Q4 2023 Progress Software Corp Earnings Call
Okay.
Good day and welcome to the progress Software Corporation Q4, 2023 earnings call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during this session you will need to press star one one on your telephone you will then hear an automated message advising your hand as rate. So withdraw your question Press Star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker, Mr. Mike Mitchell Senior Vice.
Mike Mitchell: President of Investor Relations. Please go ahead Sir.
Okay. Thank you Sherri, it's nice to have you are with US again, good afternoon, everybody and thanks for joining us for progress Software's fourth fiscal quarter of 2023 financial results Conference call on the line with me. This afternoon are Yogesh Gupta, President and CEO and Anthony Folger, Our Chief Financial Officer before we get started let's go over our <unk>.
Safe Harbor statement.
During this call we will discuss our outlook for future financial and operating performance corporate strategies product plans cost initiatives and other information that might be considered forward looking.
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 the risk factors in our filings with the Securities and Exchange Commission.
Mike Mitchell: Progress software assumes no obligation to update the forward looking statements included in this call and Additionally, please note that all the financial figures referenced on this call are non-GAAP measures unless otherwise indicated indicated you can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our financial results.
Mike Mitchell: <unk> press release.
Mike Mitchell: Which was issued after the market closed today and is on our website.
Mike Mitchell: Document contains additional information related to our financial results for the fourth quarter of fiscal 2023, and I recommend that you reference it for specific details.
Mike Mitchell: We've also prepared a presentation that contains supplemental data for our fourth quarter 2023 results, providing highlights and additional financial metrics.
Mike Mitchell: As I mentioned, both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors stop progress Dot Com also today's conference call will be recorded in its entirety and will be available via replay on the Investor Relations section of our website.
Speaker Change: With that out of the way your gas sure I'll turn it over to you.
Gas: Thank you, Mike and good afternoon, everyone and thank you for joining our Q4 'twenty three financial results conference call.
Gas: Fiscal 'twenty was another great year for progress.
Gas: I'm extremely proud of everything we've accomplished and how all of our teams.
Gas: I'll quickly take you through some highlights from the past year and that's the way to look at the year to come.
Gas: The third quarter was another strong one.
Gas: But ongoing stable demand for many of our products, especially open edge data direct and fight for it.
Gas: Topline revenues of $178 million remains robust.
Gas: 17% year over year.
Our net retention rate was a solid 100% and operating margins were well above our expectations.
Gas: For the year, we generated over $175 million of adjusted free cash flow on revenue of $698 million and finished the full year with operating margins of 39%.
Gas: Yeah.
Gas: As you recall, we began 2023 with the announcement in January after Mark logic acquisition.
Gas: At that time, we said that the Mark logic acquisition would add over $100 million.
Gas: In annual revenue and would take about a year to fully integrate.
Gas: I'm delighted to share that virtually every milestone mark logic integration was completed before the end of fiscal 2022.
Gas: This faster integration was a direct result of the continuous improvements we have made in our integration process.
As always we gained new learnings from the <unk> acquisition.
Gas: To help us further improve for the future.
Gas: For instance.
Gas: We have to maintain a separate entity to accommodate the unique requirements of the various U S. Federal agencies, who are our customers.
Gas: Now that we have this entity, we see it as a vehicle not only to build these existing customers, but to expand our relationships by addressing a wider set of their needs through a broader product portfolio.
Gas: In addition to our M&A efforts in FY2023.
Gas: We also executed well on the other two pillars of our total growth strategy, which are sustained innovation.
Gas: And an unrelenting focus on customer success.
Gas: So turning to product innovation in FY2023.
Speaker Change: Yeah, I'd capabilities to our products improve the time to value for our customers and made our products even more easy to use.
Speaker Change: For example, we incorporated <unk> into our site committee product to enable content creators to rapidly scale content production entering through targeted marketing by personalizing content to suit the needs of various parcels.
We delivered the high power contextual threat event analysis in the latest release of our flow mantra, which provides our customers faster automatic meaningful insights into possible malicious network activity.
Speaker Change: We launched chef's us, which enables Dev ops and tech ops, so rapidly realize value and we have received very positive reactions from our early customers.
Speaker Change: We launched loadmaster, <unk> 60, which provides administrators the ability to manage the performance of the variability of their entire environment from a single user interface.
