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PRGS > SEC Filings for PRGS > Form 10-Q on 10-Jul-2013All Recent SEC Filings

Show all filings for PROGRESS SOFTWARE CORP /MA

Form 10-Q for PROGRESS SOFTWARE CORP /MA


10-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain "forward-looking" statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we "expect," "estimate," "believe," "are planning" or "plan to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements, including but not limited to the following: the receipt and shipment of new orders; the timely release and market acceptance of new products and/or enhancements to our existing products; the growth rates of certain market segments; the positioning of our products in those market segments; the customer demand and acceptance of any new product initiative; variations in the demand for professional services and technical support; pricing pressures and the competitive environment in the software industry; the continued uncertainty in the U.S. and international economies, which could result in fewer sales of our products and may otherwise harm our business; business and consumer use of the Internet; our ability to complete and integrate acquisitions; our ability to realize the expected benefits and anticipated synergies from acquired businesses; our ability to penetrate international markets and manage our international operations; our ability to execute on the strategic and operational initiatives we are currently undertaking, including any resulting disruption to our business, employees, customers and the manner in which we finance our operations; our ability to absorb allocated costs, primarily general and administrative, into our operations subsequent to the divestitures occurring; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.

Use of Constant Currency

Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).

Revised Prior Period Amounts

Our financial results for prior periods have been revised, in accordance with GAAP, to reflect certain changes to the business. Prior period amounts have been revised for the impact of discontinued operations due to the sales or expected sale of our product lines not considered core to our business. Refer to Note 6 of Item 1 of this Quarterly Report on Form 10-Q for an additional description of this item.

Overview

We are a global software company that simplifies and enables the development, deployment and management of business applications on-premise or on any Cloud, on any platform and on any device with minimal IT complexity and low total cost of ownership. In April 2012, we announced a new strategic plan (the "Plan") in which we stated our intention to become a leading provider of a next-generation, context-aware application development and deployment platform in the Cloud for the Application Platform- as-a-Service (aPaas) market. We stated that we would accomplish this objective by investing in our OpenEdge, DataDirect and Decision Analytics product lines and integrating them into a single, cohesive offering.

The Plan is being executed in two phases. In the first phase, we invested in our OpenEdge and DataDirect product lines to make them more Cloud-ready. We also divested ten product lines which we did not consider core to our business:
Actional,


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Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. In the second half of fiscal year 2012, we also executed on cost reductions as part of the Plan, including the reduction of 11% of our workforce.

Our financial results for fiscal year 2012 were adversely impacted by factors related to the planning, announcement and execution of the first phase of the Plan, which also included the undertaking of large restructuring efforts and the marketing for divestiture and actual sale of the ten non-core product lines. These factors contributed to a very uncertain environment for our company, partners, customers and employees. In particular, during the second and third quarters of fiscal year 2012, customer purchasing decisions were delayed, which caused deal slippage at a greater rate than usual. This was caused both by uncertainty surrounding the Plan and generally deteriorating macroeconomic conditions, primarily in Europe.

In fiscal year 2012 and the first quarter of fiscal year 2013, we entered into definitive purchase and sale agreements to divest the product lines which are not considered core to our business. All divestitures were completed by the end of the first quarter of fiscal year 2013. The aggregate purchase price was approximately $130.0 million. As a result of the divestitures of all the product lines not considered core to our business, we ceased reporting the results of those operations as a separate reportable segment. Beginning in fiscal year 2013, we now operate as one reportable segment.

In the second phase of the Plan, we have begun to unify the product capabilities of our core product lines, which will refine and enhance our next generation, feature-rich application development and deployment solution targeting the new market category of aPaaS. To that end, during the first six months of fiscal year 2013, we added new functionalities to our existing products in furtherance of the Plan. We also completed the acquisition of Rollbase, Inc., a provider of Application Platform-as-a-Service (aPaas) technology that allows the rapid design, development and deployment of on-demand business applications. Lastly, in June 2013, we announced the upcoming release of Progress Pacific, an easy-to-use platform for building and managing "connected apps" on any cloud, mobile or social platform, combining Rollbase with our existing Open Edge, DataDirect and Corticon products in a single platform.

