After posting back-to-back "earnings misses," Progress Software (Nasdaq: PRGS ) pulled out of its slump last quarter and beat the estimators at their own game. Will it begin a new streak, and start off next week with a bang, when it reports second-quarter 2007 earnings Tuesday morning?
What analysts say:
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General consensus. Four analysts still follow Progress, where buy ratings outnumber sells three-to-one.
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Revenues. On average, they expect to see sales rise 6% to $116.4 million.
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Earnings. They also project 20% growth in profits to $0.41 per share (pro forma).
What management says:
Fellow Fool Tom Taulli did a bang-up job of reviewing Progress' report last quarter, so I won't reinvent every spoke of the wheel here today, but instead point you toward his write-up for the details. Suffice it to say that the company exceeded the Street's expectations in Q1, and upped its own expectations for the rest of this year. Progress now expects to book up to $10 million more in revenue than previously hoped for ($470 million to $480 million), and to earn $1.07 to $1.13 per share under GAAP (for those keeping score at home, that's about 64% of its pro forma profit projections).
One final bit of trivia on earnings: In Q2 (that's Tuesday's numbers), Progress is looking to earn about $0.24 GAAP, versus about $0.41 pro forma. GAAP here works out to less than 60% of pro forma profit.
What management does:
Margins, however, aren't progressing quite as nicely. The gross is stuck at 85% (although that's really nothing to complain about) for the second quarter in a row, while operating margins continue to deteriorate. The good news is that progress has been made on the bottom line, and the slide in net profits may have finally ended.
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Margins
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11/05
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2/06
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5/06
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8/06
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11/06
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2/07
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Gross
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84.3%
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84.6%
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84.7%
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84.8%
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85%
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85%
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Operating
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17%
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17.1%
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16.6%
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16.2%
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14.6%
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14.5%
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Net
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11.4%
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10.6%
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9.5%
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8.3%
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6.6%
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7%
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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:
As Tom Taulli pointed out in last quarter's earnings write-up, Progress "benefits from its loyal customer base" that includes marquee names such as Home Depot (NYSE: HD ) , Siemens (NYSE: SI ) , Intercontinental Exchange (NYSE: ICE ) , Cerner (Nasdaq: CERN ) , Expedia (Nasdaq: EXPE ) , and most interestingly of all for a software firm, granddaddy of them all Microsoft (Nasdaq: MSFT ) !
The Progress business model of first licensing software, then collecting continual revenue streams from maintenance and service fees, offers a predictable model for strong free cash flow generation ($51.4 million over the last four quarters). That said, it will need to turn around its declining operating margins and outperform the 18% growth that analysts project for it, before it becomes a buy in this Fool's book. Eighteen percent profits growth is good, but not enough to justify the firm's current market cap of 26 times trailing free cash flow. Let's hope that on Tuesday, it can take its second step toward that goal.
What kind of Progress did we expect last quarter, and what did we get? Find out in:
Home Depot and Microsoft are
Inside Value
selections.
Fool contributor Rich Smith has no interest, short or long, in any company named above.
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