Speaker Change: And we released new and updated versions of our Dev tools products with a whole host of new capabilities.
Speaker Change: These include new components to rapidly build embedded data driven applications and support us for.
Speaker Change: Port Neal accessibility standards among other features.
Yeah.
The semaphore no sequel database products, we acquired with Mark logic are leading products for semantic metadata analysis and so on.
Speaker Change: Making sense out of structured and unstructured data.
Speaker Change: As organizations embrace all kinds of AI.
Exponentially expanding the sources and scale update unnecessary.
Speaker Change: This is now better positioned to help them develop deploy their mission critical applications and experiences as well as effectively manage their data platforms cloud and it infrastructure.
Speaker Change: In addition to M&A and innovation the third pillar of our total growth strategy is an unrelenting focus on customer success.
Speaker Change: In FY2023 after a couple of years of slow enforcement activities, we hosted numerous live in person customer events.
Speaker Change: These included more than 20, local and regional events across the globe for our open edge customers.
Speaker Change: The open Edgewater tour.
Speaker Change: 3000 attendees joined us to hear what was new in our portfolio and how they open edge platform and the broader product portfolio is partnering to deliver increasing value to help propel the business forward.
Speaker Change: We also held well attended conferences for our Dev tools and <unk> customers.
Speaker Change: Progress and the user community shared innovative ideas and best practices in rapidly developing engaging digital experiences.
Speaker Change: Efficiently scaling Watson SEC ops efforts across on premise hybrid and multi cloud environments.
Speaker Change: In 2023, we also dealt with the sophisticated multi stage attacks on our customers' move it environments by a cyber criminal group.
Speaker Change: We issued a patch within 48 hours of discovering the zero day about mobility and move it and proactively engaged with our customers to help them hard and they have moved up in bottoms.
Speaker Change: We continue to cooperate with regulatory authorities, who are investigating the attack.
Speaker Change: We will provide updates regarding the impact of the movement incident on our business and operations in our upcoming Form 10-K.
I want to thank the teams across our business for the amazing way to have come together to help our customers and to continue to move our business forward.
Speaker Change: Because if I employees' hard work and dedication.
Speaker Change: Customers have remained incredibly loyal and comfortable to work closely with us.
Speaker Change: Yeah.
Speaker Change: Our employees are at the center of everything we do.
They've built our products sell service and support our customers and run our operations.
Speaker Change: In 2023, we continue to sustain it driving employee culture.
Speaker Change: Evidenced by our employee net promoter score or NPS.
Speaker Change: It's in the mid thirties.
Speaker Change: By the way this is in the same league as Microsoft and Google.
Speaker Change: Once again employees don't know wet progress was at industry levels.
Speaker Change: Mid single digits in the second half of the year.
Speaker Change: Our employees are energized by our mission vision and values and the continued to share that with the world health.
Speaker Change: US with numerous awards for being the best place to work.
Speaker Change: For example.
Speaker Change: The Boston Globe again selected progress as one of the top places to work in Massachusetts.
Speaker Change: Third year in a row.
Speaker Change: We ranked number six for 2023 moving up five spots on quality and are the highest ranking software company on the list.
Speaker Change: I am delighted that we accomplished all of this.
To improve our internal processes and systems to become even more efficient integrated a lot largest acquisition to date.
Speaker Change: And delivered outstanding results.
2020.
Speaker Change: Now looking forward towards FY 'twenty four.
Speaker Change: We are excited about what lies ahead.
Speaker Change: We foresee sustainable demand for our products in FY 'twenty four.
Speaker Change: It will be the first full fiscal year of revenue contribution from markets.
Speaker Change: As Anthony will explain in his guidance, we expected to propel us to over $745 million in revenue.
Anthony: And to also help expand our operating margin.
Anthony: We remained focus on approval total growth strategy to create shareholder value. The same way we have for the last several years.
Our capital allocation policy Patinous prioritize M&A.
Anthony: Because we see it as the best way to generate sustained shareholder return for our investors.
We are therefore extremely active in the M&A market and as we have previously noted market factors tanker to shift and update.
Competitively and financially.
Anthony: Well positioned for M&A as we have ever been.
Anthony: And our reputation as an acquirer of choice among the sellers continues to grow.
