Q4 2022 Progress Software Corp Earnings Call
Speaker 3: mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr.
Speaker 4: with us today is Yogesh Gupta, President and Chief Executive Officer, and Anthony Folger, Chief Financial Officer.
Speaker 5: 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, our proposed acquisition of MARC logic 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 is subject to the following.
Speaker 6: this call, whether a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss 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 in our financial results press release, which was issued after the market closed today.
Speaker 7: This document contains the full details of our financial results for the fiscal 4th quarter of 2022, and I recommend you reference it for specific details.
Speaker 8: We have also prepared a presentation that contains supplemental data for our fourth quarter 2022 results, providing highlights and additional financial metrics.
Speaker 9: Both the earnings release and the supplemental presentation are available in the investor relation section of our website at investors.progress.com. As she said, today's call will be recorded in its entirety and it will also be available via replay on the investor relation section of our website.
Speaker 10: So with that out of the way, let me turn it over to Yogesh.
Speaker 11: Thank you, Mike.
Speaker 12: Good evening, everyone, and thank you for joining us on our call today.
Speaker 13: We're happy to be back with you to talk about the results of our fourth quarter and full year fiscal 22 and to look ahead to fiscal year 23.
Speaker 14: And we are excited that we can provide you with much more detail about our pending acquisition of MarkLogic.
Speaker 15: Anthony will discuss the financial results from FY22, provide guidance for FY23, and he'll also walk us through the financial benefits, impact, and timing of the Marklogic deal.
Speaker 16: It's a lot to cover, so let's jump right in.
Speaker 17: Fiscal 22 was another outstanding and eventful year for progress, during which we saw steady demand for virtually every product in every geography.
Speaker 18: and exceptional execution from all of our teams in the field throughout the year.
Speaker 19: Our ongoing efforts to invest in our products and in customer success continue to bear fruit and led to exceptionally high net retention rate of over 101%.
Speaker 20: We saw customers expand their use and recommit to our products across the board.
Speaker 21: In FY22, many of our large Chef open-edge and DataDirect customers significantly increased the annual spend with us.
Speaker 22: Our DevTools products continue to see best-in-class retention rates, and products such as Sitefinity Cloud and Move It Cloud saw many new wins around the globe.
Speaker 23: Operationally, we fully integrated Camp and folded the business into our existing sales, support, engineering, and customer success platforms as planned.
Speaker 24: Our workhorse products, OpenEdgen Data Direct, continue to perform solidly above plan.
Speaker 25: along with Sitefinity, DevTools, Chef, Loadmaster and Flowmon.
Speaker 26: As customers continue to rely on our portfolio to run their mission critical applications.
Speaker 27: and manage their digital transformation efforts.
Speaker 28: All of this resulted...
Speaker 29: in our finishing the fourth quarter on a very positive note. Most notably.
Speaker 30: with ARR coming in at $497 million, up 3.5% year over year.
Speaker 31: As you know, we consistently beat estimates and raised guidance this year with strong revenues, world-class operating margins, and increasing earnings while maintaining a solid balance sheet.
Speaker 32: We navigated the tough and rapidly changing economic environment following the outbreak of war in Ukraine, a brief but dramatic resurgence of COVID, the onset of rapid inflation, and we overcame significant effects headwinds.
We managed our cost structure very effectively in FY22.
We sold our headquarters and were able to shed the associated burdens of owning real estate.
Our employees love our flexible work from anywhere model, and our leased space in Burlington, which we inherited from Ipswich, is working perfectly as our new headquarters.
We also continue to manage our variable expenses well throughout the year, even as we reunited more employees and customers.
in person.
in some cases for the first time since March of 2020.
And even more importantly…
We maintained high employee engagement and retention rates throughout the year, well above the industry averages.
We consider employee retention to be critical to our success.
because retaining employees builds institutional knowledge and is much more cost effective.
We have continued to create and nurture.
A culture geared towards teamwork, respect for all, accountability, trust, and innovation.
which is why Progless continues to win awards year after year in the US and abroad.
as one of the best companies to work for.
We're very proud of the success we've had in hiding and retaining
have had in hiding and retaining a great team.
And I believe it shows directly on both the top and the bottom lines of our business.
So all in all, we're very pleased with the fourth quarter and full year 22.
I couldn't be more proud of our team or more grateful.
to our customers and partners.
We culminated calendar 2022 by finalizing the terms to acquire Mark logic.
allowing us to kick off 2023 by announcing the signing of a definitive agreement for our largest acquisition yet.
on January the 3rd.
