Progress Software Corporation — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended August 31, 2021. Dollar amounts are in millions except per-share data. Progress provides software to develop, deploy, and manage business applications; beginning in Q2 FY2021 it reported as one operating segment. Results include Chef, acquired in October 2020.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $147.4 (+34%) | $109.7 | $391.2 (+22%) | $319.8 |
| Software license revenue | $51.9 (+89%) | $27.5 | $115.4 (+48%) | $77.8 |
| Maintenance and services | $95.5 (+16%) | $82.2 | $275.8 (+14%) | $242.0 |
| Gross profit / margin | $127.3 / 86% | $95.0 / 87% | $333.8 / 85% | $275.9 / 86% |
| Operating income / margin | $46.0 / 31% | $33.2 / 30% | $95.7 / 24% | $89.2 / 28% |
| Net income / margin | $31.0 / 21% | $24.0 / 22% | $63.5 / 16% | $62.1 / 19% |
| Diluted EPS | $0.70 | $0.53 | $1.43 | $1.37 |
| Operating cash flow | Nine-month period: $134.6 | Prior-year nine-month period: $102.1 |
Revenue growth reflected the Chef acquisition and higher sales in DataDirect, OpenEdge, and Ipswitch. Management said Q3 demand improved across almost all product lines. Constant-currency revenue growth was 33% for Q3 and 20% for the nine-month period, versus reported growth of 34% and 22%, respectively. North America represented 60% of nine-month revenue; no single customer, partner, or non-U.S. country exceeded 10% of revenue.
Cash, debt, and liquidity
- Cash, cash equivalents, and short-term investments totaled $383.7 at August 31, 2021, up from $106.0 at November 30, 2020. Operating cash flow was $134.6; capital expenditures were $2.7.
- Cash rose substantially following the convertible-note offering. Financing also included $111.7 of debt principal payments, $43.1 for capped calls, $35.0 of share repurchases, and $23.4 of dividends.
- Balance-sheet debt carrying amounts were approximately $562.5: $23.9 current term debt, $247.4 long-term term debt, and $291.3 convertible notes. The filing describes consolidated indebtedness as approximately $563. The term loan face balance was $272.8, bears a 2.13% rate, and matures in 2024; no revolving-credit borrowings were outstanding, with $2.4 of letters of credit.
- The company issued $360.0 principal amount of 1% convertible notes due 2026. The conversion price was initially approximately $57.30 per share. Capped calls cost $43.1 and are intended to limit dilution or offset certain conversion payments, subject to a cap.
- Management believes cash, operating cash flow, and available credit are sufficient for foreseeable needs, including debt service, dividends, repurchases, leases, restructuring, and acquisitions. $30.7 of cash and investments was held by foreign subsidiaries and was not expected to be needed for U.S. operations.
Material changes, outlook, and risks
- Q3 revenue and operating income rose sharply year over year, while nine-month net income increased only 2%. Margins declined year over year for the nine-month period, reflecting higher operating expenses and acquired-intangible amortization. Interest expense increased, mainly due to the convertible notes.
- Annual recurring revenue was $444.0 at August 31, up 25% from $356.0 a year earlier, primarily due to Chef. Management reported net dollar retention generally ranging from 98% to 101%. ARR is a company-defined metric, not a forecast, and may not be comparable across companies.
- Management expected strong demand to continue for the remainder of FY2021 but provided no numerical financial guidance in the supplied filing text. COVID-19 impacts remained uncertain, including possible effects on customer renewals, sales cycles, and collections.
- On September 23, 2021, after quarter-end, Progress agreed to acquire Kemp for approximately $258.0 in cash, subject to customary adjustments, with closing expected in Q4 FY2021 and funding from cash on hand. Completion, integration, and anticipated benefits were uncertain.
- Progress expected approximately $2.9 of restructuring charges in Q4 FY2021 following a September facility closure. The nine-month restructuring expense was $1.1.
- Key risks include acquisition integration and execution, competition and technology change, reliance on OpenEdge and channel partners, cyber and privacy risks, foreign-exchange exposure, COVID-19 uncertainty, and debt obligations. The company reported ordinary-course legal matters but did not expect them to materially affect financial position, results, or cash flows. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much reported revenue and ARR growth reflects organic performance versus Chef, and whether retention and renewals remain stable.
- Kemp acquisition closing, final cash consideration, funding impact, integration costs, and realized benefits.
- Debt carrying value versus principal obligations, conversion and dilution terms, covenant headroom, and future cash requirements.
- Whether margins stabilize as acquired-intangible amortization, operating costs, and the announced restructuring affect results.
- The company’s subsequent outlook and any further effects of COVID-19, foreign-exchange movements, or customer and channel trends.