Anthony: I also want to reiterate that we are unwavering in our strict disciplined when it comes to M&A.
First we will continue to pursue companies that are a good fit in terms of technology size and culture.
Anthony: We're looking for companies with great products and customers high recurring revenues and retention rates.
Anthony: As I like to say well look not looking for unicorns were looking to buy great Workforces.
Second we will be extremely disciplined about what we paid for these businesses and how we finance it to ensure that we create meaningful shareholder value.
Anthony: And lastly, as we have repeatedly demonstrated we can rapidly integrate acquired companies using the knowledge experience and best practices, we have accumulated.
Anthony: And drive higher margins.
During the year, we expect to use excess cash flow to repay debt whenever possible.
Anthony: And we will continue to repurchase shares to offset dilution from our equity programs under our existing share repurchase authorization.
Anthony: In addition to our efforts around M&A. We will also continue to execute on the other two pillars of our total growth strategy innovation and customer success.
Anthony: So investment in innovation and customer success, we will continue to drive strong operating margins higher anr and high retention rates.
Anthony: To conclude.
Anthony: I am extremely pleased with our FY <unk> performance.
Anthony: I'm more excited about what fiscal pump in FY 'twenty four.
Anthony: With that I'll turn it over to Anthony to provide additional details around our results and guidance Anthony.
Thank you Yogesh and good afternoon, everyone. Thanks for joining our call.
Anthony: As Yogesh mentioned, our fourth quarter results were strong across almost every metric and we're very pleased to deliver such a strong close to fiscal 2023.
Diving right into the numbers I'd like to start with <unk>, which we believe provides the best view into our underlying performance. We closed Q4 with IRR of $574 million, which represents approximately 17% growth on a year over year basis, and 1% pro forma growth on a year over year.
Anthony: Basis to be clear the pro forma results include Mark logic in both periods.
Anthony: The growth in IRR was driven by multiple products, including open edge, Mark logic site Trinity, our Dev tools products and move it.
Anthony: And <unk> was again bolstered by strong net retention rates of 100%.
Anthony: In addition.
And to the strength in IRR revenue for the quarter of $178 million was just above the high end of the Q4 guidance range. We provided back in September and represents approximately 12% growth on a year over year basis.
Anthony: Our strong revenue performance in the quarter was driven by multiple products led by open edge, which continues to outperform our expectations.
Anthony: For the full year revenue of $698 million grew by $88 million and.
Rents, 14% growth over the prior year.
Anthony: This growth was driven by Mark logics top line contribution.
Anthony: Combined with growth across multiple other products, most notably open edge loadmaster site entity move it and our Dev tools products.
Anthony: With customer retention rates remaining strong throughout 2023, and a strong demand environment fueling growth for a number of our products, we're thrilled with our topline results for the year.
Anthony: Turning now to expenses, our total costs and operating expenses were $115 million for the quarter up 18% over the year ago quarter and $428 million for the full year up 16% compared to fiscal 2022.
Anthony: The year over year increase in expenses for both the quarter and the full year was driven almost entirely by the addition of Mark logic to our business.
Anthony: Operating income for the quarter was $63 million for an operating margin of 35% handily exceeded our internal expectations.
Anthony: The better than expected operating performance was the result of over performing on the top line, while managing our expenses to plan.
On the bottom line our earnings per share of $1 <unk> for the quarter were nine ahead of the high end of our guidance range.
This over performance relative to expectations was again driven by strong top line performance, coupled with solid cost management across the business.
With virtually all planned synergies achieved on the integration of Mark logic during fiscal 2023, our Q4 results position us very well for the upcoming year.
Moving on to a few balance sheet and cash flow metrics. We ended the quarter with cash cash equivalents and short term investments of $127 million and debt of $731 million for a net debt position of $604 million.
Anthony: This represents net leverage of approximately two two times on a trailing 12 month EBITDA basis.
Anthony: I'd also like to highlight that during the fourth quarter, we again paid down $30 million against our revolving line of credit that we used to partially fund the acquisition of Mark logic.
Bringing the outstanding balance on that revolving line of credit to $110 million at the end of the fiscal year.
DSO for the quarter was 62 days or flat compared to the year ago quarter.
Anthony: However, it was well above the 49 days, we reported in Q3 of 2023.
