After posting 15 straight "earnings beats," application infrastructure software maker Progress Software's (NASDAQ:PRGS) winning streak came to an end last quarter, when it merely met Wall Street estimates. Can the company return to its winning ways? We'll know soon enough -- tomorrow, to be precise, Progress reports its fiscal Q2 2006 numbers.

What analysts say:

  • General consensus. Wall Street coverage of Progress has nearly doubled in the last three months. Five analysts now follow the stock, netting it four buy ratings and one hold.
  • Revenues. Analysts expect to see Progress's fiscal Q2 2006 sales rise 9% year over year tomorrow, to $109.3 million.
  • Earnings. Profits, however, are expected to be flat against last year at $0.35 per share. And beware: These estimates are of the "pro forma" (Latin for "Ignore all the bad stuff") variety.

What management says:
Progress' stock has been falling ever since the company reported that lack of an earnings beat last quarter. CEO Joseph Alsop tried to head off the selling spurt by portraying the quarter in a positive light, saying: "Although we did not achieve double-digit revenue growth on a reported basis during the first quarter, we achieved 11% revenue growth in real, constant currency terms, and 15% growth in non-GAAP diluted earnings per share, all while also completing two acquisitions [of first mainframe integrator Neon, and then Web services management software provider Actional]." But the market wasn't having any of it.

What management does:
The reason: After progressing well for over a year, Progress regressed last quarter, its operating and net earnings and margins taking a whack from non-cash expenses for goodwill amortization, in-process R&D write-offs, and stock options expensing. But as you can see on the below chart, the company's average gross margins continue to climb. All of the damage, it seems, came in the form of non-cash expenses.

Margins %

11/04

2/05

5/05

8/05

11/05

2/06

Gross

83.1

83.5

84

84.3

84.3

84.5

Op.

13.5

14.5

16

16.8

17.3

15.8

Net

8.9

9.8

10.7

11.6

12.1

11
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:
So, did the market overreact last quarter? Not necessarily. Although it's true that most of Progress' bad numbers stemmed from non-cash charges, the quarter's cash profitability also looked pretty darn miserable.

Trawling through the firm's historical results, you have to go back all the way to 1999 to find a fiscal first quarter in which Progress generated less cash from operations than it did last quarter. And although it would be a mistake to focus on a single quarter's results or to use them as a sole basis for predicting the firm's future, it must have shaken Mr. Market's confidence to see that in Q1, Progress generated just $5.3 million in operating cash flow -- less than half what it collected in the previous year, and just barely enough money to cover the firm's capital expenditures for the quarter.

Long story short, Progress stumbled badly last quarter and needs to reprove itself to the market tomorrow.

Competitors:

  • Ciprico (NASDAQ:CPCI)
  • IBM (NYSE:IBM)
  • Magic Software (NASDAQ:MGIC)
  • Microsoft (NASDAQ:MSFT)
  • Oracle (NASDAQ:ORCL)
  • Tibco Software (NASDAQ:TIBX)

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