SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMC NEWS

TMCNET eNEWSLETTER SIGNUP

Praesidium Highlights Opportunity to Drive Significant Value Creation at Progress Software
[September 27, 2017]

Praesidium Highlights Opportunity to Drive Significant Value Creation at Progress Software


Praesidium Investment Management Company, LLC ("Praesidium" or "We"), one of the largest shareholders of Progress Software (News - Alert) Corporation ("Progress" or "the Company") (NASDAQ:PRGS), owning approximately 8.8% of the outstanding shares of the Company, today commented on the opportunity to drive significant value creation at Progress. Praesidium also addressed the Progress Board of Directors' (the "Board") response to its prior letter and accompanying presentation outlining its serious concerns with the destruction in value under the direction of the Board.

On September 15, 2017, Praesidium delivered a letter and presentation to the Board which outlined a plan that it believes will drive significant shareholder value to Progress owners. In its letter and presentation, Praesidium details opportunities for the Company to unlock value for shareholders through freeing up what Praesidium believes to be over $100 million in excess sales & marketing and R&D expenditures. Praesidium believes right-sizing the current operations alone would drive operating margins to over 55% and annual free cash flow to $175 million. Praesidium has retained, as advisors, Mark Fusco and John Shackleton, two of the most respected CEOs in the software industry, both with incredible track records of driving shareholder value. Through the implementation of a low-risk, repeatable software consolidator strategy focused on reinvesting capital at high rates of return, Praesidium believes its plan has the potential to drive the value of Progress to over $80 per share.

Praesidium also expressed its serious concerns with the vast underperformance of Progress's shares under the direction of the Board, which has overseen the destruction of significant shareholder value. Despite Praesidium's repeated attempts to work constructively with Progress, the Board's private and public responses to Praesidium have been wholly inadequate. In fact, the Board's public response to our letter and presentation did not address the vast majority of serious issues Praesidium outlined, including the fact that the Board has already lost shareholders $870 million through its history of horrendous acquisitions and massive excess spending.

In its response, the Progress Board continues to display the hallmarks of an insular and entrenched Board, clinging to a value destructive strategy of making "venture-capital" type acquisitions in an attempt to buy growth at any cost to the detriment of Progress shareholders.

Progress used specious logic to defend its poor performance (Company comments in italics):

"Our stock has traded up 33% since we named Mr. Gupta CEO - in our view, recognition of the efficacy of our strategy."

During the approximately 10 months from when Yogesh Gupta was named CEO until Praesidium filed an amendment to its Schedule 13D on August 2, 2017, Progress's stock continued its long-term underperformance, rising less than 17%, compared to increases of 21% and 25% in the NASDAQ Composite and Computer indices, respectively. Meanwhile, in less than two months since Praesidium's amended Schedule 13D filing in which it stated it had met with the Board to discuss ways to enhance shareholder alue, Progress's stock has risen over 19% while both NASDAQ indices were up less than 3%. As detailed on page 2 of Praesidium's September 15, 2017 letter, Progress's stock has substantially underperformed the Company's benchmark indices over one, three, five and seven year periods, as of June 30, 2017.

Progress set modest restructuring goals and failed to deliver real savings to shareholders:

"For example, in the first quarter of 2017, we undertook a major restructuring that resulted in a 20% reduction of headcount. This action, together with prudent expense management throughout the year, has allowed us to increase our operating margin from 28% through the end of the third fiscal quarter of 2016 to 34% for the same period in fiscal 2017."


While touting the Company's increased operating margins, the Board omitted the fact that the Company is lagging behind its planned expense increases, which has the effect of boosting operating margins in the short-term. We do not believe this improvement will be sustained. Management stated on the second quarter earnings call that margins benefitted from a "slower ramping of investments in some of our growth initiatives" than expected. In other words, it is just timing as management plans to ramp up spending, so the net savings will be a fraction of the 20% headcount reduction. Praesidium believes shareholders need to be extremely careful in evaluating what the true net cost cuts will be after Mr. Gupta states, "The savings from that effort have enabled us to achieve year-over-year improvement in our operating margins…as well as provide additional flexibility to invest in our business" in his letter to shareholders on September 12, 2017 (emphasis added).

