Q2 2022 Progress Software Corp Earnings Call
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Welcome to the progress software Corporation Q2 twent thousand and twenty two earnings call. My name is darreryl and I will be your operator for today's call. At this time all participants are on listen only mode. Later we will conduct a question and answer session. During the question and answer session, if you have a question, please press zero one on your Touchstone phone. I will now turn the call over to Mike Mitch K. Mike, you may beginok. Thanks, darreryl. Nice to have you yet back with us this quarter. Good afternoon everybody, and thanks for joining us for progress software second quarter fiscal 2020 two financial results conference call.
Speaker 1: With us today's yogasupa President and Chief Executive Officer, and Anthony Folder, our 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 and operating performance, corporate strategies, product plans, cost initiatives.
Our acquisition of Kemp, the impact on our business of the COVID-19 pandemic and the sanctions against Russia and other information that might be considered forward looking. This forward looking information represents progress software is outlooking guidance only as of today and is subject to risks and uncertainties. For a description of the RIS factors that may affect our results, Please refer to our recent se C filings and in particular, the sections captioned risk factors. In our most recent Form 10-K , progress software assumes no obligation to update the forward looking statements included in this call, whether a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss, our non-GAAP measures, unless otherwise indicate.
Speaker 1: You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after Mark closeed today and is also available on our website. This document contains the full details of our financial results for the fiscal second quarter of 2022 and I recommend you reference it for specific details.
We also have prepared a presentation that contains supplemental data for our second quarter 2022 results, providing highlights and additional financial metrics. Both the earnings release and this presentation are available in the Investor relation section of our website at investors progress com.
Today's conference call is being recorded in its entiretyteam and will be available via replay on the Investor relation section of our website.
Speaker 1: With that out of the way. I'll now turn it over to you, gash.
Thank you, Mike.
Good afternoon everyone, and thank you for joining our second quarter 2022 earnings conference call.
I am extremely pleased to share with you the details of another great quarter for progress.
Where we again exceed expectations across the Board.
As results were driven by our total growth strategy.
Which layers accretive MA upon a highly profitable and predictable business with strong recurring revenues and very high retention rate.
Our disciplined execution of this strategy over the past several years has resulted in consistent performance.
That is, delivering meaningful returns to our shareholders.
Against a challenging macro backdrop our second quarter performance was strong and our outlook for the remainingder of fiscal' 22 and beyond that remains healthy.
A very important aspect of our business is its predictability and stability during times of economic turbulence.
Demand for our product remains steady and positive.
As broad products are mission critical for most of our customers.
Even when post-cobrt demand helped to deliver upside to our guidance in the recent quarters.
The reliable cobrvid by the reliable recurring revenues from our large installed base of global customers.
Still form the foundation of our business.
This combined with the mission-critical nature of our products.
Leads to a high visibility business model and provides a natural hedge.
Against uncertainties that may impact the budgets of other types of projects.
The results of a second quarter. Speak to the Slack.
Revenues and earnings again finished above expectations and exceed the top end, the our guidance.
Thanks to the continuation of strong sales performance and the stickiness of our products.
Total revenues during the quarter grew 19% year-over-year at constant currency.
And operating margins came in at 41%.
Driven by the strong execution of our total growth model and healthy expense management.
Annual recurring revenues continue to grow.
Up 13% on an as reported basis.
And three point a half percent year-over-year on a pro forma basis.
To eight $486 million.
Net retention rate was again over 100%, coming in at 100 point nine percent, and continues to be a key driver for the business overall.
Free cash flow was also ahead of plan.
And our balance sheet continues to slend them.
The develop, deploy and manage software ecosystem we serve is vital to our customers.
Especially as they scrutinize their investments in new projects and other technologies.
So it is increasingly important for progress.
To continue innovating our products and remain relevant to our customers.
As an example, we recently launched a new proress Chef cloud security product.
