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PRGS > SEC Filings for PRGS > Form 10-Q on 9-Oct-2013All Recent SEC Filings

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Form 10-Q for PROGRESS SOFTWARE CORP /MA


9-Oct-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 of our product lines not considered core to our business and the Apama product line. 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 we did not consider 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 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 differed significantly from those of our aPaas strategy and the divestiture allowed us to focus entirely on providing leading cloud and mobile application development technologies through a single cohesive platform. The sale closed in July 2013 for a purchase price of $44.3 million. Our operating performance was adversely impacted by temporarily higher expense levels and restructuring costs as we transitioned away from the product lines we divested.

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 nine 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 July 2013, we announced the 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 nine months of fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the cloud-based 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 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 cloud strategy will require continued investment in product development and cloud operations as well as a change in the way we price and deliver our products. Over time, we may experience some shift from perpetual license sales and distribution of our software if our customers desire the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period.

Our Board of Directors also authorized us to repurchase $360.0 million of our common stock through December 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.

In June 2013, we announced the adoption of a Rule 10b5-1 share repurchase plan for the purpose of repurchasing up to $100.0 million of our common stock as part of our previously announced repurchase authorization. The plan will be active from July 1, 2013 until December 31, 2013 or, if earlier, upon the repurchase of $100.0 million of our common stock under the plan. Through August 31, 2013, we have repurchased 2.7 million shares for $67.9 million under this plan. As of October 2, 2013, we have repurchased 3.4 million shares of our common stock for $84.7 million under the 10b5-1 plan.

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign


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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.

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.

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                        Nine Months Ended
                        August 31, 2013       August 31, 2012     August 31, 2013      August 31, 2012     Three Months Ended     Nine Months Ended
Revenue:
Software licenses              33 %                 30  %               35  %                  32  %                 13  %                 17  %
Maintenance and
services                       67                   70                  65                     68                     -                     -
Total revenue                 100                  100                 100                    100                     4                     5
Costs of revenue:
Cost of software
licenses                        2                    2                   2                      2                    15                    22
Cost of maintenance
and services                    8                   11                   9                     10                   (20 )                  (4 )
Amortization of
acquired intangibles            1                    -                   -                      -                   281                    55
Total costs of revenue         11                   13                  11                     12                   (10 )                   1
Gross profit                   89                   87                  89                     88                     6                     6
Operating expenses:
Sales and marketing            32                   34                  33                     29                    (2 )                  18
Product development            19                   17                  18                     14                    16                    29
General and
administrative                 18                   19                  17                     21                    (5 )                 (11 )
Amortization of
acquired intangibles            -                    -                   -                      -                     2                   (12 )
Restructuring expenses          7                    2                   4                      3                   283                    48
Acquisition-related
expenses                        1                    -                   1                      -                   100                   937
Total operating
expenses                       77                   72                  73                     67                    11                    14
Income from operations         12                   15                  16                     21                   (14 )                 (19 )
Other (expense) income          -                    -                   -                      -                   (50 )                (176 )
Income from continuing
operations before
income taxes                   12                   15                  16                     21                   (16 )                 (22 )
Provision for income
taxes                           3                    5                   6                      8                   (32 )                 (20 )
Income from continuing
operations                      9                   10                  10                     13                    (7 )                 (22 )
Income (loss) from
discontinued
operations, net                23                   (3 )                14                     (9 )               1,025                   265
Net income                     32 %                  7  %               24  %                   4  %                326  %                424  %


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Revenue

                         Three Months Ended                  Percentage Change
                                                                           Constant
(In thousands)  August 31, 2013     August 31, 2012      As Reported       Currency
Revenue        $         77,578    $          74,371         4 %                 4 %



                          Nine Months Ended                   Percentage Change
                                                                            Constant
(In thousands)  August 31, 2013      August 31, 2012      As Reported       Currency
Revenue        $         243,016    $         230,970         5 %                 6 %

Total revenue increased $3.2 million, or 4% on an actual and constant currency basis, in the third quarter of fiscal year 2013 as compared to the same quarter last year and increased $12.0 million, or 6% on a constant currency basis and 5% using actual exchange rates, in the first nine 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 as further described below.

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

License Revenue

                                                   Three Months Ended                    Percentage Change
                                                                                                       Constant
(In thousands)                             August 31, 2013     August 31, 2012     As Reported         Currency
License                                   $        25,666     $        22,637           13 %               13 %
As a percentage of total revenue                       33 %                30 %



                                                    Nine Months Ended                    Percentage Change
                                                                                                       Constant
(In thousands)                             August 31, 2013     August 31, 2012     As Reported         Currency
License                                   $        84,920     $        72,816           17 %               17 %
As a percentage of total revenue                       35 %                32 %

License revenue increased $3.0 million, or 13%, in the third quarter of fiscal year 2013 as compared to the same quarter last year, and increased $12.1 million, or 17%, in the first nine months of fiscal year 2013 as compared to the same period last year. The increase in license revenue for the third quarter of fiscal year 2013 was primarily driven by higher revenue for our OpenEdge and Corticon products in the EMEA and Asia Pacific regions, offset by lower revenue for DataDirect products due to timing of deal closures and revenue recognition on multi-year OEM agreements. The increase in license revenue for the first nine months of fiscal year 2013 was primarily driven by higher revenue for our OpenEdge and Corticon products in the North America, EMEA and Asia Pacific regions, offset by lower revenue for DataDirect products due to timing of deal closures and revenue recognition on multi-year OEM agreements.


