Progress Software Corporation (NASDAQ:PRGS) Q2 2023 Earnings Call Transcript

Progress Software Corporation (NASDAQ:PRGS) Q2 2023 Earnings Call Transcript June 29, 2023

Progress Software Corporation beats earnings expectations. Reported EPS is $1.06, expectations were $0.9.

Operator: Good day and welcome to the Progress Software Corporation Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] 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, Vice President of Investor Relations. Please go ahead.

Michael Micciche: Great, Thank you, Sherry. Good afternoon, everyone, and thanks for joining us for Progress Software’s second fiscal quarter 2023 financial results conference call. With us today is Yogesh Gupta, our President and Chief Executive Officer; and Anthony Folger, our Chief Financial Officer. Before we get started, let’s go over our Safe Harbor statement. During this call, we will discuss our outlook for future financial and reporting performance, corporate strategies, product plans, cost initiatives, our integration of MarkLogic, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software’s outlook and guidance only as of today and is subject to risks and uncertainties.

For a description of the risk factors that may affect our results, please refer to the Risk Factors section in our most recent Form 10-K. Progress Software assumes no obligation to update the forward-looking statements included in this call. Additionally, on this call, all the financial figures we discuss are non-GAAP measures unless otherwise indicated. You can find a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after the market close today. This document contains additional information related to our financial results for the second quarter of 2023 and I recommend you reference it for specific details. We have also prepared a presentation that contains supplemental data for our second quarter 2023 results, providing highlights and financial metrics.

Both the earnings release and the supplemental presentation are available in the Investor Relations section of our website at investors.progress.com. Today’s conference will be recorded in its entirety and will be available via replay on the Investor Relations section of our website. And with that out of the way, I’ll turn it over to Yogesh.

Yogesh Gupta: Thank you, Mike, and good afternoon, everyone. Welcome to our second quarter 2023 earnings conference call. As you saw in our press release, Progress had another great quarter with earnings, revenues and operating margins, all ahead of estimates. As a result, we have raised our full year 2023 outlook, which Anthony will detail for you in a few minutes. In the quarter, revenues were up 19% year-over-year to $179 million. Thanks to continued strong demand for our products and a fantastic performance again from our teams in the field. Our customers and partners remain committed to using Progress products to run their businesses, especially in these more challenging economic times. And we remain committed to providing them with great value and ensuring their success.

Earnings per share came in at $1.06, well ahead of estimates driven by strong top line revenue and helps by excellent execution on the MarkLogic integration as well as prudent expense management from all of our teams. Operating margins exceeded targets, ending the quarter at 38% versus consensus of around 35%. ARR grew in the second quarter to $569 million, an increase of 19% year-over-year and was driven by the acquisition of MarkLogic and a net retention rate that was again above 101%. These outstanding results were achieved across virtually all product lines and geographies with a strong contribution from MarkLogic, which I’ll talk more about in a minute. Our product portfolio saw broad strength this quarter led by OpenEdge, Loadmaster, Chef, Sitefinity Cloud, and MarkLogic offerings.

Strength in OpenEdge was driven by customer win-backs as well as their need to modernize their applications, once again demonstrating the value that this platform provides for the mission-critical applications of the future. Loadmaster, which we acquired through Kemp continues to see new customer wins through the Dell Channel because our product bolsters Dell’s cloud storage offerings. We also saw new wins as well as expansions with our Chef product line as customers continued to reap greater DevOps and DevSecOps benefits from our products. And our Sitefinity Cloud offering continues to grow as customers across the industries realize the value it delivers through ease of use improved engagement and marketing effectiveness. We saw new customer wins as well as expansions by existing Sitefinity Cloud customers.

And last but not least, our MarkLogic business also saw strength as we engage with the customers and began to share our vision with them. As you know the MarkLogic acquisition closed on February 7th, a few weeks prior to the end of our fiscal first quarter. Since then, we’ve welcomed our MarkLogic colleagues, connected personally with customers around the globe and made significant progress on integrating all facets of the company into Progress. As with every acquisition we’ve done, we’ve learned a few new things along the way and our integration playbook is keeping us on track as we combine the two companies. We expect to achieve all our synergy goals by the end of this fiscal year. MarkLogic’s financial contribution has been strong in FY’23 with a meaningful impact on our ARR evident in the most recent quarter.

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And as we shared in our Q1 earnings call, the full year revenue contribution from MarkLogic will hit next year in fiscal 2024. So to sum up Q2, we couldn’t be happier with the continued strong performance of our operations in the field as well as the integration of MarkLogic. And we’re thrilled that we’re able to roll these excellent Q2 results to our updated guidance for the remainder of this year. In addition to excellent financial results and the progress we’ve made with MarkLogic in Q2, we also held our first Investor Day in seven years in early April. During my session, I provided an overview of the company and described the successes we’ve had with our total growth strategy. I also discussed our longer-term plan to create shareholder value and talked about our great products, employees, customers and our culture.

