Q1 2021 Progress Software Corp Earnings Call

Ladies and gentlemen, and good day and welcome to the progress Software Corporation first quarter 2021 Investor Relations call at this time I would like to turn the conference over to Mr. Michael Mitchell K, Vice President of Investor Relations. Please go ahead Sir.

Great. Thank you David.

Thank you David Good afternoon, everyone and thanks for joining us for progress software its fiscal first quarter 2021 financial results Conference call. My name is Mike Mitchell K I recently joined progress as Vice President of Investor Relations and I'm thrilled to be on board and I look forward to meeting all of you soon with me today is Yogesh Gupta, President and Chief Executive Officer and.

Anthony Folger Chief Financial Officer.

Before we get started I'd like to remind you that during this call we will discuss our outlook for future financial operating performance corporate strategies product plans cost initiatives or integration of of.

Of share the impact of the COVID-19 crisis on our business and other information that might be considered forward. Looking this forward looking information represents progress software's outlook and guidance only as of today and are subject to risks and uncertainties for a description of the risk factors that may affect our results. Please refer to our recent SEC filings and particularly the section cash.

And risk factors and our most recent form 10-K.

Progress software assumes no obligation to update the forward looking statements, including and included in this call whether result of new developments or otherwise. Additionally on this call all financial figures. We use are non-GAAP measures unless otherwise indicated you can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and our financial results.

Release, which was issued after the market closed today and is also published on our website. This document contains the full details details of our financial results for the fiscal first quarter of 2021 and I recommend you reference it for specific details and we also published a presentation that contains supplemental data from our first quarter 2021 results, providing highlights and additional financial.

Metrics before our earnings release.

And with our earnings release, and this presentation are available and the Investor Relations section of our website at investors day progress Dot Com Today's conference call will be recorded and its entirety and will be available via replay from the Investor Relations section of our website with that I'll now turn it over to Yogesh.

Hey, Thank you Mike.

And welcome it's great to have you on board.

And thank you all for joining our Q1 2021 financial results conference call.

And I'm sure you've seen by now the first quarter was an excellent start to 2021 highlighted by better than expected performance across all metrics.

Our over performance was driven by a combination of strong execution.

And and improving demand environment from our customers and partners spanning virtually all of our product lines.

We benefited from improved macroeconomic conditions as more businesses to reopen from COVID-19, and became more active with that project.

What's more are performed on performance.

And that's an estimate to the mission critical nature of our comprehensive product portfolio, which remains as strategic as ever to our customers and partners.

As a result of our strong Q1 performance and.

And increased confidence and our business we.

We have meaningfully raised our 2021 and outlook for revenue.

P S and cash flow.

And Anthony will cover this in more detail as part of his comments.

And so I just left on the strength of our Q1 performance.

It's worth stressing the investments we've made to modernize our portfolio.

And the industry trends benefiting our business.

As more customers and partners have taken a cloud first approach for their applications data and content.

Our share open edge sites, and AP and moving products are available to support that effort.

Our heritage of delivering best in class application development offerings that are truly developer centric.

Coupled with our strength in data and infrastructure management.

And our pioneering Dev ops capabilities.

Produced a portfolio of products that fully addresses the modern continuous application development deployment and management lifecycle.

What's more it was a flagship open edge product that was the single largest contributor to our top line outperformance in Q1.

Its performance is fueled by the strong execution of our direct sales team.

And increased strength from our open edge, Isps, which is a tremendously positive data point because of the large number of global businesses that these independent software vendors and such.

Our long term expectations for open edge haven't changed and the stability and resiliency of hope on edge and remain it's true strength.

In addition, the acquisition of share, which expanded our presence and the Dev ops and desktops market.

It gives us further optimism about FY 'twenty one.

The Dev ops and deaths takeoff space continues to see growth as.

As the shift left paradigm and application development and deployment accelerate.

And the whole of developers becomes increasingly more important.

We continue to win new logos and our chefs business during the quarter.

