Tic-tac-toe, investors want to know: Will Progress Software (NASDAQ:PRGS) make it three in a row for earnings misses when it reports its fiscal Q1 2007 numbers on Tuesday?

What analysts say:

  • General consensus. Four analysts still follow Progress, where buy ratings outnumber sells 3-to-1.
  • Revenues. On average, they expect to see sales rise 7% to $111.5 million.
  • Earnings. They also project 13% growth in profits to $0.35 per share (pro forma).

What management says:
During its Q4 conference call, and again last month, Progress updated investors on its expectations for the coming year. Breaking its predictions down by segment, it expects its flagship OpenEdge division to report sales essentially flat against fiscal 2006, while its smaller DataDirect Technologies and Enterprise Infrastructure divisions should each report 10% to 20% sales growth. If those expectations play out according to plan, total firmwide revenues should approximate $470 million, and the two latter divisions combined will amount to less than half the size of OpenEdge.

For more details on last quarter's earnings news, and especially the outcome of the firm's internal investigation into its role in the stock-option backdating fiasco, click through to our December write-up.

What management does:
Options fiasco notwithstanding, Progress has continued to improve its rolling gross margins tally over the last 18 months. However, the cost of cleaning up the options mess has weighed heavily on the lower half of the income statement. Both operating and net margins have dropped steadily over the past year as charges piled up.

Margin

8/05

11/05

2/06

5/06

8/06

11/06

Gross

84.2%

84.3%

84.4%

84.6%

84.8%

85.0%

Operating

15.5%

17.0%

16.4%

15.9%

15.6%

14.6%

Net

10.4%

11.4%

10.6%

9.5%

8.3%

6.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Reviewing the last couple of earnings statements, it seems that the options scandal hasn't been the only thing hurting Progress's profits. Stock-option expenses have been significant, as have other options investigation-related costs, but charges were also taken for amortizing the goodwill of past acquisitions.

Overall, the trends look like this:

  • Sales for the last half of fiscal 2006 rose 12%, while cost of sales grew just 8% -- supporting the gross margin improvements you see above.
  • Selling, general, and administrative expenses grew 19%, doing considerable damage to operating margins.
  • Amortization of goodwill leapt 69%, and stock-option expensing increased by nearly eight times.

About the only cost going up that I'd characterize as "good" has been R&D. Second-half 2006 R&D expenses came in a good 16% higher than the prior-year period. It's nice to see that its regulatory problems haven't entirely distracted Progress from investing in its business, so as to keep the growth going once the options mess subsides.

What kind of Progress did we expect last quarter, and what did we get? Find out in:

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Fool contributor Rich Smith has no interest, short or long, in any company named above. The Fool has a disclosure policy.