Progress Software Corporation (NASDAQ:PRGS) Q4 2023 Earnings Call Transcript

Progress Software Corporation (NASDAQ:PRGS) Q4 2023 Earnings Call Transcript January 16, 2024

Progress Software Corporation beats earnings expectations. Reported EPS is $1.02, expectations were $0.91. PRGS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Progress Software Corporation Q4 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, Senior Vice President of Investor Relations. Please go ahead, sir.

Michael Micciche: Okay. Thank you, Sherry. It’s nice to have you with us again. Good afternoon, everybody, and thanks for joining us for Progress Software’s fourth fiscal quarter 2023 financial results conference call. On the line with me this afternoon are Yogesh Gupta, President and CEO; 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 operating performance, corporate strategies, product plans, cost initiatives 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 in our filings with the Securities and Exchange Commission. Progress Software assumes no obligation to update the forward-looking statements included in this call. And additionally, please note that all the financial figures referenced on this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our financial results press release, which was issued after the market close today and is on our website. This document contains additional information related to our financial results for the fourth quarter of fiscal 2023 and I recommend that you reference it for specific details.

We’ve also prepared a presentation that contain supplemental data for our fourth quarter 2023 results providing highlights and additional financial metrics. As I mentioned, both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Also today’s conference call will be recorded in its entirety and will be available via replay on the Investor Relations section of our website. So with that out of the way, Yogesh, I will turn it over to you.

Yogesh Gupta: Thank you, Mike. Good afternoon, everyone, and thank you for joining our Q4 2023 financial results conference call. Fiscal 2023 was another great year for Progress. I’m extremely proud of everything we accomplished and how all our teams performed. I’ll quickly take you through some highlights from the past year and then provide a look at the year to come. The fourth quarter was another strong one, marked by ongoing stable demand for many of our products, especially OpenEdge, DataDirect and Sitefinity. Top line revenues of $178 million remained robust. ARR grew 17% year-over-year. Our net retention rate was a solid 100% and operating margins were well above our expectations. For the year, we generated over $175 million of adjusted free cash flow on revenue of $698 million and finished the full year with operating margins of 39%.

As you recall, we began 2023 with the announcement in January of the MarkLogic acquisition. At that time, we said that the MarkLogic acquisition would add over $100 million in annual revenue and would take about a year to fully integrate. I am delighted to share that virtually every milestone for the MarkLogic integration was completed before the end of fiscal 2023. This faster integration was a direct result of the continuous improvements we have made in our integration processes. As always, we gained new learnings from the MarkLogic acquisition that will help us further improve for the future. For instance, we had to maintain a separate entity to accommodate the unique requirements of the various US federal agencies who are our customers.

Now that we have this entity, we see it as a vehicle not only to serve these existing customers, but to expand our relationships by addressing a wider set of their needs through our broader product portfolio. In addition to our M&A efforts in FY 2023, we also executed well on the other two pillars of our total growth strategy, which are sustained innovation and an unrelenting focus on the customer success. So turning to product innovation in FY 2023, we added AI capabilities to our products, improve the time to value for our customers and made our products even more easy to get. For example, we incorporated generative AI into our Sitefinity product to enable content creators to rapidly scale content production and to improve targeted marketing by personalizing content to suit the needs of various [personas] (ph).

We delivered AI powered contextual threat — event analysis in the latest release of our Flowmon product, which provides our customers faster, automatic meaningful insights into possible malicious network activity. We launched Chef SaaS which enables DevOps and SecOps to rapidly realize value and we’ve receive very positive reactions from our early customers. We launched Loadmaster 360, which provides administrators the ability to manage the performance and availability of their entire environment from a single-user interface. And we released new and updated versions of our DevTools products with a whole host of new capabilities. These include new components so rapidly built embedded data driven applications and the support of — for new accessibility standards among other features.

The Sema4 and NoSQL database products we acquired with MarkLogic are leading products for Symantec metadata analysis and are making sense out of structured and unstructured data. As organizations embrace all kinds of AI, exponentially expanding the sources and scale of data necessary, Progress is now better positioned to help them develop and deploy their mission-critical applications and experiences, as well as effectively manage their data platforms, cloud and IT infrastructure. In addition to M&A and innovation, the third pillar of our total growth strategy is an unrelenting focus on customer success. In FY 2023, after a couple years of slow in person activities, we hosted numerous live in person customer events. These included more than 20 local in region events across the globe for our OpenEdge customers called the OpenEdge World Tour.

