Progress Software (PRGS)- Red Flags Behind the Q2 Selloff
Why the low P/E may not be the bargain it appears
Despite Progress Software's (PRGS) Q2'25 earnings coming in 10 cents per share (cps) ahead of expectations, the company saw its stock price fall 12% on the day of the announcement and erode another 10% since then. The market's disappointment stemmed from soft revenue performance, declining gross margins, deteriorating cash flow, and a less-than-enthusiastic response to the announcement of the Nuclia acquisition.
The drop has left the company selling for less than 10 times the FY25 estimate of $5.34. However, before investors go bottom fishing, we believe there are several risk factors they should take into consideration. Revenue has been flat for two quarters, with guidance calling for revenue of only $237-$243 million for Q3. PRGS also carries more debt than most software companies. The company's cash of $102 million is easily offset by $389 million in deferred revenues, $660 million in bank loans, and $810 million in convertible debt. Supporting that is PRGS's forecast of adjusted and unleveraged free cash flow of $290 million. The adjustments exclude ongoing restructuring costs and $60 million in interest expense.
In addition, we see multiple red flags behind PRGS's numbers, which we will examine below: