income | $8.1 | $8.9 | $18.0 | $24.7 |
| Net income (loss) | $3.9 | $(1.9) | $35.0 | $5.6 |
| Diluted EPS | $0.07 | $(0.03) | $0.61 | $0.09 |
- Q2 revenue rose 10% reported (12% constant currency); six-month revenue rose 6%. License revenue increased 43% in Q2 and 18% for the six months, driven by OpenEdge and DataDirect. Maintenance and services declined 2% in Q2 and were flat for the six months; professional services revenue fell 15% and 12%, respectively.
- Q2 continuing-operations income declined despite higher revenue, while six-month operating income fell 20%. Sales and marketing and product development expenses rose substantially as the company absorbed costs previously associated with divested products and invested in product development.
- Six-month net income includes a $19.8 million after-tax gain on divestitures. Discontinued operations also include ongoing product-line losses; Q2 discontinued-operations loss was $4.2 million.
- Operating cash flow was negative $11.4 million for the six months, versus positive $53.7 million a year earlier. Management attributed the decline principally to $41.7 million of income-tax payments related to divestitures and higher annual bonus payments. Investing cash flow was positive $77.0 million, including $73.4 million of net divestiture proceeds; financing cash flow was negative $145.3 million, including $176.5 million of share repurchases.
- Cash, cash equivalents and short-term investments totaled $255.8 million at May 31, down from $355.2 million at November 30, 2012. The company had no revolver borrowings and $0.4 million of letters of credit; its revolving facility provides up to $150 million. Total current assets were $357.8 million and current liabilities $165.4 million.
- The company held $26.5 million of auction-rate securities (ARS) classified as long-term and subject to limited liquidity. It reported $4.2 million of temporary impairment in accumulated other comprehensive loss. No material debt balance was reported.
Material changes, outlook, and risks
- Progress completed divestitures of ten non-core product lines for aggregate consideration of approximately $130 million. In June 2013 it agreed to sell Apama to Software AG for $44.3 million, with closing expected in July; the product line was classified as held for sale and discontinued operations at quarter-end.
- In May, Progress acquired Rollbase for approximately $9.9 million, including $9.5 million cash and $0.4 million estimated contingent consideration. Separate earn-out compensation arrangements for Rollbase employees could total approximately $5.0 million and are expected to be accrued over two years if performance criteria are met.
- Management said the company is early in its aPaaS transition and expects continued product investment; sustainable revenue increases may not be foreseeable in the near term, and investment and transition costs may pressure operating margins. It expects temporary elevated costs as it adjusts to divestitures and works to improve margins.
- Management believes cash, operating cash flows and available credit will fund foreseeable needs for at least 12 months, including planned repurchases, capital expenditures and restructuring obligations. The company expected about $1.6 million of additional FY2013 restructuring costs; excess-facility payments may continue through FY2016.
- The board increased its repurchase authorization to $360 million. A new 10b5-1 plan allows up to $100 million of repurchases from July through December 2013; $2.0 million had been repurchased under it by July 1. The credit agreement requires at least $100 million in cash while repurchasing shares; management reported covenant compliance by a significant margin.
- Disclosure controls were judged ineffective at the reasonable-assurance level because of an unremediated material weakness involving documentation of customer and partner contract terms and revenue recognition. The filing says timing errors on certain transactions were immaterial; remediation was underway but not yet complete.
- Key stated risks include execution of the strategic transition, product acceptance, competitive and macroeconomic conditions, foreign-exchange movements, acquisition integration, and the ability to absorb costs remaining after divestitures. The filing identifies no material expected effect from ordinary-course legal proceedings.
Important facts for investors to verify
- Whether license growth can be sustained and maintenance renewals remain stable as the business narrows its product portfolio.
- Completion and proceeds of the Apama sale, and the continuing cash-flow and cost effects of all divestitures.
- Operating-cost trends, restructuring charges, and whether investments in the aPaaS platform translate into improved margins and revenue.
- Resolution of the revenue-recognition material weakness and evidence that remediation controls operate effectively.
- Liquidity and valuation developments for ARS, and the impact of continued share repurchases on cash and covenant headroom.
- Final purchase accounting for Rollbase and achievement of contingent-payment milestones and employee earn-out conditions.