Progress Software Reports Fiscal Third Quarter 2011 Results

BEDFORD, Mass.--()--Progress Software Corporation (NASDAQ: PRGS), a leading software provider that enables enterprises to be operationally responsive announced today results for its fiscal third quarter ended August 31, 2011. On a generally accepted accounting principles (GAAP) basis, revenue for the quarter was $128.3 million, compared to $128.7 million in the fiscal third quarter of 2010. On a non-GAAP basis, revenue totaled $128.4 million, compared to $128.8 million in the same period a year ago. Software license revenue decreased 13 percent to $38.7 million from $44.7 million in the same quarter last year.

On a GAAP basis in the fiscal third quarter of 2011:

  • Operating income decreased 18 percent to $13.5 million compared to $16.5 million in the same quarter last year;
  • Net income decreased 7 percent to $8.6 million compared to $9.2 million in the same quarter last year;
  • Diluted earnings per share decreased 7 percent to 13 cents compared 14 cents in the same quarter a year ago.

On a non-GAAP basis in the fiscal third quarter of 2011:

  • Operating income decreased 23 percent to $30.5 million compared to $39.7 million in the same quarter last year;
  • Net income decreased 17 percent to $20.6 million compared to $25.0 million in the same quarter last year;
  • Diluted earnings per share decreased 16 percent to 31 cents compared to 37 cents in the same quarter last year.

Richard D. Reidy, president and chief executive officer of Progress Software, said: “Our fiscal third quarter results were disappointing due to the decline in license revenue within the Enterprise Business Solutions (EBS) segment. The challenging macroeconomic environment in August, particularly within financial services, led some customers to postpone their purchasing decisions. With our focus on solution selling, delays in closing larger deals have a material impact on our quarterly results. Though we have greatly improved our sales capabilities over the last year, we are not consistently performing at desired levels. The EBS opportunity remains significant and will be the focus of the leadership team in driving continued growth.”

Reidy also noted: “Total revenue grew in the Application Development Platforms (ADP) segment due to continued strong performance in our application partner and OEM channels. Additionally, our Enterprise Data Solutions (EDS) segment exceeded expectations partly due to a number of larger deals that closed early in the quarter.”

Cash flow from operations for the quarter was $29.1 million, up from $19.6 million in the same quarter in fiscal 2010, and cash and short-term investments decreased to $346.5 million from $389.0 at the end of the fiscal second quarter 2011. Additionally, in August, the company obtained a $150 million unsecured credit facility from J.P. Morgan Chase Bank, N.A. and various other lenders, which may be increased by up to an additional $75 million under certain circumstances. As of August 31, 2011, the company had not borrowed any amount under this credit facility.

On June 27, 2011, the Board of Directors increased and extended the company’s stock buyback program by authorizing the repurchase of an additional $100 million of the company’s common stock (or an aggregate of $200 million) until May 31, 2012. During the third quarter, the company purchased approximately $70 million of its common stock and as of August 31, 2011, had approximately $65 million remaining under its existing repurchase authorization.

Business Outlook

Progress Software is providing the following guidance for the fiscal fourth quarter ending November 30, 2011:

  • On a GAAP and non-GAAP basis, revenue is expected to be in the range of $130 million to $134 million.
  • GAAP diluted earnings per share are expected to be in the range of 16 cents to 21 cents.
  • On a non-GAAP basis, diluted earnings per share are expected to be in the range of 30 cents to 33 cents.

Progress Software is providing the following updated guidance for the fiscal year ending November 30, 2011:

  • On a GAAP and non-GAAP basis, revenue is expected to be in the range of $527 million to $531 million.
  • GAAP diluted earnings per share are expected to be in the range of 84 cents to 89 cents.
  • On a non-GAAP basis, diluted earnings per share are expected to be in the range of $1.42 to $1.45.

Conference Call

The Progress Software quarterly investor conference call to review its fiscal third quarter 2011 results and business outlook will be broadcast live at 9:00 a.m. (EDT) on Wednesday, September 28, 2011 on the investor relations section of the company's website, located at www.progress.com. The conference call will include only brief comments followed by questions and answers. An archived version of the conference call and supporting materials will be available on the Progress Software Investor Relations Website after the live conference call.

