Business context and reporting period
Progress Software Corporation’s Form 10-K covers the fiscal year ended November 30, 2017. Progress sells application development, data connectivity, and deployment software, primarily through perpetual licenses, maintenance and services, and some subscription offerings. Its three segments are OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment (AppDev). The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $397.6 million | $405.3 million |
| Software license revenue | $124.4 million | $134.9 million |
| Maintenance and services revenue | $273.2 million | $270.5 million |
| Gross profit / margin | $328.4 million / 83% | $339.6 million / 84% |
| Operating income (loss) / margin | $70.6 million / 18% | ($29.7 million) / (7%) |
| Net income (loss) | $37.4 million | ($55.7 million) |
| Diluted earnings (loss) per share | $0.77 | ($1.13) |
| Operating cash flow | $105.7 million | $102.8 million |
At year-end, cash, cash equivalents and short-term investments totaled $183.6 million, down from $249.8 million. Current assets were $263.4 million and current liabilities $208.0 million. Long-term debt, including the current portion, was $121.9 million; the amended credit facility had a $123.8 million term loan outstanding and no revolving borrowings. The facility matures in November 2022, and $6.2 million of principal was due within 12 months. The company reported compliance with its financial covenants.
Revenue backlog was $159.4 million, compared with $164.1 million a year earlier; it included $142.3 million of deferred revenue and $17.2 million of multi-year licensing arrangements not on the balance sheet. These figures are not necessarily comparable to other companies’ backlog measures.
Material changes versus the prior period
- Revenue fell 2%. License revenue declined 8%, principally because of the timing of DCI OEM renewals; maintenance revenue grew 1% while professional services revenue declined 1%.
- OpenEdge revenue was essentially flat at $276.2 million. DCI revenue decreased 15% to $41.0 million, and AppDev revenue decreased 1% to $80.4 million.
- Operating results improved substantially from the prior-year loss, largely because FY2016 included a $92.0 million goodwill impairment and $5.1 million intangible-asset impairment, and FY2017 benefited from lower operating expenses. FY2017 still included $22.2 million of restructuring charges.
- Cash from operations increased about 3%. Cash declined mainly due to $77.2 million of net acquisition payments, $73.9 million of share repurchases, $24.1 million of dividends, and debt payments.
- FY2017 fourth-quarter revenue was $116.1 million and net income was $16.4 million; FY2016 fourth-quarter revenue was $117.7 million and net loss was $73.8 million, including the goodwill impairment.
Outlook, management commentary, risks and unusual items
Management described a strategy shift toward “Cognitive Applications,” combining developer tools, cloud backend services, data connectivity, business rules, and predictive analytics. The company acquired DataRPM for $30.0 million and Kinvey for $49.2 million in 2017. Both were included in OpenEdge from their acquisition dates, and management said their individual post-acquisition results were not significant to consolidated results.
The company discontinued investment in its Digital Factory strategy, consolidated facilities, reduced external spending, and cut headcount by more than 400 employees—over 20% of its workforce. Management said full-year expenses were reduced by more than $30 million by year-end. FY2017 restructuring expense was $22.2 million; additional facility-closure costs were expected in early FY2018 but were not expected to be material. Remaining restructuring reserves were $4.1 million.
Management believed cash, operating cash flow and available credit would fund foreseeable needs for at least 12 months. It targeted returning approximately 50% of annual operating cash flow through repurchases and 25–30% through dividends, and expected to repurchase $120 million of shares in FY2018. These are plans, not guaranteed distributions; the filing says repurchases may be changed or suspended and dividends may be modified or terminated.
- Key risks: dependence on OpenEdge and indirect channel partners; renewal and order timing, especially OEM agreements; intense competition and rapid technology change; execution and returns from cloud, Cognitive-First and IIoT investments; foreign-currency exposure; privacy, security and software-defect risks; and ability to meet debt covenants and capital-return targets.
- Tax and accounting items: The December 2017 U.S. tax law had no FY2017 impact. Management was assessing its FY2018 effects, including a possible one-time deferred-tax remeasurement. ASC 606 adoption was planned for December 1, 2018, with potential changes to the timing of license revenue recognition.
- Other unusual matters: The company recorded $2.0 million of fees related to shareholder activist Praesidium, which sought board changes; further fees were expected in FY2018. A $1.5 million acquisition of MightyMeeting, founded and partly owned by the company’s CTO, was disclosed as a related-party transaction and was not material to results.
- Management said ordinary-course legal matters were not expected to have a material effect. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the strategy and acquisitions produce durable growth, particularly given the 2% revenue decline and lower license sales.
- How much operating improvement reflects lasting cost savings versus the prior year’s $92.0 million impairment comparison and FY2017 restructuring.
- Renewal trends and customer retention, especially the lost large OpenEdge maintenance customer and timing of DCI OEM renewals.
- Cash generation after acquisitions, dividends, repurchases, debt service, and remaining restructuring payments; also monitor covenant headroom.
- The realized FY2018 tax-law impact and ASC 606 effects on reported revenue timing and comparability.
- Execution of the announced $120 million FY2018 repurchase plan and capital-return targets, alongside investment needs and activist-related costs.