Progress Software (PRGS - Free Report) recently announced preliminary results for the third quarter of fiscal 2020 that ended on Aug 31. The company raised both earnings and revenue outlook for the to-be-reported quarter and also provided its fiscal 2020 guidance.
Moreover, Progress announced that it has entered into a definitive agreement to acquire Chef, a leading provider of Continuous Automation software, for $220 million in cash.
Progress Set to Report a Strong Q3
Markedly, Progress’ shares have underperformed the Zacks Computer Software industry peers Aspen Technology (AZPN - Free Report) , salesforce.com (CRM - Free Report) and Cadence Design Systems (CDNS - Free Report) year to date.
While Progress’ shares have lost 14.6%, Aspen, salesforce and Cadence gained 2.2%, 48.4% and 44.9%, respectively. Moreover, the industry rallied 32.3% year to date. Markedly, Aspen and salesforce sport a Zacks Rank #1 (Strong Buy), while Cadence has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
However, the preliminary results suggest an impressive fiscal third quarter that is likely to help Progress’ shares rebound in the rest of fiscal 2020.
This Zacks Rank #4 (Sell) company now expects non-GAAP earnings between 75 cents and 78 cents per share, better than the previous guidance range of 69-71 cents.
Moreover, revenues are anticipated between $109 million and $111 million, better than management’s previous guidance of $104-$109 million.
Apart from better-than-expected revenue performance, stringent cost control and improving operating efficiency are expected to have aided quarter results.
The Zacks Consensus Estimate for third quarter is currently pegged at 71 cents, unchanged in the past 30 days and indicates 5.3% decline from the figure reported in the year-ago quarter.The consensus mark for revenues is pegged at $107.70 million, suggesting decline of 6.8% from the year-ago quarter’s reported figure.
Further, Progress raised its fiscal 2020 guidance. The company now expects earnings between $2.94 and $2.97 per share, better than the previous guidance range of $2.82-$2.86.
Moreover, revenues are anticipated between $452 million and $456 million, better than the previous guidance of $433-$443 million.
Progress is set to report third-quarter fiscal results on Sep 29.
Chef Buyout to Strengthen Recurring-Revenue Base
Meanwhile, the Chef acquisition will expand clientele and boost Progress’ recurring-revenue base. Notably, Chef has more than 700 customers including several blue-chip enterprises. Further, as of Jun 30, 2020, Chef’s recurring revenues on a trailing 12-month basis was $72 million.
Moreover, net retention rate of more than 95% indicates a loyal customer base. Notably, Chef is considered a DevOps pioneer and is a dominant provider of continuous delivery automation that helps in accelerating enterprises’ digital and cloud transformation.
Chef will be integrated into Progress’s Application Development and Deployment segment. Progress expects Chef’s subscription-based, term-license business model to boost its recurring-revenue base by 200 basis points. Moreover, Chef’s operating margins are expected to be more than 35% after full realization of cost synergies (expected timeframe within 12 months)
The acquisition is expected to close in October. Chef is anticipated to contribute between $10 million and $12 million to fiscal 2020 revenues. Although the acquisition is expected to be dilutive to fiscal 2020 earnings (negative impact of break-even to 4 cents), it is anticipated to be accretive beginning first-quarter fiscal 2021.
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