When we announced our total growth strategy in 2019, we announced our total growth strategy in 2019.
We made a pledge to shareholders that we would be disciplined, patient, and extremely selective in how we deployed our capital.
We have kept that promise.
and our criteria and commitment have not changed.
even as the market and the environment around us has.
We believe the M&A market will continue to evolve.
and that our ability to compete will increase as we keep adding infrastructure software acquisitions that create meaningful shareholder returns.
generate durable cash flows.
making progress the acquirer of choice.
for target company employees, customers, and sellers.
As we said on the call announcing the MarkLogic deal two weeks ago,
We think that this acquisition hits the target on every metric.
from the ability to create synergies that provide strong recurring revenues, margins, cash flows and earnings.
to a great cultural and technology fit.
We look forward to serving MarkLogic's impressive customer list of over 300 companies.
once the deal closes.
From a technology perspective,
MarkLogic's multi-modeled data platform and its capabilities for data integration and semantic analysis of structured and unstructured data.
will allow progress to deepen our data offerings and enable customers to consume data grounded in superior analytics, informed search, and fact-based intelligence.
Marklogic products will also extend data capabilities.
for our DataDirect customers.
from structured data integration.
to natively manipulating, storing, and managing non-relational data, such as graph data, triples, and other unstructured data, as well as gleaning insights by performing semantic metadata analysis.
and applying AI capabilities.
to all types of data.
Now let's talk a little bit about our FY23 expectations.
including the expected impact of MarkLogic.
We expect demand for products to remain steady in FY23.
and our ARR to continue to grow modestly.
once Marklogic is fully integrated.
progress will scale to over $700 million in revenue.
Speaking of MarkLogic's financial impact, which Anthony will explain in more detail in a minute.
We expect MarkLogic to add approximately $75 million in annual recurring revenue with high retention rates.
over 100 million dollars to the top line on a full year basis.
and expect operating margins to improve as we integrate its sales, go-to-market, engineering and support functions into the progress platform.
It is important to note a few things regarding the timing of the deal and the seasonality of the MarkLogic business.
We currently anticipate closing the acquisition in early February .
and expect MarkLogic to be a creative starting with the first full quarter of our ownership.
More importantly.
MARC logic has a January fiscal year end.
and about one third of its revenue is recorded in December and January .
Because MarkLogic's two biggest revenue months would have occurred just before the acquisition closes,
And our fiscal year ends in November .
We will only be able to benefit from about two-thirds of their annual revenue in our fiscal year 23.
And we'll only see the full year's impact on revenue in FY24.
The deal closing in February also gives us only a few weeks of contribution in our Q123.
As you will see in our guidance from Anthony, we expect the integration and synergies from this acquisition to take place.
through FY23 with the first full year of revenue and margin impact coming next year.
And speaking of M&A more broadly.
Our total growth strategy is playing out as planned.
We are sticking to our disciplined approach.
finding great companies, and adding great customers, employees, and products to our portfolio.
Our capital structure and ability to finance new transactions is in excellent shape.
We're selective, we're patient, and we're ready to find the next good deal.
We're also executing our integration playbook well once we make acquisitions.
We learn from each acquisition and continually incorporate better strategies and tactics.
and we use our significant corporate development experience.
as well as our ability to walk away from transactions that don't fit our model.
to seek out good deals in a challenging M&A landscape.
Most of all, we remain committed to our goal of providing strong returns to shareholders and allocating our capital in the most efficient and productive manner.
And as you can see, as good as fiscal 22 was, we're even more excited for fiscal 23.
With that, I'll turn it over to Anthony to go over the numbers.
Anthony?
Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call.
As I'm sure you heard in Yogesh's remarks, we're very pleased with our performance in the fourth quarter and the full fiscal year 2022. And we're also delighted to have signed a definitive agreement to acquire MARC logic, which met all our M&A criteria and provides a larger scale opportunity for our customers to be able to obtain the M&A criteria.
for significant value creation. Turning to the numbers, we'll start in the top line with ARR, which we believe provides the best view into our underlying performance.
As a reminder, our calculation of ARR is presented on a pro forma basis.
to include the results of acquired businesses in all periods presented, and in constant currency with all periods presented at our current year budgeted exchange rates.
ARR at the end of Q4 was $497 million.
representing approximately 3.5% organic growth on a year-over-year constant currency basis.
The growth in ARR was driven by multiple products, including Open Edge, DataDirect, Sitefinity, Chef, DevTools, and File Transfer.
