Good day, and welcome to the Progress Software Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Mike Micciche, Senior Vice President, Investor Relations. Please go ahead.
Okay, thank you, Sherry. Good morning. Good morning, everyone. Thank you for joining us today on short notice. With me on this call are Yogesh Gupta, our CEO, and Anthony Folger, our CFO. A little while ago, Progress announced our proposed acquisition of ShareFile. We also reiterated our prior guidance for Q3 and indicated that we expect to suspend our dividend after the acquisition closes. You can find the press release on the Investor Relations section of our website at investors.progress.com, along with a supplemental slide deck. Before we get started, I'd like to point out that any preliminary results for our third fiscal quarter are subject to revision until we report the full third fiscal quarter results on September 24th.
Details and instructions for accessing that call two weeks from now were issued in a separate press release this morning that can also be found on our IR webpage. I'd also like to remind you that during this call, we may discuss forward-looking items, including our outlook, prospective financial and operating performance, corporate strategies, product plans, cost initiatives, and other information that might be considered forward-looking, including the timing and potential results associated with our proposed acquisition of ShareFile. This forward-looking information represents Progress Software's outlook, guidance, and the potential impact of the ShareFile acquisition only as of today and is subject to risks and uncertainties. Please review the safe harbor statement regarding this information, which is available in today's release, in the supplemental slide deck issued along with the release, and on the investor relations section of our website. Again, that's investors.progress.com.
Progress Software assumes no obligation to update forward-looking statements included in this call, whether as a result of new developments or otherwise, and we will make reference to several non-GAAP measures on this call, including annual recurring revenue or ARR, and diluted earnings per share. Please see important information regarding non-GAAP financial information in Exhibit 99.1 of the Form 8-K filed by Progress on June 25th, 2024, for a description of these non-GAAP metrics. Lastly, just a reminder that we're gonna record this call in its entirety, and a replay will be available on our IR webpage as soon as the vendor can get it on the page for us. With all that out of the way, Yogesh, I'll turn it over to you.
Thank you, Mike, and good morning, everyone. Thank you for joining us today as we share some really exciting news about our latest acquisition. Before we get into the details of the acquisition, let me just highlight that in our press release this morning, we reiterated our guidance for revenue and earnings per share for Q3. Our expectations for both are within or above the high end of the ranges we provided last quarter. We also announced that we have decided to suspend our quarterly cash dividend after the closing of the ShareFile acquisition, which I'll discuss in more detail shortly. So as you saw earlier, we signed a definitive agreement to acquire ShareFile for $875 million in an all-cash deal. ShareFile, which is a business unit of the Cloud Software Group, is a leading provider of collaboration software for document-centric use cases.
ShareFile is a modern SaaS-native platform, which offers AI-powered document-centric collaboration and automated workflows, client portals, secure file sync and share, and e-signature solutions. It will significantly expand our digital experience portfolio so that we will be able to offer greater value to our customers. ShareFile serves a wide range of industries, including business services such as legal and accounting, financial services, healthcare, construction, and real estate, and has a large and loyal customer base. When the deal closes, we expect to add more than $240 million in annual revenue and ARR, bringing Progress ARR to well over $800 million and annual revenue to nearly $1 billion. Subject to regulatory approvals and customer closing conditions, we expect this acquisition to close before the end of our fiscal year, ending on November 30, 2024.
We will finance this transaction entirely with cash on hand and our existing revolving credit facility. Our expected pro forma net leverage will be 3.6 at closing, and we intend to delever quickly as we have with our previous acquisitions. When we initiated our Total Growth Strategy, we knew it would require patience and discipline to be successful. We have indicated many times, especially over the last year or so, that we would not compromise our standards on the kind of companies we acquire and the multiple we would pay. We have demonstrated this discipline numerous times since our last acquisition, and our purchase of ShareFile meets all of our strict criteria. Recall, our Total Growth Strategy has three main elements. First, investing and innovating within our existing products, sec ond, acquiring great businesses at reasonable valuations and rapidly integrating them.
