Q3 2020 Progress Software Corp Earnings Call
Yeah.
[music].
Please stand by.
Good day.
Come to the progress Software Corporation, Q3, 2020, Investor Relations Conference call.
Today's call is being recorded.
This time I'd like to turn the conference over to you.
To me Folger. Please go ahead.
Thank you Alan.
Good afternoon, everyone and thanks for joining us for progress Software's fiscal third quarter 2020, <unk> financial results Conference call.
With me today is you know Glasgow, President and Chief Executive Officer.
Before we get started I would like to remind you that during this call we will discuss our outlook for future financial and operating performance.
Kurt strategies product plans cost initiatives or acquisition and integration of shelf.
Impacted because it 19 crisis on our business and other information that might be considered forward.
This forward looking information represents progress software's outlook and guidance only as of today.
And subject to risks and uncertainties.
To review, our Safe Harbor statement regarding this information, which.
Today's financial results press release.
Well within the Investor Relations section of our website at progress that call.
Progress software assumes no obligation to update the forward looking statements included in this call whether as a result of new developments or otherwise.
Additionally, on this call all the financial figures, we discuss our non-GAAP measures and.
Unless it is stated that the measure is a GAAP.
You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release issued today.
Today, we published our financial results press release on our website.
This document contains the full details on our financial results for the fiscal third quarter 2020.
I recommend you reference it for specific details.
We have also published a presentation that contains supplemental data for our third quarter 2012 results.
Highlights and additional financial metrics.
This presentation is available on the Investor Relations section of our website at investors that progress dotcom.
Today's conference call will be recorded in its entirety and will be available by replay on our website in the Investor Relations section.
Yeah that.
I'll now turn it over to Yogesh.
Thank you Anthony and good afternoon, everyone.
On today's call I'd like to recap our strong third quarter results that's all.
That's all I have some more color on why we are so excited about our pending acquisition of show.
We reported strong Q3 financial results.
Mm Hmm, yes.
Both meaningfully exceeded the high end of our guidance.
Against the backdrop of a major goal we've had them.
Our continued strong performance demonstrates the durability of our business.
Our relationships with our customers and partners.
Discipline and commitment.
Employees.
I'm very happy with themselves.
The strength of our business enabled us to raise our 2020, okay well.
Revenue and EPS, yes.
The improved outlook reflects our confidence in the continued momentum in our business through the fourth quarter.
And the contribution from chefs.
[laughter] without shareholder friendly be dropped him allocation policy.
For the poor year removal.
<unk> quarterly dividend.
Not sure I can give it to you.
The generates strong cash flow.
I'd like to spend the bulk of my time discussing our pending acquisition of chefs.
Which it appears that all the important milestone.
Maybe execution <unk> go strategy.
You can see the cheap cost do you give them sort of you.
Integration planning.
Absolutely.
And we hope to close the transaction then shawky.
Just stupid stuff like that so they want to watch the stadium.
During the one month since we announced the transaction the reaction from customers bookstores are you.
Following on the heels of Lipsitch.
Let's move the other successful demonstration what's driving the cost in the month of stabilizes.
Yes, you do M&A.
The infrastructure software space.
As we discussed during our Investor calls on September eight.
That's a good bit of amazing company and has been a pioneer in the growing Devops and best back office markets.
And usually beans to build deploy and manage secure applications in modern multi cloud Juan.
Bye.
As the leader in continuous automation software.
The whole basin, the mixed and Bob This is often in an eco system, which has become increasingly important.
Yes technology enables organizations to rapidly develop and deployed consistent reliable high back business system.
The ever increasing demands for performance and security in today's complex somebody.
This enables ideal innovations to be agile and proactive you'll sit off slow and be active.
What excites US most is doing that's a caliber of chefs 700, plus customers, which include new fortune 500 companies oclock divorce and markets and verticals.
The talent a group of employees focused on innovation and customer success Sherpa funds must be gone its its business.
<unk> expenses was $17 million in revenue.
The vote has also elected stupidity and there, but let's let's focus on customer success and retention because of this has resulted in better pardon mek with interim rates in a business that is approximately 95% recurring in nature.
Going forward, we will align business without objectives to drive a higher mix of revenue or something because they're going to screen and as a result, we expect the additional shifts we've made great progress is old and we're all going to revenue mix.
Rocks Mckee <unk> percentage points.
In addition, chefs not detention breach.