The world stopped to social media companies and four of the five Fang companies on now chef customers.

In addition to acquiring new chef logos on net retention rate suggests continued to run higher than anticipated as a result of continued success renewing and expanding relationships with some of the world's largest and fastest growing SaaS companies, such as Salesforce slack and Microsoft to name a few.

Yeah.

The <unk> team.

Suite and customer base have.

And I've been tremendous additions to progress and.

And I've been amazed by the dedication of the team to customer Centricity.

Similar to the dedication and within our progress DNA.

We also saw strength within our Dci direct business as well as with our network monitoring solution that came over with the Ipswich acquisition.

We have seen increased interest given the turmoil in that space.

All in all we could not be pleased with the performance of.

Products.

And you will continue to focus our growth efforts on this market by enhancing and expanding our portfolio and.

And we will also remain laser focused on delivering superior value to our customers in order to maintain our solid net dollar retention rate, which have consistently been above 97% across our portfolio.

A stable customer base, coupled with some of the market trends and I described earlier and allow.

All of us to maintain a very stable topline, which is reflected in our high and increasing mix of recurring revenue.

As we've mentioned previously the mix of revenue from recurring sources has increased 600 basis points from 74% in 2018.

And 80% and 2020 and do you expect the strength to continue.

Additionally to provide better investors better visibility into this dynamic and our topline.

And to provide more insight into our underlying performance we've begun to disclose.

They are our annualized recurring revenue was also highlights the stability and durability of our business.

Anthony will talk in more detail about our E. R. R and net dollar retention rates and his comments, but I'd like to reiterate that the strength and stability of our topline and.

It used to come from a combination of all.

First outstanding Enterprise technology that powers mission critical system, serving a growing and dynamic market.

And second and customer centric approach across our entire organization, including product management engineering, and technical support sales and customer relationship management.

Now turning to our M&A efforts, which underpin our overall total growth strategy.

I mean laser focused on.

Building on opportunities in this hyper competitive but plentiful environment.

Our integration of chefs is proceeding ahead of schedule, which contributed to our profitability upside and mcwhorter.

Meanwhile, our pipeline for deals has grown meaningfully and we've continued to expand and strengthen our sourcing channels as well as on internal capabilities.

Simultaneously operate integrate and support acquired companies.

We have been and.

And are actively pursuing deals across the entire Dev ops lifecycle and application development deployment and operation.

Our financial criteria, which includes a mix of recurring revenue and strong retention rates continues to be Paramount.

And we will of course remain disciplined to ensure we realize meaningful value from each acquisition.

In summary, Q1 marked an excellent start to the year for progress.

Our performance was stronger than expected across virtually all product lines and all of our metrics.

And I'm thrilled with how well we are positioned to tackle the opportunities ahead of us.

I would like to now turn the call over to Anthony to discuss our financial results and other items from Q2 as well as for the full year.

Anthony.

Great. Thank you Yogesh and good afternoon, everyone. Thanks for joining our call.

As Yogesh mentioned, we're very pleased with our Q1 results and feel we're positioned well for the year ahead.

Our revenue for the quarter came in at $131 8 million.

Well above the high end of the guidance range, we provided back in January and represents 16% growth on a year over year basis.

Our top line results from the quarter were driven by better than expected performance across all of our product lines, but much of the outperformance came from open edge.

RF switch products, what soft cold and move it and finally chef.

I'd also like to point out that our strong Q1 performance was more than enough to offset the expected year over year decline of more than $8 million and our data direct product, which.

Which we mentioned as part of our outlook back in January.

We've previously discussed our ASC 606 has affected revenue recognition for subscription products such as day to direct.

With the addition of chefs to our portfolio and increasing proportion of our revenue now comes from recurring sources, whether they be on Prem subscriptions term license agreements or SaaS deployment models.

In order to provide better insight into the underlying performance of our business to address the potential variability and revenue recognition, resulting from these different revenue models and to highlight the durability of our recurring revenue base beginning in the first quarter, we are disclosing annualized recurring revenue.

And net dollar retention rate.

We've provided clear definitions of these metrics in the supplemental presentation accompanying our press release.

And I'd like to comment briefly on both.

First our Q1, ending a RR was $432 million and increase of 22% on a year over year basis with the increase largely driven by the acquisition of share.

It's also worth highlighting however that on a pro forma basis, which would include chefs pre acquisition AOR.

Our a R. R would still reflect low single digit growth in the first quarter of 2021, when compared to the first quarter of 2020.

That stability.

Coupled with a net dollar retention rate that's consistently ranged between 97 and 100%.

<unk> provides us with confidence and the durability of our topline.

We will continue to provide these a R R and and our our metrics quarterly and we look forward to discussing them further on future calls.

Turning now to expenses, our total costs and operating expenses for the quarter were $75 1 million up 14% compared to the prior year quarter. This.

This year over year increase is driven by the acquisition of chef, partially offset by lower expenses and the rest of our business, where we continue to operate more efficiently.

Operating income was $56 $7 million up $8 7 million or 18% compared to the first quarter of 2020.

And our operating margin was 43% compared to 42% in the prior year quarter.

On the bottom line earnings per share of 95 cents for the quarter represents growth of 25% year over year.

And as 19 cents above.

Above the high end of our guidance range.

This over performance on the bottom line was driven by our outstanding top line performance, coupled with good cost management across the business, including chef.

And where our integration is now running slightly ahead of plan.

And I'd like to point out that we still anticipate recognizing all synergies from the chef integration by the end of fiscal 2021.

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 $114 million and debt of $366 million.

DSO for the quarter was 53 days and improvement of one day when compared to the fourth quarter of 2020.

And an increase of four days from 49 days in the year ago quarter.

Adjusted free cash flow was $47 million for the quarter up almost $14 million or 40%.

From the 33 million, we achieved in Q1 of last year.

This growth and free cash flow was driven by our strong topline performance and the previously mentioned and improvements to operating leverage and our business.

During the first quarter, we repurchased 353000 shares of progress stock at a total cost of $15 million and at the end of the quarter, we had $175 million remaining under our current share repurchase authorization.

In addition, during the first quarter, we made a $15 million payment against our revolving line of credit, which we had drawn down to consummate the chef acquisition and the fourth quarter of 2020.

Before I turn to our outlook for Q2 and for the full year of 2021.

I'd like to point out that with recent changes to our business, including the acquisition of chef and other product level realignments.

We have changed how we assess performance and allocate resources across the business.

As a result of these changes we expect to begin operating as one distinct segment instead of the three segments that we've previously reported.

We plan to implement the new segment structure, starting with our results for the second quarter of 2021, which will be reported in June.

Okay, and now like to turn to our outlook for Q2, and the full year 2021 for.

For the second quarter of 2021, we expect revenue between 119 and 123 million.

And earnings per share of between 72 and 74 cents.

And for the full year 2021, we are increasing our outlook on each metric.

And expect revenue between 519 and $527 million and.

And increase of $6 million from our prior guidance.

Operating margin of approximately 38% and increase of 100 basis points from our prior guidance.

Adjusted free cash flow between 155 and $160 million and.

And increase of $5 million from our prior guidance.

And earnings per share of between $3.38 and $3 and 42.

And increase of 15 cents from the midpoint of our prior guidance.

Our annual EPS estimate contemplates a tax rate of 20%.

Approximately $44 6 million shares outstanding.

And the impact of $40 million of share repurchases, we are targeting to complete by the end of 2021.

In closing, we're truly excited to deliver results that reflect our strong and durable topline expanding operating margins and meaningful growth and earnings per share as.

As we begin to realize synergies from the acquisition of chef. Our total growth strategy continues to be validated and we're very well positioned to deliver strong results for the remainder of 2021.

With that David I'd like to open the call for Q&A.

Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so by pressing star one now if you're using a speaker phone. Please make sure that your mute function is disabled. She will have your signal to reach our equipment again, if he would like to ask a question. Please press star one now.