Anthony: The reason for the sequential increase in DSO is the timing of our bookings and billings in the quarter with a significant portion coming later in the quarter and pushing the related cash collection into early 2024.
Anthony: Deferred revenue was $295 million at the end of the fourth quarter up by approximately $15 million on a sequential basis.
Reflecting our strong topline performance in the fourth quarter.
Adjusted free cash flow was $33 million for the quarter, which was slightly less than we expected, but was entirely driven by the timing of billings as I mentioned in my discussion on DSO.
Anthony: Okay.
Anthony: During the fourth quarter, we repurchased $4 million of progress stock, bringing our annual total to $34 million and ending our fiscal year with $194 million remaining under our current share repurchase authorization.
Speaker Change: Okay, now I will turn to the outlook and when considering our outlook for 2024.
Speaker Change: It is important to keep in mind the following.
Speaker Change: First 2023 was a year of topline growth across many of our product lines.
In 2024, we expect the demand environment for our products to remain stable.
Speaker Change: Next Mark logic contributed to our 2023 results for approximately 10 months.
Speaker Change: However, due to the seasonality in the Mark logic business that 10 month contribution represented roughly 70% of Mark logics annual topline.
Speaker Change: In 2024, we expect the incremental contribution from Mark logic that 30%, we didn't see in 2023.
Speaker Change: To occur in our first fiscal quarter and to a lesser extent in our second fiscal quarter.
Speaker Change: Also.
Speaker Change: <unk> revenue model is comprised mostly of term based licenses.
When combined with some of our other products, which employ a similar revenue model.
Speaker Change: Most notably chef and data direct.
Speaker Change: It's fair to say that approximately one third of our product revenue will be recognized under an on prem.
Term based license model.
Speaker Change: As a result, the timing of contract renewals, especially multiyear contracts will have a more significant impact on our revenue in any given quarter and could skew results higher or lower.
Speaker Change: We will therefore continue to focus on <unk> as a way to cut through the noise in 2024.
Speaker Change: And we expect.
Speaker Change: We will continue to grow at a level, that's generally consistent with 2023.
Speaker Change: The final point I'd like to highlight is that absent any acquisitions. We anticipate we'll continue to aggressively repay the revolving line of credit that was used to partially finance the mark logic acquisition and by the end of fiscal 2024, we expect.
Speaker Change: That we will fully repay that revolving line of credit driving our net leverage ratio down to approximately one five times.
Speaker Change: With all that said.
Speaker Change: For the first quarter of 2024.
Speaker Change: We expect revenue between 100.
Speaker Change: And 80 and $184 million and earnings per share of between $1 12, and $1 16.
For the full year, we expect revenue of between 722% and $732 million representing.
Renting between three and 5% growth over 2023.
Speaker Change: We anticipate an operating margin for the year of 39% to 40%.
Speaker Change: We are projecting adjusted free cash flow of between 202 and $212 million.
Speaker Change: And we expect earnings per share to be between $4 58, and $4 68.
Our guidance for the full year EPS assumes a tax rate of 20% the repurchase of $45 million in progress shares.
Speaker Change: And approximately 45 million shares outstanding.
Speaker Change: Our share buyback activity in 2024 is meant to address potential dilution from our equity plans.
And while we believe that share buybacks and dividends can provide shareholders with a good return.
Speaker Change: Our M&A track record over the past three years has delivered superior returns for our shareholders and for that reason disciplined accretive M&A will continue to be the top capital allocation priority of our total growth strategy.
In closing, we're excited to deliver strong financial results across the board in the fourth quarter, a continuation of the trend we saw for all of 2023.
We're thrilled with the integration of Mark logic, and how it positions us for the future and we believe we're on track to deliver a great 2024 and beyond.
Speaker Change: With that I'd like to open the call for questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question Press Star one again 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 standby while we.
Speaker Change: We compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: And our first question will come from the line of pendulum Bora with J P. Morgan Your line is open.
Pinjalim Bora: Oh, Great Hey, guys congrats on the quarter.
Pinjalim Bora: I wanted to ask.
Wanted to ask you on Mark logic now that you have integrated.
Pinjalim Bora: Mark logic, what are you hearing from the market logic customer base in terms of innovation that they would like to see and I know you don't focus on cross sell as much but is there any opportunity for cross sell that that youre seeing in that base and one for Anthony what is the dollar contribution from oncologic. This for the full year.