Right, well north of 95% and.
They don't focus on customer success shifting to contribute very stable recurring revenue stream.
From the perspective of chefs customers employees, and maybe you could source.
We are the ideal quiet.
Like chefs.
Have a longstanding track record of outstanding customer satisfaction.
I've spoken at length.
On our lives to maximize customer success, and how that has enabled us to retain our loyal customers and partners for decades.
Indicates the Openedge and Datadirect blocks.
And at the same time, the master developer network the Telerik desks.
We've also heard me sold the mission critical nature of our products and help build thousands of businesses that benefit from our technologies.
<unk>.
More than 40 million thought of downloads over the years.
Hundreds of thousands of organizations that benefits, but it's a good social software.
The critical factor in why not.
Makes sense to sharpen its customers is that <unk> began shifting profit platform and longstanding record of outstanding customer satisfaction.
But the public company with a 40 year track record of customer success, the leverage thrombus, its just been talking peace and additional resources.
No one has the success of chefs customers.
We continue to support chefs vibrant open source community, which is another key ingredient off good success.
In addition to meeting or.
New criteria from a technology and taught important <unk> we.
We believe the shelf acquisition. It's also in complete alignment with our objective to scale our business.
Good day.
Once the acquisition is complete we believe me we begun implementing our integration plans.
Based on anticipated synergies, we expect to file the action to turn accretive in the first quarter of 2021.
And is that ships operating margin contribution video group through the course of 2021.
Reaching more than 35%.
End of <unk>.
To summarize the acquisition of chef squarely supports our strategy with the goal to come to them and it it checks all the boxes, but part of it.
Sure Greg.
However, you want to do on that.
We intend to continue to grow through accretive acquisitions.
Focused on building another crew do M&A pipeline and as you mentioned, a big story, our internal team to enable us to do so and to be.
And to be opportunistic as acquisitions present themselves, where do you live in an uncertain market like living in today.
If she can shop and continued execution of our long term strategy.
We've been doubled the size of our business over a five year period.
We look forward to updating you on that success as we move forward.
In summary.
We are excited with our strong third quarter performance and the subsequent progress you have made on our strategy that offending ship acquisition.
The bump and that shift will serves as another one that illustrates the potential that part will be books to artisan.
Sandal business.
We do M&A for the benefit of all our stakeholders.
With that I'd like to.
I'd like to turn the call over what accident the delight more details on our financial results and our outlook.
Actually I guess.
Good afternoon, everyone and thanks for joining our call.
As Yogesh noted, we're very pleased with our strong third quarter performance and we're also very excited about our pending acquisition of shop.
Which we think is a perfect fit with our longer term strategy.
For the quarter total revenue was 110.9 million or.
Or 1.9 million above the top end of the guidance range, we provided in June.
And was primarily driven by better than expected performance of our Openedge profit.
The durability and stability of our revenue.
Even in the backdrop of a major global pandemic demonstrates just how mission critical our products are to the tens of thousands of businesses you have benefited from our technologies.
The high an increase in Mexico occurring.
I'll give you the maintenance revenue retention rate well over 90% reflect the investments we've made in our products and our customer success and position us well for the future.
On a year over year basis total revenue decreased by 4% in both actual and constant currency.
The year over year decrease is driven by a decline in D.C.I. revenue, resulting from the timing of multiyear term license renewals as we anticipated.
As we've previously discussed the timing of DCR contract renewals with certain OEM partners can cause fluctuations in revenue recognition under ASV six so six.
Which can significantly affect our top line in any given quarter.
This timing benefit it up in fiscal year 2019.
And Q1 of 2020.
What caused aart de <unk> revenue to decline year over year in both Q2 and Q3 of 2020.
Because the timing of hurdles can materially impact revenue recognition.
We believe the annual contract value or.
For HCV more closely reflects longer term trends in our DC I business then reported revenue.
We continue to expect ACB to be 32 to 33 million for 2020.
Justin let our actual performance in 2019.
Turning now to expenses.
Our total Cogs and operating expenses were 63.8 million for the quarter down 8% compared to a year ago.
This year over year decline is primarily the result of a reduction in travel and in person to them.
Both of which were driven by restrictions put in place to calling about the spread of Coke at 19.
And cost reductions we made as part.
As part of a restructuring in the fourth quarter of 2019 and.
Aimed at driving greater operating efficiency and margin expansion.