And third, maintaining a fanatical focus on customer success. In search for good acquisition candidates, we look for businesses with great products, a sticky customer base with high retention rates, significant recurring revenue, the potential to generate strong cash flows, and to be able to leverage our existing sales, support, go-to-market, and operating platforms. In addition to a target's product, customer, and go-to-market fit, as well as its financial merits, we also look for alignment across people and culture. ShareFile checks the box on all these requirements, which is why we're so excited about the deal. ShareFile is a modern SaaS offering with 100% recurring revenue, adding recurring revenues to Progress at scale, and it has high customer retention rates. Its best-in-class content collaboration platform meaningfully expands our digital experience portfolio and is highly complementary to our existing offerings.
We also see the opportunity to leverage our existing sales, support, go-to-market, and operating platforms, providing a clear path to bringing operating margins up to our 40% target. Because of the highly attractive acquisition multiple, especially given the cash tax advantage of an asset purchase transaction and our ability to drive strong cash flows through our proven integration processes, we expect this acquisition to generate strong returns that exceed our cost of capital. This deal demonstrates that our patience and discipline are integral to making good acquisitions that will enable us to continue to execute on our strategy. Now to share a bit more on ShareFile's business. ShareFile was founded as a SaaS company in 2005 and has been a part of Citrix and subsequently Cloud Software Group since 2011 .
The company provides a best-in-class collaboration and workflow platform, which it delivers mission-critical solutions, including document-centric collaboration with automated workflows, client portals, secure sharing and syncing of files, and integrated e-signature. ShareFile's purpose-built workflow automation platform gives users great visibility, greater visibility and control over tasks and projects, especially for customers industries, in industries that prioritize security and compliance, such as business services, financial services, and healthcare. When it comes to leveraging GenAI, ShareFile has applied it across a wide range of functions in the platform. For example, it uses GenAI to provide a simple, guided, self-service user experience to internal users and to the clients of a business. It also uses GenAI to automatically summarize documents, as well as create Q&A related to those documents. And GenAI identifies sensitive content and suspicious access to improve the security of the platform.
Another exciting aspect of this acquisition is the fact that it brings a modern, market-leading, SaaS-native, secure platform that is operating efficiently at scale and will enable Progress to accelerate our own cloud efforts. ShareFile's world-class solutions will enable us to serve a wider set of customers with a broader set of digital experience offerings. ShareFile's approximately 86,000 customers will also benefit from becoming Progress customers. We have a long and successful track record of success, of strengthening customer relationships through our unrelenting focus on our customers. With our financial strength, customer-centricity, and history as a trusted provider of digital experience software to organizations globally, ShareFile customers can have confidence in the continued investment in innovation. So innovation in ShareFile's platform and products. We firmly believe we are the right long-term home for ShareFile.
Our conviction is further supported by the strong cultural alignment of the two organizations. ShareFile employees, like us, share a commitment to continuous improvement and a deep dedication to the success of their customers. We believe that they will find working at Progress a rewarding learning and growth experience. It's important to note that the 12-month employee retention from our recent acquisitions, MarkLogic and Kemp, was well over 90% in each case, and we believe ShareFile employees will also have long careers with us. Lastly, to close the loop on the dividend. For a few years now, we've been clearly communicating our capital allocation priorities as being M&A and share repurchases, both ahead of dividends.
We believe that we can provide far more shareholder value by utilizing the relatively small amount of cash applied to the dividend to pay down debt and even more aggressively and to continue to repurchase shares. With that in mind, as we head into our latest acquisition, we've reached the decision to suspend the dividend once the deal closes. So to wrap it up, I want to leave you with this. This will be our fifth acquisition since we implemented the Total Growth Strategy. With all of our prior acquisitions, we've demonstrated our ability to choose the right asset at the right price, to successfully execute our integration plans and deliver strong returns. The acquisition of ShareFile is the latest step in our strategy, and we believe it will create meaningful value for our shareholders and provide significant benefits to ShareFile customers and employees.
I look forward to welcoming ShareFile customers and employees into the Progress family when the deal closes. We can't wait to begin working with you. And as always, I want to thank the Progress team for all their hard work to get this deal done. And finally, I want to express our sincere gratitude to our investors for their continued trust and patience. With that, operator, let's open the floor for Q&A.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question will come from the line of John DiFucci with Guggenheim Securities. Your line is open.
