Bear of the Day: PROS Holdings (PRO) - Bear of the Day

By Zacks | May 28, 2014 AAA

PROS Holdings (PRO) recently missed the Zacks Consensus Estimates for Q1 on both the top and bottom lines. Although management reiterated its full year revenue guidance, analysts revised their earnings estimates lower for both 2014 and 2015. This sent the stock to a Zacks Rank #5 (Strong Sell).

While shares of PROS Holdings have taken a beating like many other "high tech" stocks, valuation still looks very expensive with shares trading at 144x next year's earnings.

PROS Holdings is a "big data" software company that offers solutions to optimize sales, pricing, quoting, rebates and revenue management across more than 40 industries. Around 69% of total revenue comes from "License & Implementation" while the rest comes from "Maintenance & Support". Approximately 56% of its revenue comes from outside of the United States.

First Quarter Results

PROS Holdings reported its first quarter results on May 8. Adjusted earnings per share (which still includes share-based compensation) came in at a loss of 12 cents, which was below the Zacks Consensus Estimate calling for a loss of 9 cents.

Total GAAP-revenue rose 25% year-over-year to $40.9 million, but it was below the consensus of $42.0 million. The increase was driven by 25% growth in "License & Implementation" while "Maintenance & Support" increased 14%. The impressive revenue growth did not translate into impressive profit growth, however.

One reason for this was a decline in the gross profit margin, which fell from 69% to 66% of total revenue. Moreover, there was a 57% jump in 'Selling, marketing, general and administrative expenses'. These expenses accounted for 55% of total revenue, up from 42% in the same quarter last year.

R&D costs totaled 28.3% of revenue, up from 24.1% in the same quarter last year. The company also recognized $4.4 million in share-based compensation in the quarter.

One bright spot was cash from operations, which improved from $1.3 million to $3.4 million in the quarter.

Estimates Falling

In the Q1 report, management reiterated its full year revenue guidance. But that didn't stop analysts from lowering their earnings estimates for both 2014 and 2015.

This sent the stock to a Zacks Rank #5 (Strong Sell).

As you can see below, consensus estimates - and the stock price - have fallen considerably so far in 2014.

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The current 2014 Zacks Consensus Estimate is -$0.04, down from +$0.14 just 90 days ago. The 2015 consensus is now $0.16, down from $0.27 over the same period.

Pricey Valuation

PROS Holdings, like a lot of other "high tech" stocks, has sold off heavily lately. But the valuation picture still does not look attractive. The stock trades around 576x 12-month forward earnings and 144x 2015 earnings. And its EV/EBITDA multiple is a lofty 80x.

This is despite the fact that shares of PRO are down more than 40% from their 52-week high.

The Bottom Line

With very little profit, falling earnings estimates, and premium valuation multiples, investors should avoid PROS Holdings at least until its earnings momentum improves.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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