Designed to help organizations around the world ensure that dilive cloud, multi-cloud and hybrid environments are safe and secure.
This product buildids on our commitment to deliver a unified and scalable platform that enables ourclients to accelerate the delivery of secure and compliance application releases in any kind of environmentwe also launched MOVEit 2022 with advanced capabilities to further secure and simplify the movement of mission-critical data across cloud and on-prem infrastructures.
And we delivered teleric Qi for Dot net Maui on the same day that Microsoft made the do net Maui framework generally available.
The impact of our ongoing drives. We invest in our products.
And in customer support and success efforts is reflected in our retention rates and increasing recurring revenues.
While we remain judicious with our investments in these line item costs.
We invest where needed, because we know that there's much more expensive to place a customer than it is to retain one.
Let's talk a bit about inflation.
First inflation has created an opportunity to increase effective prices wherever possible.
A significant portion of progress revenue comes from over 1700 ISV.
Who emwe our products in their offerings.
And have either revenue sharing or some form of royalty arrangements with us.
As many of these companies raise the prices of their products.
Of these companies raise the prices of their products, we indirectly benefit.
We also have a variety of contract agreements with the large numbers of customers and partners, which results in a variety of methods by which we pursue price increases.
For example, in some cases we may increase price at the time of renewal.
And in other cases, a price increase may take the form of reduced discounts.
We've successfully begun to implement this way we can, and we continue to look for more opportunities.
On the expense side, the labor market remains tight.
Experienced personnel are harder to find.
And command a higher premium.
We believe that it's significantly better for our business.
And less expensive.
To keep good employees instead of the cruiting and training new ones.
So we focus our energies on employee retention.
We continue to be rewarded by a turnover rate which has averaged about 1% per month over the past 12 months.
This is well below the norm of 2% or more among many tech companies and we are proud of it.
We are also proud of our amazing employee engagement.
Which is the key driver of strong retention.
And is demonstrated by the positive results of a broad employee surveys.
Further rogress has won 10 third-party awards for employee engagement and corporate social responsibility in the first six months of this year alone.
Just last week, progress was once again honored by the Boston business Journal as one of the top five companies to work for in the Boston area, making this our second consecutive year of being included on this list.
We were also selected by Forbes as one of America's best midsized employers of 2022 for the second year in the row.
And by an inkc magazine for its 2022 best workplaces list.
Further we took home our second consecutive CV for achievements and diversity and inclusion.
And our third executive international CSR excellence award.
And we recently announced the winners of this year's progress: women in STEM scholarships.
Which went before, outstanding young Ladies in Bulgaria, India and the U? S.
I'm incredibly proud of these awards and the work it took to achieve them.
And I'm very grateful to the whole progress team for the ongoing contributions.
To the success of our company.
Before moving on to the impact of changing macro environment on our MNA efforts, let me share that the integration of our latest acquisition camp.
Which closed last October , is going well.
Recall that temm acquired slowan in late 2020 and kept the two businesses largely settlate.
So our tap integration has essentially been through simultaneous integrations.
And I'm happy to report that we've overcome some unique challenges with no major issues or setbacks.
The integration is progressing according to plan and we remain on track to complete it over the next several months.
And our optimism continues to grow regarding MA, the most significant driver of our total growth strategy.
Progress remains well positioned both from a financial and strategic perspective.
We're well capitalized, with the vast majority of our current financing facilities fixed at very low rates.
Our balance sheet continues to strengthen. Our base of recurring revenues is stable and growing.
And our outlook for free cash flow is favorable.
All this, combined with our prior successes integrating acquired companies, itegroups us well to remain active in the MNA market as an acquirer of choice.
Further as we shop for the right kind of infrastructure software businesses.
We're seeing early signs of a shift towards the more buyer-friendly in mindine.
The it window appears to be closed for now.
Funding is getting more scarce.
And higher interest rates may negatively impact the ability of many of our competitors to lever up.
