Progress Software Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended November 30, 2010. The filing is an annual report, not a standalone Q4 filing; quarterly figures are included below. Progress develops enterprise software across Application Development Platforms, Enterprise Business Solutions and Enterprise Data Solutions. Its products are sold through direct and indirect channels, with roughly half of worldwide license revenue historically generated through partners and OEMs.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $529.1 million | $494.1 million | +7% |
| Software license revenue | $192.6 million | $175.6 million | +10% |
| Maintenance and services revenue | $336.6 million | $318.6 million | +6% |
| Gross profit / margin | $429.8 million / 81% | $400.9 million / 81% | +7% in gross profit |
| Operating income / margin | $67.7 million / 13% | $51.1 million / 10% | +32% |
| Net income | $48.6 million | $32.8 million | +48% |
| Diluted EPS | $0.73 | $0.53 | Up $0.20 |
| Cash from operations | $96.2 million | $62.8 million | +$33.4 million |
Quarter ended November 30, 2010: Revenue was $145.2 million versus $136.8 million in Q4 2009; operating income was $32.8 million versus $25.8 million; net income was $21.3 million versus $16.7 million; diluted EPS was $0.31 versus $0.27.
Business-unit revenue: Application Development Platforms increased 1% to $333.2 million; Enterprise Business Solutions grew 43% to $122.1 million, including $19.5 million from Savvion and 21% organic growth; Enterprise Data Solutions declined 10% to $75.0 million. International markets generated 54% of revenue, down from 55% in FY2009.
Liquidity, debt and capital
- Cash and short-term investments totaled $322.4 million at year-end, up $98.3 million. Total assets were $936.8 million and shareholders’ equity was $688.3 million.
- Total debt was $0.7 million, including current maturities; the company reported no off-balance-sheet arrangements. Operating lease obligations totaled $25.6 million.
- Operating cash flow was $96.2 million; capital expenditures were $9.7 million. The company paid $29.3 million to repurchase shares and $49.2 million for Savvion.
- Accounts receivable rose $17.7 million; days sales outstanding increased to 74 from 65, within the company’s stated target range of 60–80 days.
- Backlog was approximately $174 million, down from $186 million a year earlier; $142 million was deferred revenue. Management cautions that unrecognized backlog is not a reliable predictor of future performance.
Material changes and unusual items
- FY2010 included $40.0 million in restructuring charges, compared with $5.2 million in FY2009. The company reduced its global workforce by about 13% in Q1 and a further 7% in Q3, and consolidated offices. Lower operating costs helped improve operating income despite these charges.
- Savvion was acquired in January 2010 for $49.2 million in cash. It contributed $19.5 million of Enterprise Business Solutions revenue; acquisition-related intangible amortization also increased.
- The effective tax rate fell to 32% from 36%, including a nonrecurring $2.5 million tax benefit. Management estimated an approximately $3 million FY2011 benefit from the retroactive reinstatement of the research and development tax credit.
- Other income included a $3.1 million gain from foreign-currency options and a $0.9 million insurance settlement gain. The company also recorded $7.2 million of forward-contract losses, substantially offset by gains on related positions.
- A three-for-two stock split was approved in December 2010 and distributed in January 2011; reported share and per-share data have been restated.
Outlook, commentary and risks
- Management expected existing cash and operating cash generation to fund foreseeable needs for at least 12 months. It provided no specific FY2011 revenue or earnings guidance in the supplied filing text.
- Management expected $5–$8 million of additional restructuring charges and nonrecurring transition expenses over the next 12 months, primarily for severance, transition and facility consolidation. Development and some administrative functions were planned to shift to India, increasing the Hyderabad development organization from about one-third to about one-half of development resources.
- The company identified macroeconomic conditions as a key FY2011 risk, including customers delaying, reducing or foregoing technology purchases or paying later. Other central risks include dependence on OpenEdge, competition and pricing pressure, execution and demand for the new Progress RPM initiative, foreign exchange exposure, reliance on channel partners, and employee retention during restructuring.
- Foreign currency exposure is significant: management estimated that a hypothetical 10% adverse currency movement could reduce reported revenue by about 5% and net income by about 20%, before hedging offsets.
- Approximately $39.6 million of auction-rate securities remained illiquid, with a $6.6 million temporary impairment recorded in other comprehensive loss. Management said cash and expected operating flows made the lack of liquidity manageable, but a decline in issuer or insurer credit quality could trigger an earnings impairment.
- JuxtaComm alleged patent infringement involving certain Sonic, FuseSource, DataDirect Connect and DataServices products, seeking unspecified damages and injunctive relief. Progress denied the claims; trial was scheduled for January 2012. Management said an unfavorable outcome could negatively affect the business.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether FY2010 growth and improved margins persist after separating restructuring effects, Savvion contributions and the nonrecurring tax benefit.
- Progress in stabilizing Enterprise Data Solutions revenue and sustaining growth in Enterprise Business Solutions and OpenEdge.
- Execution, costs and realized savings from workforce restructuring and the expansion of operations in India.
- Collection trends and receivable aging following the nine-day increase in DSO, plus the quality and conversion of reported backlog.
- Liquidity and valuation developments for the auction-rate securities, and material updates in the JuxtaComm litigation.
- Use of the newly authorized $100 million share-repurchase program, alongside acquisition plans and capital needs.