Progress Software Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended February 29, 2012; comparisons are to the three months ended February 28, 2011. Financial statement amounts below are in millions of dollars unless otherwise noted. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $124.4 | $134.2 | Down 7% |
| Software license revenue | $41.5 | $51.3 | Down 19% |
| Maintenance and services revenue | $82.9 | $82.9 | Approximately flat |
| Gross profit / margin | $99.0 / 80% | $110.1 / 82% | Down 10%; margin down 2 points |
| Operating income / margin | $11.9 / 10% | $28.3 / 21% | Down 58%; margin down 11 points |
| Net income | $7.5 | $20.5 | Down 64% |
| Diluted EPS | $0.12 | $0.29 | Down $0.17 |
| Cash from operations | $38.5 | $50.2 | Down 23% |
Operating expenses rose 7% to $87.1 million, or 70% of revenue versus 61% a year earlier. Sales and marketing increased 6%, product development 7%, and general and administrative 30%. The effective tax rate was 38.4%, compared with 27.4%; the prior-year rate benefited from a $2.0 million research and development credit.
Liquidity, cash flow and debt
- Cash, cash equivalents and short-term investments totaled $315.2 million at February 29, 2012, up $53.7 million from November 30, 2011. Total current assets were $451.7 million and current liabilities were $246.1 million.
- Operating cash flow was $38.5 million. Investing activities provided $16.5 million, principally reflecting net investment maturities and sales; capital expenditures were $3.9 million. Financing activities provided $13.6 million, including $14.0 million from stock issuance and option exercises.
- Debt was minimal: $174,000 current debt and no borrowings on the $150 million revolving credit facility. The company reported covenant compliance by a significant margin.
- Cash, cash equivalents and short-term investments held by foreign subsidiaries were $180.4 million; some foreign earnings were considered permanently reinvested. The company said this did not materially affect liquidity.
- A further $33.3 million of auction rate securities was classified as long-term and lacked short-term liquidity. Its $6.3 million unrealized impairment was considered temporary; management warned deterioration in issuer or insurer credit could require an impairment charge.
Material changes and business drivers
- License revenue fell primarily because fewer large deals closed; direct end-user license revenue declined 32% and indirect-user revenue 7. Management said benefits from prior investments in the direct sales organization had been slow to materialize.
- Enterprise Business Solutions revenue decreased 17% to $30.9 million, and its operating loss widened to $20.7 million from $6.9 million. Application Development Platforms revenue fell 4% to $75.6 million; Enterprise Data Solutions revenue was nearly flat at $18.0 million.
- Regional revenue declined 14% in EMEA and 7% in North America; it rose 2% in Latin America and 16% in Asia Pacific. Currency movements had little effect on total reported revenue, though they affected regional results.
- Maintenance revenue increased 2%, while professional services revenue declined 10%. The company attributed higher maintenance and services costs partly to investment in its professional services infrastructure.
- Stock-based compensation increased to $7.1 million from $4.2 million, including $0.6 million of accelerated vesting following an executive’s departure. General and administrative expense also included a $0.9 million litigation settlement and proxy-related costs.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance is provided. Management said cash, expected operating cash flows and available credit should fund operations and foreseeable cash needs for at least the next 12 months.
- The company was conducting a comprehensive strategic evaluation that could change strategy, product portfolio, expense levels and capital allocation. Management warned that resulting actions could disrupt operations, affect employees and customers, complicate sales or financing, and adversely affect results.
- Management expected macroeconomic uncertainty to continue in FY2012, particularly in EMEA, and noted customers had delayed software investments. Other cited risks include competition and pricing pressure, product acceptance, large-deal variability, foreign-exchange movements, and acquisition integration and execution.
- The JuxtaComm patent litigation was settled in March 2012 for $0.9 million. The company recorded the settlement as Q1 FY2012 general and administrative expense and received a release for past damages and a perpetual license for future product uses.
- The CFO’s employment ended March 22, 2012; the filing refers to a separate Form 8-K and separation agreement for details. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
- Revenue backlog was $185.7 million, including $167.6 million of deferred revenue. Management cautioned that backlog is not a standardized measure and is not necessarily a reliable indicator of future performance.
Important facts for investors to verify
- Whether license sales and large-deal activity recover, particularly in Enterprise Business Solutions, and whether sales-force investments produce improved productivity.
- Whether the strategic review results in material changes to products, costs, capital allocation or financing, and the associated execution and customer-retention effects.
- The recoverability and liquidity of auction rate securities, including the potential for credit deterioration or an other-than-temporary impairment.
- The drivers and sustainability of higher operating expenses, stock-based compensation and the lower prior-year tax comparison.
- The reported share count: 62.7 million shares were outstanding at February 29, 2012; 62.847 million were reported outstanding as of March 30, 2012.