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Maintenance and Services Revenue

                                                   Three Months Ended                    Percentage Change
                                                                                                       Constant
(In thousands)                             August 31, 2013     August 31, 2012      As Reported        Currency
Maintenance                               $        49,752     $        50,285           (1 )%              (1 )%
As a percentage of total revenue                       64 %                68 %
Professional services                               2,160               1,449           49  %              47  %
As a percentage of total revenue                        3 %                 2 %
Total maintenance and services revenue    $        51,912     $        51,734            -  %               -  %
As a percentage of total revenue                       67 %                70 %



                                                    Nine Months Ended                      Percentage Change
                                                                                                          Constant
(In thousands)                             August 31, 2013     August 31, 2012       As Reported          Currency
Maintenance                               $       151,627     $       151,800            -  %                  - %
As a percentage of total revenue                       62 %                66 %
Professional services                               6,469               6,354            2  %                  2 %
As a percentage of total revenue                        3 %                 2 %
Total maintenance and services revenue    $       158,096     $       158,154            -  %                  - %
As a percentage of total revenue                       65 %                68 %

Maintenance and services revenue increased $0.2 million in the third quarter of fiscal year 2013 as compared to the same quarter last year. Maintenance revenue decreased 1% and professional services revenue increased 49% in the third quarter of fiscal year 2013 as compared to the third quarter of fiscal year 2012.

Maintenance and services revenue was flat in the first nine months of fiscal year 2013 as compared to the same period last year. Professional services revenue increased 2% in the first nine months of fiscal year 2013 as compared to the first nine months of fiscal year 2012.

Maintenance revenue remained flat in the third quarter of fiscal year 2013 and the first nine months of fiscal year 2013 compared to the same time periods of the previous year as the loss of revenue from non-renewing customers offset the growth in maintenance revenue associated with new license sales. Professional services revenue increased in the third quarter of fiscal year 2013 compared to the same time period of the previous year due to the timing of professional services engagements.

Revenue by Region

                                                   Three Months Ended                    Percentage Change
                                                                                                      Constant
(In thousands)                             August 31, 2013     August 31, 2012     As Reported        Currency
North America                             $        34,596     $        34,548            -  %              -  %
As a percentage of total revenue                       45 %                47 %
EMEA                                      $        32,315     $        28,155           15  %             10  %
As a percentage of total revenue                       42 %                38 %
Latin America                             $         5,496     $         6,905          (20 )%            (13 )%
As a percentage of total revenue                        7 %                 9 %
Asia Pacific                              $         5,171     $         4,763            9  %             18  %
As a percentage of total revenue                        6 %                 6 %


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                                                    Nine Months Ended                    Percentage Change
                                                                                                      Constant
(In thousands)                             August 31, 2013     August 31, 2012     As Reported        Currency
North America                             $       111,446     $       103,480            8  %              8  %
As a percentage of total revenue                       46 %                45 %
EMEA                                      $        98,344     $        92,352            6  %              5  %
As a percentage of total revenue                       40 %                40 %
Latin America                             $        18,844     $        20,951          (10 )%             (2 )%
As a percentage of total revenue                        8 %                 9 %
Asia Pacific                              $        14,382     $        14,187            1  %              6  %
As a percentage of total revenue                        6 %                 6 %

Total revenue generated in North America was flat compared to the same quarter last year, and represented 45% and 47% of total revenue in the third quarter of fiscal years 2013 and 2012, respectively. Total revenue generated in markets outside North America increased $3.2 million, or 7% on a constant currency basis and 8% using actual exchange rates, in the third quarter of fiscal year 2013 as compared to the same quarter last year, and represented 55% and 53% of total revenue in the third quarter of fiscal year 2013 and 2012, respectively. If exchange rates had remained constant in the third quarter of fiscal year 2013 as compared to the exchange rates in effect in the third 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 $8.0 million, or 8%, as compared to the same period last year, and represented 46% and 45% of total revenue in the first nine months of fiscal year 2013 and 2012, respectively. Total revenue generated in markets outside North America increased $4.1 million, or 4% on a constant currency basis and 3% using actual exchange rates, in the first nine months of fiscal year 2013 as compared to the same period last year, and represented 54% and 55% of total revenue in the first nine months of fiscal 2013 and 2012, respectively. If exchange rates had remained constant in the first nine months of fiscal year 2013 as compared to the exchange rates in effect in the first nine months of fiscal year 2012, total revenue generated in markets outside North America would have represented 54% of total revenue.

In the third quarter of fiscal year 2013, EMEA was helped by stronger local currencies. In the third quarter and first nine months of fiscal year 2013, Latin America and Asia Pacific were hurt by weaker local currencies.

Cost of Software Licenses

                                              Three Months Ended                                     Nine Months Ended
                                                                      Percentage                                             Percentage
(In thousands)                August 31, 2013     August 31, 2012       Change       August 31, 2013     August 31, 2012       Change
Cost of software licenses    $         1,587     $         1,375          15 %      $         5,033     $         4,117          22 %
As a percentage of software
license revenue                            6 %                 6 %                                6 %                 6 %
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 increased $0.2 million, or 15%, in the third quarter of fiscal year 2013 as compared to the same quarter last year, and remained consistent as a percentage of software license revenue at 6%. Cost of software licenses increased $0.9 million, or 22%, in the first nine months of fiscal year 2013 as compared to the same period last year, and remained consistent as a percentage of software license revenue at 6%. The increase in the third quarter and first nine months of fiscal year 2013 was primarily due to higher royalty expense for products and . . .

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