Thank you. My first question has to do with the cost synergies to be realized in 12 months, and bring it up to above your margins. Can you tell us what the current profit margins are for ShareFile?
Anthony, maybe you can add as well, but, you know, John, this is a carve-out from a larger business, as you know. So, y ou know, we have some data that is very good about the business. You know, some aspects of the business. Other aspects of the business are, as, as you can imagine, are part of a larger business, and so allocation of costs is always a little bit tricky. That said, you know, this business is in the approximately 20-ish% range. Anthony?
Yep, exactly. Just slightly below 20%, we think in terms of the operating margin, where it's at today, John.
Okay. Okay, great. Thank you. And then, just a quick follow-up. Is it—was there any organic growth in? I think you said the NRR was greater than 100%, so I assume there's something there. But who knows? Maybe they're acquiring assets, too. And then, if there was, any thoughts on that, once you bring the margins up, once it's part of Progress?
Yeah. So a really good question, John. Yes, the business has NRR growth that is in the mid to high single digits currently, and that is organic growth, not related to acquisitions. Obviously, when you, you know, take these kind of costs out, we think that the organic growth will, you know, basically probably trend in the same direction, and in the same range as our overall organic growth. So, you know, low single digits is where we think we will end up with this business as well.
Okay, great. Okay, great. Nice job, guys. Thank you.
Thank you, John. Good morning.
Thank you. One moment for our next question. And that will come from the line of Rachit Agrawal with J.P. Morgan. Your line is open.
Hello, Rachit?
If you're muted, please unmute your line. Mr. Agarwal? Okay, we'll move on to the next question. And that will come from the line of Fatima Boolani with Citi. Your line is open.
Good morning. Thank you for taking my questions. My first question is just around asset quality. I wanted to better understand, what about ShareFile and aspects of the intellectual property in the portfolio really stood out to you, it being, you know, maybe the more attractive acquisition candidate in a marketplace that, you know, has a few, even public, file share and content management assets? So just wanted to kind of get your sense there, and if there are any consumer-oriented angles to the business. And then I have a follow-up, please.
Good morning, Fatima. So, yeah, so I mean, when you think about it, right, you are right, that, you know, it's the primary competitors of ShareFile are people like Box and Dropbox. And even though they are the primary competitor, the fact that ShareFile offers a much richer workflow and collaboration solutions, as well as client portal capabilities, as well as GenAI capability and robust security, et cetera, make it much more competitive in the market, and gives it an edge when competing with those businesses, especially for those organizations, that are focused on, compliance as a big issue. You know, I mentioned that, you know, business services is one of the larger industries and segments that, that ShareFile addresses.
These are, for example, law firms looking to collaborate with their clients' attorneys. These are financial institutions or accounting firms, you know, collaborating not just internally, but also with their clients and so on. And so when you have this sort of sophisticated client collaboration, not just file sharing, that's where the differentiation matters. And so it is truly a business-to-business offering. The business has the vast majority of its 86,000 customers are small to mid-sized businesses. There is really no consumer play in the business. It truly is a business offering, Fatima.
Thank you so much, and if you can also address any overlap, just from a technology standpoint with MOVEit, and then one for Anthony. You know, this is the first time I think I recall you suspending the dividend, following an acquisition. Just wanted to get a better understanding here of why that is the correct, or the most appropriate, pivot or evolution in the capital allocation strategy for now. Just because we have kind of seen you walk and chew gum at the same time. You do your acquisitions, you know, reduce the debt load, as well as, you know, continue on with the Total Growth Strategy by acquisition. So just kind of wanted to understand the impetus behind suspending the dividend this go around. Thank you.
Fatima, let me start with the, you know, product overlap or not, none thereof, and then I'll turn it over to Anthony for the second question. You know, the MOVEit, as you mentioned, is a file transfer product, right? It is used for securely move files between organizations or between systems. What's interesting is in something like MOVEit, you know, you move files from one place to the other, you know, you end up with two copies of the file, of course. There is no collaboration, there is no syncing. I mean, literally it is a, "Let me move something from here to there." It is very, very wonderful, it is large- scale, it is secure, robust, reliable, and so it serves a very important purpose, but ShareFile is very different.