There over 3,000 attendees joined us to hear what was new in our portfolio and how the OpenEdge platform and the broader product portfolio is continuing to deliver increasing value to help propel the business forward. We also held well attended conferences for our DevTools and Chef customers, where Progress end user community shared innovative ideas and best practices in rapidly developing engaging digital experiences and efficiently scaling DevOps and SecOps efforts across on-prem, hybrid and multi-cloud environments. In 2023 we also dealt with the sophisticated multi-stage attack on our customers MOVEit environment by a cybercriminal group. We issued a patch within 48 hours of discovering the zero-day vulnerability in MOVEit and proactively engaged with our customers to help them harden their MOVEit environment.

We continue to cooperate with regulatory authorities who are investigating the attack and we’ll provide updates regarding the impact of the MOVEit incident on our business and operations in our upcoming Form 10-K. I want to thank the teams across our business for the amazing way they have come together to help our customers and to continue to move our business forward. Because of our employees’ hard work and dedication, our customers have remained incredibly loyal and continue to work closely with us. Our employees are at the center of everything we do. They build our products; sell, service and support our customers and run our operations. In 2023, we continued to sustain a thriving employee culture, evidenced by our employee net promoter score or ENPS, which is in the mid ’30s.

By the way, this is in the same league as Microsoft and Google. Once again, employee turnover at Progress was at industry lows, hitting mid-single digits in the second half of the year. Our employees are energized by our mission, vision and values and they continue to share that with the world, helping us win numerous awards for being the best place to work. For example, The Boston Globe again selected Progress as one of the top places to work in Massachusetts. This time, third year in a row. We ranked number six for 2023, moving up five spots from 2022 and now the highest ranking software company on the list. I am delighted that we accomplished all this, continued to improve our internal processes and systems to become even more efficient, integrated our largest acquisition to date and delivered outstanding results for 2023.

Now looking forward towards FY 2024, I’m incredibly excited about what lies ahead. We foresee sustainable demand for our products in FY 2024 and it will be the first full fiscal year of revenue contribution from MarkLogic. As Anthony will explain in his guidance, we expect it to propel us to over $725 million in revenue and to also help expand our operating margin. We remain focused on our proven total growth strategy to create shareholder value, the same way we have for the last several years. Our capital allocation policy continues to prioritize M&A, because we see it as the best way to generate sustained shareholder return for our investors. We are therefore extremely active in the M&A market. And as we’ve previously noted, market factors continue to shift in our favor.

Competitively and financially, we are as well positioned for M&A as we have ever been and our reputation as an acquirer of choice among the sellers continues to grow. I also want to reiterate that we are unwavering in our strict discipline when it comes to M&A. First, we will continue to pursue companies that are a good fit in terms of technology, size and culture. We’re looking for companies with great products and customers, high recurring revenues and retention rates. As I like to say, we’re not looking for unicorns, we’re looking to buy great workforce. Second, we will be extremely disciplined about what we paid for these businesses and how we finance it to ensure that we create meaningful shareholder value. And lastly, as we have repeatedly demonstrated, we will rapidly integrate acquired companies using the knowledge, experience and best practices we have accumulated and drive higher margins.

During the year, we expect to use excess cash flow to repay debt whenever possible and we will continue to repurchase shares to offset dilution from our equity programs under our existing share repurchase authorization. In addition to our efforts around M&A, we will also continue to execute on the other two pillars of our total growth strategy, innovation and customer success. Through investment in innovation and customer success, we will continue to drive strong operating margins, higher ARR and high retention rates. To conclude, I am extremely pleased with our FY 2023 performance and I’m even more excited about what is to come in FY 2024. With that, I’ll turn it over to Anthony to provide additional details around our results and guidance.

Anthony?

Anthony Folger: Thanks, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh mentioned, our fourth quarter results were strong across almost every metric and we’re very pleased to deliver such a strong close to fiscal 2023. Diving right into the numbers, I’d like to start with ARR, which we believe provides the best view into our underlying performance. We closed Q4 with ARR of $574 million, which represents approximately 17% growth on a year-over-year basis and 1% pro forma growth on a year-over-year basis. To be clear, the pro forma results include MarkLogic in both periods. The growth in ARR was driven by multiple products including OpenEdge, MarkLogic, Sitefinity, our DevTools products and MOVEit.

And ARR was again bolstered by strong net retention rates of 100%. In addition to the strength in ARR, revenue for the quarter of $178 million was just above the high end of the Q4 guidance range we provided back in September and represents approximately 12% growth on a year-over-year basis. Our strong revenue performance in the quarter was driven by multiple products, led by OpenEdge, which continues to outperform our expectations. For the full-year, revenue of $698 million grew by $88 million and represents 14% growth over the prior year. This growth was driven by MarkLogic’s topline contribution, combined with growth across multiple other products, most notably OpenEdge, Loadmaster, Sitefinity, MOVEit and our DevTools products. With customer retention rates remaining strong throughout 2023 and a strong demand environment fueling growth for a number of our products, we’re thrilled with our top line results for the year.