A consistent trend that continues to fuel our ARR growth is strong net retention, with rates remaining at a record high in Q4, again exceeding 101%.
Revenue for the quarter was $159.2 million and represents 11% growth over the prior year.
reflecting an incremental contribution from CHEMP, which we acquired in Q4 of 2021, coupled with strong sales of our open edge DataDirect, Sitefinity dev tools and file transfer products.
It's also worth highlighting that on a constant currency basis, our year-over-year revenue growth for the fourth quarter increased from 11% to 15%.
For the full year, revenue of $610.6 million represents 10% growth compared to 2021.
This year-over-year growth is comprised of a full year revenue contribution from CHMP and growth across multiple other product lines, most notably Open Edge, DataDirect, and DevTools.
Again worth highlighting is the impact of exchange rates.
because revenue growth for the full year at constant currency would have increased from 10% to 12.5%.
an approximately $17 million headwind from foreign exchange for the year.
With customer retention rates remaining consistently strong throughout 2022, and with a strong demand environment fueling growth across our portfolio.
We're thrilled with our top-line results for the year.
Turning to expenses.
Total cost and operating expenses were $97 million for the quarter, up 6% over the year of the quarter.
and $369 million for the full year, up 12% compared to the full year 2021.
For the quarter and the full year, the increase in costs and operating expenses was driven by an increase in our cost base resulting from the acquisition of Kemp.
Operating income for the quarter was $62 million for an operating margin of 39%.
compared to $52 million or 36% in the year ago quarter.
For the full year, operating income was $242 million for an operating margin of 40%.
compared to 229 million or 41% in 2021.
Earnings per share were $1.12 for the quarter, an improvement of $0.20 compared to the year ago quarter, and for the full year, earnings per share was $4.13, an increase of $0.26 compared to 2021.
Moving on now to a few balance sheet and cash flow items.
We end the year with $252 million in cash, cash equivalents, and short-term investments, and approximately $300 million in untapped capacity under our revolving line of credit for total liquidity of $552 million.
In addition, we had a debt balance of $628 million.
which is comprised of our term loan in the amount of 268 million and 360 million in convertible notes.
DSO for the quarter was 62 days compared to 60 days in the fourth quarter of 2021.
The increase in DSO was driven by the timing of billings with much of our billings over performance coming very late in the quarter.
Deferred revenue was $282 million at the end of the fourth quarter, up $30 million from a year ago, a reflection of our strong year-over-year top-line performance.
Adjusted free cash flow was $37 million for the quarter and $189 million for the full year.
We repurchased $1.5 million worth of stock during the fourth quarter, bringing our total for the year to $77 million.
As a result, at the end of Q4, we had $78 million remaining under our current share repurchase authorization.
But as you've no doubt seen in today's press release
We've increased the amount available.
by $150 million for a total of $228 million now available under our plan.
Now, I'd like to turn to our outlook for Q1 in the full year 2023.
When considering our outlook, it's important to keep in mind the following.
important to keep in mind the following. First,
2022 was a year of top-line growth in constant currency across many of our product lines.
In 2023, we expect stability in the demand environment for our products.
And as a result, our top-line guidance range
reflects a relatively flat top line for our non-Marklogic product lines.
Next, our expectations for MarkLogic and MarkLogic's contribution to 2023 are driven off an assumption that the deal will close during February of 2023.
thereby contributing to this.
in 10 months marked by the activity.
Once integrated, we expect Marklogic's tickets to be more than $100 million for our offline annually. We expect Marklogic's tickets to be more than $100 million for our online annually.
It's important to understand that Mark's logic as a revenue model, driven by current day-sales and payments, will result in even significant revenue.
It's also very important to understand that MARC logic has a January 31st fiscal year end.
The availability in the business results in roughly one third of all our private activity will be booked in December and February of the new year.
Because of the ill body, we expect more objects.
Okay, approximately 17 million dollars of revenue.
To our fiscal 2023.
and to deliver an operating margin of approximately 25.7.
As previously mentioned, we expect the integration of Mark Roger to continue through about 2023.
The tech forum expects to recognize cost energies gradually during the year.
to exit the year with a marginal margin of more than 40%.
We anticipate drawing on our revolving line of credit to finance a portion of the Mark MARK Rule abrasion by anyized ASS2000 Sv unsatisfied with this
while our pro forma net leverage levels are expected to remain modest.
Increased interest rates will impact our borrowing costs.
resulting in interest expense of roughly 20 cents per share.
associated with the mark logic revolver drawdown.
and another increase in interest expense of 11 cents per share on our existing term loan A.