Pinjalim Bora: So.
Pinjalim Bora: I'll take the first part and then Anthony can talk about.
Revenue contribution in FY2023 so.
Pinjalim Bora: Benjamin.
A lot of interesting things one.
Pinjalim Bora: It has come out loud and clear is that the <unk> product and <unk> and some of our combined.
Pinjalim Bora: Designed as a underlying database system and it really requires a fair bit of.
Pinjalim Bora: Well to start getting value out of it and the time to value is a bit longer than we would like to see so we've actually been working on throughout this past year. The team has been and we've just sort of in the process of coming out with it.
Pinjalim Bora: Fast track option as an add on to the product to really accelerate the ability for folks to.
Pinjalim Bora: Be able to create data driven applications.
Pinjalim Bora: Rather than start from scratch, so so thats something that retro medically excited about in terms of the type of innovation. The other type of innovation that they have.
Pinjalim Bora: We have gotten that we've actually already addressed was how can they use mark logic in summer for to take their existing data and potentially augment and to be honest.
Pinjalim Bora: <unk>.
Pinjalim Bora: May be generative AIA answers from standard.
Pinjalim Bora: <unk> tools that are out there to be specific to their business.
How do they make it without having that data go out of their environment and so we have created.
Pinjalim Bora: Sort of additional offerings around that to make it easy for folks to leverage their internal data and.
Pinjalim Bora: And therefore create in context.
Pinjalim Bora: Relevant to their business our non hallucinogenic.
Pinjalim Bora: <unk> type of answers so that is the bullet two of the things that we've already done.
Pinjalim Bora: In terms of cross sell pendulum.
Speaker Change: Yes, as you know when we build our business model for these things, we do not take into account.
Speaker Change: Cross sell because we want to make sure that the business.
Speaker Change: We will be able to generate shareholder value without relying on that that said, we do see cross sell opportunities I think that.
Speaker Change: Our digital experience products can truly help.
Speaker Change: Logic customers do a better job of.
Speaker Change: Presenting the information and creating data driven applications much more easily.
Speaker Change: In fact, our fast track offering leverages some of those.
Speaker Change: The.
In addition to that.
Speaker Change: The opportunities for these environments, which are large scale environments and these applications that are complex applications to have in our Dev ops and tech ops capabilities. So far looks like chef. We also see a product like <unk>, which is our decisioning engine.
Speaker Change: That can also be used by these companies and these organizations too.
Speaker Change: Further augment the kind of business logic that they need to apply to their mop logic data. So there are some opportunities, but I want to sort of be a bit careful we are just starting that effort of Boeing going into that customer base and offering that those will also have just started bringing.
The value of oncologic and several other customers I think 2024 will be a year for us to see if those cross sell opportunities materialize in something that is worth talking about on this call. So so we are early in the timeframe.
Speaker Change: Yes.
Speaker Change: To take the second question pendulum.
Speaker Change: When we acquired Mark logic, we had mentioned that it was roughly a $100 million business, maybe a little bit more.
Speaker Change: And we thought they would do probably $70 million for the year in 2023.
Speaker Change: The business came in just slightly ahead of that so just north of $70 million in fiscal 'twenty three it was the number.
Got it thank you very much.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of.
John with Oppenheimer. Your line is now open.
John: Thanks, guys, maybe a sort of a few yogesh.
Our next call you sounded very upbeat on.
John: The potential for M&A kind of like the valuations are finally, starting to come into direct.
John: I wanted to come.
John: And.
John: We're now literally a year since Mark logic, maybe you can give us an update on what do you see out there.
And how would you rate the odds of a.
John: Another acquisition.
John: And 24.
John: So.
John: Youre absolutely right, we have been very active in the M&A.
John: Space.
John: We are looking at companies, we are competing for them, we're actually interestingly enough.
John: We have said no to a lot of them because we felt that they just did not meet our.
John: Brachia of being really solid businesses that we wanted to own at any price to be honest.
And given where we are and given what we are seeing I feel truly confident that we will do an acquisition in FY 'twenty for now.
John: I also want to make sure people do understand that you might take.