All of these factors will give us the ability to focus on acquisitions that meet our disciplined framework for financial returns, product compatibility and overall fit.
So we are happy to remain patient and we're very selective in where and how we choose our capital to work.
The strength of our capital allocation policy is that it is multifaceted.
And we continually evaluate options.
To select those we believe will generate the highest return for our shareholders.
I'm happy to say that, compared to the broader markets, whilethis talx has done well.
So we've had relatively few occasions to buy back shares opportunistically amid dramatic market turmol.
Even So, we bought back $26.5 million of our shares in the second quarter and will continue to repurchase shares whenever buybacks produce compelling returns.
In all, our second quarter was another solid one.
And I'm very pleased with the results.
I'm also optimistic about our outlook for the rest of 2020 -two.
Q3 is off to a good start and, despite it, to ultuous market and an economy with increasing macro risks, I am confident that progress is well positioned to deliver stable and predictable results.
With that, I'll turn it over to Anthony.
To provide details on the numbers for Q2 and the forward outlook.
Anthony.
Thank you gas, thanks Mike.
Good afternoon everyone, and thanks for joining our call.
As your guest mentioned.
Q2 was another great quarter for progress.
And our results reflects strong execution across our product portfolio.
Coupled with a strong and stable demand environment.
Speaker 1: Total revenue for the second quarter was $151 million, or 17% growth over the year ago quarter, and was approximately $3 million above the high end of the guidance range we provided back in March.
In constant currency, our second quarter revenue exceed $154 million, or 19% growth on a year-over-year basis.
The addition of Kemp is the biggest contributor to our year-over-year growth.
However many of our other product lines also contributed to growth, most notably our data direrect and Deb tools products.
In addition, we closed the second quarter with approximately $486 million in annualized recurring revenuerepresenting 13% growth on a constant currency basis.
And 4% growth on a pro forma constant currency basis.
Consistent with prior quarters.
Our growth in ARR.
Was driven by virtually all products in our portfolio.
Led by OpenEdge dev tools, site finity and data direct.
As we've mentioned many times before the mission-critical nature of the applications we power.
Speaker 1: And our consistent focus on improving the customer experience have resulted in a very stable and durable top line.
At the end of Q2, our trailing 12 -month net retention rate was approximately 101%, with improvements and strength evident across our entire product portfolio.
Turning now to expenses, our total costs and operating expenses were $89.6 million for the quarter, an increase of 10.1 million compared to Q2 of 2021 .
Virtually all of this year-over-year spend increase is driven by the addition of Kemp to our business.
Operating income was $61.3 million for the quarter, up approximately 23% compared to Q2 of 2021 , and.
And our operating margin was approximately 41%.
Compared to 38% in the year ago quarter.
On the bottom line. Our earnings per share of $1 in four cents for the quarter was eight cents above the high end of our guidance range and approximately 27% above our earnings per share of 82 cents in the year ago quarter.
Moving on to a few balance sheet and cash flow metrics.
Speaker 1: We ended the quarter with cash and short-term investments of $226 million.
And having restructured our credit facilities during Q1.
Speaker 1: We also have approximately $3 million in untapped capacity under our revolving line of credit.
For total liquidity of approximately $526 million.
Our DSO for the quarter was 39 days, an improvement of five days compared to Q2 of last year.
Adjusted free cash flow was $68 million for the quarter, up 13 million or 23% from Q2 of last year.
The increase in free cash flow was driven primarily from increased profitability and improved collections in the quarter.
In the second quarter we repurchased $26.5 million of stock and at the end of Q2 had $104 million remaining under our share repurchase authorization.
I would now like to turn to our outlook for the full year and Q3.
For the full year, we are maintaining our revenue guidance to be between 609 and $617 million.
And I'd like to highlight a few points about our annual revenue guide.
First it includes the negative impact of exchange rates on a year-over-year basis of approximately $12 million.
With approximately six million of that negative impact spread across Q3 and Q4.