The final point I'd like to highlight relates to Section 174 of the U.S. Tax Code.
and its anticipated impact on our 2023 cash flows.
As most of you are probably aware, Section 174 of the Code was introduced in the Tax Cuts and Jobs Act of 2017, and it's effective for progress beginning in fiscal 2023.
Section 174 requires us to capitalize certain R&D expenses for tax purposes, which previously would have been expensed as incurred.
Although we don't expect any meaningful change in our effective tax rate,
We do expect to make $15.2 million of cash tax payments in 2023.
specifically associated with the capitalization requirements of Section 174, unless it's again deferred, repealed, or otherwise modified.
With that, for the first quarter 2023, we expect revenue between $157 and $161 million. This includes less than one month of a contribution from MarkLogic.
We also expect earnings per share of between $1.04 and $1.08.
For the full year 2023, we expect revenue of between $675 and $685 million.
representing 11 to 12 percent growth over 2022.
We anticipate an operating margin for the year of approximately 38 percent.
with a headwind from the MarkLogic integration, which will improve through the course of the year as I've previously mentioned.
We're projecting adjusted free cash flow of between $175 and $185 million, which includes the $15.2 million in incremental tax payments associated with Section 174 of the U.S. tax code.
And we expect earnings per share to be between $4.09 and $4.17.
Again, this range reflects the previously mentioned negative impact from increasing interest rates of 11 cents per share on our existing credit facilities.
and 20 cents per share on the facilities we anticipate tapping into for the MARC Logic acquisition.
Our guidance for the full year earnings per share assumes a tax rate of 20 to 21 percent.
the repurchase of $30 million in progress shares,
and approximately 44.4 million shares outstanding.
Our share buyback activity in 2023 is meant to address 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 continues to be the top capital allocation priority of our total growth strategy.
In closing, I'd like to reiterate that we're thrilled with our Q4 performance.
the announced acquisition of MarkLogic, and our outlook for 2023. As Yogesh outlined, we believe we're well positioned operationally and financially to continue executing our total growth strategy to create meaningful value for our shareholders.
acquisition of MarkLogic and our outlook for 2023. As Yogesh outlined, we believe we're well positioned operationally and financially to continue executing our total growth strategy to create meaningful value for our shareholders. With that, I'll turn it over to you,
I'd like to open the call for questions. Hey, Shree, it's Mike and everybody I know Anthony's audio was breaking up while he was giving the MarkLogic guidance. Shree, if it's okay with you, can Anthony do you mind reading the part again that I sent it's in your chat and also it's the paragraph.
Yeah, sure.
Which one was that one Mike?
Yeah, so we're going to start again and just go through the, the MarkLogic guidance with the paragraph that starts next to our expectations for MarkLogic and MarkLogic's contributions and then go right to the end where we talk about term loan A.
Yeah. Okay.
All right, so I will
We'll go with take two. And next, our expectations for MarkLogic and MarkLogic's contribution to 2023 are driven off an assumption that the deal will close during February 2023, thereby contributing less than 10 months of MarkLogic activity.
Once integrated, we expect MarkLogic to contribute more than $100 million to our top line annually.
It's important to understand that MARC Logic has a revenue model driven by term-based license agreements
which can result in uneven recognition of revenue.
It's also very important to understand that Marklogic has a January 31st fiscal year end.
and seasonality in the business results in roughly one-third of all MarkLogic activity being booked in December and January of any given year.
Because of this seasonality, we expect MARC logic to contribute approximately 70 million dollars of revenue to our fiscal 2023 and to deliver an operating margin of approximately 25%.
As previously mentioned, we expect the integration of MARC logic to continue throughout 2023. Therefore, we expect to recognize cost synergies gradually during the year and to exit the year with an operating margin from MARC logic of more than 40%.
We anticipate drawing on our revolving line of credit to finance a portion of the MarkWagit purchase price, and while our pro forma net leverage levels are expected to remain modest,
Increased interest rates will impact our borrowing costs, resulting in interest expense of roughly 20 cents per share associated with the MARC logic revolver drawdown and another increase in interest expense of 11 cents per share on our existing term loan A.
Hopefully, that will move it a lot more clear.
It was. Thank you, Anthony. Sorry to throw that on you at the last second. Now, I think if you guys are good, Anthony, and your guests, we can open up to open up to Q and a.
As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster.
And today's first question will come from the line of Pendulum Bora with JP Morgan. Your line is open.