John: Two to tango as they say right and so the sellers have to align with us as well, but yes, we feel good we feel really good about the pipeline we feel really good about the activity we feel really good about the policy issues. We've had over the last second half of FY2023.
To feel that whenever we have engaged they have been meaningful and they have been.
That's something that we're going to need in the middle of and pickup things. So.
John: Sure.
John: I am confident that high that we will do something in FY 'twenty.
John: Okay.
John: And then on the financial side.
John: You gave a quite interesting review on the enhancements you've made to the portfolio.
John: But kind as to answer in his comments on the year it sounds like.
John: Theres literally.
John: Zero core growth that you're expecting with the.
John: The business outside of the incremental contribution from <unk>.
John: What's not caught in 'twenty three.
John: For the guide maybe really zero growth in the core I'm just trying to think why with all the changes within the portfolio. There is no greater opportunity for you to monetize these.
Speaker Change: Maybe going back to the first question over to Jim <unk> enhancements are none of them revenue generating or they're all just experience enhancing as there are no better way to squeeze a little bit more out of this.
Speaker Change: Yeah, Hi, it's Anthony.
Anthony: Good question.
Anthony: Part of this really is and I mentioned, a little bit the timing of contract renewals within the business and 24.
Anthony: We do have a lot more term based sort of the on Prem term based subscription model.
And so the timing of when those contracts renew or when they're set to renew will will influence the revenue quarter to quarter.
Anthony: But again.
Anthony: Also alluded to the fact that we had pretty good IRR growth last year multiple products contributed to that growth and we expect stability in the demand environment. So.
Again quarter to quarter things may move a little bit but over the course of the year I would expect to see IRR growth.
Anthony: Thats relatively consistent with 23.
Speaker Change: Alright, great. Thank you good luck.
Speaker Change: Thank you Scott.
Speaker Change: Thank you one moment for our next question.
And that will come from the line of Fatima <unk> with Citi. Your line is open.
Good evening, gentlemen, and thank you for taking my question.
Either for Anthony or Yogesh. It was interesting from Bahir that move it had a strong performance in the quarter. It was enough for you to call. It out in your prepared remarks, and appreciating that it was an incident, where the business I'm very curious as to.
Speaker Change: How customers have responded I mean, it seems almost counterintuitive that the contributing factor to some of the strength you saw so I just wanted to unpack that.
Speaker Change: A little bit because it seems counterintuitive.
Speaker Change: And then I have a follow up please.
Speaker Change: So.
Speaker Change: Okay. Good to hear from you Fatima.
Speaker Change: So part of it maybe Anthony can add as well.
Anthony: From my perspective, right, we have actually done everything in our power to help our customers.
Anthony: A card in their environment deal with the incident that they faced and move forward and we continue to do so.
Anthony: I am really proud of what the team has done and we're really proud of being able to.
Anthony: Keep our customers and the customers have been loyal to us and it's been it's been a really wonderfully positive.
Anthony: Set of outcomes, obviously huge Allen.
Still a lot of.
Anthony: Unresolved legal issues and regulatory issues, but from a customer perspective, we continue to be very positive about move it.
Anthony you want to add.
Anthony: No I would agree I think there is move it performed well certainly in the first half of 'twenty three.
Anthony: And it held up in the second half of 'twenty three.
Anthony: I would say.
Anthony: We keep an eye on the pipeline.
Anthony: And we want to make sure that we can continue to close deals.
Speaker Change: And retention rates of hub I think remained fairly strong, but we'll measure that over the course of the year right. We want to we want to see how the retention plays out over time, so I'll I'll dial back Yogesh, a little bit I'll be I'll be the conservative one to say, yes. It was a very good year and I think we are.
Speaker Change: Very pleased with the outcome on the top line, but we're still cautious and we're still.
Speaker Change: I would say very focused on where our customers are at and wanting to understand renewal trends and also wanting to make sure that we can continue to build the pipeline. So.
Speaker Change: I think it's.
Speaker Change: It's held up well for sure yes.
Speaker Change: Okay. Okay. That's helpful and since you brought up retention rates.
Speaker Change: Segue into my question around <unk>.
Speaker Change: Youre thinking about net retention rates underneath the hood as you tell us and talk to us about consistent they are.
