Progress Software: Reasonable value software player (NASDAQ: PRGS)

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ipuwadol

Investment thesis

I believe that Progress Software Corporation (NASDAQ: PRGS) is quite popular right now. Although I think it lacks industry dominance, it has a decent product portfolio, consistent growth rates, and reasonable P/E ratio in a attractive sector.

In this article, I will describe:

• An introduction to the Progress software

• Financial performance

• Factors influencing future performance

• Valuation and other statistics

• Final grip

Presentation of the Progress software

Progress Software Corporation provides software products for developing, deploying and managing enterprise applications. A business application is a software solution or set of applications that perform business functions. They are used to drive and track productivity across the business.

Its product portfolio has grown over time through acquisitions. It now offers multiple products in DevOps, Application Development, Data Connectivity, Digital Experience, Application Experience Management.

Financial performance

Growth rate (year over year):

Index

2019

2020

2021

last 4 quarters

Revenue

9%

6%

20%

22%

Gross profit

8%

12%

19%

21%

Net revenue

-46%

201%

-1%

28%

Source: Alpha Research

Margins (% of turnover):

Index

2019

2020

2021

last 4 quarters

Gross profit

81%

85%

85%

84%

Sales, general and administrative

37%

34%

35%

35%

research

21%

20%

19%

18%

Net revenue

6%

18%

14%

16%

Free Cash Flow Margin

31%

31%

32%

36%

Source: Alpha Research

Its revenue growth rates are nothing spectacular in 2019 and 2020, a little above the average growth of most American companies. In 2021 and more recently, the company experienced a spike in revenue growth. According to the latest annual report, this is due to the acquisition of Chef, which closed in the fourth quarter of fiscal 2020, increased demand for its OpenEdge and Ipswitch product offerings, and the acquisition of Kemp, which generated $5.9 million in revenue in the fourth quarter of Fiscal 2021. The Chef acquisition closed on November 1, while Fiscal 2020 ended End of november. So most of the incremental revenue from this acquisition is generated in 2021 and not 2020. This is important to know, as it gives us a better view of its organic revenue growth rate.

Revenue was $531 million and $442 million in 2021 and 2020 respectively, taking into account additional acquisitions.

The company said that if the acquisition of Chef had taken place before 2020, hypothetically the company would have made $497 million in 2020. This means the company would have generated $55 million in the additional 11 months, indicating approximately 5 million USD per month. If we take that in 2021, that would mean the acquisition would yield an additional 5 * 12 = $60 million. Thus, I argue that to review its organic growth rate, we will need to subtract $60 million from 2021 revenue and $5 million from 2020 revenue. Additionally, we should also subtract the $5.9 million related to the acquisition of Kemp from 2021. This translates into an organic change in revenue from 437.15 in 2020 to 465.1 in 2021, or 6.4% in percentage. This roughly matches the growth rate seen in 2020 compared to 2019.

As far as margins go, the profit margin and especially the free cash flow margin looks really robust and has grown nicely. Its acquisitions create potential synergies, which could be the source of the increase in its profit margin.

Factors influencing future performance

Industry

I believe that companies’ increased use of a customer-centric strategy, competitive advantages over competing software, and acceptance of cloud and mobile applications have and will continue to fuel the expansion of the global application market. of business. As these applications can tend to become more complex, due to increasing requirements, the three aspects of developing, deploying and managing business applications are essential. Thus, I believe that the market, in which Progress Software operates, is experiencing robust growth. Also, due to the wide range of application usage and ongoing management required, I believe the market is huge. Allied Market Research estimates the enterprise application market to be $527.40 billion by 2030.

Product review

As the company has many different software products, I will choose some of its most well-known products.

OpenEdge was one of its revenue drivers in 2021, it is a development suite for building dynamic multilingual applications for safe deployment on any platform. Users rate OpenEdge an average of 4.2/5 on Gartner.

Frequently mentioned tastes of the product are:

  • Ease of deployment
  • Easy to use

Frequently mentioned dislikes for the product are:

  • Feature lag compared to industry
  • OpenEdge seems to be a little behind
  • Low community support
  • Not easy to find people with OpenEdge skills

Another product is Sitefinity, a web content management and consumer analytics platform. Sitefinity is rated 4.3/5 by Gartner.

Frequently mentioned tastes of the product are:

  • intuitive back-end interface
  • ease of use

Frequently mentioned dislikes for the product are:

  • Lack of automation (with processing of images, documents, etc.)
  • Takes too long to customize the site to current standards.
  • The lack of professionally developed themes/skins makes setting up a new site a burden.

Overall the products are well rated and seem to do the job. However, in my opinion, some of the dislikes mentioned could indicate a lack of dominance in the industry. As I mentioned, business applications are becoming more and more complex and due to the development of technology, users are always expecting more features offered. Although the platforms, according to reviewers, are easy to use and can perform most basic tasks, they seem to lack advanced (new) features.

Competition

Gartner’s comparison page features relevant alternatives to Progress Software’s product. In this case, OpenEdge, there are many huge and successful companies competing in the same market. The products are AWS Lambda from Amazon (AMZN), Salesforce Lightning Platform from Salesforce (CRM), Jetty from Eclipse, and the list of products offered by major companies keeps growing. These products score 0.2 to 0.4 out of 5 higher than OpenEdge. These products are popular both for their ease of use and the range of features offered. Although the difference in ratings is smaller for Sitefinity, there are also huge companies competing with this product.

I’m not completely sold on the competitive strength of Progress Software products. OpenEdge has been mentioned as one of their revenue growth engines but seems to be lacking in some features and speed which is why it is rated lower than its competitors.

I believe that the gap between their products and their competitors caused the difference in the amount of resources. While Progress Software has a market capitalization of $1.9 billion, other competitors such as Salesforce, Microsoft (MSFT), Oracle (ORCL), SAP SE (SAP), Google (GOOG, GOOGL) and Amazon have a lot more resources to allocate. As a result, I believe they are and will be able to better meet the (evolving) needs of users. Also, it doesn’t really help that Progress Software has so many different products in different markets, as it could make it easier to lose focus and reduce resources allocated per product.

Rating and other statistics

Basic statistics:

Index

PS report

P/E ratio

Gross margin

Price to gross profit

Sales growth over 3 years

Progress software

3.27

20.42

84%

3.89

16%

Source: Alpha Research

Progress Software has a relatively low P/E ratio for a software company. Its sales growth is quite high, although it is strongly stimulated by the acquisition strategy. Organically, it would be closer to 7%.

Final take

Progress Software has managed over time to build a robust product portfolio and achieve a healthy profit margin, with the help of acquisitions. I believe the business will achieve a reasonable organic growth rate of around 6% as I believe the market is expected to grow at a higher rate and the products are expected to be easy to use and manage to perform many essential tasks . I don’t think it will dominate the market because its products are supposed to lack some essential (newer) features compared to products offered by bigger companies. I believe this discrepancy is due to Progress focusing on many different products and industries while having a lower amount of resources overall.

Still, paying a P/E ratio of 20.42 for a company that shows consistent revenue growth in an attractive market, a decent profit margin, and a decent product portfolio seems reasonable to me. I don’t think PRGS will create alpha for your portfolio, but I think it’s fair valuation right now.

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