As a result of the decline in total cost and operating expenses.
Operating margin for Q3 came in at 42%.
An increase of 200 basis points on a year over year basis.
We recognize that some of this margin improvement is the result of better than expected performance during the quarter.
However, it's important to highlight that a significant portion of the Martin prison.
Was driven by reduced expenses, resulting from the restrictions put in place.
That the sporadic broke at 19.
As a result.
We reiterate our sustainable operating margins in the high Thirtys.
On the bottom line our earnings per share of 78 cents for the quarter exceeded the high end of our guidance range.
And increased three cents from a year ago.
Moving on now to balance cash flow metrics.
We ended the quarter with cash cash equivalents and short term investments of 230 million.
And debt of 288 million.
Dsos for the quarter was 49 days.
Within recent historical ranges.
Deferred revenue was 171 million at the end of the third quarter, almost 11 million coming the Dell and down slightly from the second quarter, reflecting normal seasonality.
Adjusted free cash flow was 31 for the quarter.
Oh, and 27 million a year ago.
We did not repurchase any stopped during the third quarter.
As a result at the end of Q2, we had 230 million remaining under our current share repurchase authorization.
We're also pleased to announce our board of directors recently declared a quarterly dividend of 17 and a half cent per share.
Which represents a 6% increase.
Dividends remain an important element of our balanced and shareholder friendly capital allocation strategy.
And our strong performance in 2020 along.
Along with an improved outlook and healthy balance sheet enables such increase.
Note that our pending acquisition of Schuff was announced after the end of this fiscal third quarter and we anticipate the closing to occur shortly.
Roughly one month into our fiscal fourth quarter.
The purchase price for chefs is $220 million and will be funded with a combination of cash on hand, and by drawing down on existing $100 million revolving credit facility.
With the high recurring revenue and strong net dollar retention rates that you have to ask mentioned earlier.
We anticipate chefs business to grow in the low single digits as we move forward.
This growth rate is consistent with some of our other products.
Our focus on customer retention.
We expect the transaction to be slightly dilutive to net income in the fourth quarter.
That should become accretive in the first quarter of 2021.
With increasing synergies being realized throughout 2021.
And exiting the year with an operating margin of more than 35% for the shop business.
I would now like to turn to our outlook for Q4.
And for the full year 2020, which reflects the combination of our better than expected third quarter performance.
Ongoing new business momentum.
And the impact of the Shaw acquisition.
As we've mentioned well.
While the impact of the probably depend on their own all business. Thus far has been less than originally anticipated.
Our outlook continues to assume some headwinds, resulting from the economic challenges brought on by the pain done.
For the fourth quarter 2020, we expect revenue between 225 and 129.
This includes approximately 10 to 12 million dollar contribution from chefs.
And the earnings per share of between 76 and seven cents.
Including the impact of shaft in quarter.
Which we anticipate the between breakeven and a loss of four cents.
For the full year fiscal 2020.
We are increasing our revenue guidance to be between 452 and 456 million.
Consistent with updated guidance, we provided with our preliminary third quarter results.
This increase reflects the impact of our better than expected third quarter performance healthy business trends in the 10 to 12 million dollar contribution from shops.
Often incorporated in this guidance is the impact of eight to 11 million from the coated Nike thing and then if you could.
Including what we have realized to date.
We anticipate operating margin for the year of approximately 40% with the slight Q4 heading into shop acquisition.
We are projecting adjusted free cash flow to be between 135, and 140 million and E.
An increase from our prior outlook.
We expect earnings per share to be between $2 and money before and $2.97 also consistent with the updated guidance provided with our preliminary third quarter results.
When comparing our current EPS guidance to the 2019 results. It's important to note that Weve included a two cents reduction for the anticipated negative impact of foreign exchange on a year over year basis.
Our guidance for full year, EPS assumed a tax rate of 20% and approximately 45 million shares outstanding.
Although we will provide guidance for fiscal 2021 on her next financial results Conference call.
Our comments today and those made previously should provide a helpful gauge.
To summarize a few directional measures for fiscal 2021.
We anticipate double digit revenue growth.
To be driven by a full year EPS contribution from shucks.
While our remaining businesses continue to demonstrate their stability and met out roughly flat on a year over year basis.
In addition, we believe we can maintain an operating margin in the high Thirtys.
With respect to operating margin there will be some pressure from chef early in the year, which would diminish during the year as we drive synergies.