Hey, thank you guys for taking the question. 1 question for Anthony 1st.
on mock logic, the seasonality that you're talking about with one-third bookings and I think you said December and January , how does the rest of the year flow? Is it very minimal in Q1 and kind of goes through the year?
Yeah, and are you talking from a revenue perspective or just overall on the business?
Yeah, from a revenue perspective, I'm just trying to think how to model it next year.
I'm just trying to think how to model it next year quarterly.
Yeah, I would say you're going to pick up, you know, what we would see in the first quarter as a contribution is going to be minimal. You know, and certainly because we closed during February , you know, end of February is our Q1.
and because so much activity gets booked in December and January . So, you know, I think spreading things.
relatively evenly over the remaining three quarters is pretty much a safe bet.
I see. Okay. Got it. One question for.
I checked that Marklogic's website, they were talking about an OEM partnership as well. What portion of the business is OEM related? And it seems like they have a general SI channel. Now with GEMP, I guess you have two companies with a broader SI channel.
We'd love to hear what you were talking about the plans of kind of developing that broadly across the business. Where do we stand today? Maybe help us give us an update on that. That's all for my sake.
I'm happy to do so, Pinchalim. Thank you. The OEM business is relatively small for Marklogic. As you know that in our Datadract business, the OEM business is the lion's share.
That's not the case in MachLogic. MachLogic does have an OEM business but rather small.
That's not the case in MachLogic. MachLogic does have an OEM business, but rather small. The SI part is really interesting because...
Our relationships with SI started actually also increasing with Chef. Chef was sort of the first one where SI's have been playing a very important role in winning customers and helping customers be successful. And then that further expanded with Campus, you likely recall. And then now it further helps expand that.
channel for us with MarkLogic. So, you know, it is to me a really important channel. As you're aware, system integrators do enormous amount of work in terms of making customers successful. Having...
trusted partnerships with system integrators who are well versed with products, who have certified folks on their team, who know the products and can do wonderful things for the customers with them, who actually have a practice around products is truly beneficial.
And so we are happy that we're able to expand that relationship, and again, the opportunity in my mind is really the key opportunity is to be able to go to somebody who is an SIS for a particular product and have them do some work for another product.
Just as an aside, by the way, we also have, and we don't call them as eyes because these guys do more than system integration work. We have a digital agency ecosystem.
around our site safety and the whole online presence product portfolio around building and developing and targeting and doing the online analytics for online customers. then those digital agencies
they play a big role in the success of SiteCinity as well, which includes a part of those digital agencies also have some system integration capabilities as well. So we actually are building a really solid SI ecosystem in addition to our standard go-to-market with our own business as well as the...
sort of the channel business, which is much more reseller, distributor, you know, two-tier channel. So we're really excited about that as well.
Thank you. I'll get back in the queue.
Thank you. One moment for our next question.
That will come from the line of Ray McDonough with Guggenheim Partners. Please go ahead..
Great, thanks for taking my questions. This is Ramek for John DiPucci. Yogesh, maybe to start, you mentioned that business was strong across all business lines and I was hoping you could parse that out a bit. Was there anything in the portfolio that was a little softer than another? I'm thinking open edge is probably more stable in this environment.
Actually, if you look at our business, and again, FX makes the business look.
looked different than really in constant currency it was. There was a significant amount of outperformance throughout the year. And it did come across.
pretty much the entire portfolio. You know, when you think about whether it is a Chef, or whether it is Open Edge, or whether it is Data Direct, or you know, Sitefinity and DevTools. If there's one product which I would say, you know, didn't show the same level of outperformance, it's a Network Management product, WhatsApp Gold.
And I think that's because in 2021, there was significant tailwind in the market because of what had happened to solar winds at the end of 2020. And as everybody knows, 2021 was a really turbulent year for solar winds, and I think a lot of solar wind customers went looking for alternatives in 2021.
which led to some additional outperformance on our part with WhatsApp Gold. I think it's back to sort of more of its regular cadence that it had before that happened. So I think that would be the only area where I would say we did not see the level of performance, really outperformance and strength.
that we saw across everything else. Thanks for the color and then maybe for Anthony. As I think about
you taking on more leverage for MarkLogic, how should we think about the use of capital going forward to either pay down debt and what levels are you comfortable at in terms of your net leverage if you see an attractive M&A opportunity in the next six to 12 months where you really feel like you should be pulling the trigger where do you think?
you feel comfortable bringing that leverage in light of a rising interest rate environment here.
Yeah, Ray, it's a good question. And I talked a little bit about the impact of increasing rates on the outlook for the year.
