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progress software (Nasdaq: PRGS) recently announced plans to acquire MarkLogic, a privately held on-premises NoSQL database vendor, for $355 million (webcast here). Given the low-single-digit growth rate, the implied 3-4x EV/sales valuation looks a bit pricey However, its highly loyal customer base is a good fit for PRGS’ acquisition plans. Although management has not embraced cross-selling synergies much, cost synergy opportunities should ultimately help the company achieve net incremental benefits (though not in the short term).
Stocks rose on M&A news, but valuation multiples are still well below historical medians. Given the slow organic revenue growth in recent quarters and the limited cost levers available, this seems like a no-brainer. In my view, for equities to perform in the short to medium term, PRGS will need to accelerate the pace of its rollup, especially in a high interest rate environment, as valuations of private software companies are significantly reset. And payout rates are likely to stay relatively low, so the company needs to have plenty of dry powder on hand. Probably fair for EPS growth companies, I’ll set that aside.
Acquired MarkLogic for $355 million
After acknowledging a slowdown in deal flow through Q2, PRGS indicated it was picking up the pace in its Q3 conference call, with a focus on recurring revenue and strong retention. MarkLogic’s recent acquisition is in line with management’s comments, but the deal size, he said, was $355 million, which came as a bit of a surprise. The company has sufficient cash on hand to fund this transaction, but will also leverage an existing revolving credit facility of approximately $200 million. The transaction is being guided to close in the second half of next month.
For context, MarkLogic’s primary product is an AI-integrated NoSQL database, primarily serving as an operational and analytical data hub for approximately 300 customers to manage unstructured and structured data. MarkLogic has approximately $100 million in annual revenue, of which approximately $75 million is recurring, representing a 3-4x EV/revenue valuation. This is in line with PRGS’ previous transaction comp, but multiples look a bit expensive compared to his flat to low single-digit growth profile.
Fits profile, but likely limited short-term increase
The added scale from this acquisition is a bonus of over $100 million in annual revenue and $75 million in recurring revenue, but the margin opportunity is significant. Management sees a clear path for MarkLogic to achieve his over 40% pro forma operating margin (after synergies), which should lead to strong cash flow. Most notably, MarkLogic’s recurring revenue contribution continues to grow on the back of strong gross retention rates of over 90% and net retention rates of up to 100%. The margin tailwind from this mix shift alone should bring PRGS close to reaching its margin targets, as the professional services revenue share is declining at the same time.
That said, it is unlikely that MarkLogic additions will increase in the short term. Post-acquisition, the pro forma company gets more contribution from low-margin professional services revenue, leading to EPS dilution. Execution is key here, and CEO Gupta’s strong integration track record should be a source of comfort for investors. Additionally, since this is an asset run by private equity (Vector Capital), most of the heavy lifting to optimize its financial profile may have been done.
On the one hand, the complementary fit with PRGS’ existing OpenEdge and DataDirect products could provide cross-selling advantages. But for now, management has refrained from incorporating many revenue synergies into its pro forma model. While we acknowledge that recent efforts to foster collaboration between teams and increase operational efficiency are well underway, it remains to be seen whether this will ultimately lead to more effective integration processes.
Good Tracking to Q4 Guidance
In line with the M&A update, PRGS reaffirms its Q4 recurring revenue guidance of $497 million (+3.5% year-on-year), with further low-single-digit % organic growth Recorded quarterly. Perhaps more importantly, the company sees fourth-quarter earnings and non-GAAP EPS likely to exceed the upper end of its previous guidance range (earnings of $158 million to $166 million; $1.06 to $1.10 per share of EPS). However, the degree of currency impact is worth noting. PRGS has consistently raised its currency-neutral growth guidance throughout the year, while maintaining its dollar-based guidance. Meanwhile, operating margins and his FCF guidance remain unchanged as management continues to streamline costs to mitigate pressure from ongoing wage inflation.
progress software
Restarting the M&A Engine with the Acquisition of MarkLogic
PRGS’ recent acquisition of on-premises NoSQL database vendor MarkLogic marks a return to the rollup playbook. This is an asset that provides a fixed customer base even at the expense of growth. There may be an opportunity to unlock post-deal cost synergies, but the $355 million all-cash price tag (meaning 3-4x EV/sales) sets the bar high and is poised for growth Given the low profile, the execution should be good. .
As for the PRGS stock, the current ~12x forward EV/EBITDA is not cheap for a mid-single-digit EPS growth story and will be responsible for an accelerated inorganic growth strategy from here. The company is well positioned in this respect, backed by a strong balance sheet and limited dividend commitments. The valuation reset of private software companies over the past year presents an attractive buying opportunity. I remain neutral on these levels as I am uncertain about his future M&A growth potential.