Next it does not assume any increase to revenue associated with the price increases that yo gas mentioned earlier.
Finally as mentioned on our last call.
Our full year revenue guidance excludes two to $3 million in revenue.
Associated with previously forecasted business activity in Russia.
I call out these points because they highlight.
The considerable strength of our business.
In light of the challenging macro environment that, you'll guess, referred to.
Moving on.
We expect an operating margin of between 39%, 40% and.
Consistent with our prior guidance.
We are projecting adjusted free cash flow between 185 and 19 million, consistent with our prior guidance.
And we are increasing our guidance for earnings per share to be between $4 and five cents and $4 and 11 cents.
Our annual EPS estimate contemplates a tax rate of 20% to 21% and.
And approximately 44 and a half million shares outstanding.
And does not assume any additional share repurchases.
In 2020 -two.
Turning now to our third quarter guidance.
I'd like to start by reminding everyone.
That in the third quarter of 2021.
We exceed the midpoint of our revenue guidance by $22 million.
And a significant portion of this overperformance.
Was the result of timing, specifically revenue shifting from Q4 into Q3.
There was also increased contract durations in that $22 million overperformance.
I would encourage everyone to review our Q3 2021 earnings materials.
When're making year-over-year comparisons.
With that, for the third quarter we expect revenue between 147 and $15 million and earnings per share of between 96 and 98 cents.
In closing, we are thrilled with our Q2 results and the execution across our business that drove those results.
Speaker 1: We are well positioned for the balance of 2022 and feel we're even better positioned to continue executing our total growth strategyokay darrel, I think we're ready to open it up for QA.
And if anyone has a question, you can press zero one on your Touchstone phone once again, if you have a question, it's zero one on your Touchstone phone.
And our first question comes from Ana soers strom. Go ahead on you.
Yes Thank you for taicking re cord shaales and congratulations under the good quarter you mentioned. You haven't Tal compar in the third quarter versus last year, but it's just a little little bit us to some pull into the second quarter from the third quarter as well. Al can talked about the dynamics of the revenue bases for this quarter.
No no, we got Bo empty.
No I'm just going to say I now. There was no, no pull-in from Q3 into Q2. I think we had solid performance across.
Multiple products in the quarter.
But don't think there was anything specific to timing that we called out, but you guess I D hope let you add to that.
Yes now I was also going to say exactly in titania and really the timing happened last year quarter, not this year. So this, this year, we have had a very steady business and no timing shift.
Okay Thank you. And in terms of the MA activity, what they see there in terms of valuations, and also, who do you compete against to Su, you're the acquire of choice with many of your targets, but do do you compete againstsmo?
If say, just on two parts to your question right, the first is around the: what are we seeing with respect to the environment? So, as we all know, the public markets have really changed in terms of valuation metrics. We are beginning to see some of that change in the private markets, by the way, just to highlight something.
The first six months of this year we were busier with MNA activity and.
Reviewing deals and pursuing transactions.
That more than we have ever been in the prior any prior six -month period. So it really it really there's a lot of activity going on but we are being very disciplined. We want to make sure that we find the right assets and that we pay the right amount that delivers the kind of shareholder return that we expect to deliver and that our shareholders expect us to deliver. So So we actually find that from the second point to the respect to competitive landscape many times the other buyers are private equity owned businesses. Some of them are strategic themselves but.
But it was primarily- it is primarily- private equity on businesses that actually are participating in these transactions on the other side.
okaythank you one last one given the goodlong economy are you starting to see any change in behavior am on your customers in the conversations with them or.
So interesting enough on are not right. We continue to be confident. We are. We are seeing that our customers continue to invest in the businesses and the products that that we offer them. What's interesting, as you know right, the vast majority of our business is recurring revenue and retaining customers and really that strong foundation allows us to feel good about the way our whole years continue to shape up.
