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Progress Software (PRGS +12%) progresses to all-time highs today after exceeding earnings and sales estimates in Q3 (Aug) and projecting decent Q4 (Nov) guidance. While the enterprise software provider's adjusted EPS prediction for the upcoming quarter missed expectations, it was dragged down by its previously disclosed acquisition of ShareFile, which it expects to close by year's end.

The acquisition of ShareFile was massive for PRGS, considering the $875 mln price tag versus PRGS's $2.44 bln market cap. The addition of ShareFile was not well-received at first, as it prompted PRGS to suspend its dividend to deleverage rapidly after the deal closed. However, there was still plenty to like, especially ShareFile's 86,000 customer base spanning a broad range of industries, the fact that 100% of its revs was recurring, boosting PRGS's annualized recurring revenue (ARR) by $240 mln upon close, and that it meshed with the company's existing Digital Experience offerings.

At the same time, by delivering sound quarterly numbers in Q3 and illuminating that the financial impact of ShareFile was mild, evidenced by sufficient Q4 guidance, PRGS doused heightened fears over the acquisition while showcasing its growing technological advantages.

• In Q3, PRGS expanded its adjusted EPS by 17% yr/yr to $1.26, crushing its $1.11-1.15 forecast. The impressive profitability was supported by a 200 bp lift in operating margins -- reflecting ongoing expense management -- and a return to positive revenue growth of 2% to $178.69 mln following last quarter's -2.3% dip.
• ARR saw a slight uptick from Q2 (May) to end Q3 at $582 mln. No single product drove material growth in total ARR. Rather, the mild increase emerged from growth across multiple product lines. At the same time, net retention remained sturdy at 99%.
• ShareFile commanded much of the spotlight during the call. However, PRGS's attention on AI should not be overlooked as it underpins much of its recent quarterly performances. By operating in the DevOps market, where customers build, deploy, and manage applications, AI can bring meaningful advantages, especially efficiency improvements. PRGS remains locked in on incorporating AI into its products.
• Looking at Q4, PRGS expects adjusted EPS of $1.15-1.25 and revs of $207-217 mln. The guidance incorporates one month of contribution from ShareFile. The acquisition will weigh on cash flows, clipping about $15-20 mln. However, PRGS is confident in a quick turnaround, especially given ShareFile's fundamentals, which include operating at around 15-20% operating margins. PRGS remarked that as soon as the deal closes, it will begin the integration process, anticipating full integration within 12 months.

PRGS's ShareFile acquisition injected some nervousness into its stock due to the price tag and the subsequent dividend pause. However, following energetic Q3 numbers and better-than-feared Q4 guidance, investors' nerves have subsided, replaced by excitement over a significantly more fortified company operating amid an AI frenzy.