Note to Editors

Progress Software is providing, in advance, a copy of prepared remarks for its conference call. These prepared remarks will not be read on the call. The press release, the prepared remarks, related presentations and additional financial disclosures are available on the Progress website www.progress.com within the investor relations section.

Progress Software Corporation

Progress Software Corporation (NASDAQ: PRGS) is a global software company that enables enterprises to be operationally responsive to changing conditions and customer interactions as they occur – to capitalize on new opportunities, drive greater efficiencies and reduce risk. The company offers a comprehensive portfolio of best-in-class infrastructure software spanning event-driven visibility and real-time response, open integration, data access and integration, and application development and deployment – all supporting on-premises and SaaS/Cloud deployments. Progress Software maximizes the benefits of operational responsiveness while minimizing IT complexity and total cost of ownership. Progress Software can be reached at www.progress.com or +1-781-280-4000.

Legal Notice Regarding Non-GAAP Financial Information

Progress Software provides non-GAAP revenue, operating income, operating margin, net income and earnings per share as additional information for investors. The non-GAAP amounts primarily exclude the amortization of acquired intangibles, stock-based compensation, restructuring and transition costs, acquisition-related costs and purchase accounting adjustments for deferred revenue. These non-GAAP measures are not in accordance with, or an alternative to, generally accepted accounting principles in the United States (GAAP). Such measures are intended to supplement GAAP and may be different from non-GAAP measures used by other companies. Progress Software believes that the non-GAAP results described in this release are useful for an understanding of its ongoing operations and provide additional detail and an alternative method of assessing its operating results. Management uses these non-GAAP results to compare the company's performance to that of prior periods for analysis of trends and for budget and planning purposes. A reconciliation of non-GAAP adjustments to the company's GAAP financial results is included in the tables below.

Note Regarding Forward-Looking Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which include statements regarding the company’s business outlook for its fiscal fourth quarter, 2011, and the full 2011 fiscal year and strategic plans, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including but not limited to the following: the receipt and shipment of new orders; the timely release of enhancements to the company’s products; the growth rates of certain market segments; the positioning of the company’s products in those market segments; the customer demand and acceptance of our new product initiatives, the Progress RPM suite; variations in the demand for professional services and technical support; pricing pressures and the competitive environment in the software industry; continuing uncertainty in the U.S. and international economies, which could result in fewer sales of the company’s products and may otherwise harm the company’s business; the company’s ability to complete and integrate acquisitions; the company’s ability to realize the expected benefits and anticipated synergies from acquired businesses; the company's ability to penetrate international markets and manage its international operations; and changes in exchange rates. The company undertakes no obligation to update information contained in this release. For further information regarding risks and uncertainties associated with the company's business, please refer to the company's filings with the Securities and Exchange Commission.

Progress is a trademark or registered trademark of Progress Software Corporation or one of its subsidiaries or affiliates in the U.S. and other countries. Any other trademarks contained herein are the property of their respective owners.

GAAP Condensed Consolidated Statements of Income

(In thousands, except per share data)
  Three Months Ended
August 31,   August 31,   Percentage
    2011   2010   Change
 
Revenue:
Software licenses $ 38,713 $ 44,748 (13 )%
Maintenance and services     89,621       83,989     7 %
Total revenue     128,334       128,737     0 %
Costs of revenue:
Cost of software licenses 2,321 2,025 15 %
Cost of maintenance and services 20,529 17,845 15 %
Amortization of purchased technology     3,966       4,839     (18 )%
Total costs of revenue     26,816       24,709     9 %
Gross profit     101,518       104,028     (2 )%
Operating expenses:
Sales and marketing 45,251 39,362 15 %
Product development 19,107 21,941 (13 )%
General and administrative 20,342 11,937 70 %
Amortization of other acquired intangibles 1,937 2,733 (29 )%
Restructuring expense 1,369 11,533 (88 )%
Acquisition-related expenses     -       53     (100 )%
Total operating expenses     88,006       87,559     1 %
Income from operations     13,512       16,469     (18 )%
Other income, net     (774 )     (1,720 )   55 %
Income before income taxes 12,738 14,749 (14 )%
Provision for income taxes     4,137       5,505     (25 )%
Net income   $ 8,601     $ 9,244     (7 )%
Earnings per share:
Basic $ 0.13 $ 0.14 (7 )%
Diluted   $ 0.13     $ 0.14     (7 )%
Weighted average shares outstanding:
Basic 65,861 64,836 2 %
Diluted     67,280       66,636     1 %

Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands, except per share data)

   
  Three Months Ended August 31, 2011    
As       Percentage
    Reported   Adjustments   Non-GAAP   Change
 
Total revenue (1) $ 128,334 $ 18 $ 128,352 0 %
 
Income from operations $ 13,512 $ 16,954 $ 30,466 (23 )%
Purchase accounting adjustments
for deferred revenue (1) (18 ) 18
Amortization of acquired intangibles (5,903 ) 5,903
Stock-based compensation (2) (9,468 ) 9,468
Transition expense (3) (196 ) 196
Restructuring expense (1,369 ) 1,369
 
Operating margin percentage 10.5 % 23.7 %
 
Other income (expense), net $ (774 ) $ - $ (774 ) 55 %
Provision for income taxes (5) $ 4,137 $ 4,923 $ 9,060 (30 )%
Net Income $ 8,601 $ 12,031 $ 20,632 (17 )%
 
Earnings per share $ 0.13 $ 0.31 (16 )%
 
Diluted shares outstanding     67,280       -     67,280     1 %
 
Three Months Ended August 31, 2010  
As
    Reported   Adjustments   Non-GAAP    
 
Total revenue (1) $ 128,737 $ 79 $ 128,816
 
Income from operations $ 16,469 $ 23,226 $ 39,695
Purchase accounting adjustments
for deferred revenue (1) (79 ) 79
Amortization of acquired intangibles (7,572 ) 7,572
Stock-based compensation (2) (3,989 ) 3,989
Restructuring expense (11,533 ) 11,533
Other (4) (53 ) 53
 
Operating margin percentage 12.8 % 30.8 %
 
Other income, net $ (1,720 ) - $ (1,720 )
Provision for income taxes (5) $ 5,505 $ 7,501 $ 13,006
Net Income $ 9,244 $ 15,725 $ 24,969
 
Earnings per share $ 0.14 $ 0.37
 
Diluted shares outstanding     66,636       -     66,636      

(1) The purchase accounting adjustment for deferred revenue is included within maintenance and services revenue and represents the write-down to fair value of the deferred maintenance revenue of Savvion and Iona Technologies at the date of the acquisitions.

(2) Stock-based compensation expense, representing the fair value of equity awards, is included in the following GAAP expenses:

(In thousands)

  Three Months Ended August 31, 2011
As    
    Reported   Adjustments   Non-GAAP
 
Cost of revenue $ 428 $ (428 ) $ -
Sales and marketing 1,952 (1,952 ) -
Product development 1,319 (1,319 ) -
General and administrative   5,769     (5,769 )     -
Total   $9,468   $ (9,468 )   $ -
 
Three Months Ended August 31, 2010
    As

Reported

  Adjustments  

Non-GAAP

 
Cost of revenue $ 232 $ (232 ) $ -
Sales and marketing 1,340 (1,340 ) -
Product development 1,066 (1,066 ) -
General and administrative   1,351     (1,351 )     -
Total   $3,989   $ (3,989 )   $ -

(3) Transition expenses for the three months ended August 31, 2011 represent incremental costs incurred to transform our cost structure to a more efficient cost model and such expenses are included primarily within our product development and general and administrative expenses.

(4) Other adjustments for the three months ended August 31, 2010 include a credit of $0.1 million in general and administrative expenses for an insurance reimbursement in excess of previously estimated amounts related to professional service fees associated with the stock option investigation and related shareholder derivative lawsuit.

(5) The non-GAAP provision for income taxes was calculated reflecting an effective rate of 30.5% and 34.3% for the three months ended August 31, 2011 and 2010, respectively. The difference between the effective tax rate under GAAP and the effective tax rate utilized in the preparation of non-GAAP financial measures primarily relates to the tax effects of stock-based compensation expense and amortization of acquired intangibles, which are excluded from the determination of non-GAAP net income.