Speaker 2: Right So we are confident we're not seeing anything from our customers. There is little different today. I think the COVID-19 demand was last year, that pent up demand went away last year. But other than no difference in this quarter compared to the last couple of quarters.
Ok good, Thank you about what's for me.
Thanks on AR, and our next question comes from Tyler. Red key: go ahead, Tyler.
Hi thanks for taking the question. You made some comments during your prepared remarks that you're seeing some customers pull back on other spending categories. I was wondering if you could elaborate on what those categories are and where you see customers kind of making the biggest cutbacks to spending.
So Tyler would 't? I don't know whether we can comment on other people's businesses as much as we can on ours. Right? Most of our customers, from our perspective, are focused on cost control measures. At this point, there's a significant focus on businesses to to make sure that technologies that can help them reduce costs or where they are willing to continue to spend, and because products progress, products are all structured that way right, So we are- whether we, whether we are about increasing the productivity of developers or those that are building great digital experiences, or those that are deploying and running great digital experiences and managing them.
In cloud and nonprem environments it is about doing things more efficiently. It is doing things more effectively and more securely that we support and so I think we are seeing continued. Demand Tyler I think when it comes to some kind of new projects that potentially might have been planned. I think there is some hesitation the customer base and those are related to potentially maybe new projects to do something things that that might have helped to the top line but from our perspective. We primarily helpped. Drive exexpse control our products and make the organization more efficient and more successful which is why.
Why we find that our products are actually consistently in, you know, in good shape. That's great. And just on the price increase commentary, could you help quantify? You know what percent of your business is has seen price increases and just give us a sense on maybe that the blended asse increase that you've seen?
Yes So Tyler, absolutely So. First of all about.
Speaker 2: 60% of our business is inddirect right, whether it is to the is, dss or whether it is through the channel, the two Tier channel, right? So there, there isn't a direct increase that we can affect, because we basically have relationships with this, which are you, as I said, with is's of AR, royalties or or the revenue sharing or, But even the two TI model, whether there is a price that they basically get a discount from us and they basically charge something different to their, to their customers. So So, and that's really not in our hands. So really, what you?
Speaker 2: What we have is about a 40% of our business is really possibly where we can affect change. The other interesting thing to realize is that those changes only happen when there is a contract that comes up, So when the renewals come up- and in many of ourcast products, you know we have three year contract, So So it isn't something that happens instantly, Tyler. It is something that we will see the benefit of over time, which is why you know we have not included that in our guidance for the remainder of 2022. usually the price increases are rather.
Modest they might be 3% to 5% a year but again, as I said, because a small percentage of them get touched every year and it is a small percent of a 40% pool, to begin with it is the impact is not that significant.
Thank you.
Thank you, you areher.
Our next question comes from Benjamin Bora. Go ahead, Benjamin.
He guys this bendulum. Thanks for taking the questions and I phone congrads and I.
Guess I wanted to ask you a high level question when I was looking back had progress software in 2008 2009, how it did? I know the business had changed a lot. Is there a way to help kind of compare the business today versus during the great financial Cris and how resilient do you expect the core organic business to be going into any potential macro slowdown next year or?
In the future? Absolutely yes right, and I can do it at a high level. Obviously, I wasn't here 15 years ago, But when you think about the progress products, then they were primarily products that where the tail end of their their life cycle from the perspective, you know, basically relev right. You know, while they were continuing to be relevant to the existing customers, the relevance in the market at that time had significantly declined. That is not the case today. If you look at sort of what has happened though, especially over the last three years with what we have done in terms of acquisitions, and over the last five years in terms of what we have done with our investments, So we have cloud enabled our products.
We have acquired products like Chef, which are truly relevant in this modern cloud DevOps space from a deployment, configuration management and and secure infrastructure scalability. When you look at what we have acquired with its switch and camp around observability and and high availability and delivering performance and making sure that the infrastructure continues to perform well, and so resilience to failures and those kind of things, those offerings are much more relevant today.
