More than a year into large-scale efforts to reshape the organization, Progress Software (Nasdaq:PRGS) is hinting that its transition toward faster-growing markets could pay off. The company still has much to prove, and I would not ignore the risk of competition from large, entrenched rivals like IBM (NYSE:IBM), Oracle (Nasdaq:ORCL), and Microsoft (Nasdaq:MSFT), nor smaller rivals like TIBCO (Nasdaq: TIBX) and Software AG (Nasdaq:STWRY). At the same time, the company's significant cash balance, cash generating capabilities, and large maintenance revenue base all provide more than the normal margin of breathing room to execute this transformation. SEE: The Value Investor's HandbookSolid Fiscal Q2 ResultsIt feels like it has been a while since I could talk about a software company posting better than expected results, but Progress managed that this quarter. Net of businesses being divested, revenue rose 10% as reported (12% in constant currency) from last year, while falling 2% sequentially. That was good for a small beat, as strong license revenue (up 43% and down 2%, respectively) offset sluggish maintenance revenue (down 2% over both periods). Progress also did well with margins and reported profits. GAAP gross margin improved more than a point (to nearly 90%), while operating income rose 12%. Non-GAAP operating income declined 6% from the year-ago period, but was still stronger than analysts had forecast. Changing The Core Philosophy To Recharge GrowthProgress enjoys a very large customer base (well over 100,000), which is not altogether surprising when you consider that the roots of this company go back about 30 years. The challenge for the company is that what worked so long ago (closed, proprietary systems with steep learning curves) doesn't work anymore and open source application development tools from the likes of Red Hat (NYSE:RHT) give clients the option to perform those tasks without chaining themselves to a single provider. I believe Progress is on the right track. Recent versions of OpenEdge (the company's legacy application infrastructure platform) are significantly stronger with respect to enabling cloud and mobile functionality. The company is looking to go even further, though, and ultimately reposition OpenEdge as an application platform-as-a-service (PaaS) development platform that can serve as basically an agnostic platform that cloud app developers can use in virtually all ecosystems and situations. To accomplish this, the company is also going to have to go away from its roots. The company's proprietary programming language (OpenEdge ABL) is very robust, but its Progress-specific and not widely taught. If Progress wants to have platform-agnostic tools, I would assume it has to move away from a proprietary programming language and I'm curious to see the trade-offs that will have to be made – can Progress retain the “robustness” of ABL in this next incarnation. Plenty Of Competition In An Evolving MarketProgress has had more than its share of challenges over the past couple of years. Re-crafting a business for new market realities is never easy, but it has been even harder with three CEOs over the past two years. It looks like the management situation has stabilized, though, and amidst the strategic shifts and divestitures it looks like the company has a more logical, streamlined go-to-market strategy. Still, this is not going to be easy. Although the cloud app development market is still pretty new, giant software companies like Oracle, IBM, Microsoft, and SAP (NYSE:SAP) have large presences in the application infrastructure market. Likewise, smaller companies like Red Hat, Pegasystems (Nasdaq:PEGA), TIBCO, and Software AG all see cloud app development as an important market. I would think that Progress's legacy success in app development and its relationships with over 1,000 independent software vendors is worth something, but Progress would hardly be the first software company to be left behind by a fundamental shift in the basic rules of its core market. The Bottom LineProgress shares have been pretty choppy as investors try to reconcile the profitability and cash flow generation of the base business with the lack of growth and uncertainties of the strategic shift. For my part, I see things similarly – while I think Progress “as is” is worth something in the low $20s, it's hard to generate a higher target price without real evidence of sustainable revenue growth potential. Double-digit growth this quarter is certainly an encouraging sign, though. If you believe long-term revenue growth of about 4% is all the company can manage, the shares shouldn't trade for much more than $21 or $22. Bump that up to about 6%, though, and the target moves to $25. Move that up another 2% (8% long-term revenue growth), and fair value of close to $30 is entirely reasonable. Consequently, investors who are sold on Progress Software's new strategy could still find some value here today, but more skeptical investors may want to look at other names for better value.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    Kevin O'Leary Biography

    Kevin O'Leary is a television personality, businessman and investor from Canada. A brash public personality with a net worth of roughly $300 million, he is considered to be the Canada’s answer ...
  3. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  4. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  5. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  6. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  7. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  8. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  9. Investing

    10 New Apps That Help Budget For Expensive Cities

    From platforms for saving money to those that account for side jobs, mobile apps are changing spending habits and income generation in urban areas.
  10. Investing

    Carly Fiorina Biography

    Carly Fiorina is an American businesswoman, and former CEO of technology giant Hewlett Packard, who is also a Republican politician with aspirations to the presidency. She and her husband, former ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating weighted average cost of capital (WACC) in Excel?

    When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!