Anthony then provided a full financial review and gave metrics and details on longer-term model. And he was followed by our Head of Corporate Development, Jeremy Segal, who gave an extensive review of our M&A and integration strategies, which covered everything from how we source deals at the top of the funnel to the details of our integration methodology. If you haven’t seen it yet, the website — the webcast and slide decks are available on the Investor Relations section of the Progress website. The key theme in all our comments was our commitment to our total growth strategy, which is number one; invest in our product, system and processes to keep our products relevant and to be operationally efficient; two, to acquire and integrate great businesses that make us stronger and create sustained shareholder value; and three, an unrelenting focus on customer success to drive great retention rates.

All of this is supported by a prudent capital allocation strategy focused on maximizing shareholder returns. Our acquisition model is highly disciplined yet simple. We find solid infrastructure companies with great complementary technology, the right size and scale with an excellent customer base, strong recurring revenues and high retention rates, and achievable synergies to ensure that our return on invested capital is greater than our WACC. We then pay a reasonable price for it, improve customer retention, and maximize cash flows and margins to deliver sustained shareholder value. We have repeatedly demonstrated our ability to execute M&A while following this disciplined criteria and we will continue to do so. From a broader M&A perspective, we’ve previously discussed how we believe that the M&A market is moving in our favor.

We still believe this is true. As capital continues to get scarcer in the private market and unfavorable cyclical economic conditions prevail over the coming years, many more attractive companies will be looking for exit strategies and alternatives to go in public. Jeremy and his team are busy as ever and the number of potential targets continues to be healthy, while the competitive dynamics for completing a deal has become more constructive for us. Further, we have continued to institutionalize the learning process that comes with acquiring and integrating companies and we are compounding our success to help make us better at it each time. While we remain very optimistic and excited about our ability to source and complete future acquisitions and that includes doing more than one deal in a year if the opportunity arises, we intend to remain as patient and disciplined as we have been since we embarked on our total growth strategy in 2019.

Finally, I want to take a moment to address an issue that our team has been very focused on over the last few weeks. As many of you are aware from the 8-K that Progress filed on June 7th, we have identified and patched a zero-day exploit in the MOVEit Transfer and MOVEit Cloud products. We’ve been taking this issue very seriously. We have engaged with industry-leading cybersecurity experts and researchers. And together, our focus throughout this process has been on supporting our customers in securing their environment. While working through an issue of this nature, it’s important not to speculate broadly or prematurely but rather focus on task at hand, doing what we can to protect our customers against the ongoing threat of cybercriminals.

As you know, an unrelenting focus on customer success across our entire product portfolio is a foundational pillar of our strategy and has led to a strong performance over the past few years, including the most recent quarter. So in summary, we delivered better than expected financial results across the board and are confident about the strength of our business to raise guidance for the rest of the year. The integration of MarkLogic is proceeding on plan and MarkLogic is already making meaningful contributions to revenue, ARR and profitability. Lastly, we still believe that the market for M&A is improving for us while we continue to improve our internal capabilities to source, integrate, and complete deals. As always, I’m very proud of our teams for their excellent work and thank them for their dedication and commitment towards our success.

With that, I’ll turn it over to Anthony to provide the financial details and guidance. Anthony?

Anthony Folger: Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call. As Yogesh mentioned, we’re very pleased with our Q2 results, which again exceeded the high end of our guidance range on revenue and earnings per share. We’re also very pleased to see some of this upside coming from MarkLogic, which is performing a bit better than our expectations thus far. Turning to the numbers. We’ll start on the top line with ARR. We closed the second quarter with ARR of $569 million, which represents approximately 19% growth on a year-over-year basis and 3% pro forma growth on a year-over-year basis. To be clear, the pro forma results include MarkLogic in both periods. As Yogesh mentioned, the growth in ARR was again driven by multiple products across our portfolio including OpenEdge, MarkLogic, Sitefinity and DataDirect.

A trend that continues to fuel our ARR growth is strong net retention with Q2 rates at just over 101%. In addition to our strong ARR growth, revenue for the quarter of $179 million was well above the high end of the guidance range we provided back in March and represents approximately 19% growth on a year-over-year basis. The better than expected revenue performance in the quarter was driven by stronger than expected demand from multiple products including OpenEdge, Loadmaster, Chef, MarkLogic, Sitefinity. For those of you who listened to our Q1 earnings call, you’ll recall that our Q1 performance was aided slightly by timing. In that, some revenue we expected to recognize in the second quarter actually came in early and was recognized in the first quarter.

I mentioned this only to highlight our exceptional top line performance in Q2, which punctuated a very strong first half of 2023. Turning now to expenses. Our total costs and operating expenses for the quarter were $112 million, up 25% compared to the prior year and in line with our expectations. The year-over-year increase was driven by the acquisition of MarkLogic and to a lesser extent an expected increase in compensation and benefit costs across the rest of our business, which we’ve detailed on previous calls. Operating income was $67 million, up $6 million compared to the prior year quarter and our operating margin was 38% compared to 41% in the second quarter of 2022. On the bottom line, earnings per share of $1.06 for the quarter is $0.14 above the high end of our guidance range.

