Progress Software Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars.
Business context and results
Progress sells software licenses and related maintenance and services through direct and indirect channels, including application partners and OEMs. Its three segments are OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. Management’s strategy centers on a platform for “Cognitive Applications,” combining application development, cloud backend, data connectivity, and machine-learning capabilities.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $93.2m | $96.1m | $184.2m | $185.6m |
| Gross profit / margin | $75.8m / 81% | $79.9m / 83% | $151.1m / 82% | $153.6m / 83% |
| Operating income / margin | $20.3m / 22% | $12.3m / 13% | $21.5m / 12% | $19.0m / 10% |
| Net income | $10.3m | $7.3m | $9.8m | $10.5m |
| Diluted EPS | $0.21 | $0.14 | $0.20 | $0.21 |
- Q2 revenue fell 3% reported (2% constant currency); first-half revenue declined 1% reported and was flat constant currency. License revenue decreased 11% in Q2 and 5% for the half year, primarily due to timing of OEM renewals in Data Connectivity and Integration.
- Maintenance and services revenue increased 1% in the first half. Application Development and Deployment revenue grew 5% in both periods; Data Connectivity and Integration revenue fell 29% in Q2 and 16% in the first half.
- Q2 operating income rose 64%, mainly on lower compensation, facilities, and marketing costs after workforce reductions. First-half operating income increased 13% despite $17.8m of restructuring expense.
- Q2 net income improved year over year, but first-half net income declined 6%. The first-half effective tax rate was 47%, versus 34% in 2016; the prior-year comparison included a $2.7m out-of-period tax benefit.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $59.7m, compared with $49.3m a year earlier. Investing cash outflow was $33.7m, including $28.3m net cash paid for the DataRPM acquisition. Financing cash outflow was $41.6m, including $25.0m of share repurchases, $12.1m of dividends, and $7.5m of debt principal payments.
- At May 31, cash and cash equivalents were $197.9m and short-term investments were $47.2m, totaling $245.1m, down $4.7m from November 30, 2016. Accounts receivable was $43.9m; DSO was 42 days versus 45 days in Q2 2016.
- Debt carrying value was $126.6m, with $127.5m principal outstanding on the term loan; $15.0m was due within 12 months. The variable rate was 2.75%. The $150m revolving facility had no borrowings and $0.5m of letters of credit; the company reported compliance with its covenants.
- The company repurchased $25.0m of shares in the first half and had $110.4m remaining under its authorization. It initiated a quarterly dividend of $0.125 per share.
- Deferred revenue was $142.1m; reported revenue backlog, including multi-year licensing arrangements, was $163.4m versus $167.6m a year earlier.
Material changes, outlook, and risks
- During the first half, Progress reduced its global workforce by approximately 20% and substantially completed the reductions by quarter-end. It recorded $17.8m of related restructuring costs; $7.2m of total restructuring reserves remained at May 31. Management expects about $20m of net annual run-rate cost reductions by fiscal year-end, after investment in the new product strategy. Additional facility-closure costs are expected but not considered material.
- Progress acquired DataRPM on March 1 for $30.0m, including approximately $1.7m in employment-conditioned restricted stock units. Preliminary purchase accounting included $12.6m of goodwill and $19.9m of purchased technology intangibles; the acquired business’s results were not material to reported results.
- After quarter-end, on June 1, Progress acquired Kinvey for $49.0m. The acquisition’s initial accounting was incomplete when the filing was issued; its results are to be included in OpenEdge from the acquisition date.
- Management said cash, operating cash generation, and available credit should fund operations and foreseeable requirements for at least 12 months, including dividends, debt repayment, restructuring, repurchases, and potential acquisitions. No specific revenue or earnings guidance was provided in the filing.
- Key risks include license-revenue volatility and OEM renewal timing; foreign exchange exposure (about 45% of revenue outside North America); reliance on OpenEdge and third-party channels; competition and the transition toward cloud and subscription offerings; and acquisition integration and execution of the new product strategy. The company also cited cybersecurity, privacy/regulatory, economic, and tax risks. It reported no material change in its risk-factor assessment and no legal matter expected to materially affect results.
Important facts for investors to verify
- Whether license sales and Data Connectivity and Integration renewals recover, and whether maintenance growth can offset license weakness.
- Whether workforce and spending changes deliver the targeted approximately $20m net annual run-rate savings without impairing product development, customer retention, or growth.
- Kinvey integration, acquisition costs, and the final purchase accounting for DataRPM and Kinvey.
- Cash generation and use, including dividends, buybacks, debt amortization, and the December 2019 credit-facility maturity; confirm covenant compliance in subsequent filings.
- The impact of the elevated effective tax rate and the prior-period $2.7m tax correction on future comparisons.