GAAP Condensed Consolidated Statements of Income

(In thousands, except per share data)
  Nine Months Ended
August 31,   August 31,   Percentage
    2011   2010   Change
 
Revenue:
Software licenses $ 135,466 $ 136,093 0 %
Maintenance and services     261,789       247,847   6 %
Total revenue     397,255       383,940   3 %
Costs of revenue:
Cost of software licenses 7,023 5,633 25 %
Cost of maintenance and services 58,203 53,086 10 %
Amortization of purchased technology     11,871       15,222   (22 )%
Total costs of revenue     77,097       73,941   4 %
Gross profit     320,158       309,999   3 %
Operating expenses:
Sales and marketing 134,261 122,707 9 %
Product development 60,103 68,481 (12 )%
General and administrative 45,937 38,167 20 %
Amortization of other acquired intangibles 6,193 7,833 (21 )%
Restructuring expense 4,627 37,508 (88 )%
Acquisition-related expenses     -       468   (100 )%
Total operating expenses     251,121       275,164   (9 )%
Income from operations     69,037       34,835   98 %
Other income, net     (604 )     4,955   (112 )%
Income before income taxes 68,433 39,790 72 %
Provision for income taxes     21,352       12,495   71 %
Net income   $ 47,081     $ 27,295   72 %
Earnings per share:
Basic $ 0.71 $ 0.43 65 %
Diluted   $ 0.69     $ 0.42   64 %
Weighted average shares outstanding:
Basic 66,581 63,420 5 %
Diluted     68,728       65,673   5 %

Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands, except per share data)

  Nine Months Ended August 31, 2011
As       Percentage
    Reported   Adjustments   Non-GAAP   Change
 
Total revenue (1) $ 397,255 $ 93 $ 397,348 3 %
 
Income from operations $ 69,037 $ 42,593 $ 111,630 3 %
Purchase accounting adjustments
for deferred revenue (1) (93 ) 93
Amortization of acquired intangibles (18,064 ) 18,064
Stock-based compensation (2) (18,755 ) 18,755
Transition expense (3) (1,054 ) 1,054
Restructuring expense (4,627 ) 4,627
 
Operating margin percentage 17.4 % 28.0 %
 
Other income, net $ (604 ) $ - $ (604 ) (114 )%
Provision for income taxes (6) $ 21,352 $ 12,954 $ 34,306 (11 )%
Net Income $ 47,081 $ 29,639 $ 76,720 4 %
 
Earnings per share $ 0.69 $ 1.12 (1 )%
 
Diluted shares outstanding     68,728       -       68,728     5 %
 
Nine Months Ended August 31, 2010
As
    Reported   Adjustments   Non-GAAP    
 
Total revenue (1) $ 383,940 $ 1,138 $ 385,078
 
Income from operations $ 34,835 $ 73,505 $ 108,340
Purchase accounting adjustments
for deferred revenue (1) (1,138 ) 1,138
Amortization of acquired intangibles (23,055 ) 23,055
Stock-based compensation (2) (12,666 ) 12,666
Restructuring expense (37,508 ) 37,508
Other (4) 862 (862 )
 
Operating margin percentage 9.1 % 28.1 %
 
Other income, net (5) $ 4,955 $ (899 ) $ 4,056
Provision for income taxes (6) $ 12,495 $ 26,001 $ 38,496
Net Income $ 27,295 $ 46,605 $ 73,900
 
Earnings per share $ 0.42 $ 1.13
 
Diluted shares outstanding     65,673       -       65,673      

(1) The purchase accounting adjustment for deferred revenue is included within maintenance and services revenue and represents the write-down to fair value of the deferred maintenance revenue of Savvion and Iona Technologies at the date of the acquisitions.

(2) Stock-based compensation expense, representing the fair value of equity awards, is included in the following GAAP expenses:

(In thousands)

  Nine Months Ended August 31, 2011
As    
    Reported   Adjustments   Non-GAAP
 
Cost of revenue $ 807 $ (807 ) $ -
Sales and marketing 4,143 (4,143 ) -
Product development 3,878 (3,878 ) -
General and administrative     9,927     (9,927 )     -
Total   $ 18,755   $ (18,755 )   $ -
 
Nine Months Ended August 31, 2010
    As

Reported

  Adjustments  

Non-GAAP

 
Cost of revenue $ 706 $ (706 ) $ -
Sales and marketing 4,132 (4,132 ) -
Product development 3,139 (3,139 ) -
General and administrative     4,689     (4,689 )     -
Total   $ 12,666   $ (12,666 )   $ -

(3) Transition expenses for the nine months ended August 31, 2011 represent incremental costs incurred to transform our cost structure to a more efficient cost model and such expenses are included primarily within our product development and general and administrative expenses.