Progress moved the financial goal posts and then claimed victory when they met their own lowered guidance:

"Our preliminary third quarter results exceed our guidance (as did our second quarter results)."

At the beginning of 2017, a few months after Mr. Gupta became CEO, he provided revenue guidance materially below consensus expectations for fiscal year 2017. Prior to this resetting of guidance, consensus revenue estimates were $99 million for Q2 and $106.3 million for Q3 of 2017. Actual revenue ended up coming in at only $93.4 million in Q2 and $97.6 million in Q3, which was well below initial expectations. The only reason actual results exceeded guidance is because the Company reset guidance earlier this year to ridiculously low levels that it was certain to beat.

The fact that the Board thinks that (1) beating drastically lowered revenue guidance and (2) not ramping up expenses as fast as it had hoped is proof that the strategy is working shows just how little the Board understands about driving shareholder value. Further, it has only been approximately six months since the Board approved two of the most wildly speculative acquisitions in the Company's history, neither of which are contributing to revenue, yet the Board states that "Praesidium fails to acknowledge" that the strategy is already working. Six months after making the largest acquisition in the Company's history Telerik, shareholders were told the strategy was working. Telerik was then written down as permanently impaired little more than a year later. Six months after paying $125 million to buy IONA, shareholders were told the strategy was working. IONA was sold (in two pieces) for $36 million just a few years later. Shareholders had been told the strategy is working six months after buying Savvion, Actional, NEON, Apama, Corticon (News - Alert) and over a half a dozen other companies. All of these acquisitions ended up being sold for a fraction of the price the Company paid for them. This "strategy" of using large amounts of a company's cash to buy money-losing, venture-capital type companies never drives sustainable long-term shareholder value.

Praesidium has several important questions for Progress that it believes all shareholders deserve the answers to on today's earnings call:

1. After destroying over three quarters of a billion dollars on 18 failed acquisitions, why is the Board continuing to operate with the same underlying strategy of making speculative acquisitions to buy growth at any cost?

2. What companies does the Progress Board model against in pursuing this strategy? Please provide examples of public enterprise software companies that have spent large amounts of their cash flow on venture capital-like, speculative acquisitions that have been able to drive sustained increases in shareholder value.

3. How did the Board arrive at its end market assumptions in the Telerik due diligence process given that they were massively revised, leading to a permanent impairment only seven quarters after the acquisition?

4. What changes, if any, did the Board make to improve its due diligence and forecasting processes prior to making the acquisitions of DataRPM and Kinvey?

5. What IRR does the Board expect on the $79 million it approved for DataRPM and Kinvey, and what is the expected payback period?

6. How much additional internal investment is needed to pursue the Company's cognitive applications strategy, and when will shareholders see a return on these investments?

7. Does the Board benchmark Progress's expense structure against its peers? If so, why does Progress spend nearly twice as much on R&D as a percentage of sales as its mature software peers?

8. Why does Progress spend 90% of its license revenue on sales & marketing when its business is essentially a royalty stream with the Application Partners bearing the majority of the costs of selling to end customers?

Progress shareholders deserve straight answers from the Board and management.

Shareholders are encouraged to review Praesidium's letter and presentation.

About Praesidium:

Praesidium Investment Management Company, LLC is a value-oriented investment management firm based in New York City. The firm was founded in 2003 and manages capital on behalf of some of the world's most respected university endowments, foundations and wealthy family offices who share a long-term orientation to investing in public equity markets.


[ Back To TMCnet.com's Homepage ]






Technology Marketing Corporation

35 Nutmeg Drive Suite 340, Trumbull, Connecticut 06611 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2017 Technology Marketing Corporation. All rights reserved | Privacy Policy