Shares of PROS Holdings Tank on Poor Preliminary Results, but Investors Ought to Be Patient

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of PROS Holdings (PRO -1.22%) fell as much as 23% on Friday after the data software company released preliminary results for the first quarter that fell substantially short of analysts' expectations. The stock was down 15% at 2:59 p.m. EDT. It didn't help shares that broker Stifel Nicolaus reduced its price target for the stock from $40 to $35 in a report published on Friday. The stock had closed Thursday at $27.15.

So what: Here's how the numbers shake out:

*Non-GAAP, i.e. not conform to Generally Accepted Accounting Principles
Sources: Thomson Financial Network, PROS Holdings

Note that analysts' consensus estimate for revenues was in line with the guidance range of $48 million to $49 million that the company had previously provided. Similarly, analysts were in line with the previous guidance for earnings per share of ($0.04) to (0.07).

PROS Holdings CEO Andres Reiner said in a statement that the "shortfall in license and services revenue for the first quarter was primarily driven by a higher mix of subscription bookings than expected, which had an impact on our recognized revenue in the quarter, and which we anticipate will be recognized in future periods. Our strong sales momentum continued with total bookings in the quarter growing by 20% year over year, in line with our expectations."

In other words, the miss is just a timing issue, according to Reiner, and the "missing" revenues will ultimately show up in future quarters. That's a plausible explanation for a small software company.

Now what: Given the magnitude of the share price drop early on, it looks quite conceivable -- perhaps even likely -- that the market is overreacting to PROS' announcement. After all, the shortfall in revenues relative to the consensus estimate is less than 8% and, assuming revenues ultimately reflect bookings, the long-term impact is likely to be less than that. Today's news doesn't appear to strike any sort of major blow to the long-term thesis for holding the shares, but the press release doesn't contain much information per se. Investors will want to pay close attention when the company announces its full results on May 7.