But, you know, even having said that, I think with what we will draw down or what we anticipate drawing down from ArcLogic, I would expect the leverage level sort of on a pro forma basis to remain well under three.
I would expect that probably debt repayment will come into the calculus on capital allocation during the year. We will do some calculus on that.
rates and other potential uses of capital, but I suspect we're going to want to pay down. And like I said, the drawdown is not so much. So, you know, if we were to go up to say two and a half times leverage on a pro forma basis, you'd probably see that under two.
as we go into 2024. You know, so I would expect that we start to de-lever from this one pretty quickly.
And you know, I think we'd be comfortable up at, you know, to do a deal, maybe up at three times net. But again, that's at a point in time to get a deal done. And, you know, similar to what we would do with a deal like MarkLogic, we probably look to deliver in a rate environment like this pretty quickly.
Thanks for taking the questions.
Thanks for taking the questions.
Thank you. One moment for our next question.
That will come from the line of Fatima Boulani with Citi. Please go ahead.
Hi, good afternoon. Thank you for taking my questions and happy new year. Yogesh, I'll start with you. There was a cyber incident at the firm and I understand you're taking a couple of charges just with respect to that incident. So I'm curious if you could just expand upon that a little bit and to the extent that media margins.
maybe creating a little bit more, maybe a little less stability, if you will, in terms of growth expectations for the non-marchalogic portfolio. And then I have a follow-up for Anthony, if I could, please.
So, you know, as you are aware, and I think as we have mentioned before, you know, the investigation into the incident is still open and ongoing. So we really can't comment on it any further other than basically we said before and we reiterate that we do not expect any material.
I don't think that the growth aspects of our projections for FY23 are related to that. As Anthony mentioned, we're expecting stable revenues this year from the base products. Obviously, 2020, sorry, 2021 and 2022 saw some.
phenomenally wonderful demand for us. And I think the overall macro is slightly different or maybe usually different depending on what you think. And so we are being very straightforward about the fact that yeah, we expect there to be stability in our business this year rather than significant growth. We do expect ARR to grow by the way, Fatima, right? Well.
And we said that we do, and we'll expect it to go modestly. And.
We think that our core business is truly solid across the board.
Fair enough. Anthony, just shifting gears to the cash flow, appreciate some of the commentary you shared about some of the tax and regulation changes on R&D expensing. But I wanted to ask about potentially other impacts to cash flow, inclusive of if there is a linearity or collections consideration for MARC logic.
And then just generally, I think you called out sort of back end loaded performance. So just curious as to why you did see linearity shift to the back end of the quarter and how that should feather into our cash flow expectations considering the R&D expense and dynamic.
and potentially what we need to stay mindful of on MarkLogic's impact to the cash flow. And that's it for me. Thank you. All right. Yeah, so there's a lot there sort of passed into that question, I guess.
you know, the largest item in terms of the 23 cash flow to call out really is that $15 million in incremental cash payments that we'll make under Section 174. And, you know, like I said, that doesn't affect our
rate in any meaningful way. So it really just is an acceleration of cash out to the IRS.
So that has an impact in 23. I think Mark Wojcik for sure, you know, when they're booking, you know, let's say a third of the business in December and January , that certainly will.
will impact sort of the linearity or seasonality of cash flow. You know, we won't realize the benefit of that, I think, until we roll into next year and do our fiscal 24.
But certainly along with the top line seasonality and the amount of activity that's packed into December and January , we should see something similar from a cash flow standpoint.
And then the last comment I think that you were sort of driving at was
Be about DSO and our DSO and HVAC.
Um, you know, over here for the 4th quarter. And we had a pretty good. Or I think from a client perspective, there was a lot came in at the tail end of the quarter. And so that really was what that comment was. With the
So hopefully that provides some context you were looking for.
Thank you.
Thank you. One moment for our next question.
And that will come from the line of Harshal Fakker with Oppenheimer. Your line is open.
Hey guys, this is Hershel on for Utah. Can you hear me?
Hey guys, this is Herschel on three. Can you hear me? Yep.
Yes, yes, we can.
Great, thanks for taking the question. So, Yogesh, you've talked about previously how there are parts of the portfolio that kind of operate in these price competitive markets where you're a bit careful on conducting price increases. And then there are other parts where you'll be a bit more proactive. Can you just describe where you think mark logic fits within that spectrum?
how we should be thinking about price increases for that business going forward. And then as you look at the renewal pipeline for 2023, how are you thinking about price increases there?
