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PRGS > SEC Filings for PRGS > Form 10-Q on 9-Apr-2014All Recent SEC Filings

Show all filings for PROGRESS SOFTWARE CORP /MA

Form 10-Q for PROGRESS SOFTWARE CORP /MA


9-Apr-2014

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, 2013. 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 sale of our 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 the development, deployment and management of business applications on-premise or in the cloud, on any platform or device, to any data source, with enhanced performance, minimal IT complexity and low total cost of ownership. In 2013, we introduced the Progress Pacific platform-as-a-service (PaaS) that is the foundation of a strategic plan (the "Plan") we announced in April 2012. In April 2012, we announced our intention to become a leading provider of next-generation application development and deployment capabilities in the cloud for the PaaS market by investing in our OpenEdge, DataDirect, and Corticon product lines and integrating components of those products into a single, cohesive offering.

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


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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 core strategy and the divestiture allowed us to focus entirely on providing leading cloud and mobile application development and integration solutions. 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 furtherance of the Plan, we began to unify the product capabilities of our core product lines with the goal of refining and enhancing our next generation, feature-rich application development and deployment solution targeting the new market category of PaaS. To that end, during fiscal year 2013, we added new functionalities to our existing products. We also completed the acquisition of Rollbase, Inc., a provider of application development software 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, which provides users with the freedom to choose the development environment tools, data sources, deployment environments and devices that best fit business and user needs. It is comprised of Rollbase and DataDirect Cloud, together with assets from our OpenEdge, DataDirect and Corticon products.

As a result of our renewed focus on our core products, the enhancements to our existing products and improvement in our cost structure, we experienced improved financial performance during fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the cloud-based PaaS 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.

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 further 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.

In the first quarter of fiscal year 2014, we experienced a significant decrease in license revenue, primarily due to lower revenues related to our DataDirect and Corticon products in the North America and EMEA regions. We are in the process of making changes to our go to market sales coverage for DataDirect and Corticon and believe these changes will result in increasing our pipeline opportunities as well as our conversion to revenue. These changes may take time to impact performance.

As part of the Plan, in April 2012 our Board of Directors authorized us to repurchase $350.0 million of our common stock through fiscal year 2013, and in October 2012, under the authorization, we announced the adoption of a Rule 10b5-1 plan to repurchase up to $250.0 million of our common stock through June 30, 2013, or earlier. We completed the plan in May 2013, having repurchased 11.7 million shares for $250.0 million. In July 2013, our Board of Directors increased the authorization to $360.0 million, and we launched a new Rule 10b5-1 plan to repurchase up to $100.0 million of our common stock through December 31, 2013, or earlier. We completed this plan in October 2013, having repurchased 4.0 million shares for $100.0 million. Through November 30, 2013, we repurchased a total of 16.1 million shares for $357.9 million under the authorization.

In January 2014, our Board of Directors authorized a new $100.0 million share repurchase program. Under this authorization, we have repurchased 0.4 million shares for $9.8 million during the first quarter of fiscal year 2014.

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.

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 through at least the next twelve months.


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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
                                       February 28, 2014       February 28, 2013          2014 to 2013
Revenue:
Software licenses                                30 %                   36  %                   (26 )%
Maintenance and services                         70                     64                       (3 )
Total revenue                                   100                    100                      (11 )
Costs of revenue:
Cost of software licenses                         3                      3                       (4 )
Cost of maintenance and services                  7                      9                      (30 )
Amortization of acquired intangibles              1                      -                      281
Total costs of revenue                           11                     12                      (20 )
Gross profit                                     89                     88                      (10 )
Operating expenses:
Sales and marketing                              33                     34                      (14 )
Product development                              20                     16                       11
General and administrative                       16                     18                      (20 )
Amortization of acquired intangibles              -                      -                       (4 )
Restructuring expenses                            -                      1                      (80 )
Acquisition-related expenses                      1                      -                      100
Total operating expenses                         71                     69                       (9 )
Income from operations                           18                     19                      (11 )
Other (expense) income                            -                     (1 )                    101
Income from continuing operations
before income taxes                              19                     18                       (8 )
Provision for income taxes                        4                      6                      (46 )
Income from continuing operations                15                     12                       13
Income (loss) from discontinued
operations, net                                   -                     25                      100
Net income                                       15 %                   37  %                   (64 )%



Revenue

                           Three Months Ended                    Percentage Change
                                                                             Constant
(In thousands)  February 28, 2014      February 28, 2013     As Reported     Currency
Revenue        $            74,538    $            83,733        (11 )%         (10 )%

Total revenue decreased $9.2 million, or 11%, in the first quarter of fiscal year 2014 as compared to the same quarter last year. Revenue would have decreased by 10% if exchange rates had been constant in fiscal year 2014 as compared to exchange rates in fiscal year 2013. The decrease was primarily a result of a decrease in license revenue as further described below.

