Progress Software - Boring Is Fine

| About: Progress Software (PRGS)


Modest 5% revenue and 4% EPS guidance for 2016.

2016 guidance better than consensus.

Strong valuation support.

Progress Software

Progress Software (NASDAQ:PRGS) reported a credible 2015 annual result of non-GAAP earnings per share of $1.58 with mid-point of November 2016 year guidance being $1.63 per share. The 2015 actual earnings per share were exactly in line with market expectations, while the mid-point in 2016 guidance is approximately 4.5% better than consensus 2016 numbers. The first quarter 2016 guidance was a touch weaker than expectations but I'm happy to pay more credence to the annual guidance rather than get consumed in natural quarterly variability.

An investment in Progress Software today is offering investors relatively lowly 5% revenue growth in 2016, while earnings per share are expected to grow even more modestly at 3.7%. The lack of earnings leverage is explained by continued investment in research and development which accounted for 21.1% of sales in 2015 compared to 19% in 2014. This software development spend can come back in time, propelling operating profit margins back over 30%.

The lackluster topline 2016 growth is explained by OpenEdge and the Data Connectivity & Integration Division's essentially flat revenue growth, with the Application Development and Deployment Division(Telerik) growing by 15%. The company maintained each of these three divisions were growing in constant currency in 2015, with a further $7 million in currency headwinds expected in 2016, based on currency today. On a constant currency basis, Progress Software is guiding 6.7% organic revenue growth for 2016, which while not setting the world on fire is credible.

There is belief from management that the company can achieve double-digit earnings growth in the medium term, so the consensus 2017 earnings per share estimates at $1.68 now look light. And if Progress Software hits its 2016 guidance of $1.63, the number could easily be $1.80.

Investors are getting Progress Software at 14.6 times historical non-GAAP eps and 14.1 times 2016 guidance. After adding back stock based compensation (only), investors are paying 20.6 times 2015 and 19.6 times 2016 earnings per share. The enterprise value to sales and enterprise value to recurring revenues ratios for 2016 at 2.5 times and 3.7 times are pretty solid for an enterprise software company.

Investors will get rewarded when the Telerik acquisition is fully digested and margins return to over 30% which should push earnings growth back to double digits. The likely return of the buy-back should underwrite the share price in the immediate future. More of a waiting game than anything.

Progress Software - share price $23.00
Shares on issue 51.117
Capitalization in $M $1,176
Net Cash / (Debt) - 30 November 2015 in $M $97
Enterprise value in $M $1,079
Figures in thousands 2014A 2015A 2016G
Sales 332533 412407 433000
Operating income 117392 120417 126700
NPAT 77896 80555 83500
Non-GAAP EPS $1.52 $1.58 $1.63
Investment Metrics 2014A 2015A 2016G
Enterprise value to sales 3.2 2.6 2.5
Enterprise value to recurring revenues 4.9 3.9 3.7
Gross profit margins 90.6% 88.8% n/a
Operating income to sales 35.3% 29.2% 29.3%
Research and development to sales 19.0% 21.1% n/a
Enterprise value to EBIT 9.2 9.0 8.5
Price to non-GAAP earnings 15.1 14.6 14.1
Price to Adjusted for stock comp earnings 22.2 20.6 19.6
Annual dilution via stock comp 2.12% 1.99% 1.99%
A = Actual
G = Guided
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Disclosure: I am/we are long PRGS, QADA, TISA, MITK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.