It actually is around collaborating on shared content, shared documents, and I think that's a really big difference. And so that's why it is a cloud offering, where the content is shared with the participants who use it, both that are inside their business that has licensed the software, as well as with their clients that they have. The workflows around it, the project management and the process management around it, are very distinct and essential to get the collaborative work done, and the mission accomplished or whatever that business is. And so they really do serve very, very different things, and they're complementary. In fact, we have common customers who use both products.
So we feel really good that there is really no overlap across our portfolio and really feel good how ShareFile extends the product portfolio that we have around digital experience. Anthony, do you wanna take the dividend question?
Sure. Yeah, Fatima. So, you know, we had, I think for maybe a couple of years now, had the dividend sort of in third place in our capital allocation philosophy. And, you know, M&A had always been in the lead, share repurchases and then the dividend. And I think we're at a point now, certainly we're at a scale as a business, where, you know, we'd like to delever from this deal and free up more liquidity so we can go out and do the next.
I think, you know, looking at a dividend that was, you know, a pretty low yield in this market, we just didn't think it was all that attractive to investors, and we still have our share repurchases, which we can, you know, move those around depending on the facts and circumstances to be more or less. We've done that in the past. I think we've been opportunistic with the share repurchases. I think we just felt like the dividend was, you know, less attractive to investors, less important to us. We still have the opportunity to return capital to shareholders through repurchases, and we just felt like freeing up more liquidity for future M&A was a more efficient use of capital for us right now. I think that was the thinking behind it.
I appreciate that. Thank you.
One moment for our next question, and that will come from the line of Harshil Thakkar with Oppenheimer. Your line is open.
Hey, good morning and congrats on the acquisition. Yogesh.
Good morning, Harshil.
Hey, good morning. Yogesh, in the past you've talked about, you know, potentially being able to do two deals in conjunction and kind of integrate them at the same time. Just given the size of ShareFile, and this is clearly bigger than the past deals that you guys have done in the past, do you still feel you have confidence in being able to potentially maybe do another acquisition if the opportunity comes up?
Absolutely, yes, Harshil. I think that's a really good question. You know, so we really feel good about our ability to integrate. As you know, we have demonstrated over the last four acquisitions that we can rapidly integrate. We can get to the synergies usually faster than we say we would. We actually are able to bring people on board. We're able to retain customers. We're able to get employees engaged and really keep the businesses solid and moving forward. As we have continued to do so, our integration playbook has gotten better. Our integration platform internally, our systems and processes have gotten better, and we have gotten better as we have more experience under our belt. So yes, we will continue to look.
You know, from my perspective, if the right deal comes along at the right price, we will not hesitate in doing the deal, because we believe we can integrate more than one at the same time. And so from an integration perspective, from our ability to make it work, from our ability to execute, I feel very good about it.
Got it. Thank you.
Thanks, Harshil.
One moment. One moment for our next question, and that will come from the line of Lucky Schreiner with D.A. Davidson. Your line is open.
Great. Congrats on the acquisition. As a.
Thank you. Thank you.
Yeah, it's quite a bit larger than, you know, your more recent acquisitions. I guess maybe a two-parter. You know, how did the deal come about? And, you know, what kind of gives you the confidence in integrating it, you know, this much larger company compared to the previous couple of acquisitions? Thanks.
Sure. I'm happy to, happy to answer. So, you know, Lucky, the deal, of course, came about basically with CSG deciding that ShareFile is not strategic to them. They are very focused on large enterprises and serving those customers, I believe. And I think it's probably a better, you know, they answering the question why, but it is my understanding that they decided that this was no longer strategic to the go-forward strategy that they have at CSG. So they actually hired bankers who reached out. And, as you know, we have been very active, and we have really good connections with folks in the banking community, and we were able to get involved in the deal early on.
and so that's how the deal came about, and that's how we ended up winning it. We, the more we looked, the more we liked what we saw. It is a larger deal than we have done before, proportionally speaking. But one important thing to realize, a really big part of integration, to be honest, is the people, right? And I've said always that we wanna make sure that we acquire, you know, a group of people that can be substantial, but that, you know, it isn't overwhelming to our organization. And when you think about it, you know, their employee population is just about 25% of our current population, right?