Turning now to expenses, our total costs and operating expenses were $115 million for the quarter, up 18% over the year ago quarter and $428 million for the full year, up 16% compared to fiscal 2022. The year-over-year increase in expenses for both the quarter and the full year was driven almost entirely by the addition of MarkLogic to our business. Operating income for the quarter was $63 million for an operating margin of 35%, handily exceeding our internal expectations. The better-than-expected operating performance was the result of over-performing on the topline, while managing our expenses to plan. On the bottom line, our earnings per share of $1.02 for the quarter were $0.09 ahead of the high end of our guidance range. This over performance relative to expectations was again driven by strong top line performance coupled with solid cost management across the business.

With virtually all planned synergies achieved on the integration of MarkLogic during fiscal 2023, our Q4 results position us very well for the upcoming year. Moving on to a few balance sheet and cash flow metrics, we ended the quarter with cash, cash equivalents and short-term investments of $127 million and debt of $731 million for a net debt position of $604 million. This represents net leverage of approximately 2.2 times on a trailing 12-month EBITDA basis. I’d also like to highlight that during the fourth quarter, we again paid down $30 million against the revolving line of credit that we use to partially fund the acquisition of MarkLogic, bringing the outstanding balance on that revolving line of credit to $110 million at the end of the fiscal year.

DSO for the quarter was 62 days or flat compared to the year ago quarter, however, it was well above the 49 days we reported in Q3 of 2023. The reason for this sequential increase in DSO is the timing of our bookings and billings in the quarter with a significant portion coming later in the quarter and pushing the related cash collection into early 2024. Deferred revenue was $295 million at the end of the fourth quarter, up by approximately $15 million on a sequential basis, reflecting our strong top line performance in the fourth quarter. Adjusted free cash flow was $33 million for the quarter, which was slightly less than we expected, but was entirely driven by the timing of billings as I mentioned in my discussion on DSO. During the fourth quarter, we repurchased $4 million of Progress stock, bringing our annual total to $34 million and ending our fiscal year with $194 million remaining under our current share repurchase authorization.

Okay. Now, I will turn to the outlook. And when considering our outlook for 2024, it’s important to keep in mind the following. First, 2023 was a year of top line growth across many of our product lines. In 2024, we expect the demand environment for our products to remain stable. Next, MarkLogic contributed to our 2023 results for approximately 10 months. However, due to the seasonality in the MarkLogic business, that 10-month contribution represented roughly 70% of MarkLogic’s annual topline. In 2024, we expect the incremental contribution from MarkLogic, that 30% we didn’t see in 2023 to occur in our first fiscal quarter and to a lesser extent in our second fiscal quarter. Also, MarkLogic’s revenue model is comprised mostly of term-based licenses.

When combined with some of our other products which employ a similar revenue model, most notably Chef and DataDirect, it’s fair to say that approximately one-third of our product revenue will be recognized under an on-prem term-based license model. As a result, the timing of contract renewals, especially multi-year contracts will have a more significant impact on our revenue in any given quarter and could skew results higher or lower. We will therefore continue to focus on ARR as a way to cut through the noise in 2024 and we expect ARR will continue to grow at a level that’s generally consistent with 2023. The final point I’d like to highlight is that, absent any acquisitions we anticipate we’ll continue to aggressively repay the revolving line of credit that was used to partially finance the MarkLogic acquisition.

And by the end of fiscal 2024, we expect that we will fully repay that revolving line of credit, driving our net leverage ratio down to approximately 1.5 times. With all that said, for the first quarter of 2024, we expect revenue between $180 million and $184 million and earnings per share of between $1.12 and $1.16. For the full year, we expect revenue of between $722 million and $732 million, representing between 3% and 5% growth over 2023. We anticipate an operating margin for the year of 39% to 40%. We are projecting adjusted free cash flow of between $202 million and $212 million and we expect earnings per share to be between $4.58 and $4.68. Our guidance for the full year EPS assumes a tax rate of 20%, the repurchase of $45 million in Progress shares and approximately 45 million shares outstanding.

Our share buyback activity in 2024 is meant to address potential dilution from our equity plans. And while we believe that share buybacks and dividends can provide shareholders with a good return, our M&A track record over the past three years has delivered superior returns for our shareholders. And for that reason, disciplined accretive M&A will continue to be the top capital allocation priority of our total growth strategy. In closing, we’re excited to deliver strong financial results across the board in the fourth quarter, a continuation of the trend we saw for all of 2023. We’re thrilled with the integration of MarkLogic and how it positions us for the future and we believe we’re on track to deliver a great 2024 and beyond. With that, I’d like to open the call for questions.

