Enterprise software developer Progress Software (NASDAQ:PRGS) recently completed its second quarter. In the first quarter, the company met expectations but lowered guidance for the second quarter (keep in mind that it had beat estimates 15 times in a row). Unfortunately, this was an accurate forecast because in the second quarter, revenues only increased 9% to $109.6 million. Earnings? Well, because of an audit of its stock options program, Progress Software was unable to compute its net income.
Progress Software is undergoing a voluntary review of how it has granted employee stock options. The concern is that the company may have engaged in "backdating." This is when certain employees get options that are priced when a company's stock price hits a low -- say over the last few months or even the year. It's a brewing scandal that has engulfed nearly 50 companies so far.
What does Progress Software do? It helps companies develop, deploy, integrate, and manage business applications. It has many sterling customers, such as Goldman Sachs (NYSE:GS), IBM (NYSE:IBM), and Wal-Mart (NYSE:WMT).
Here's an example of how Progress Software works: Quicken Loans wanted to more efficiently deliver its loans. With the Progress OpenEdge solution, Quicken Loans developed a sales and marketing application to streamline the loan origination process. As a result, the time to process loans fell by 60%.
Despite such customer success stories, it still has been difficult for Progress Software to ramp up growth. For example, in the second quarter, its license revenue (which accounts for the purchase of new software) increased by 11% to $41.4 million. In terms of guidance, Progress Software expects overall revenues to range from $110 million to $112 million for the second quarter.
Intense competition is certainly a big factor that has muted the company's growth. For example, there is pressure from database vendors such as Microsoft, IBM, and Oracle (NASDAQ:ORCL). Over the last few years, Fortune 1000 customers have been reluctant to invest in new information technology projects. So while Progress Software provides valuable tools, it is not necessarily a "must have" for customers. For instance, Quicken Loans really did not need an application to streamline its loan process.
Furthermore, while it's not clear if Progress Software backdated any options, it is nonetheless a potential negative that investors must deal with. After all, until this is resolved, investors will not know the company's net income. So with all these concerns surrounding the company's prospects, I'd recommend investors stay away at least until the options review is completed.
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Fool contributor Tom Taulli does not own shares of any company mentioned in this article.