Yeah, absolutely. I'm so happy to do that. So again, Marklogic has by and large a business that as Anthony mentioned is multi-year term licenses that renew, let's say three years at a time or somewhere in that range. And so, I think that's a good thing.
you end up with, again, only about a third of the business coming up for renewal in any given year. So that's point number one. Point number two, based on what we know and our due diligence, not every one of their contracts has the ability to have meaningful price increases in it.
As you know, they have a significant government business, and there are limits to how much you can do in terms of price changes with the government, federal government contracts. So, you know, it is, again, it is, I would say, given the fact that it is only about three-quarters of the business.
in terms of three fiscal quarters, given the fact that only about 70 or even slightly less than 70% of their overall business and the one third of the business doesn't come in in FY 23. And given the fact that only about a third of the business will be up for renewal. And given the fact that only about a third of the business will be up for renewal.
I don't think it is a very large number. You know, I would say maybe on an annualized basis, it would be about 20% of their revenue for MathLogic, where I think there's an opportunity to do some price increases. The product is very strong and it's excellent, so I think in both cases we may be able to.
do some reasonable price increases.
Again, the goal for us is customer retention matters more than the actual price increases. So that's our philosophy, it has always been. And we will continue to focus on that. Going back to the rest of our portfolio again.
Oh gosh, I keep going back to this, right? That, you know, more than a third of
the business of the core business pre-Mart logic business that progress has is such that it's, you know...
OEM or it is based on royalties or...
You know, revenue sharing, etc. So those things, there are really no price increases that are in our control where there is price increase opportunity, obviously.
across two-thirds of the portfolio, as you yourself said, right? There are some products that are extremely competitive markets where we don't see much either. So, much opportunity either. So that leaves probably about half our business. And in about half our business, maybe somewhat less of our original business, again, we're looking at...
sort of three year revenue, three year renewal cycles. So you can do the math yourself and you end up with, again, less than sort of 20% of our overall revenue can have some price increases. So overall, by the way, Arshad, price increases are not a big...
big component of our business stability. Our business stability is primarily driven by the fact that we have very, very high, and increasing by the way, growth retention rates. Every single acquisition we do, or we have done so far.
we have increased the retention rate and thereby increased the next dollar retention rate as well. And so to me that's sort of what drives.
those retention rates and thereby increase the net dollar retention rate as well. And so to me that's sort of what drives the stability in the business.
Thank you.
Got it. Thank you. You're welcome.
And one moment for our next question.
And that will come from the line of Anja Soderstrom with Sdoti. Your line is open.
Hi, thank you for taking my questions. A lot of my questions have been addressed already, but I'm just curious, after sort of bidding your guidance throughout the year, you're coming in at the lower end, was there anything in the first quarter that sort of surprised you? I think no, I think it everybody thinks that when a tax statutoryorn attributes a very
Not really, you know, we, we had a solid 4th quarter, you know, we, we were within our guidance for revenue. We were. Above our guidance for, you know, I think we had a, we had a solid quarter. You know.
I do think that we executed well. Again, Anthony, I don't know if you have something you want to add. Yeah, I would just say that we, coming into the fourth quarter, we probably left our range on the top line a little wider than we might otherwise.
And the reason for that was because, you know, we were just whipsawed on foreign exchange rates last year, like a lot of companies were. And so there was, you know, a bit of uncertainty going into the fourth quarter about how that would all land. So, you know, the range might have been a little bit wider than
would have ordinarily been the case, but to Gesh's point, otherwise it was, you know, from our perspective, just all across the board.
Okay, thank you. And I'm just also curious for the Mark logic with a term by based licenses, how long are the duration of those are those one year contracts or?
A lot of multi-year so I say yeah a lot of three-year contracts.
some longer than that but by and large we end up with a lot of multi-year term based license deals.
Okay, thank you. That was all for me.
Thank you. One moment for our next question.
And that will come from the line of Brentsville with Jeffries, your line is open.
Hi guys, it's Antonio on for Brent here. Thanks for taking the question. You know, about 20% of your revenue is invested back in R&D. And I was just wondering if you could talk a little bit about where those investment dollars are going, how many that you guys are working on now, and then maybe some key points you'd like to highlight for us.
Yeah, so you know I'm talking about the as we've said before right that are
But we have a tremendous emphasis on customer retention.
And so the question becomes, what can you do to drive net dollar retention of your customers? And, you know, retain them and expand business with them and continue to grow with them.