Our first questioner is on your soda storm with Sidoti.

Hi, everyone and thank you for taking my question and.

Congratulations on a great quarter.

First a question on on the guidance since net.

For the full year increase and it might be all of it.

Conservative considering the beat on the first quarter can you just talk a little bit about that.

So on yes. Thank.

Thank you first of all yeah. It was.

Wonderful quarter.

In terms of.

Our base as you know historically.

And when we've beaten.

On the top line in the first quarter by.

And by a couple of million dollars we have.

And usually not done any changes to our top line for the year and that's because you know that's still three quarters ahead.

Because of the really strong performance.

And our confidence in the way the business is shaping up for the whole year.

We talked that we could weighted and a meaningful way.

With the ways that we have that.

Yeah.

Okay and that sounds good and.

About the momentum that through the quarter and into the second quarter.

Since like it sounds like that's very strong.

So we had a really good quarter.

And you know.

We have provided guidance for Q2 based on what you think.

We expect for the second quarter.

We are confident about the way.

<unk> is up yet.

And at this point force to uncertainty.

It is not behind us that is still on.

Pockets, where.

Businesses.

And have been blocks that basically are and and lockdown mode, but we feel confident about the trajectory of our business, we feel confident about our execution.

And we feel confident about the demand for our products.

And so.

The items reflects that confidence.

Thank you and one more from me and and robust year M&A you made a comment about your app and expansion.

And of the sourcing channels can you elaborate on that.

So yes of course on yet so so you know.

Historically, we have focused of course, but working closely with investment bankers.

And that has got to and expand it in fact, we have.

Many more investors.

And that's on banker relationships.

And once Jeremy came on board he is being able to expand back and in a meaningful way. We have also spent a significant amount of effort and time.

<unk> weighted a whole host of venture capitalists, who have portfolios that are in the application development deployment and management a market segment.

That have products that would fit in our product portfolio.

And and that basically could have opportunities that are getting to be of scale. So that's another area, where jeremy and the team have done a really good job of expanding.

We are.

Also connecting with more.

Founders as well.

And I'll, let companies if you recall.

If switch was a company that was still owned by Roger Green, who was the founder and and so we weren't able to do that and so expanding that channel has been another effort and last but not least we are also expanding our relationships with some of the larger technology companies that might have some carve outs and that's.

A very small universe as you know.

But still you know begun to have conversations with them as well so again to us. It is trying to find all venues and and all avenues for us to be able to find more opportunities and and.

And to be able to find the right ones that fit us not only from the perspective of.

The business quite high levels of recurring revenue high retention rates, but also where we believe we can generate meaningful value for our shareholders by being disciplined on the financial side. So that's what we've been doing and and also on your as an aside we also have continued.

Improve and spend on our internal capabilities. So that we can do multiple deals. We can have the SaaS deal was done and as we said in January we were ready to do another one and so.

That is why we feel really confident about our ability to continue to execute on our total growth strategy.

Driven by M&A.

Okay. Thank you that was all from me.

Thank you O'neil.

Thank you. Our next question comes from Mark Chapelle them with benchmark.

Hi, guys.

Hey, Mario one.

And so we're on yogurt couple questions, we'll start with you.

First of all bring.

Very nice job on the quarter.

Thank you.

With respect to the open edge IFC business continues to perform well and I was wondering if you could just provide any additional color.

With respect to what maybe your ISP partners are telling you they're sitting on your business.

Yeah, absolutely Mark so weak and.

Interestingly enough in this quarter, we had strong open that ISP.

<unk> performance as well as by the way open edge direct as well as some of the some of our customers expanded their their relationships with us and a meaningful way.

And what we hear from.

And the IFC and of course is that their business.

They are becoming more confident and their own business and since they are the ones that of course is as you know mark.

We have a very very large reach on a global basis.

To us that reflect.

On a a.

A strengthening of the U.

Market and and and the demand for the kind of products, we offer and the.

