Progress Software Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended November 30, 2011. The filing also reports unaudited fourth-quarter results. Progress sells enterprise software, principally through its Application Development Platforms, Enterprise Business Solutions and Enterprise Data Solutions segments.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $533.6 million | $529.1 million | Up 1% |
| Software license revenue | $184.2 million | $192.6 million | Down 4% |
| Maintenance and services revenue | $349.4 million | $336.6 million | Up 4% |
| Gross profit / margin | $430.3 million / 81% | $429.8 million / 81% | Margin unchanged |
| Operating income / margin | $88.2 million / 17% | $67.7 million / 13% | Up 30% |
| Net income | $58.8 million | $48.6 million | Up 21% |
| Diluted EPS | $0.87 | $0.73 | Up 19% |
| Cash from operations | $126.3 million | $96.2 million | Up $30.1 million |
Operating cash flow less capital expenditures was approximately $109.2 million. FY2011 revenue was approximately 2% lower on a constant-currency basis; management attributed the reported increase partly to exchange rates. Revenue mix was 35% licenses and 65% maintenance and services.
Fourth quarter: Revenue was $136.3 million, versus $145.2 million in Q4 FY2010; operating income was $19.2 million versus $32.8 million, and net income was $11.7 million versus $21.3 million. Diluted EPS was $0.18 versus $0.31.
Segments and material changes
- Application Development Platforms revenue declined 2% to $326.4 million; segment operating income declined 10% to $189.4 million.
- Enterprise Business Solutions revenue rose 12% to $136.8 million, driven mainly by Apama, Savvion and FuseSource. Its operating loss widened to $52.0 million from $40.1 million.
- Enterprise Data Solutions revenue fell 6% to $70.5 million; the segment moved from a $12.9 million operating loss to $7.0 million operating income.
- License revenue weakened, while maintenance and services revenue grew with the installed base. Sales to direct end-users declined; indirect-channel license sales increased, primarily through OpenEdge partners.
- Operating expenses fell 6% overall, with restructuring expense down to $4.6 million from $40.0 million. This helped lift operating income, despite higher sales and marketing and general and administrative costs.
Cash, debt and liquidity
- Cash and short-term investments totaled $261.4 million at year-end, down from $322.4 million. Total assets were $865.3 million and shareholders’ equity was $622.3 million.
- Reported long-term debt, including current portion, was $0.4 million. The company had no borrowings on its $150 million revolving facility and $0.2 million of letters of credit; the facility matures in August 2016 and includes financial covenants.
- Current assets were $407.8 million and current liabilities $231.5 million. Management said cash, operating cash flows and available credit were expected to fund foreseeable needs for at least 12 months.
- Progress repurchased $200.0 million of stock in FY2011 and acquired Corticon for $23.0 million. The share repurchase authorization had no remaining availability at November 30, 2011. No cash dividends were planned for the near future.
- Backlog was $176.2 million, including $152.3 million of deferred revenue. Management cautioned that non-deferred backlog is not subject to normal financial-statement controls and is not necessarily a reliable indicator of future performance.
Outlook, risks and unusual items
- No quantified FY2012 financial guidance is provided. Management expected macroeconomic uncertainty to continue, particularly in EMEA, and said customer delays had affected FY2011. Sales, professional-services and marketing investments were expected to continue in FY2012; benefits had not yet been fully realized.
- Management cited greater exposure to quarterly fluctuations as the company shifted toward larger, direct, industry-focused solution sales. The success and profitability of the Progress RPM initiative remained uncertain despite FY2011 sales growth; integration and delivery costs were increasing.
- Key risks include dependence on OpenEdge, competition and pricing pressure, customer and partner demand, foreign-exchange exposure, international economic conditions, product development and security risks, and acquisition integration. A hypothetical adverse 10% currency movement was estimated to reduce reported revenue by about 5% and net income by about 13%, before hedging effects.
- FY2011 included $7.1 million of former CEO separation costs in general and administrative expense, including $4.6 million of stock-based compensation and $2.5 million of future cash payments. Litigation costs also contributed to higher G&A.
- At year-end, auction-rate securities had a fair value of $33.5 million versus $39.9 million par value. They were illiquid, with a $6.4 million temporary impairment recorded in accumulated other comprehensive loss; management did not expect the illiquidity to impair operations.
- JuxtaComm patent litigation sought unspecified damages and injunctive relief. A December 2011 claim-construction ruling favored Progress on a key issue, but the case was stayed and trial postponed; the company could not estimate potential loss.
- Deloitte issued unqualified opinions on the financial statements and internal controls. The filing disclosed an immaterial prior-period classification error involving certain investments, with no restatement.
Important facts for investors to verify
- Whether FY2012 license sales and larger direct deals improve, and whether the RPM-related investments generate adequate revenue and margins.
- Progress’s ability to sustain cash generation while funding repurchases, acquisitions and operating investments; note the $200 million FY2011 buyback.
- Developments in JuxtaComm litigation and any change in the estimated exposure.
- Liquidity and valuation of auction-rate securities, and any deterioration in underlying issuers or insurers.
- Foreign-exchange impacts, especially given the company’s substantial international revenue and management’s sensitivity estimate.