PRGS

Business Context and Reporting Period

Company: Progress Software Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: November 30, 2009
Business Overview: A global enterprise software company providing application development platforms, enterprise business solutions, and enterprise data solutions. The company enables operational responsiveness through real-time business solutions, event processing, and business process management.
Segment Reorganization: In Q4 2009, the company reorganized into three business units for fiscal 2010 reporting: Application Development Platforms, Enterprise Business Solutions, and Enterprise Data Solutions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 4% year-over-year. Excluding foreign exchange impacts, revenue would have increased 1%. The decline was driven by a 17% drop in the OpenEdge segment and a 9% drop in Data Infrastructure, partially offset by a 50% increase in the Enterprise Infrastructure segment (driven by the IONA acquisition).
• Profitability Pressure: Net income fell 29% to $32.8 million. Operating income decreased 21% due to lower gross profit and increased expenses related to recent acquisitions (Mindreef and IONA).
• Foreign Exchange Impact: The strengthening of the U.S. dollar in the first three quarters of 2009 negatively impacted the translation of international results, which account for approximately 55% of total revenue.
• Cost Structure: Product development expenses increased 6% due to headcount from acquisitions. Sales and marketing expenses decreased 7% due to restructuring and foreign exchange.

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Activity: On January 8, 2010, the company acquired Savvion, Inc. for approximately $49 million (net of cash) to expand its Enterprise Business Solutions unit. The company expects to pursue additional acquisitions in fiscal 2010.
• Restructuring Plan: In December 2009, management announced a restructuring plan to reduce the global workforce by 13-14% (230-260 positions) and consolidate offices. This is expected to result in a pre-tax charge of $19 million to $23 million in Q1 2010.
• Liquidity and Investments: The company holds approximately $40.7 million in non-current Auction Rate Securities (ARS) that lack short-term liquidity due to failed auctions. Management believes these are temporary impairments and expects to hold them for 2-5 years. A put option to sell certain ARS at par value to UBS is available starting June 30, 2010.
• Risk Factors: Key risks include the adverse global economic environment, potential delays in customer payments, integration risks from the Savvion acquisition, and continued volatility in foreign currency exchange rates.
• Internal Controls: A material weakness regarding the accumulation of cash flow data identified in Q2 2009 was remediated by November 30, 2009.

Investor Verification Checklist

• ARS Liquidity: Verify the status of the $40.7 million in illiquid Auction Rate Securities and the timeline for the UBS put option settlement.
• Restructuring Costs: Monitor Q1 2010 results for the anticipated $19-$23 million pre-tax restructuring charge and its impact on cash flow.
• OpenEdge Performance: Assess the continued decline in the core OpenEdge product line revenue (-17% YoY) and its impact on long-term growth.
• Acquisition Integration: Review the integration progress and financial contribution of the Savvion acquisition in the first quarter of fiscal 2010.
• Foreign Exchange Sensitivity: Evaluate the company's hedging strategies given that over 50% of revenue is generated outside North America.