Progress Software Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended August 31, 2019. Comparative 2018 results were retrospectively adjusted for adoption of ASC 606.
Business context
Progress sells software licenses and related maintenance and services, including cloud subscriptions. It reports three segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment. Ipswitch, acquired April 30, 2019, was added to OpenEdge.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $106.7 million | $92.6 million | $296.3 million | $280.9 million |
| Operating income | $16.0 million | $19.1 million | $46.1 million | $56.8 million |
| Net income | $13.6 million | $14.4 million | $31.1 million | $41.0 million |
| Diluted EPS | $0.30 | $0.32 | $0.69 | $0.88 |
| Gross margin | 80% | 82% | 82% | 82% |
| Operating margin | 15% | 21% | 16% | 20% |
- Revenue grew 15% in Q3 and 5% for the nine months as reported; constant-currency growth was 17% and 8%, respectively. Ipswitch contributed $10.7 million and $14.0 million to those periods.
- Q3 software-license revenue rose 34%; maintenance and services revenue rose 9%. Nine-month growth was 16% and 2%, respectively. Segment growth was strongest in Data Connectivity and Integration, reflecting Ipswitch and the timing of OEM multi-year renewals.
- Operating income and net income declined despite higher revenue. Management cited higher operating costs, acquired-intangible amortization, restructuring and acquisition expenses, and increased interest expense.
- Nine-month operating cash flow was $91.9 million, down from $97.0 million. Investing cash outflow was $208.1 million, principally reflecting the $225.3 million net cash acquisition payment. Financing cash inflow was $138.8 million, including $185.0 million of debt proceeds.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $145.4 million at August 31, 2019, versus $139.5 million at November 30, 2018. Current assets were $236.3 million and current liabilities $215.3 million.
- Term-loan principal was $299.1 million; the balance-sheet carrying value of current and long-term debt was about $296.5 million. The $100 million revolving facility had no borrowings outstanding; $1.8 million of letters of credit were outstanding. The facility matures April 2024, and the company reported compliance with its financial covenants.
- The loan’s stated interest rate was 3.75% at period end. A swap covering an initial $150 million notional amount fixed part of variable-rate exposure at 1.855% through April 2024, subject to the contract terms.
- The company said available liquidity, operating cash generation and credit-facility availability should meet foreseeable needs for at least 12 months. It suspended share repurchases for the remainder of fiscal 2019 and expected to resume them in fiscal 2020. In September, the board raised the quarterly dividend to $0.165 per share.
Changes, outlook and notable items
- Ipswitch acquisition: Purchased for $225 million cash, funded with existing cash and new term-loan borrowing. Preliminary purchase accounting included $117.7 million of goodwill and $111.3 million of identifiable intangible assets; valuations remained subject to measurement-period adjustments.
- Subsequent restructuring and impairment risk: On September 26, Progress announced reduced spending on cognitive-application products, primarily DataRPM and Kinvey. It expected a fiscal Q4 restructuring charge of $2–$4 million and said it expected to write down related intangible assets, whose combined carrying value was $23.6 million. The impairment amount was not yet determined.
- Tax correction: A $3.6 million out-of-period tax benefit was recorded in Q3 to correct prior-quarter tax expense relating to an intercompany intellectual-property sale; the company said the prior-quarter errors were not material. The Q3 effective tax rate was negative 11%. Separately, an $8.2 million deferred-tax-asset adoption error was corrected in Q3 and also described as not material to the earlier quarters.
- Accounting change: ASC 606 was adopted retrospectively. It accelerated recognition of certain license revenue and changed reported comparative-period revenue and earnings, but did not affect total cash flows.
- Key risks: Revenue and license sales can fluctuate with deal timing and renewal rates; the company depends substantially on OpenEdge and indirect partners, faces foreign-exchange exposure, and competes in rapidly changing software markets. Acquisition integration, cloud-strategy execution, cybersecurity, privacy, and potential goodwill or intangible impairments are also identified risks. No material effect from ordinary-course legal proceedings was anticipated by management.
Important facts for investors to verify
- Whether Ipswitch contributes sustained growth and integration benefits sufficient to offset acquisition-related costs, amortization and higher debt expense.
- The eventual amount and timing of any DataRPM and Kinvey intangible-asset impairment and the Q4 restructuring charge.
- Debt repayment, interest-rate exposure, covenant headroom and the effect of the acquisition on future cash generation.
- Underlying revenue trends by segment, including OEM renewal timing, OpenEdge license performance and foreign-exchange effects.
- Progress’s stated liquidity outlook, planned dividend and buyback policy, and the effects of the tax corrections and retrospective ASC 606 presentation.