Progress Software Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended February 28, 2019. Comparative figures are for the three months ended February 28, 2018 and have been retrospectively adjusted for ASC 606 revenue recognition.
Business context
Progress sells software licenses and related maintenance and services through three segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. The company adopted ASC 606 on December 1, 2018 using the full retrospective method; this accelerated recognition of certain license revenue but did not affect cash flows.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $89.5 million | $95.4 million | Down 6% reported; down 4% constant currency |
| Gross profit / margin | $73.5 million / 82% | $78.5 million / 82% | Gross profit down 6% |
| Operating income / margin | $15.4 million / 17% | $19.1 million / 20% | Down 19% |
| Net income | $9.4 million | $13.7 million | Down 32% |
| Diluted EPS | $0.21 | $0.29 | Down $0.08 |
| Operating cash flow | $24.4 million | $31.6 million | Down $7.2 million |
License revenue was $22.8 million, down 12%; maintenance and services revenue was $66.7 million, down 4%. Management attributed the revenue decline to lower Data Connectivity and Integration revenue from OEM renewal timing, declines in parts of Application Development and Deployment and OpenEdge, and unfavorable foreign exchange. Lower operating income primarily reflected reduced revenue.
At February 28, 2019, cash, cash equivalents and short-term investments totaled $133.5 million, versus $139.5 million at November 30, 2018. Current assets were $215.7 million and current liabilities $182.0 million. Long-term debt had a carrying value of $114.6 million; term-loan principal was $116.0 million, including $7.0 million due within 12 months. The $150 million revolving facility had no borrowings outstanding; $1.3 million of letters of credit were issued. The facility’s stated interest rate was 4.00%. The company reported compliance with its financial covenants.
Operating cash flow funded $25.0 million of share repurchases, $7.0 million of dividends and $1.5 million of debt principal payments, among other items. The company repurchased 688,000 shares in the quarter. Deferred revenue was $142.2 million at quarter end, and remaining performance obligations were $143 million, approximately 92% expected to be recognized within one year.
Changes and management commentary
- Revenue fell 6% as reported, while constant-currency revenue fell 4%; North America revenue declined 11%, while EMEA was flat as reported and up 5% in constant currency.
- Segment revenue was $65.3 million for OpenEdge (down 2% reported), $6.0 million for Data Connectivity and Integration (down 37%), and $18.3 million for Application Development and Deployment (down 5%).
- The effective tax rate rose to 30% from 22%, primarily because the prior-year quarter included a $1.4 million provisional tax benefit related to U.S. tax reform. The company expects incremental U.S. tax from GILTI provisions in FY2019.
- Management said cash, operating cash generation and available credit should fund operations and foreseeable needs for at least 12 months. It targets returning approximately 75–80% of annual operating cash flow to stockholders, subject to business needs.
- After quarter end, Progress agreed to acquire Ipswitch for $225 million in cash, funded with existing cash and a new credit facility. Closing was expected in late April 2019, subject to customary conditions. Ipswitch was described as having approximately $75 million in revenue, 75% recurring, and about 24,000 customers.
- Progress intended to suspend repurchases for the remainder of FY2019 because of the acquisition and expected to resume them in FY2020. It declared a $0.155 per-share dividend payable June 17, 2019.
Risks, contingencies and unusual items
- Key disclosed risks include revenue and license-sales variability, reliance on OEM and other channel partners, foreign-exchange exposure, competition and product-development execution, cybersecurity and privacy, and the execution and integration risks of the proposed Ipswitch acquisition.
- Approximately one-third of revenue is denominated in foreign currencies. The company uses foreign-exchange forwards, but says hedging may not fully offset currency impacts.
- The company reported $0.4 million of restructuring expense in the quarter and expects additional facility-closure costs through FY2019, which it does not expect to be material. The remaining restructuring reserve was $0.5 million.
- Management stated that ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Ipswitch acquisition closed as expected, its final funding mix and resulting debt, and whether anticipated integration benefits materialize.
- Whether license demand, OEM renewal timing and revenue trends improve, particularly in Data Connectivity and Integration and North America.
- Whether operating cash flow and deferred revenue remain adequate to support dividends, debt service, acquisition funding and the stated capital-allocation policy.
- How foreign-exchange movements and the higher effective tax rate affect subsequent results.
- The effect of ASC 606 on comparability; prior-year figures in this filing were restated, and the standard accelerated recognition for certain licenses.