As a result of the enhancements to our existing products and renewed focus on our core products, we have experienced improved financial performance during the first half of fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the aPaas market. As a result, we anticipate continued reinvestment in our products will be necessary and sustainable increases in revenue may not be foreseeable in the near term. Overall, our investments to improve our product lines require time to impact performance. Until these investments are realized, our operating margins will be adversely impacted.

In addition, our new business focus and new strategy has required us to restructure our organization and the way we go to market, how we think about and implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption and could cause additional disruption in the future as we implement our new go to market plans. Our operating performance is also being adversely impacted by temporarily higher expense levels as we transition away from the product lines we divested. We expect to be impacted by higher expense levels until all appropriate steps are taken under our Plan to improve our operating margin.

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations.

In June 2013, we entered into a definitive purchase and sale agreement to divest our Apama product line to Software AG. The target market, deployment and sales model for the Apama product line differs significantly from those of our aPaas strategy and the divestiture allows us to focus entirely on providing leading cloud and mobile application development technologies through a single cohesive platform. The sale is expected to close in July 2013 for $44.3 million.

We believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit line will be sufficient to finance our operations and meet our foreseeable cash requirements, including our plans to repurchase shares of our common stock, through at least the next twelve months.

Our Board of Directors also authorized us to repurchase $350.0 million of our common stock through November 2013. In October 2012, under the authorization, we announced the adoption of a 10b5-1 plan to repurchase up to $250.0 million of our common stock through June 30, 2013, or earlier. We completed the 10b5-1 plan in May 2013, having repurchased 11.7 million shares of our common stock for $250.0 million. Through May 31, 2013, we have repurchased a total of 12.1 million shares for $257.9 million under the $350.0 million authorization.


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In June 2013, we announced the adoption of a Rule 10b5-1 share repurchase plan for the purpose of repurchasing up to $100 million of our common stock as part of our previously announced repurchase authorization, which the Board of Directors increased by $10 million to $360 million. The plan will be active from July 1, 2013 until December 31, 2013 or, if earlier, upon the repurchase of $100 million of our common stock under the plan. As of July 1, 2013, we have repurchased 86,000 shares of our common stock for $2.0 million under this plan.

Results of Operations

The following table sets forth certain income and expense items as a percentage
of total revenue, and the percentage change in dollar amounts of such items
compared with the corresponding period in the previous fiscal year:

                                           Percentage of Total Revenue                                    Percentage Change
                              Three Months Ended                   Six Months Ended
                        May 31, 2013       May 31, 2012     May 31, 2013      May 31, 2012    Three Months Ended      Six Months Ended
Revenue:
Software licenses            36  %               28  %           36  %              32  %               43  %                 18  %
Maintenance and
services                     64                  72              64                 68                  (2 )                   -
Total revenue               100                 100             100                100                  10                     6
Costs of revenue:
Cost of software
licenses                      2                   2               2                  2                   -                    26
Cost of maintenance
and services                  9                  10               9                  9                  (2 )                   4
Amortization of
acquired intangibles          -                   -               -                  -                   3                   (26 )
Total costs of revenue       11                  12              11                 11                  (1 )                   7
Gross profit                 89                  88              89                 89                  12                     5
Operating expenses:
Sales and marketing          32                  26              33                 27                  34                    29
Product development          18                  14              17                 13                  41                    37
General and
administrative               17                  24              17                 21                 (22 )                 (14 )
Amortization of
acquired intangibles          -                   -               -                  -                 (20 )                 (19 )
Restructuring expenses        3                   6               2                  3                 (42 )                 (21 )
Acquisition-related
expenses                      2                   -               1                  -                 100                   492
Total operating
expenses                     72                  70              70                 64                  12                    15
Income from operations       17                  18              19                 25                  12                   (20 )
Other (expense) income        -                   -              (1 )                -                (217 )                (262 )
Income from continuing
operations before
income taxes                 17                  18              18                 25                   8                   (24 )
Provision for income
taxes                         7                   6               7                  9                  42                   (17 )
Income from continuing
operations                   10                  12              11                 16                  (8 )                 (27 )
Income (loss) from
discontinued
operations, net              (5 )               (15 )            10                (12 )                61                   189
Net income                    5  %               (3 )%           21  %               4  %              305  %                528  %


