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.

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