Last week, Saugatuck was briefed by Colleen Smith, VP at Progress Software (NASDAQ: PRGS), concerning the firm’s recently announced strategy to refocus around its core OpenEdge product line (see April 25 press release).
Over the past half dozen or so years, Progress had been successfully diversifying the company beyond its historical 4GL and app dev roots, primarily through the acquisition of a number of high-profile BPM, event-processing, middleware and integration-focused assets. This strategy apparently had been working until recently, when top line revenue and operating income began to fall. In response, the firm’s former CEO Richard Reidy stepped down last August – and after a five month BOD search, the firm hired Jay Bhatt as its new President and CEO (formerly of Autodesk) in December 2011.
As emphasized by Smith, Bhatt immediately initiated a comprehensive strategic review of the business, the net results of which are now clearly playing out. The plan centers on refocusing the company around its historic mission as a premier provider of applications development and deployment solutions, and platform capabilities – what Progress calls “Application Platform-as-a-Service (aPaaS).” This includes its core OpenEdge, DataDirect Connect and Apama product lines, with a plan toward integrating them into a unified, single offering over time. The firm announced that it will be divesting a mix of 10 non-strategic product lines (including Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Oribix, Savvion, Shadow and Sonic) – some of which are fast growing but unprofitable, others legacy in nature.
Complicating things was a move by activist investor (Starboard Value LP) who questioned the strategic direction of the company, as it felt that the company’s shares were substantially undervalued. In a January letter to investors, they sought shareholder approval for several BOD nominations to help drive change. However, with the recent announcements by Bhatt, Starboard has withdrawn its director nominations and pending proxy contest, and voiced support for Progress’s new strategic direction.
What Does This All Mean?
Overall, we think this plan makes a lot of sense. Progress has been a best kept secret for years – the brand nobody knows about, yet a powerful force fueling and underpinning a wide range of ISV offerings (especially mid-market targeted software providers, such as Epicor). Its core app dev / deployment technology (OpenEdge) has been substantially enhanced over the past few years, and has become a solid multi-tenant platform for ISVs migrating to the Cloud.
As we wrote back in late March 2011 (see Research Alert "SaaS Enablement Platforms: Fast Path to Multi-tenancy or Lock-In?"), Progress has some natural strengths for ISVs migrating to the Cloud:
In this regard, the firm has 1,400 active (and paying) ISV customers, fifteen percent of whom are already on OpenEdge 11, with another ten percent migrating by YE2012. Adding this footprint to previous releases, Saugatuck would estimate that roughly 45 percent of Progress’s ISV clients will have moved to a SaaS deployment model by YE2012.
The planned divestiture of the non-strategic businesses combined with the planned layoffs (10-15 percent of workforce) will ultimately result in a very lean and mean firm that should be highly focused, and highly profitable – two ingredients that will help the firm simplify its messaging and go-to-market strategy. While Progress will be very cash flow positive as it continues to upgrade its current customer base to the latest releases (especially in Europe, where the firm has a substantial footprint) – what is yet to be seen is whether it can 1) move the top-line with new organic customer growth, 2) continue the cycle of upgrading existing ISV customers to OpenEdge, 3) maintain the slow trickle of ISV customer defections, and 4) maximize its return on the assets that it will dispose. In regards to the latter, we can’t imagine that the multiple it will receive on trailing 12x revenues will be as high as it could have been without the pre-announcement – perhaps on average a 2-3X multiple rather than 4-5X on many of the assets.
To be successful with its highly focused strategy, Saugatuck believes that Progress will need to substantially reinvent its much understated brand – and to seek out a wide range of partners who can help facilitate new ISV and enterprise customer acquisition. While going direct will no doubt continue to be an important part of its strategy, growing its indirect channels, whether through OEM partners, VARs, hosters and aggregators, will be critical to its success.
Saugatuck estimates that roughly 30-35 percent of ISVs have already brought to market first or second generation Cloud-enabled offerings, whether core to their strategy or line extensions. Another 30-35 percent has begun their Cloud evolution – some of whom have selected a strategic platform to deploy against, others not – with another 20-25 percent not yet active in the journey. Given this, Saugatuck sees substantial market opportunity in these regards. However, the market will no doubt be crowded with established and emerging PaaS players. Seizing the moment with a clear and focused message, combined with additional funding to market an evolved positioning and brand, are required for success.
This blog originally appeared at Saugatuck Lens360.