Progress Software Corporation (NASDAQ: PRGS) — Q2 FY2024 10-Q
Reporting period: Three and six months ended May 31, 2024. Progress provides enterprise software for developing, deploying and managing applications. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 FY2024 | Six months FY2024 |
|---|---|---|
| Revenue | $175.1 million; down 2% year over year | $359.8 million; up 5% |
| Gross profit / margin | $143.0 million / 81.7% | $294.9 million / 82.0% |
| Operating income / margin | $27.1 million / 15.5% | $62.2 million / 17.3% |
| Net income | $16.2 million; up 34% | $38.8 million; up 9% |
| Diluted EPS | $0.37, versus $0.27 | $0.87, versus $0.81 |
| Operating cash flow | Not separately reported for the quarter | $134.2 million, versus $94.7 million |
- Cash and cash equivalents were $190.4 million at May 31, 2024, including $76.0 million held by foreign subsidiaries and not available for domestic operations.
- Debt consisted of $794.3 million net carrying value of convertible senior notes: the 2026 notes and $450 million principal of 3.5% notes due 2030. The $900 million revolving facility was undrawn; no term loan or revolver borrowings remained.
- Current assets were $343.0 million and current liabilities $307.2 million. Deferred revenue was $291.6 million; remaining performance obligations were $344 million, with about 75% expected to be recognized within one year.
- ARR was $579 million, up 1% year over year. Management reported net retention rates generally between 99% and 102% for periods presented.
Changes versus the prior comparable period
- Q2 revenue was nearly flat apart from a 2% decline, while operating income increased 18% and net income increased 34%. Lower costs of revenue and operating expenses supported operating results.
- For the first six months, revenue grew 5%, primarily because FY2024 included a full six months of MarkLogic results while the prior-year period included MarkLogic only from its February 2023 acquisition. DataDirect renewal timing partly offset growth.
- Q2 software license revenue declined 4%; maintenance and services revenue declined 1%. For the six-month period, software licenses rose 4% and maintenance and services rose 6%.
- Operating cash flow rose to $134.2 million, which management attributed to higher billings and collections. Receivables declined from fiscal year-end and DSO was 41 days, versus 44 days in Q2 FY2023.
- Cash increased $63.5 million from November 30, 2023. The company issued $450 million principal of 2030 convertible notes and used proceeds, among other purposes, to repay prior term-loan and revolver balances. It also spent $72.4 million on share repurchases and paid $16.1 million in dividends in the six-month period.
Outlook, risks and unusual items
- Management believes cash, operating cash generation and available revolving credit will cover foreseeable needs for at least the next 12 months. The filing does not provide specific revenue or earnings guidance.
- The company incurred $4.0 million of net cyber incident and MOVEit response costs in the first six months, including $3.0 million in Q2. It expects further investigation, legal and professional expenses, net of insurance recoveries.
- MOVEit-related litigation includes approximately 144 class-action lawsuits consolidated in a multidistrict proceeding; the company also faces customer claims and regulatory inquiries or investigations, including an SEC fact-finding inquiry. Management says a possible loss is reasonably possible but cannot estimate a range and has recorded no loss contingency liability. MOVEit products represented less than 4% of six-month revenue.
- Progress had $15 million of cybersecurity insurance coverage for the relevant incidents and had recorded approximately $7 million in recoveries by May 31, 2024; remaining coverage was approximately $8 million, subject to policy terms and retention.
- Restructuring expense was $3.0 million in the first six months, primarily related to a facility closure; management does not expect additional material expenses for that action. The company declared a $0.175-per-share dividend payable September 16, 2024, subject to the stated record date.
Investor verification checklist
- Track organic revenue and ARR growth, particularly given Q2 revenue softness and MarkLogic’s effect on year-to-date comparisons.
- Monitor MOVEit litigation, investigations, insurance recoveries and any change to the currently unestimable loss exposure.
- Review the terms and potential dilution or cash-settlement consequences of the 2026 and 2030 convertible notes, as well as compliance with credit-facility covenants.
- Assess cash generation against continued buybacks, dividends and acquisition plans; verify availability of foreign-held cash for domestic needs.
- Watch renewal timing and customer retention, including DataDirect multiyear contracts and the reported 99%–102% net retention range.