Over the past four years, "application infrastructure" software maker Progress (NASDAQ:PRGS) has beaten consensus estimates for its earnings 15 times in a row. Can the company make it a streak of "sweet 16" trouncings of the Wall Street Wise? By this time tomorrow, we'll know. While we wait for the fiscal Q1 2006 numbers, let's take a look at how the company has managed to achieve its success.

Wall Street Wisdom:

  • General consensus. For all its success, only three analysts follow Progress. Each of them rates the stock a buy.
  • Revenues. Analysts expect to see Progress' fiscal Q1 2006 sales rise 6% year over year tomorrow, to $104 million.
  • Earnings. Profits are predicted to more than double that rise, with analysts calling for a 15% increase to $0.31 per share.

Margin watch:
Progress' margins are, well, progressing. Over the past 18 months, the firm has grown its already robust gross margin by another 220 basis points (on a rolling basis), and increased its operating margin by a third and its net margin by 41%. Those kinds of improvements in profitability, when combined with even the modest rise in sales that analysts forecast for tomorrow, promise bumper profits for the quarter.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

82.1

83.1

83.5

84

84.3

84.3

Op.

13

13.5

14.5

16

16.8

17.3

Net

8.6

8.9

9.8

10.7

11.6

12.1
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.

Foolish lookout:
The problem, of course, is that a company can only improve its profitability so much before its fat margins begin to attract hungry competitors. (And since Progress is already competing with the likes of Oracle (NASDAQ:ORCL) and Inside Value pick Microsoft (NASDAQ:MSFT), the last thing it needs is more competition.) Ultimately, to keep profits growing, a firm also needs to just plain sell more stuff.

And so it is that Progress has been deploying its cash war chest to buy itself a bit of growth. As we discussed last quarter, Progress has already acquired mainframe integrator Neon. On Jan. 19, Progress announced yet another purchase, this time of privately owned web services management software provider Actional.

With essentially no debt on its books, $266 million (at last report) in its coffers, and $70 million in free cash flow last year, the company can afford to continue buying growth. The question investors need to focus on is this: Is the company getting what it's paying for? We won't know the answer to that tomorrow, but as the new acquirees' results begin to be consolidated with Progress', that's something we'll want to watch in future quarters.

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