In addition.
We assume that some of the restrictions put in place.
That the spread of Cobiz 19, maybe relax through 2021, resulting in a pick up in travel and related expenses.
In closing we are very excited about our third quarter results that exceeded our original guidance ranges.
We're also pleased to be reaching another milestone in the execution of our longer term growth strategy with the pending acquisition of chef.
With that I'd like to open the call for today.
Thank you and if you would like to ask a question. Please signal I think star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signatory care equipment.
You find your question has been answered you may remember yourself from the queue by pressing star Q.
As a reminder, it is star one if youd like to ask a question.
And we'll take our first question from on yet Soderstrom from Sonata. Please go ahead.
Hey, I guess, you're not the name congratulations great quarter and acquisition of checks as you said, there's good fits for you.
Thank you I wanted to ask I want to ask you about that that's actually shut them in <unk>. Yeah, you have spoken about that before and I remember your help last year.
But that's all in all of the contracts there what are you seeing in terms of competing flip chip there I mean.
Are there any larger contracts coming in in the near term or in a matter of course sure.
What are you seeing it sounds revenue up for the DC.
So I'll speak to sort of be first of all due to the fact that by the way the renewals that are coming off or going really well.
They are very very sticky product.
I'd be beat our direct business is a is the business that are largely an OEM business with over 200.
Over 200 different software vendors.
Everything there products and you know those that come up are they really right. In fact, I think we've talked about this before.
That we've not had I asked me a immunized he actually Ah you know John you had a decade or more so I think it's a it's a really really sticky business.
Oh Im dumb folks know what comes up when looking at our guidance.
Mm.
You know the.
Hmm of bookings from the renewals that are coming in any given period.
But he would like to add more.
No I think that's right you got from that I think you know the reality is we know the renewals tend to to move around them they tend to be lumpy and that that will obviously drive.
You know a little bit of a lumpiness in our revenue recognition, but ultimately when you look at the business on and on an annual basis. When you look at the minimum revenue, we're generating from an AC.
In HCV basis, it's been in that 32 to 33 million dollar range for a couple of years now so it's been very stable I think to to your gushes point.
Okay, and I guess in terms of revenue on you said you haven't had any churn, but how should we think.
Should we think about pricing I, probably could there be a P.I. I.
Good morning.
Yes.
It is actually.
<unk> expenses to continue to be very stable and they continued to be favorable we expect them to continue to be stable, which is why the annual contract value or stay stable and the other 32 to 32 million dollar range right. So if somebody had a you know previously had a two year contract.
Do you have a contract that was $1 million a year they will work.
Most likely renew it and we don't see any reason why they don't in fact, we have not seen any different this year.
Revenue at the same place.
Okay. Thank yet they went up on me for now well get back into queue.
Thank you on your.
Thanks, Dan.
Well now take our next question from Mark Schappel from benchmark. Please go ahead.
Hi, good afternoon. Thank you for taking my questions.
Kumar starting off with high prices, so starting off with a couple of questions on schuff, how much international business or the good there.
Okay.
No business is.
Sure Mark significantly.
Smaller as a percentage then progressive over all right. So Uh huh.
No. They do they are they are older people bought herself their revenue or a U S.
I think what if anything is that correct I'm, sorry, I just want to make sure I didn't miss it.
Yeah that vast majority is U.S. based margin and even more so than the progressives list.
Okay, Great and then with respect to the geographic business, you know where is that focus to overseas because it mostly in Europe. So yes, yeah. I mean, I think you know pretty much a you know.
In the <unk> is the place where they have you know customers. That's all as you know some parts of it that but but as I said you know I'd say it this way more focused on on North America than than any of the other geographies.
Okay, Thanks and you.
You ever so I know, it's only been a few weeks since the acquisition, particularly there or any potential touch points or sale synergies between New York Telluric business troughs.
So I mean, I don't want to get you know there are some some potentially interesting you know things, they're not definitely excited but otherwise as well but.
What we have done is that you know we have modeled the business going forward very much focused around you know.
A no additional cross sell no additional you know.
Right, that's fine revenue synergies between businesses I don't know bode well to be honest it too.
Steve a focus on making sure that the.
Got the customer base is stable that the the cutting revenue from from those customers into the calculus is very very high and that we you know spoke.