Changes in prices from fiscal year 2013 to 2014 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.


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License Revenue

                                                     Three Months Ended                      Percentage Change
                                                                                                          Constant
(In thousands)                             February 28, 2014     February 28, 2013     As Reported        Currency
License                                   $          22,264     $          29,907          (26 )%            (25 )%
As a percentage of total revenue                         30 %                  36 %

License revenue decreased $7.6 million, or 26%, in the first quarter of fiscal year 2014 as compared to the same quarter last year. The decrease in license revenue was primarily in the North America and EMEA regions, mainly as a result of lower revenues related to our DataDirect and Corticon products, and, to a lesser extent, sales of OpenEdge to direct end users.

Maintenance and Services Revenue

                                                     Three Months Ended                      Percentage Change
                                                                                                          Constant
(In thousands)                             February 28, 2014     February 28, 2013     As Reported        Currency
Maintenance                               $          50,181     $          51,456           (2 )%             (2 )%
As a percentage of total revenue                         67 %                  61 %
Professional services                                 2,093                 2,370          (12 )%            (12 )%
As a percentage of total revenue                          3 %                   3 %
Total maintenance and services revenue    $          52,274     $          53,826           (3 )%             (2 )%
As a percentage of total revenue                         70 %                  64 %

Maintenance and services revenue decreased $1.6 million in the first quarter of fiscal year 2014 as compared to the same quarter last year. Maintenance revenue decreased 2% and professional services revenue decreased 12% in the first quarter of fiscal year 2014 as compared to the first quarter of fiscal year 2013. The decrease in maintenance revenue is due to the impact of moving to a distributor model in certain markets in the Latin America region, as well as the loss of revenue from non-renewing customers more than offsetting the growth in maintenance revenue associated with new license sales, primarily in our EMEA region. Professional services revenue decreased in the first quarter of fiscal year 2014 due to the timing of professional service engagements.

Revenue by Region

                                                     Three Months Ended                      Percentage Change
                                                                                                          Constant
(In thousands)                             February 28, 2014     February 28, 2013     As Reported        Currency
North America                             $          34,586     $          39,310          (12 )%            (12 )%
As a percentage of total revenue                         47 %                  47 %
EMEA                                      $          29,315     $          32,548          (10 )%            (12 )%
As a percentage of total revenue                         39 %                  39 %
Latin America                             $           5,108     $           6,822          (25 )%            (14 )%
As a percentage of total revenue                          7 %                   8 %
Asia Pacific                              $           5,529     $           5,053            9  %             21  %
As a percentage of total revenue                          7 %                   6 %

Total revenue generated in North America decreased $4.7 million, and total revenue generated outside North America decreased $4.5 million, in the first quarter of fiscal year 2014 as compared to the same quarter last year. The decrease in North America was primarily related to a decrease in license revenue in the region, while the decrease in EMEA was due to lower license and maintenance revenue and the decrease in Latin America was primarily due to a decrease in maintenance revenue. Total revenue generated in markets outside North America represented 53% of total revenue in the first quarter of fiscal year 2014 and 2013. If exchange rates had remained constant in the first quarter of fiscal year 2014 as compared to the exchange


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rates in effect in the first quarter of fiscal year 2013, total revenue generated in markets outside North America would have been 54% of total revenue.

