Progress Software Lowers Guidance

| About: Progress Software (PRGS)

Summary

Downgrade in revenues and earnings for November 2016 year.

1Q OpenEdge license sale shortfall explains majority of shortfall.

CRM Integration of mobile software platform Telerik also a drag.

Takeover prospects replaced by enlarged buy-back.

Reminder around nervy US enterprise software market prospects in 2016.

Progress Software (NASDAQ:PRGS) dimmed its guidance for 2016 after its core OpenEdge software platform recorded a 7.7% drop in Q1 sales vs pcp. The company attribute the OpenEdge shortfall to sales delays from their direct enterprise channel, which will push sales into the 3rd and 4th quarters of 2016. Management say its difficult to forecast the timing of sales in this channel, but did say positively their are some larger deals in the mix for latter in the year. Sales of OpenEdge to the independent software venders (ISV) has not been affected.

It was also disappointing to hear the company's key growth platform Telerik had a below par start to 2016, with December monthly billings not matching company expectations. The company attributed the mobile application business shortfall to issues around business integration or more particularly getting the newly acquired business on to the company wide CRM system. The company positively did say while December 2015 month was poor, January and February 2016 months have been more aligned with expectations.

The market will perhaps be most disappointed with the announcement of an enlarged share buy-back program to $203 million, with an intent to utilize the full program by the end of the company's fiscal year (30 November 2016). While an enlarged buy-back program is typically positive when it appears to have replaced a potential buy-out at a premium, this is less than desirable.

The investment metrics going forward still look supportive (assuming a lower share price of $22.50). EV/Sales at 2.5 times, and price to Non-GAAP earnings ratio of 14.1X. The business continues to generate good free cashflow however is not growing, so the share price can drift back hence the enlarged share buy-back.

Management in the conference call outlined the slowing US macro environment could place a potential dampener on enterprise software sales in the US, so risks around enterprise software businesses remain.

Progress Software - share price $22.50        
Shares on issue 51.44        
Capitalization in $M $1,157        
Net Cash / (Debt) - 31 January 2016 in $M $111        
Enterprise value in $M $1,047        
           
Figures in thousands 2014A 1Q 2015 2015A 1Q 2016 2016G
Sales 332533 95455 412407 89481 417000
Operating income 117392 20409 120417 20772 123015
NPAT 77896 15139 80555 13782 82304
Non-GAAP EPS $1.51 $0.29 $1.57 $0.27 $1.60
           
Investment Metrics 2014A 1Q 2015 2015A 1Q 2016 2016G
Enterprise value to sales 3.1 2.7 2.5 3.9 2.5
Enterprise value to recurring revenues 4.8 4.1 3.8 4.4 3.7
Gross profit margins 90.6% 86.6% 88.8% 87.0% n/a
Operating income to sales 35.3% 21.4% 29.2% 23.2% 29.5%
Research and development to sales 19.0% 23.9% 21.1% 24.4% n/a
Enterprise value to EBIT 8.9 12.8 8.7 50.4 8.5
Price to non-GAAP earnings 14.9 19.1 14.4 21.0 14.1
Price to Adjusted for stock comp earnings 21.8 30.6 20.2 41.1 19.6
Annual dilution via stock comp 2.15% 1.96% 2.02% 2.33% 2.02%
           
A = Actual          
G = Guided          
F = Consensus Forecasted          
           

Disclosure: I am/we are long PRGS, QADA, MITK, PEGA.

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.

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