Operator: Thank you. [Operator Instructions] And our first question will come from the line of Pinjalim Bora with JP Morgan. Your line is open.

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Q&A Session

Pinjalim Bora: Great. Hey guys, congrats on the quarter.

Yogesh Gupta: Thank you, Pinjalim.

Pinjalim Bora: I want to ask you on MarkLogic. Now that you have integrated MarkLogic, what are you hearing from the MarkLogic customer base in terms of innovation that they would like to see? And I know you don’t focus on cross-sell as much, but is there any opportunity for cross-sell that you’re seeing in that base? And one for Anthony, what is the dollar contribution for MarkLogic for the full year?

Yogesh Gupta: So, I’ll take the first part and then Anthony can talk about the revenue contribution in FY 2023. So Pinjalim, a couple of interesting things. One that has come out loud and clear is that, the MarkLogic product and MarkLogic and Semaphore combined, it’s really designed as an underlying database system and it really requires a fair bit of work to start getting value out of it. The time to value is a bit longer than we would like to see. So we’ve actually been working on throughout this past year and the team has been and we’ve just sort of in the process of coming out with a fast-track option as an add on to the product to really accelerate the ability for our folks to be able to create data driven applications rather than start from scratch.

So, that’s something that we’re tremendously excited about in terms of the type of innovation. The other type of innovation, the request that we have gotten that we’ve actually already addressed was how can they use MarkLogic and Semaphore to take their existing data and potentially augment. And to be honest, make the generative AI answers from standard generative AI tools that are out there to be specific to their business, how do they make it without having that data go out of their environment. And so, we have created sort of additional offerings around that to make it easy for folks to leverage their internal data and therefore create in context relevant to their business, non-hallucinogenic ChatGPT type of answers. So that is — those are two of the things that we’ve already done.

In terms of cross-sell, Pinjalim, as you know, when we build our business models for these things, we do not take into account cross-sell because we want to make sure that the business — we will be able to generate shareholder value without relying on that. That said, we do see cross-sell opportunities, right? I think that our digital experience products can truly help MarkLogic customers do a better job of presenting the information and creating data driven applications much more easily. In fact, our fast-track offering leverages some of those. In addition to that, we see opportunities for these environments, which are large scale environments and these applications that are complex applications to have DevOps and SecOps capabilities from products like Chef.

We also see a product like Corticon, which is our decisioning engine that can also be used by these companies and these organizations to further augment the kind of business logic that they need to apply to their MarkLogic data. So there are some opportunities, but Pinjalim, I want to sort of be a bit careful. We are just starting that effort of going into that customer base and offering them those. We also have just started bringing the value of MarkLogic and Semaphore to our own other customers. I think 2024 will be a year for us to see if those cross-sell opportunities materialize in something that is worth talking about on this call. So, we are early in the time frame.

Anthony Folger: Yes. And to take the second question, Pinjalim, when we acquired MarkLogic, we had mentioned that it was roughly $100 million business, maybe a little bit more. And we thought they would do probably $70 million for the year in 2023. And the business came in just slightly ahead of that, so just north of $70 million in fiscal 2023 was the number.

Pinjalim Bora: Got it. Thank you very much.

Operator: Thank you. One moment for our next question. And that will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron: Thanks guys. Maybe I’ll start with you, Yogesh. Last earnings call you sounded very upbeat on the potential for M&A. Sounds like that valuations are finally starting to come in the direction you want them to come. And we’re now literally a year since MarkLogic. Maybe you can give us an update on what you see out there and how would you rate the odds of another acquisition in 2024?

Yogesh Gupta: So, Ittai, you’re absolutely right. We have been very active in the M&A space. We are looking at companies, we are competing for them. We’re actually — interestingly enough, we have said no to a lot of them because we felt that they just did not meet our criteria of being really solid businesses that we wanted to own at any price to be honest. And given where we are and given what we are seeing, I feel truly confident that we will do an acquisition in FY 2024. Now with that, I also want to make sure people do understand that it takes, you know, two to tango as they say, right? And so the sellers have to align with us as well. But yes, we feel good. We feel really good about the pipeline. We feel really good about the activity.

We feel really good about the conversations we’ve had over the last second half of FY 2023 to feel that whenever we have engaged, they have been meaningful and they have been something that we’ve been truly in the middle of and thick of things. So I am confident, Ittai, that we will do something in FY 2024.