Investing

Progress Software Surprises With Q2 Beat and Raised Outlook Amid Cloudy Macro Environment

Ben Ward

Published: July 3, 2023 10:24 pm

Progress Software (US:PRGS), a major player in software application development, deployment, and management solutions, is poised to extend gains on Monday after PRGS stock shot 5.9% higher in trading on Friday.

The surge followed the company’s release of its fiscal second quarter results which exceeded expectations, propelling the stock against a backdrop of recent volatility.

The Burlington, Massachusetts tech firm’s performance was robust, beating both sales and profit expectations from market analysts. This was mainly attributed to a stronger than expected revenue from Maintenance and Services, and a slightly higher contribution from MarkLogic, a recently acquired software enterprise.

The company’s solid revenue of $179.2 million and $1.06 earnings per share were driven by strength across all product lines, marking a revenue beat of approximately 6% — the highest in the last five quarters. Organically, revenue grew 2% year-over-year in constant currency, but also marked a slowdown from the 11% growth last quarter.

Free Cash Flows

The stock also generated $48 million of adjusted free cash flow, providing management with additional balance sheet flexibility.

Investors were no doubt pleased to see the continued growth in cash generated from operating activities.

In response to the sturdy performance, full year guidance got a modest bump, indicating management confidence despite the recent exploited vulnerability in its MOVEit software which had sparked some market turmoil.

Progress Software is currently navigating through a challenging macro environment, characterized by uncertainties in the global economy. However, the company has maintained a consistent performance, primarily driven by renewals and robust cash flows, the latter being partially fuelled by highly profitable and sticky recurring maintenance revenue.

The second quarter also saw strong performance from other products like Open Edge, Chef, and Kemp. The revenue beat was largely attributed to better than expected maintenance and services revenue.

Shaken by Breach

The security breach in the company’s MOVEit file transfer software had raised concerns, leading to some recent instability in the stock price. The share price had reached a 12-month high of $61.24 in mid June before concerns knocked it down to as low as $53.45 on June 28.

Despite this, Progress Software has managed to execute well, highlighting the resilience of its product portfolio. Progress has also signaled a deeper focus on security posture across its entire product range, reassuring investors and consumers alike of its commitment to cybersecurity.

Despite the MOVEit security incident, the company remains steadfast in its commitment to product security. Current reports indicate that customer activity has not been significantly impacted. Progress Software’s revised FY23 revenue guidance took into account a $10M increase following a solid Q2 beat and a minor currency benefit.

Management raised its full-year guidance and now expects to generate underlying EPS of $4.16 to $4.24 for the full year based on sales guidance of $690 million to $698 million.

Compelling Valuation

The company expects the current macro environment to work in its favor over the next six to nine months, as private software company valuations reset, opening up attractive buying opportunities. As shares are currently trading at around 14x expected free cash flow for next financial year, Progress Software continues to represent a rare value opportunity in a growth world.

Fintel’s valuation analysis chart shows how the stock has tracked in recent years.

Institutions vs Insider Moves

Data compiled on the Fintel platform highlighted the continued growing support of the stock from institutional investors. The number of institutions on the register has grown by 2% during the most recent quarter to a total of 617. During this period the average portfolio allocation rose by 19.2% for the institutional holders.

These factors have contributed to a bullish Fund Sentiment Score of 77.22 for PRGS, which ranks the stock with some of the highest global peers on the leaderboard.

In contrast, the stock has a very bearish Insider Sentiment Score of 13.53, as there have been seven insiders selling stock during the most recent quarter. These insiders sold a total of 0.2% of the total float through these sales.

While the institutional activity is a net positive for the stock, selling pressure from insiders gives us a clouded judgment on the outlook for the company.

Oppenheimer Bumps Target

Following the update, Oppenheimer analyst Ittai Kidron bumped his 12-month target price to $66 from $63, claiming the possibility for potential upside to even higher than his forecast if the demand environment remains stable.

Kidron was pleased to see no change in customer behavior even after the MOVEit breach.

Fintel’s consensus target price of $64.43 suggests the market thinks the stock could rally a further 11% over the next year from Friday’s $58.10 close.

Progress Software leans more toward inorganic growth as opposed to organic, but nonetheless offers a solid portfolio of software products. This is driven by a repeatable M&A playbook focusing on software companies fitting its current product suite, presenting an optimistic forecast for future growth and stability.

The latest quarterly results reflect a company that remains focused and resilient despite some recent hurdles. The strong financials, along with the positive revisions to the full-year outlook, have certainly contributed to Friday’s stock price surge and underpin the broader investor confidence in the company’s direction.

As it continues to navigate the ever-evolving macro landscape, Progress Software offers investors a unique blend of value, growth, and a proven ability to weather storms.

This article originally appeared on Fintel