Citi updated its financial outlook for Progress Software (NASDAQ:PRGS), increasing the price target to $65.00 from the previous $60.00, while maintaining a Neutral rating on the stock. The software company's revenue growth of approximately 2% year-over-year exceeded the flat expectations, largely driven by its License segment. This performance comes amidst a backdrop of consistent demand across its product portfolio, even as net revenue retention (NRR) remains around 99%, with second half fiscal year 2023 churn still impacting the trailing twelve months calculation.
The analyst noted that Progress Software's in-quarter profitability benefited from disciplined cost management and timing of expenses, which resulted in a 3 percentage point increase in operating profit margin (OPM) and a 2 percentage point increase in free cash flow margin (FCFM).
Additionally, the impending acquisition of ShareFile was acknowledged as a highlight, anticipated to contribute $18-20 million for one month in fiscal fourth quarter, despite the deal not being finalized and its structure affecting free cash flow.
Progress Software's limited exposure to the seat-based business model, which accounts for less than 10% of its business through its Developer Tools, was emphasized as a protective factor against the current volatility in workforce numbers and the cautious outlook on General AI affecting seat expansion velocity. The firm's developer products, which are more foundational than Integrated Development Environment (IDE) style tools, are seen as less susceptible to these market trends.
The report also pointed out the potential for Progress Software to bolster its cloud momentum, which is currently less than a 25% mix but is expected to be enhanced by the addition of ShareFile, bringing in additional cloud expertise. While near-term operating profit margin forecasts have been lowered due to the costs associated with merging and integrating acquisitions, the inclusion of ShareFile in Citi's top-line estimates has led to an overall positive adjustment in the price target. Despite these changes, the analyst's stance on the stock remains Neutral.
In other recent news, Progress Software Corporation has reported a successful third quarter in 2024, with earnings and revenue that exceeded expectations. The company announced a 2% year-over-year increase in revenue, reaching $179 million, and a significant 17% growth in earnings per share (EPS) to $1.26. The company's robust financial performance is further highlighted by an increase in Annual Recurring Revenue (ARR) to $582 million and a maintained net retention rate of 99%.
In addition to its financial achievements, Progress Software is expanding its product offerings with the planned acquisition of ShareFile from Cloud Software Group for $875 million. This acquisition is anticipated to finalize by the end of fiscal 2024. The company expects this move to contribute between $18 million and $20 million to Q4 revenue, with an operating margin of 15% to 20%.
Despite the initial impact on free cash flow due to the ShareFile acquisition, the company projects positive adjusted free cash flow by 2025. Furthermore, Progress Software plans to suspend its quarterly cash dividend to prioritize debt repayment and future acquisitions.
InvestingPro Insights
As Progress Software (NASDAQ:PRGS) continues to navigate through its fiscal year with strategic acquisitions and consistent demand for its products, real-time data and InvestingPro Tips provide additional context for investors. The company boasts an impressive gross profit margin of 86.28% over the last twelve months as of Q3 2024, indicating strong efficiency in its operations. Furthermore, the firm's net income is expected to grow this year, offering a positive outlook for its financial performance.
InvestingPro data highlights a market capitalization of $2.8 billion, reflecting the company's substantial size in the software industry. Despite the high P/E ratio of 38.97, which suggests a premium valuation, the company's significant return over the last week of 10.84% demonstrates current investor confidence. Additionally, analysts predict Progress Software will be profitable this year, reinforcing the company's robust financial health.
For investors seeking a deeper dive into Progress Software's performance and future prospects, InvestingPro offers a comprehensive list of tips, including insights on valuation, stock performance, and profitability. With 12 additional tips available, including the company's trading patterns and analyst revisions, investors can access a wealth of information to inform their investment decisions at https://www.investing.com/pro/PRGS.
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