Cost of Software Licenses

                                                                        Three Months Ended
                                                                                                  Percentage
(In thousands)                                        February 28, 2014     February 28, 2013       Change
Cost of software licenses                            $           2,007     $           2,090          (4 )%
As a percentage of software license revenue                          9 %                   7 %
As a percentage of total revenue                                     3 %                   3 %

Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication and packaging. Cost of software licenses decreased $0.1 million, or 4%, in the first quarter of fiscal year 2014 as compared to the same quarter last year, and increased as a percentage of software license revenue from 7% to 9%. 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
                                                                                                  Percentage
(In thousands)                                        February 28, 2014     February 28, 2013       Change
Cost of maintenance and services                     $           5,345     $           7,650         (30 )%
As a percentage of maintenance and services revenue                 10 %                  14 %
As a percentage of total revenue                                     7 %                   9 %

Cost of maintenance and services consists primarily of costs of providing customer support, consulting and education. Cost of maintenance and services decreased $2.3 million, or 30%, in the first quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of maintenance and services revenue from 14% to 10%. The decrease in cost of maintenance and services is primarily due to lower compensation-related costs as a result of the significant decrease in headcount in this area, in addition to the decrease as a result of lower maintenance and services revenue compared to the first quarter of fiscal year 2013.

Amortization of Acquired Intangibles

                                                                         Three Months Ended
                                                                                                     Percentage
(In thousands)                                        February 28, 2014       February 28, 2013        Change
Amortization of acquired intangibles                 $            529       $            139             281 %
As a percentage of total revenue                                    1 %                    - %

Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles increased $0.4 million, or 281%, in the first quarter of fiscal year 2014 as compared to the same quarter last year. The increase was due to amortization of intangible assets acquired with the Rollbase acquisition, which was completed in the second quarter of fiscal year 2013, partially offset by decreases due to the completion of amortization of certain intangible assets acquired in prior years.


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Gross Profit

                                                   Three Months Ended
                                                                             Percentage
(In thousands)                    February 28, 2014     February 28, 2013      Change
Gross profit                     $          66,657     $          73,854        (10 )%
As a percentage of total revenue                89 %                  88 %

Our gross profit decreased $7.2 million, or 10%, in the first quarter of fiscal year 2014 as compared to the same quarter last year, and increased as a percentage of total revenue from 88% to 89%. The dollar decrease is primarily related to the decrease in license revenue while the cost of licenses remained relatively flat period over period.

Sales and Marketing

                                                   Three Months Ended
                                                                             Percentage
(In thousands)                    February 28, 2014     February 28, 2013      Change
Sales and marketing              $          24,509     $          28,642        (14 )%
As a percentage of total revenue                33 %                  34 %

Sales and marketing expenses decreased $4.1 million, or 14%, in the first quarter of fiscal year 2014 as compared to the same quarter last year, and decreased as a percentage of total revenue from 34% to 33%. The decrease was primarily due to lower compensation-related and travel costs in the sales function as a result of headcount reduction actions occurring subsequent to the first quarter of fiscal year 2013, as well as lower commissions expense due to the lower level of license revenue as compared to the first quarter of fiscal year 2013. Marketing expenses were relatively consistent between the two periods.

Product Development

                                                                        Three Months Ended
                                                                                                  Percentage
(In thousands)                                        February 28, 2014     February 28, 2013       Change
Product development costs                            $          15,934     $          13,622           17 %
Capitalized product development costs                             (821 )                   -          100 %
Total product development expense                    $          15,113     $          13,622           11 %
As a percentage of total revenue                                    20 %                  16 %

Product development expenses increased $1.5 million, or 11%, in the first quarter of fiscal year 2014 as compared to the same quarter last year, and increased as a percentage of revenue from 16% to 20%. The increase was primarily due to higher costs related to our new product development strategy, including higher expenses related to building our Progress Pacific platform. The increase was partially offset by the deferral of capitalized product development costs related to certain development of our Progress Pacific platform beginning in the fourth quarter of fiscal year 2013.

General and Administrative

                                                   Three Months Ended
                                                                             Percentage
(In thousands)                    February 28, 2014     February 28, 2013      Change
General and administrative       $          11,727     $          14,666        (20 )%
As a percentage of total revenue                16 %                  18 %

General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased $2.9 million, or 20%, in the first quarter of fiscal year 2014 as compared to the same quarter in the prior year, and decreased as a percentage of revenue from 18% to 16%. The


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decrease is primarily related to lower compensation-related costs as a result of headcount reduction actions occurring subsequent to the first quarter of fiscal year 2013, as well as lower professional services costs.

Amortization of Acquired Intangibles

                                                                          Three Months Ended
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