(4) Other adjustments for the nine months ended August 31, 2010 include acquisition-related expenses of $0.4 million for the Savvion transaction and a credit of $1.3 million in general and administrative expenses for an insurance reimbursement in excess of previously estimated amounts related to professional service fees associated with the stock option investigation and related shareholder derivative lawsuit.

(5) The non-GAAP adjustment in other income for the nine months ended August 31, 2010 relates to an insurance settlement gain from a pre-acquisition contingency assumed as part of a prior acquisition.

(6) The non-GAAP provision for income taxes was calculated reflecting an effective rate of 30.9% and 34.3% for the nine months ended August 31, 2011 and 2010, respectively. The difference between the effective tax rate under GAAP and the effective tax rate utilized in the preparation of non-GAAP financial measures primarily relates to the tax effects of stock-based compensation expense and amortization of acquired intangibles, which are excluded from the determination of non-GAAP net income.

Condensed Consolidated Balance Sheets

(In thousands)
  August 31,   November 30,
      2011     2010
 
Assets
Cash and short-term investments $ 346,543 $ 322,396
Accounts receivable 83,887 119,273
Other current assets     37,992     42,189
Total current assets     468,422     483,858
Property and equipment 66,344 58,207
Goodwill and intangibles 303,931 321,551
Other assets     72,063     73,207
Total   $ 910,760   $ 936,823
 
Liabilities and Shareholders’ Equity
Accounts payable and other current liabilities $ 83,725 $ 98,715
Short-term deferred revenue     144,713     138,961
Total current liabilities     228,438     237,676
Long-term deferred revenue 5,026 2,908
Other noncurrent liabilities 6,268 7,907
Shareholders’ Equity:
Common stock and additional paid-in capital 340,118 347,604
Retained earnings     330,910     340,728
Total shareholders’ equity     671,028     688,332
Total   $ 910,760   $ 936,823

Condensed Consolidated Statements of Cash Flows

(In thousands)
  Nine Months Ended
August 31,   August 31,
    2011   2010
 
Cash flows from operations:
Net income $ 47,081 $ 27,295
Depreciation, amortization and other noncash charges 43,387 44,551
Changes in operating assets and liabilities     27,660       (1,311 )
Net cash flows from operations 118,128 70,535
Capital expenditures (13,956 ) (7,091 )

Redemptions of auction-rate-securities

6,300

1,250

Acquisitions

-

(49,186

)

Issuance (repurchase) of common stock, net (93,398 ) 38,478
Other     7,073       (8,894 )
Net change in cash and short-term investments 24,147 45,092
Cash and short-term investments, beginning of period     322,396       224,121  
Cash and short-term investments, end of period   $ 346,543     $ 269,213  

Reconciliation of Forward-Looking Guidance

Reconciliation of GAAP to Non-GAAP forward-looking guidance range of diluted earnings per share for the three months ended November 30, 2011:

     
   
GAAP expectation for diluted earnings per share $0.16 to $0.21
 
Adjustment to exclude stock-based compensation $0.06 to $0.07
Adjustment to exclude amortization of acquired intangibles $0.06 to $0.06
Adjustment to exclude restructuring & transition-related expenses $0.00 to $0.01
       
Non-GAAP expectation for diluted earnings per share     $0.30 to $0.33

Reconciliation of GAAP to Non-GAAP forward-looking guidance range of diluted earnings per share for the twelve months ended November 30, 2011:

     
   
GAAP expectation for diluted earnings per share $0.84 to $0.89
 
Adjustment to exclude stock-based compensation $0.26 to $0.27
Adjustment to exclude amortization of acquired intangibles $0.24 to $0.24
Adjustment to exclude restructuring & transition-related expenses $0.06 to $0.07
       
Non-GAAP expectation for diluted earnings per share     $1.42 to $1.45

Contacts

Investor Relations Contact:
Progress Software Corporation
Tom Barth, 781-280-4135
tobarth@progress.com
or
Media Relations Contact:
John Stewart, 781-280-4101
Progress Software Corporation
jstewart@progress.com

Sharing

Contacts

Investor Relations Contact:
Progress Software Corporation
Tom Barth, 781-280-4135
tobarth@progress.com
or
Media Relations Contact:
John Stewart, 781-280-4101
Progress Software Corporation
jstewart@progress.com