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Revenue

                      Three Months Ended                Percentage Change
                                                                     Constant
(In thousands)  May 31, 2013      May 31, 2012      As Reported      Currency
Revenue        $       81,705    $       74,128         10 %              12 %



                       Six Months Ended                 Percentage Change
                                                                      Constant
(In thousands)  May 31, 2013      May 31, 2012      As Reported       Currency
Revenue        $      165,438    $      156,599         6 %                 6 %

Total revenue increased $7.6 million, or 12% on a constant currency basis and 10% using actual exchange rates, in the second quarter of fiscal year 2013 as compared to the same quarter last year and increased $8.8 million, or 6% on a constant currency basis and 6% using actual exchange rates, in the first six months of fiscal year 2013 as compared to the same period in the prior year. The increase was primarily a result of an increase in license revenue, driven by an increased focus on OpenEdge and DataDirect products in the North America and EMEA regions.

Changes in prices from fiscal year 2012 to 2013 did not have a significant impact on our revenue. Changes in foreign currency exchange rates negatively impacted our reported revenues.

License Revenue

                                                Three Months Ended                 Percentage Change
                                                                                                 Constant
(In thousands)                             May 31, 2013     May 31, 2012     As Reported         Currency
License                                   $     29,347     $     20,506           43 %               45 %
As a percentage of total revenue                    36 %             28 %



                                                 Six Months Ended                  Percentage Change
                                                                                                 Constant
(In thousands)                             May 31, 2013     May 31, 2012     As Reported         Currency
License                                   $     59,254     $     50,179           18 %               19 %
As a percentage of total revenue                    36 %             32 %

License revenue increased $8.8 million, or 43%, in the second quarter of fiscal year 2013 as compared to the same quarter last year, and increased $9.1 million, or 18%, in the first six months of fiscal year 2013 as compared to the same period last year. The increase was driven by an increased focus on OpenEdge and DataDirect products in the North America and EMEA regions.

Maintenance and Services Revenue

                                                Three Months Ended                 Percentage Change
                                                                                                Constant
(In thousands)                             May 31, 2013     May 31, 2012     As Reported        Currency
Maintenance                               $     50,419     $     51,350           (2 )%             (1 )%
As a percentage of total revenue                    62 %             69 %
Professional services                            1,939            2,272          (15 )%            (14 )%
As a percentage of total revenue                     2 %              3 %
Total maintenance and services revenue    $     52,358     $     53,622           (2 )%             (1 )%
As a percentage of total revenue                    64 %             72 %


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                                                  Six Months Ended                   Percentage Change
                                                                                                  Constant
(In thousands)                             May 31, 2013      May 31, 2012      As Reported        Currency
Maintenance                               $     101,875     $     101,515            -  %              1  %
As a percentage of total revenue                     62 %              65 %
Professional services                             4,309             4,905          (12 )%            (12 )%
As a percentage of total revenue                      2 %               3 %
Total maintenance and services revenue    $     106,184     $     106,420            -  %              1  %
As a percentage of total revenue                     64 %              68 %

Maintenance and services revenue decreased $1.3 million, or 2%, in the second quarter of fiscal year 2013 as compared to the same quarter last year. Maintenance revenue decreased 2% and professional services revenue decreased 15% in the second quarter of fiscal year 2013 as compared to the second quarter of fiscal year 2012.

Maintenance and services revenue was flat in the first six months of fiscal year 2013 as compared to the same period last year, primarily as a result of maintenance revenue remaining consistent year over year. Professional services revenue decreased 12% in the first six months of fiscal year 2013 as compared to the first six months of fiscal year 2012.

Maintenance revenue remained flat in the second quarter of fiscal year 2013 and the first six months of fiscal year 2013 compared to the same time periods of the previous year as maintenance renewal rates remained consistent with our historical rates. Professional services revenue decreased due to a lower number of professional services engagements.

