Progress Software Corporation — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2022; comparative periods ended May 31, 2021. Unaudited. Unless otherwise noted, amounts are in U.S. dollars and millions.
Business context
Progress provides software products to develop, deploy and manage business applications. It reports one operating segment. Products are sold through perpetual and term licenses, maintenance and services, and cloud subscriptions. The November 2021 Kemp acquisition is a significant factor in year-over-year comparisons.
Financial performance and key metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $148.7 | $122.5 | $293.7 | $243.8 |
| Gross profit | $124.8 | $103.2 | $246.5 | $206.5 |
| Operating income | $40.2 | $22.3 | $69.7 | $49.7 |
| Net income | $29.1 | $13.6 | $49.6 | $32.5 |
| Diluted EPS | $0.66 | $0.30 | $1.11 | $0.73 |
| Operating cash flow | Not separately stated | Not separately stated | $112.4 | $99.4 |
- Revenue mix and growth: Q2 software license revenue was $44.8 million, up 49% reported (53% constant currency); maintenance and services were $103.9 million, up 13% reported (15% constant currency). Total revenue rose 21% reported and 24% constant currency in Q2; six-month growth was 20% and 23%, respectively.
- Margins: Gross margin was 84% in Q2, unchanged year over year, and 84% for the six months versus 85%. Operating margin was 27% versus 18% in Q2 and 24% versus 20% for the six months. Q2 operating income included a $10.8 million gain on sale of property; excluding that gain, Q2 operating income was approximately $29.5 million.
- Cash generation: Six-month operating cash flow was $112.4 million. Investing cash flow was $24.9 million, including $26.0 million net proceeds from the property sale. Financing cash flow was negative $62.6 million, including $51.5 million in share repurchases and $15.6 million in dividends. Cash and cash equivalents increased to $224.9 million from $155.4 million at November 30, 2021; cash, equivalents and short-term investments totaled $225.9 million.
- Liquidity and debt: Current assets were $355.9 million and current liabilities $284.2 million. Reported debt carrying value was approximately $620.1 million, including current debt; the term loan had $271.6 million outstanding and the $360 million principal convertible notes mature in April 2026. No revolving credit borrowings were outstanding; $2.1 million of letters of credit were issued under the facility.
- Recurring-revenue indicators: ARR was $486 million at May 31, up 12.5% year over year, primarily due to Kemp. Management said net dollar retention generally ranged from 100% to 102%; it did not state a specific period-end rate in the filing excerpt.
- Capital returns: The company repurchased 1.1 million shares for $51.5 million during the six months; $103.5 million remained under the authorization. The declared quarterly dividend was $0.175 per share.
Material changes versus prior period
- Growth reflected the Kemp acquisition and increases in DataDirect and Chef offerings; foreign exchange partially offset growth, particularly in EMEA. Q2 reported revenue growth was 21%, compared with 24% constant-currency growth.
- Q2 net income more than doubled, but the $10.8 million property-sale gain materially contributed to operating income and should be distinguished from ongoing performance. Amortization of acquired intangibles increased with Kemp.
- Six-month operating cash flow rose to $112.4 million from $99.4 million, aided by strong receivables collections. Gross accounts receivable fell $34.8 million from fiscal year-end; DSO was 39 days versus 44 days in the prior-year second quarter.
- Cash, cash equivalents and short-term investments increased by $68.5 million from fiscal year-end, including property-sale proceeds. Share repurchases also increased from $35.0 million in the prior-year six-month period to $51.5 million.
- Progress adopted ASU 2020-06 on December 1, 2021, changing convertible-note accounting and diluted EPS methodology. The adoption reduced additional paid-in capital by $47.5 million and increased opening retained earnings by $4.9 million; prior-period statements were not restated.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided in the filing. Management said existing cash, operating cash generation and available credit were expected to fund operations and foreseeable requirements for at least the next 12 months.
- Management cited economic, geopolitical and market volatility; foreign-exchange movements; transaction timing and renewal rates; cloud and subscription-model transitions; product development; channel-partner reliance; cybersecurity; acquisition integration and realization of Kemp benefits; COVID-19; and the Russia-Ukraine conflict as risks.
- The January 2022 amended credit agreement provides a $275 million secured term loan and $300 million secured revolving facility. It includes leverage and interest-coverage covenants, customary restrictions and events of default; the term loan bears a 2.63% rate as of May 31, 2022.
- Remaining restructuring liabilities were $4.7 million, primarily facility-related costs from the Chef and Kemp integrations. Management expected additional fiscal 2022 restructuring costs to be immaterial. Ordinary-course legal proceedings were not expected by management to have a material financial effect.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and ARR growth reflects Kemp versus organic growth, and how reported growth compares with constant-currency growth.
- The sustainability of earnings and margins after excluding the $10.8 million property-sale gain, while accounting for acquired-intangible amortization and acquisition-related costs.
- Whether receivables collection improvements and operating cash flow are repeatable, and how cash is allocated among acquisitions, debt repayment, dividends and buybacks.
- Debt maturities, floating-rate exposure, covenant headroom and the credit facility’s maturity provisions in relation to the 2026 convertible notes.
- ARR and retention trends, including renewal and expansion performance; ARR is a company-defined metric and is not a forecast or a GAAP measure.