Progress Software Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended August 31, 2011; comparisons are with the corresponding 2010 periods. Unless otherwise stated, amounts are in U.S. dollars and millions. Financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $128.3 | $128.7 | $397.3 | $383.9 |
| Gross profit / margin | $101.5 / 79% | $104.0 / 81% | $320.2 / 80% | $310.0 / 81% |
| Operating income / margin | $13.5 / 11% | $16.5 / 13% | $69.0 / 17% | $34.8 / 9% |
| Net income | $8.6 | $9.2 | $47.1 | $27.3 |
| Diluted EPS | $0.13 | $0.14 | $0.69 | $0.41 |
| Operating cash flow | Not separately provided for the quarter | $118.1 | $70.5 |
- Q3 revenue was nearly flat year over year; management said it would have declined 6% at constant exchange rates. License revenue fell 13% to $38.7 million, while maintenance and services rose 7% to $89.6 million.
- Nine-month revenue increased 3% as reported, but was flat at constant exchange rates. Maintenance and services grew 6%; license revenue was slightly lower.
- Q3 operating income fell 18%, and net income fell 7%. For the first nine months, operating income approximately doubled, principally reflecting higher revenue and lower restructuring charges than in 2010.
- Nine-month operating cash flow rose to $118.1 million, aided by higher profitability and working-capital improvements, particularly collections. Accounts receivable declined $35.4 million from fiscal year-end; DSO was 59 days.
Financial position and liquidity
- At August 31, cash and short-term investments totaled $346.5 million, compared with $322.4 million at November 30, 2010. Current assets were $468.4 million and current liabilities $228.4 million.
- Total debt was approximately $0.4 million, with no amounts drawn on the new $150 million revolving credit facility. The facility matures in August 2016 and includes financial covenants; the company reported compliance at quarter-end.
- Cash and cash equivalents were $257.8 million. The company repurchased $134.9 million of shares in the first nine months and had about $65 million remaining under its $200 million buyback authorization.
- Long-term auction-rate securities had a fair value of $34.5 million and a $5.4 million temporary unrealized impairment. These securities lack short-term liquidity. Management said cash, the credit facility and expected operating cash flows should be sufficient to meet foreseeable needs for at least 12 months.
Changes, outlook and notable matters
- Q3 segment results were mixed: Application Development Platforms revenue was $79.6 million and operating income $45.4 million; Enterprise Business Solutions revenue was $30.1 million and operating loss $18.8 million; Enterprise Data Solutions revenue was $18.7 million and operating income $4.0 million. EBS’s Q3 operating loss widened from $4.4 million a year earlier.
- Management cited macroeconomic uncertainty and customer delays, particularly in financial services, as risks to purchasing and payment timing. Larger solution-focused transactions can lengthen sales cycles and increase quarter-to-quarter volatility. Foreign-exchange movements also materially affect reported results.
- The company said its Progress RPM product initiative achieved significant sales growth, but cautioned that product introduction and integration carry execution risk and may not generate sufficient revenue to justify investment.
- Management expects approximately $1–$2 million of additional restructuring and transition costs in the remaining three months of fiscal 2011, primarily for severance, transition and facility consolidation. It also plans to pursue acquisitions, with no assurance any will be completed.
- CEO Richard D. Reidy is expected to leave when a successor begins. Amended separation terms resulted in $6.4 million of Q3 expense, including $3.9 million in stock compensation and $2.5 million in future cash payments.
- JuxtaComm patent litigation seeks unspecified damages and injunctive relief; trial was scheduled for January 3, 2012. The company disputes the claims but cannot estimate the potential loss.
- Revenue backlog was approximately $167 million, including $150 million recorded as deferred revenue. The remaining $17 million relates to multi-year licensing arrangements and is not included on the balance sheet; management cautions that backlog is not a reliable performance indicator.
Important facts for investors to verify
- Whether license revenue and the EBS segment recover, and whether the solution-selling strategy and Progress RPM generate sustainable growth.
- Execution against the stated restructuring savings and remaining $1–$2 million of expected fiscal 2011 costs, alongside elevated sales and marketing spending.
- Liquidity and valuation of auction-rate securities, including the risk of further impairment if issuer or insurer credit quality deteriorates.
- Outcome and potential financial exposure from the JuxtaComm case, for which no loss range was estimable.
- CEO succession and the costs and timing of Reidy’s separation; also, credit-facility covenants and restrictions if borrowings are used.
- Backlog composition and conversion: part is off-balance-sheet and is not subject to the company’s normal accounting controls for reported financial-statement information.