And so we actually.
basically spend and invest more in R&D to make sure that our products stay ahead of the curve. And this is across the board, right? This is across our portfolio. To make sure that our customers...
stay with us because it's much, much easier, much, much cheaper for us to retain customers that way than to win new ones. And so, and of course we spend significantly less, again, relatively speaking, on sales and marketing, which is why if you look at our overall operating margins, they truly are world class.
right, a company our size and scale in the software industry just doesn't have the percentage operating margin that we do and the kind of cash flow generation that we do. So I think that, you know, to me it becomes, and to us it becomes very much a question of where do you put in your dollar for the best.
And we believe that investing in the product side is much better than trying to not invest on the product side and then try to clean up with all the other effort that would be needed. And so that's where we invest and we continue to look for the right level of investment to continue to make sure that our products are leading edge.
And it really is across our entire portfolio.
Awesome. Thanks for that. And maybe one quick follow-up or more of a clarification. I know you mentioned Kemp in your opening remarks, but where are we with that acquisition? I know you have to integrate Kemp and Flom on together. Are we done with that, or is it a little more work to be done?
No, no, no. Yeah, I mean, we are done integrating camp. I think I might have said that in the in the in the opening remarks as well. Our integration of the campus, both the products, campus, and flow on products and the business is complete. They are. A key part of our infrastructure management portfolio.
and they have been integrated on our platform and we're now looking forward to closing the Markzware deal and bringing that integration.
Awesome. Well, thank you guys and good luck on integrating.
Awesome, well thank you guys and good luck integrating. Thank you so much.
Thank you. One moment for our next question.
And that will come from the line of It's High Kidron with Oppenheimer. Your line is open. I'll be playing.
Hey guys, I just want to follow up on a couple financial things, Anthony. I just want to follow up on a couple financial things, Anthony.
on MarkLogic.
Can you talk about how you're going to incorporate them?
in ARR since they're so lumpy, what is the
financial exercise you'll do to normalize that into an ARR number.
Yeah, sure, Itay. I think we would expect that once the deal closes and we get to Q1, we would incorporate all of the ARR. So we would.
And effectively able to provide. as if we had owned business.
from the beginning.
treated exactly like we do it with other products.
And as you know, we were properly.
I've known all of that are from business. And we expect to continue to see that grow. But I think more to come than the other two on Earth all want to.
from business and we expect to continue to see that grow but you know I think more to come for there to be so many new people coming online, how many just trying to reach out to these brands?
So if I let me try to let me try to repeat what Anthony was saying just to see if we can, you can hear it this time around. So basically, as you know, when we complete that, you know, when we close the deal, then in the first reporting period, which will be at the end of Q1.
we basically take the historic ARR of that business and we do a pro forma across the history and current and we use that going forward. For of course, for multi-year term licenses, we analyze those. Obviously, when we make a62-year timeline, that's what we do with the Clintaca star. We require a** and so we turn towards the Seneca through to eventually quickly start the future. Then it would be 0% 2% and so money for exactly that we are conditional on those crises.icus X tosn't Corscade, whichASU did before the Telltale F or betterBO slpp or less. And then there is 60% potential Striker for Access2 Defense. It's a If not current Personality that nowISA
the maintenance becomes or any other recurring revenue is annualized, of course. So what we would expect to do is we would expect about $75 million increase to show in the ARR once the deal closes. And then, you know,
We expect the ARR from MarkLogic to continue to grow. We have seen a steady growth in the ARR over the last three years, and we expect that trend to continue. Okay, and then last one for me on the revenue guide for the year.
I assume that your guidance for 23 includes already the 675 to 685. Does that include or does not include? Yes, that is correct.
You know, when I take out MarkLogic from this exercise, and I assume that your guidance for 23 includes already, the 675 to 685, does that include or does not include MarkLogic, just to be clear.
It's included in that number.
So if you exclude your comments on MarkLogic from that number.
You're basically guarding a shortfall of about $20 million, roughly plus minus on the year. Can you talk about witch laser we're up to?
break that down a little bit more as to the components of that and what is your underlying macro assumption that you've taken into account in your guide?
No, we're actually guiding, Itai, if you were to take out 70.
I think you'd be showing and also if you factor in.
say, I think 1.2 million in exchange rates that we mentioned. You know, you'd be showing a little bit of growth at the midpoint. I mean, it would be slight, but growing a little bit.
And I think from a macro perspective, that's.
sort of leads to the consistency we talked about and in terms of what we're seeing in the demand environment.
Thank you.
Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for closing remarks.
Well, thank you again, everyone, for joining for this call. And we look forward to speaking to you again soon. Thank you and have a good night.
Thank you all for participating. This concludes today's conference call. You may now disconnect.
I.
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Will.
No.