Progress Software Corporation — Q2 FY2023 Form 10-Q
Business context and reporting period: The quarter and six months ended May 31, 2023. Progress sells software licenses and related maintenance, services and cloud offerings. The company operates as one reportable segment. Results include MarkLogic, acquired February 7, 2023.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $178.3 | $148.7 | $342.5 | $293.7 |
| Gross profit / margin | $144.5 / 81% | $124.8 / 84% | $282.5 / 82% | $246.5 / 84% |
| Operating income / margin | $23.0 / 13% | $40.2 / 27% | $58.6 / 17% | $69.7 / 24% |
| Net income | $12.1 | $29.1 | $35.8 | $49.6 |
| Diluted EPS | $0.27 | $0.66 | $0.81 | $1.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $94.7 | $112.4 |
- Q2 revenue increased 20%; six-month revenue increased 17% reported and 18% at constant currency. Growth was principally attributed to MarkLogic and increases in OpenEdge, Chef and Kemp. Q2 increases were partly offset by DataDirect declines.
- Software license revenue grew 26% in Q2 and 30% for the first six months. Maintenance and services grew 17% and 11%, respectively. MarkLogic contributed approximately $25.3 million of Q2 revenue and $30.3 million for the six-month period.
- Profitability contracted despite revenue growth. Q2 operating income fell 43% and net income fell 58%; six-month operating income fell 16% and net income fell 28%. Higher acquired-business operating costs, acquired-intangible amortization, restructuring and interest expense weighed on results. The prior-year comparison also included a $10.8 million gain on sale of assets, absent in 2023.
- Q2 and six-month income tax rates were 17% and 20%, respectively, versus 21% in each prior-year period. Management cited discrete stock-compensation tax benefits and an audit settlement.
- Six-month operating cash flow was $94.7 million, down from $112.4 million. Capital expenditures were $2.0 million; operating cash flow less capital expenditures was approximately $92.7 million. The decline reflected higher operating expenses, partly offset by higher billings and collections. DSO was 44 days, compared with 39 days in Q2 2022.
Balance sheet, debt and capital allocation
- Cash and cash equivalents were $125.5 million at May 31, down from $256.3 million at November 30, 2022. The six-month cash decrease of $130.7 million principally reflected $356.1 million of acquisition payments, offset in part by operating cash flow and $195.0 million of debt proceeds.
- Current assets were $281.1 million and current liabilities $323.5 million. Reported debt carrying amounts included $422.7 million of long-term debt, $9.7 million current debt and $353.7 million of convertible notes. These total approximately $786.0 million, or about $660.5 million net of cash. The company had $170.0 million outstanding on its revolving credit line; the 2026 notes had $360.0 million face value.
- MarkLogic was acquired for a base cash purchase price of $355.0 million. Preliminary purchase accounting recorded $154.9 million of goodwill, which is not tax deductible; acquisition valuations remain subject to measurement-period adjustment.
- Six-month share repurchases totaled $30.0 million; $198.0 million remained under the authorization at May 31. The quarterly dividend was $0.175 per share, and a further $0.175 dividend was declared June 21, 2023.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is stated in the provided filing text. Management believes cash, operating cash generation and available credit are sufficient for foreseeable needs through at least the next 12 months. Management also expects to continue evaluating acquisitions, dividends and repurchases.
- ARR, a non-GAAP operating metric defined by the company, was $569.0 million at May 31, up 19% year over year, primarily due to MarkLogic. Net retention rates generally ranged from 101% to 102%. The filing cautions that ARR is not a forecast and is not directly comparable to similarly titled measures at other companies.
- The MOVEit zero-day vulnerability was discovered May 30, 2023; patches were released May 31, and MOVEit Cloud was restored that day. MOVEit Transfer and MOVEit Cloud represented approximately 4% of six-month revenue. Customers reported exploitation in certain environments; the company said it had not found evidence of data exfiltration from public MOVEit Cloud instances. The investigation was ongoing.
- As of filing, four customers had indicated intent to seek indemnification and 11 class-action lawsuits had been filed. The company was cooperating with inquiries and one formal law-enforcement investigation. It could not reasonably estimate potential losses and recorded no loss contingency. Future investigation, legal and professional costs are expected. Insurance coverage is up to $15.0 million; $3.0 million had been recorded for the earlier November 2022 incident, leaving $12.0 million of stated additional coverage, subject to a $0.5 million per-claim deductible.
- Separately, the November 2022 cyber incident generated $4.2 million of net response expenses for the first six months of FY2023. MarkLogic-related restructuring costs were included in $5.4 million of six-month restructuring expenses; further FY2023 costs were expected but not expected to be material.
- Management concluded disclosure controls were effective. MarkLogic was excluded from the internal-control assessment for the quarter.
Important facts for investors to verify
- Updates on MOVEit investigations, customer claims, litigation, regulatory inquiries, insurance recoveries and any resulting financial exposure or customer-retention effects.
- MarkLogic’s contribution to organic versus acquisition-driven growth, integration progress, realized synergies and final purchase-price allocation.
- Whether revenue growth can offset ongoing pressure on gross and operating margins, increased amortization and higher interest expense.
- Cash conversion, deferred-revenue trends, DSO, debt repayment capacity and remaining liquidity after acquisition-related borrowing and capital returns.
- Future disclosures of guidance and ARR composition, noting that ARR is a company-defined, non-GAAP metric.