It isn't that big a deal from employee integration perspective, and I think that's a really important part and was a really important part of for us to look into this and see how confident we felt about integrating it. Also, as I just mentioned earlier, we have continued to make our abilities to integrate better, and that includes our playbook, our processes, our systems, our integration platform, and our own people's experiences. We feel very confident that this is a business that can really integrate well into us. The culture of the two organizations is very similar. You know, there are people at ShareFile who've been there for 20+ years, or almost 20 years, pretty much since they started in 2005 . There are people at Progress who've been with us for 30+ years.
So the, you know, we have organizations where both sides, where with people who are committed to the organization, committed to customer success, dedicated to making sure that the product is innovated, dedicated to continue to improve and grow. And when you have organizational alignment and cultural alignment, it also makes it easier to bring organizations together. So a lot of thought went into it, Lucky, because it is a larger deal than we've done before. It, you know, but we feel really comfortable and confident that we can execute on the integration and deliver the results.
Great. Yeah, that makes sense. And then maybe last follow-up, anything to note, from a pricing perspective here? I know you said it brings your ARR to nearly a billion. Maybe is there any seasonality that we should be aware of, as it impacts your business?
Yeah. So, Lucky, I said that it brings our annual revenue to nearly $1 billion and ARR to over $800 million. The business in general doesn't have any meaningful seasonality. You know, overall, the business is relatively steady throughout the year. One of the advantages of having a business where you have 86,000 customers, and each of the deal is relatively small, because of that, when you think about it, you know, the average customer relationship is, you know, 240 divided by 86,000, which gets you to about $3,000 each. And so you, you know, you've got a really, really sort of steady, constant, high-velocity business. We at Progress, by the way, have another high-velocity business in digital experience, which is why this is, you know, another good reason why it's a great fit for us. No real seasonality when it comes to revenue over the year.
Thank you. As a reminder, if you have a question, please press star one, one. One moment for our next question, and that will come from the line of Rachit Agrawal with J.P. Morgan. Your line is open.
Great. Can you guys hear me?
Yes, Rachit, good morning.
Hey, this is Pinjalim. Actually, dialing through Rachit's number.
Hi, Pinjalim. Hi, Pinjalim. How are you?
Good, good. Congrats on the acquisition. I want to ask you, the space seems like is completely moving towards AI becoming a big differentiator. So I want to ask you the investments that is left on the AI front, for ShareFile to kind of continue to differentiate in the market and could it be a potential drag on margins over time?
Yeah. So by the way, you know, as I already mentioned in my earlier remarks, Pinjalim, they have done enormous amount of investment in AI, and they continue to do so, right? They're applying GenAI to basically every function and every aspect of the business that it can be applied to. And we believe that there are enough resources, there is enough investment going on, and we do not believe that it will create a challenge for us when it comes to delivering on a margin part. The teams exist. You know, many of the teams are in lower- cost countries. And there's an opportunity for us to you know, shift that as time goes on as well.
I don't believe, Pinjalim, that we will have challenges getting to the margin targets that we outlined. Because, you know, to us, that is the fundamental driver of value creation, right, Pinjalim? And so if we were not seeing clear line of sight to 40% operating margin, we would not do the deal. We are very, very confident that we can get there.
Understood. One quick follow-up. I think you said it's 100% recurring. Wanted to ask if it's 100% cloud, or is there any on-premise component? Trying to understand if the rev rec is ratable, or is there a further term component?
Yeah, it is 100% cloud and 100% recurring. It is completely ratable. There is no piece of the business that is perpetual. It is a cloud-native company. It started off as a cloud-native company. It has continued to be a cloud-native company. Its licensing model is completely cloud-based. It is a cloud product.
Got it. Thank you very much.
Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.
Thank you, everyone, for joining us early this Monday morning for this exciting news, and have a wonderful rest of the day, and we'll talk soon.
This concludes today's program. Thank you for participating. You may now disconnect.