This overperformance relative to our expectations was driven by outstanding top line performance coupled with solid cost management across the business. Our outlook for the MarkLogic integration remains unchanged and we continue to expect that we will achieve all our synergy targets by the end of this fiscal year. Moving on now to a few balance sheet and cash flow metrics. We ended the quarter with cash, cash equivalents and short-term investments of $126 million and debt of $795 million for a net debt position of $669 million. This represents net leverage of roughly 2.5 times using our forecasted fiscal year 2023 adjusted EBITDA. And if we pro forma that EBITDA to consider MarkLogic synergies, our net leverage drops even further. I’d also like to mention that during the second quarter, we paid down $25 million against the revolving line of credit that we drew down to partially fund the acquisition of MarkLogic, bringing the outstanding balance on our revolving line of credit to $170 million at the end of the quarter.

DSO for the quarter was 44 days, which is generally consistent with last quarter and in line with our expectations. Adjusted free cash flow was $48 million for the quarter, an increase of $1 million from Q1 and generally in line with our expectations. During the second quarter, we repurchased $15 million of Progress stock. And at the end of the quarter, we had $198 million remaining under our current share repurchase authorization. Okay. Now I’d like to turn to our outlook for Q3 and the full year 2023. When considering our outlook, we continue to see strength in the demand environment for our solutions despite potential that the macro environment may become more challenging. With that, for the third quarter of 2023, we expect revenue between $172 million and $176 million and earnings per share of between $0.98 and $1.02.

For the full year 2023, we expect revenue between $690 million and $698 million, an increase of $10 million from our prior guidance. We expect an operating margin of between 38% and 39%, generally consistent with our prior guidance, adjusted free cash flow between $175 million and $185 million, again consistent with our prior guidance, and earnings per share of between $4.16 and $4.24, an increase of $0.07 from our prior guidance. Our annual EPS estimate contemplates a tax rate of 20% to 21%, approximately 44.7 million shares outstanding, the impact of $30 million of share repurchases and the paydown of $85 million on our revolving line of credit, which we believe we can complete by the end of 2023. In closing, we’re excited to deliver strong financial results across the board in the second quarter, a continuation of the trend that we saw from much of 2022 and the first quarter of 2023.

We’re thrilled to see the MarkLogic integration gaining momentum and we believe we’re very well-positioned to deliver strong results for the remainder of 2023 and well beyond. With that I’d like to open the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron: Thanks, guys, and great execution. Maybe a couple of questions for you, Yogesh. First on the MOVEit issue in this past quarter. Can you, first of all, quantify how big of a product line that is for you from a revenue standpoint? And what has been the feedback from customers? I know it’s not easy to move off something like this quickly. But what is the risk here down the road that customers are trying to find alternatives to this situation?

Yogesh Gupta: Hey, thank you, Ittai for the nice feedback on the quarter. We had actually in our 8-K that we filed mentioned that the MOVEit file transfer, MOVEit transfer product and MOVEit cloud which are the two products that were impacted were less than 4% of our overall annual revenue. So it’s a rather limited impact so to speak. As far as customers are concerned, Ittai, we continue to engage with them. Our focus at this point is making sure that they get their environment secure and continue to get work done. We feel really good about the effort our team is putting in to help our customers. And at this point, it’s really too early to speculate about potentially what kind of an impact we might have in terms of customers saying that they want to use something else. So right now, Ittai, we’re just focused on making sure that our customers are back to running, back to feeling that their environment is secured, applying the patches that we’ve provided them, et cetera.

Ittai Kidron: Very good. And maybe a follow-up for you on, I want to make sure I understand the commentary. Last quarter, clearly, there was some pull-forward element and some components. Help me understand to what degree do you have visibility whether the products or outperformance this quarter is also a pull forward from the third quarter perhaps or just pure expansion activity given specific needs of customers? How do you get your hands around this?

Yogesh Gupta: Yeah. So go ahead, Ittai. Go ahead, Anthony.

Anthony Folger: Yeah. I was just going to jump in there Ittai and say, yeah, in Q1 of this year, we did have a couple of deals that came in earlier than we anticipated. And I think they came in earlier and maybe they were a little bit bigger. In Q2, there really was none of that activity. So I don’t think anything in this quarter, at least nothing material is something that should have been recognized in Q3. And that’s why I made the comment in my remarks because I think we felt really good about the performance in the quarter. And I think in light of the fact that some of the revenue got booked in Q1. I think it just — it makes it even stronger case for how good the performance was in Q2 on the top line. So it’s continuing to acquire new customers, continuing to renew, continuing to expand with our existing customers. I think in a lot of areas we’re performing well.

Ittai Kidron: Excellent. Good stuff. Thank you very much. Keep it up.

Operator: Thank you. One moment for our next question. That will come from the line of Ray McDonough with Guggenheim Securities. Your line is open.

Ray McDonough: Great. Thanks for taking the questions. Yogesh, maybe for you. You mentioned customer success is obviously core to your strategy and you opened up with statements regarding customers remaining committed to using Progress products. But I was wondering how conversations went outside of the MOVEit customer base regarding the vulnerability. Have customers outside of that installed base indicated any concern around using any other Progress products? Or just in general how have those conversations went?