Progress Software Corporation (PRGS): A Bear Case Theory

Core Thesis - Progress Software Corporation (PRGS) presents a bearish investment outlook due to leverage, inconsistent performance, and reliance on acquisitions for growth [1][2]. Financial Performance - PRGS's share price was $40.99 as of February 2nd, with trailing and forward P/E ratios of 24.65 and 7.03 respectively [1]. - The company has delivered flat returns over the past five years, with a near-term downside expected due to deteriorating earnings quality [2]. - PRGS's largest acquisition, ShareFile, for $875 million, increased leverage above 3.5x, complicating future fiscal comparisons [3]. Growth and Acquisitions - The company has shifted to reporting "pro forma" ARR growth to mask stagnating legacy growth, with organic growth averaging -0.3% over the last eight quarters before acquisition adjustments [3][4]. - Although ShareFile has shown modest growth, recent trends indicate a deceleration, including the first negative sequential quarter [4]. Financial Position and Risks - PRGS has $1.5 billion in debt, rising stock-based compensation exceeding 30% of cash flow from operations, and aggressive revenue recognition practices [5]. - Additional concerns include a halt in disclosing allowance for doubtful accounts, spikes in cash flow addbacks for credit losses, declining deferred revenue, and frequent insider selling [5]. Future Outlook - The underlying performance of PRGS may disappoint once the acquisition impact rolls off, with organic growth and cash flow under pressure [6]. - The company faces significant near-term headwinds, with challenging operational comparisons expected and continued investor caution [6].