But then again all those offerings are also applicable not just on time violence but to cloud you know. Those things are much more relevant today going forward and as you realize right that that that business is now you know approaching 40% of our overall business. So you you have these sort of the the legacy business which why do it has become much stronger our know retention rate. Even there have gone up significantly. We have 101% retention rate which we never had in 2008 or 2007 as far as back as I can recall all or as far back and I can talk to people who can recall So in I thinkwe re in a very different part. I feel really confident about.
About our business I mean look at. For example I mean I remember two years ago March 2020 right. We were the first software enterprise software company that actually announced results because we.
Last week of March, which was basically two weeks after the pandemic.
And we basically said maybe, or three percenting fac is what we would expect, and we actually ended up having a one and a half percent back.
You know, but to us that 3% was very measured, it wasn't just a random number out of the Hat right, and since then we have acquired camp and we are a stronger business because of that. So I actually am really confident about our business.
Got it. Thanks also to answer one for Anthony, the guidance for.
three seems to suggest like an airpocket in Q3 and big ramp in Q4. I understand what you're saying with respect to a year ago. Maybe consensus got it wrong, but is that it? Are you baking in some extra level of conservatism as well, given where the environment is that today? Are you, are you baking in some kind of an acquisition in Q4? Help us the tension of unpacket.
No yes, share pangeel. It's a great question and thank you for that. I would say no, we're not really baking. I mean there's always a little bit of conservative because I'm in the guide.
But I really if you look at the different variables on a year-over-year basis. Whether it's the impact of foreign exchange if you sort of take Kemp. If you want to sort of take it out of both years.
And then just look at the business on a pure sort of year-over-year comp basis. I guess I would say.
Q3 to us, especially relative to the overperformance we saw last year, which was B anomalous.
You know feels incredibly steady and pretty solid you know Q3 of 22 versus Q3 of 21 and also when you sort of consider all the factors like like I said F X and you know the addition of camp when you sort of normalize for those things you know. Even our annual guide is is really up from Q1 to Q2. I mean F X is sort of eating the uptick in our guide but you know you can. I mean we put out the constant currency numbers where you know I mentioned the the $12 million F X headwind on a year year basis and when you look at that from quarter to quarter and.
Should we move on to the next question?
yesplease.
I got very next. I got our next question. I Kidron, go ahead.
heyys, this is a heral long free tie. Thanks for taking the question. I just wanted to ask around new customer adds. Is that still primarily being driven by OpenEdge or are you seeing other parts of the portfolio becoming more prominent landing points?
So herschel definitely, we are seeing much more new customer ads on products like Chef.
The camp product if switch products such as movement and what's the gold? You know, OpenEdge itself doesn't land new customers directly. For us, what it does land is that the is V that use our products, use openage and they have BU, their applications on top of openagege. They go out and land additional customers for their offerings, those business applications, and so we indirectly benefit from that. But really for for us- you know where we go out and win customers ourselves- it's primarily around the deft tools business, the Chef business, the move it and what's a gold businesses that we acquired for.
Know we believe that you know those are.
Got always realizable and we know we could realize the expense 1, So we focus on the expense synergies. It's been the first six months. I think it's really still early. We are beginning to see a little bit- but not in any meaningful way- of cross-sell between products like work and camp, like flowoma. Really, flowomat is the main product. That would go well with what's a wholeal, but I think, as I said, it's rather early.
And we know we could realize the expense 1, So we focus on the expense synergies. It's been the first six months. I think it's really still early. We are beginning to see a little bit, but not in any meaningful way, of cross sell between products like work and camp, like flowa. Really, flowa is the main product that would you know, go well with with what's a wholeal. But I think, as I said, it's rather early. Got it, Thank you.
We have no more questions at this time. I'll pass it back to the speakers for closing comments.
Thank you, darryl. Thank you all for joining our call today. I look forward to speaking with you soon. Thanks again and goodbye.
And thank you, Ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Thank you, G Ye.