Progress Software Earnings Call INSIGHTS: Non-Core Divestures, Operating Margins

On Wednesday, Progress Software (NASDAQ:PRGS) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Non-Core Divestures

Mark Schappel – Benchmark: Melissa, welcome aboard.

Melissa Cruz – SVP, Finance and Administration and CFO: Thank you, Mark.

Mark Schappel – Benchmark: Jay, starting with you, with respect to the non-core product line divestitures, what are some of the roadblocks that that may be running into some of the challenges you’re facing. Is the price, maybe lack of buyers, decisions that you wanted to sell products as a bundle or individually, could you just walk us through that a little bit?

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

Jay Bhatt – President and CEO: Sure Mark. No, what I would say, first let me just remind, our guidance around non-core divestitures was a combination of the process sometime end of next – mid-to-end of next year. I don’t think you should interpret anything I said to imply the roadblocks. In fact, I would say the process is going extremely well. There’s a lot of interest. I think it’s a testament to the strength of the product. As I said before, I said in April I said again on the earnings call last quarter and I’ll say again today, these products that we’re selling they’re good products, they’re very solid products. They’re just not core to our strategic plan and I think we’re seeing that very clearly from the buyer populous out there in there and their reaction to it. So, I’m feeling really good about the process, I’m feeling really good about the progress against the process. Unfortunately, when you are in the middle of the process like we are we’re not able to disclose a lot of the details, but I don’t really have any issues with the process right now.

Mark Schappel – Benchmark: Then as a follow-up, with respect to the $150 million in share repurchases that was scheduled for this year, are you still on target to meet that plan or things running a little bit tight for time?

Jay Bhatt – President and CEO: No, like I said in the remarks earlier, we are still intending to execute on that $150 million share repurchase.

Operating Margins

Greg MacDonald – JMP Securities: Firstly, I do appreciate the increased transparency in this Core and non-Core breakout, thank you for that. I did want to ask about the non-core revenue guidance for the fourth quarter and I know it’s on a constant currency basis and you didn’t have another currency headwind, but even assuming sort of negative 6% to negative 3% as reported number it still imply the pretty aggressive sequential improvement in non-core revenue from Q3 to Q4. So, my question is, is there something special about this Q4 compared to previous Q4 that gives you the confidence that you could have such a strong sequential uplift in revenue?

Jay Bhatt – President and CEO: Greg, are you talking about the core guidance because we’re not guiding on non-core.

Greg MacDonald – JMP Securities: No, just core – core guidance.

Jay Bhatt – President and CEO: Okay. You had mentioned non-core.

Greg MacDonald – JMP Securities: Yeah, sorry I misspoke.

Jay Bhatt – President and CEO: No problem. So, yeah, so we said negative 6% is what we achieved and our guidance is not negative 3% it is negative 2% to positive 1%. So that’s our guidance – that’s our guidance range. Sequentially, it’s a continued move to stability. I think we believe very strongly in the strength – in the foundation of the core and there are a lot of things that we’ve encountered. If you think about where we’re going through, I think it’s a very unique set of circumstances around the kinds of divestitures activity that we have going on, separation of the business that we’ve had to do to get the core, non-core while still running your core and driving it. So, I think that – one other things I’ll point to is there were things that were happening in the third quarter that have to happen frankly, things like restructuring that have started to occur in EMEA that was delayed. If you recall we talked about second quarter restructuring around that $55 million cut that we took, but it didn’t affect EMEA until the third quarter because of some regulatory and unique situations to EMEA, so that was – there are barriers around that. There are barrier – we have – we’re still operating the non-core assets and through the third quarter we had certain economic and compensation programs focused on continuing to drive the non-core that aren’t necessarily going to be at the same level in the fourth quarter. So, there are some things that give us a lot of strong feeling that we will have a movement toward that stabilization range. I don’t think the guidance range we’ve given for the core is – you know that’s not where we wanted to be. We ultimately – it needs to go north of that as we continue to stabilize the core, but I think it shows a fantastic progression towards that stabilization in that strong foundation.

Greg MacDonald – JMP Securities: Just one quick follow-up on the operating margins. I mean when I look back at 2010, the core segment margin was 49% and as you mentioned it was 26% in Q3, and you expect to exit 2013 around 35%, but I guess longer term what is it going to take to get it back up to these almost 50% level that we saw seven or eight quarters ago?

Jay Bhatt – President and CEO: Well, I’m going to have Melissa describe the dynamic going on there in the margin and then I’ll jump in around what we’re doing in the future on the business to achieve that 35% margin level, as the second part of the question.

Greg MacDonald – JMP Securities: Okay. Thank you.

Melissa Cruz – SVP, Finance and Administration and CFO: From 2010 through 2011, we were operating under a different segment structures, of course you know. And when we look at the comparison for how we’re operating now that was – we were not in the process of investing in these particular product groups at that time. So, what we’ve done because we were following the RPM strategy, right, so what we’ve done now is we’ve increased our investment in the core products and that really causes the expense – the margin reduction. At the same time you have to look at the revenue side of that. We’ve had revenue declines in the core during that same period, so that’s a double effect on the margin rate during that period. Going forward we are still focused on the 35% exit margin for Q4 of 2013, but in terms of going from 35% up to 40%, I give that one back to Jay.

Jay Bhatt – President and CEO: Well, I think also given that 35%, there are things like operating costs that relate to a larger company that don’t relate to the smaller company that we are becoming as we divest these assets that ultimately get allocated to the core. And so I think there are things you have to look at to say, we are not through the transition out of the non-core yet and there’s still some work to be done as we get on that glide path, if you will, to that 35% margin in Q4. We feel very confident on the exit margin at 35%. In terms of getting back up to 46%, I don’t think a healthy company – I think what you see in those historical margins is a business that wasn’t investing in frankly these core assets and ultimately the result that I identified when I got here, which was not a lot of growth and not a lot of innovation going on around them, was the result of that lack of investment. I don’t think in the software universe many companies are able to grow and deliver that kind of level, 45%, 50% margins. And so my objective, as I’ve said for the last four or five months, is to achieve a continuous improvement in margins starting at the 35% level when we get to Q4, so I want to see those margins improve, but I also want to see investment going back into the business, so we can drive the top line, which ultimately is critically important to us. So, recall Greg we’re stabilizing the foundation, we’re stabilizing the margin and then we’re going to start to invest as we get to the sort of second prong or Phase 2 of our plan which is around a PaaS.