ShareFile Acquisition To Catapult Digital Experience Leader Into A New Era Of Growth And Profitability

Key Takeaways

• The acquisition of ShareFile is poised to significantly boost Progress Software's revenue and ARR by expanding digital experience offerings and leveraging a loyal customer base.
  
• A strategic focus on using capital for growth and debt repayment, post ShareFile acquisition, aims at long-term value over short-term shareholder returns, enhancing earnings.
  
• The acquisition of ShareFile introduces financial strain, execution risk, investor concerns, and challenges in market competition, impacting Progress Software's stability and growth prospects.

Catalysts

Develops, deploys, and manages business applications in the United States and internationally.

• The acquisition of ShareFile is expected to significantly increase Progress Software's annual revenue and ARR, directly impacting future growth. This all-cash purchase for $875 million indicates a strategic move to enhance their digital experience offerings, potentially leading to increased revenue streams.
  
• ShareFile brings a strong, loyal customer base across various industries with a high net retention rate over 100%, suggesting stable and recurring revenue that could stabilize and grow Progress Software's financials, particularly boosting its annual revenue and ARR.
  
• Progress Software's integration strategy for ShareFile involves leveraging its existing digital experience, sales, go-to-market, engineering, support, and operating infrastructure. This integration is projected to achieve operating margin targets of 40% for ShareFile, positively impacting net margins.
  
• The company's decision to suspend its quarterly cash dividend post the ShareFile deal closure reflects a strategic pivot towards using available capital for growth through acquisitions and debt repayment. This could signify a focus on long-term value creation over short-term returns to shareholders, potentially leading to improved earnings per share as leverage is aggressively reduced.
  
• Progress Software's disciplined approach to M&A, focusing on acquiring businesses with excellent products and loyal customer bases, and the subsequent integration and focus on customer success and retention, is expected to continue driving shareholder value, indicating a strategic path towards boosting revenues, earnings, and cash flows.

Assumptions

• Analysts are assuming Progress Software's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $161.3 million (and earnings per share of $3.84) by about September 2027, up from $82.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $99.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2027 earnings, down from 34.3x today. This future PE is lower than the current PE for the US Software industry at 38.7x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Risks

• The acquisition of ShareFile, with an all-cash purchase of $875 million, could strain financial liquidity and increase leverage, resulting in a higher risk profile impacting net margins and earnings.
  
• Integrating ShareFile within the projected 12-month period carries significant execution risk, potentially affecting revenue synergies and operational efficiency.
  
• Progress Software's decision to suspend its quarterly cash dividend post-ShareFile acquisition could alienate income-focused investors, affecting share price stability.
  
• The reliance on maintaining a high net retention rate (over 100% for ShareFile) in an increasingly competitive cloud collaboration market could challenge revenue growth and client retention.
  
• ShareFile's customer base and product focus, while complementary, introduce a new layer of complexity in cross-selling and integration with existing offerings, impacting revenue realization and margin improvements.

Valuation

• The analysts have a consensus price target of $70.0 for Progress Software based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $161.3 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.3%.
• Given the current share price of $66.3, the analyst's price target of $70.0 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.