Focus on making sure that the business continues to you know as as Anthony said, you know blow into both single digits right and so you know, we're not contemplating or pushing for a cross sell across sort of looks like those.
So is the integration plan to work.
<unk> operate as a kind of a standalone entity for the most part or at least for the first year.
Oh, no no actually or didn't do rapidly integrated as as you did with it since we are going to you know bring it under a one of five D ends and then we are going to you know basically you know our integration plan.
Gets ATP, our DNA or structure put in place very quickly and and start putting or a video.
Then you have other structures in place as well, including technical support and so on so obviously.
Obviously part of the calculation with any acquisition that we did this with <unk> well you know Mark we just to make sure. You know you don't do it so fast that you rock the boat, but you do it as fast as possible. So we are we lock in dental Romney does it separate business, we do not intend to run it as a separate standalone entity, we are integrating it into others.
Yes.
Okay, Great and then turning to the core business or your guess could you just summarize real quick which parts of your business actually drove the upside in the quarter.
I really probably the Openedge product and you know I mean, you know they're doing it in a nutshell Mark you know that you know the BTI, we knew what was going to happen from year to year. So we or you know we had the.
You know the decline year over year, but that it was what as expected.
B, but the Openedge business it did well and you know it was actually the best went to the strength of the product right or would be a bit better than even in times like these.
It continues to perform well.
Is it fair to say that it was the.
Our current core I asked few channel Oh, we opened outside.
Yes, yes that is correct and as you know you know Mark we have even when you had a in a you know at the end of Q1 revenue that provided guidance. You know we had talked about the fact that a you know part about contemplating the headwinds, though well flop.
Oh, Oh, Oh, good work around new business acquisition, right and if you know how many new business acquisition is in that group products as well as it'd be ipsit shell portfolio right today, the Oh, what's up gold and a little bit. So you know whatever little we've seen.
That's where we're seeing the prime we felt the open it doesn't it doesn't really strong and I guess people have been really strong.
Great. Thank you that's all.
Hi, Mark.
Well now take our next question from its high it can run from Oppenheimer. Please go ahead.
Oh, Hey, guys out your shirt and after the congrats again on the <unk> deal looks very attractive.
I guess that you're talking about a yagi Africa itself sure if I mean.
Very hard to Ardagh things out there in the market place. If you think you can kinda built around an app to shift it can I add a little bit more meat around the bones that one.
I guess Italian lots of assets that exist in the market as you know with with with M&A. It is viewed as opportunistic right now both both sides have to agree that now is the time or whenever it is a good time to do a deal right Oh, yes, absolutely.
I mean, if you think about the whole opportunity around you know the.
Flooring managing operating expenses.
Then you get an extremely complex modern environment right. There are tremendous challenges that they said and there's a whole portfolio of solutions that are needed.
That I needed by enterprises to do that successfully and do that well and then jump is there is a market leader in in one aspect of it but I think there's a whole them off cycle and a whole set of products and capabilities in the Las Vegas, a debt that we do not participate in today. So so yes, I think the tremendous.
Publishing.
That's great and then as a follow up Anthony I'm on the financial side of the deal.
Correct me, if I'm wrong, I think you mentioned, a 35% to get to 45% margin on that business exiting 21 did I get that right and if so are we looking at about a five to 7 million dollar increase on the operating profit side on a quarterly basis am I thinking about this right.
Yeah.
You're correct in that where there's certainly projecting to get north of 35% operating margin as we exit 2001.
You know it will build gradually through the course of the year for the chef business say little you know to be a little bit compressed as we as we work through Q1 Q2 Q3.
But yeah I think in terms of the.
Quarterly operating margin that you might see from that.
Yeah, I think you're you're writing them, though.
Got it excellent alright, good stuff congrats guys.
Thank you if I could.
And we have no further questions that does conclude our question and answer session I would now like to turn the call back over to Nogales for any closing remarks.
Thank you Allie. Thank you all for joining us on the call today.
And they need to with our two people foreman and the continued strong momentum in our business going forward as well.
We're also excited looking forward to closing the Sheffield and getting to work on the integration plans.
Financially strong and healthy and we will continue to execute aggressively on our Google strategy to drive long term value to accretive M&A and the infrastructure software space. Thanks.
Thank you again for joining us today and I look forward to speaking with you.
During our that's why 2020.
Full year conference call Bye bye.
Bye bye.
And this does conclude today's call. Thank you for your participation you may now disconnect.
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