Revenue by Region

                                                Three Months Ended                Percentage Change
                                                                                              Constant
(In thousands)                             May 31, 2013     May 31, 2012      As Reported     Currency
North America                             $     37,540     $     32,190           17  %             17  %
As a percentage of total revenue                    46 %             44 %
EMEA                                      $     33,481     $     30,689            9  %             11  %
As a percentage of total revenue                    41 %             41 %
Latin America                             $      6,526     $      6,660           (2 )%              4  %
As a percentage of total revenue                     8 %              9 %
Asia Pacific                              $      4,158     $      4,589           (9 )%             (7 )%
As a percentage of total revenue                     5 %              6 %



                                                 Six Months Ended                  Percentage Change
                                                                                                 Constant
(In thousands)                             May 31, 2013     May 31, 2012      As Reported        Currency
North America                             $     76,849     $     68,932           11  %              11  %
As a percentage of total revenue                    46 %             44 %
EMEA                                      $     66,029     $     64,197            3  %               3  %
As a percentage of total revenue                    40 %             41 %
Latin America                             $     13,348     $     14,046           (5 )%               3  %
As a percentage of total revenue                     8 %              9 %
Asia Pacific                              $      9,212     $      9,424           (2 )%              (1 )%
As a percentage of total revenue                     6 %              6 %

Total revenue generated in North America increased $5.4 million, or 17%, as compared to the same quarter last year, and represented 46% and 44% of total revenue in the second quarter of fiscal years 2013 and 2012, respectively. Total revenue generated in markets outside North America increased $2.2 million, or 8% on a constant currency basis and 5% using actual


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exchange rates, in the second quarter of fiscal year 2013 as compared to the same quarter last year, and represented 54% and 56% of total revenue in the second quarter of fiscal year 2013 and 2012, respectively. If exchange rates had remained constant in the second quarter of fiscal year 2013 as compared to the exchange rates in effect in the second quarter of fiscal year 2012, total revenue generated in markets outside North America would have represented 55% of total revenue.

Total revenue generated in North America increased $7.9 million, or 11%, as compared to the same period last year, and represented 46% and 44% of total revenue in the first six months of fiscal year 2013 and 2012, respectively. Total revenue generated in markets outside North America increased $0.9 million, or 3% on a constant currency basis and 1% using actual exchange rates, in the first six months of fiscal year 2013 as compared to the same period last year, and represented 54% and 56% of total revenue in the first six months of fiscal 2013 and 2012, respectively. If exchange rates had remained constant in the first six months of fiscal year 2013 as compared to the exchange rates in effect in the first six months of fiscal year 2012, total revenue generated in markets outside North America would have represented 54% of total revenue.

In the second quarter and first six months of fiscal year 2013, Latin America and Asia Pacific were hurt by weaker local currencies. Asia Pacific was also negatively impacted as we transitioned sales leadership in that region.

Cost of Software Licenses

                                            Three Months Ended                                  Six Months Ended
                                                                 Percentage                                         Percentage
(In thousands)                May 31, 2013     May 31, 2012        Change         May 31, 2013     May 31, 2012       Change
Cost of software licenses    $      1,356     $      1,357           -  %        $      3,446     $      2,743          26 %
As a percentage of software
license revenue                         5 %              7 %                                6 %              5 %
As a percentage of total
revenue                                 2 %              2 %                                2 %              2 %

Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses was flat in the second quarter of fiscal year 2013 as compared to the same quarter last year, and decreased as a percentage of software license revenue from 7% to 5%. Cost of software licenses increased $0.7 million, or 26%, in the first six months of fiscal year 2013 as compared to the same period last year, and increased as a percentage of software license revenue from 5% to 6%. The increase in the first six months of fiscal year 2013 was primarily due to higher royalty expense for products and technologies licensed or resold from third parties. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services

                                           Three Months Ended                                 Six Months Ended
                                                                Percentage                                        Percentage
(In thousands)                May 31, 2013     May 31, 2012       Change        May 31, 2013     May 31, 2012       Change
Cost of maintenance and
services                     $      6,990     $      7,114          (2 )%      $     14,640     $     14,039           4 %
As a percentage of
maintenance and services
revenue                                13 %             13 %                             14 %             13 %
As a percentage of total
revenue                                 9 %             10 %                              9 %              9 %

Cost of maintenance and services consists primarily of costs of providing customer support, consulting and education. Cost of maintenance and services decreased $0.1 million, or 2%, in the second quarter of fiscal year 2013 as compared to the same quarter last year, and remained stable as a percentage of maintenance and services revenue at 13%. Cost of maintenance and services . . .

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