And if that customer, saying, hey, how do we modernize how do we expand how do we take on application that is on the open edge and do more with it.

As business needs go so.

And so that's really a very very positive sign for us and we feel really good about what is happening with ISP base and and as I said and I also actually seen and we saw in Q1 was actually a a pick up on some of our direct customers who ended up expanding relationships with us as well so what we see.

And some interesting.

Very positive signs. We also saw signs that we're positive with respect to IP projects being started four new online engagement and and new customer.

Customer engagement projects and those professional services projects of course are only done and I think business is feeling a little bit better because they are not just and I'll just add some more licenses right, they're doing something more doing something new so we think that that business is feeling more confident around the globe and and that's reflected and the performance of <unk>.

Who use open edge.

Great. Thank you and then shifting gears, a little bit with respect to the integration of shelf.

It sounds like it's proceeding ahead of plan. That's good I was just wondering if maybe you can give us an idea of some of the integration work still remains to be from performed out there.

Yes, I think.

And the.

The initial sort of heavy lifting it is all done so which we feel really good about.

And obviously mark for certain things like you know some some backend systems that need to be integrated.

And that are not related to finance that are related to let's say technical support and customer support and those kinds of things are being worked on and will continue to be worked on and which is why Anthony said.

Some of the integration.

We'll take us towards the end of the year and end up but overall, we've actually been able to accelerate.

A lot of the integration and that that helped us of course on the profitability Chef also of course outperformed on the top line as well compared to our plan. So so we're really pleased with the way chef is shaping up both on the topline and bottom line and a.

And the team that has come across it's just absolutely phenomenal and it may be it is a spit sold well with progress day do you have a very much a customer centric view of what they do there.

And theyre passionate about the product they are passionate about the open source community.

And the passionate about serving our customers and making sure that the customers are successful we have been able to and <unk>.

Not only connect with a very large number of the large customers, but we've also been able to connect with.

The open source community contributors and and they are very engaged with us so all of that stuff and it really meshes well with our DNA and progress which has always been customer centric as you know mark so so.

So it has been so far it has been wonderful and it has been a really really positive acquisition.

Okay, very good and then bringing it into the mixture and I was wondering if you could just review some of the reasons why the company has decided to move to a single reporting structure rather than the current three segment structure.

Yeah, Yeah sure markets are good question and I think there was a point and time historically were.

I would say the company was probably very reaches Lee aligned around those three segments and it made a lot of sense in terms of how we manage the business.

And you know I think over time things started to shift a little bit.

And when we brought on chef in.

And you know chefs in our existing segment structure fit into application development and deployment.

And once we put that in there it really became.

I would say, it's one unit and we started to look at the business.

More on a product by product level.

And I would say less so on the traditional segment. So we were evaluating performance down to the product level thinking about resource allocation down to the product level and.

And ultimately it just no longer made sense too.

With all the realignments that had gone on to carry the three segments forward. So.

You know I think that that change will roll through and in the second quarter. I think we'll still continue to give color on some product level performance as it's relevant to the to the operations overall.

But I don't think that the the three segments are still going to be meaningful progress and so I think ultimately what.

And what starts to probably become interesting I think as you know the annualized recurring revenue and really the stability there the net dollar retention rates and the stability that those display as well.

And then a lot of product level detail that we can share as quarters go by and and as products may or may not have a material impact on the business.

Great. Thank you helpful and that's all from me.

Thank you thank.

Thank you at this time, we thank you Mark.

At this time, we have no further questioners and I'll turn it back to Mr. Yogesh Gupta for closing comments.

Thank you David.

Thank you all for joining our call today.

I'm genuinely excited about our performance in Q1.

Our product portfolio.

Addresses a large market opportunity and I'm, especially proud of the continued hard work and dedication of our entire organization during the quarter.

Which positions us really well as we continue to execute our total growth strategy.

And I look forward to talking to you all soon thank you again and goodbye.

Ladies and gentlemen that concludes today's presentation and thank you all for your participation you may now disconnect.

Yes.

Paul.

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