Speaker Change: Growth trends consistent with this year and the spirit of the question really is we did see that retention rate this quarter that about 100 basis points. So it's not dramatic keeping operating the 101, one <unk> Zip code pretty consistently so.
Speaker Change: Maybe to ask that the prior quarter.
Different lens.
Speaker Change: Expect some of those innovations in the portfolio and pull up the Fox so to speak our net retention rate or any other commentary you might be able to share as you think about that retention rate trajectory in 2024.
Speaker Change: Yes, sure Tim I can I can take that I think I think in the back half of 'twenty three we do have churn from time to time and.
Speaker Change: And I think Yogesh has mentioned this before sometimes it's factors that are outside of our control like like M&A.
Speaker Change: And so I think any slight dip we saw in the back half of the year was associated with a very small number of contracts and one in particular, where there was.
Speaker Change: Two two global financial institutions.
Speaker Change: Emerged and the party that was using.
Speaker Change: Our technology did not come out on top in the integration and so sometimes those things happen.
Speaker Change: And we measure net retention rates on a trailing 12 month basis. So.
Speaker Change: I think as we move through the first half of 2024, we would expect retention rates to be maintained and then start to sort of normalize and improve in the back half of the year again, I think that would be.
Speaker Change: Projection on where the estimate would be there I don't want to guide to a specific number we still are happy 100% or better for us is great.
Speaker Change: I still think for the full year of 2024, there can be some improvement there.
Speaker Change: Perfect. Thank you so much.
Speaker Change: Thank you one moment our next question.
Speaker Change: Okay.
Speaker Change: And that will come from the line of Brent Thill with Jefferies. Your line is open.
Brent John Thill: Thanks, Ken.
Brent John Thill: So if you could just address the demand environment and how you would characterize.
Brent John Thill: Customers are.
Brent John Thill: Feeling today versus six months ago, a year ago.
Brent John Thill: What are you seeing in terms of their overall attitude to spend and how.
Brent John Thill: How you are feeling about the pipeline.
So then we.
Brent John Thill: We continue to see as we even said in our prepared remarks.
Brent John Thill: So to stable continued demand. It is it is a we have a product portfolio that is.
Very much relevant to the businesses, even more so today than it was a year ago, which was even more relevant than the year before and so on as we pick up these new products that address.
Brent John Thill: Additional areas that we can help them with.
Brent John Thill: Demand remains good.
Brent John Thill: We are not seeing any sort of meaningful change up or down I want to be careful about that.
Brent John Thill: I don't think that people are suddenly volume.
Brent John Thill: Maybe there will be no recession, and therefore, let's and I'll spend money like drunken sailors.
Brent John Thill: We're not seeing that we're not expecting that I think by the expecting you to be.
Brent John Thill: Watched.
Brent John Thill: I think people are cautious about their spend.
Brent John Thill: But because of our product portfolio, which helps people optimized expenses, one things better improve efficiency of engineering and development organizations improve operational as an improved security.
Brent John Thill: <unk> the development lifecycle, all those things actually play towards that so I think we see more of the same in 2004 as we did in 2020 at this point there.
Brent John Thill: Yeah.
Brent John Thill: And on M&A in a number of your peers are saying kind of the same things youre, saying.
Brent John Thill: Curious if.
Brent John Thill: Is there one or two points that you would add to what.
Brent John Thill: What's enabling this M&A environment to pick back up is it just more reasonable evaluation is that hey, we've had such a stall out for so long that it's just kind of natural pent up demand like what what what do you think is causing this now.
I think Brent it's all of the above I think that when you look at.
Brent John Thill: One of the examples is VC backed companies if you look at VC backed companies.
Brent John Thill: Their main.
Our plan is IPO exit site and you look at enterprise software IPO exits over the last 24 months and boy. It is sparse right. So if you have a business in Europe <unk>.
Brent John Thill: And you have a business that is absolutely not a rock star business.
Brent John Thill: Youre not thinking IPO in 'twenty four right. So so the question is what do you do you've got you've had two years behind you.
Brent John Thill: And 'twenty two 'twenty, three where disasters from IPO perspective, now 'twenty forest looks like it's gone for that kind of a business and it's unclear whether business that is growing let's say single digits and revenue is ever going to be able to IPO. So what do you do.
So I think people are beginning to get there.
Brent John Thill: Think that founders who will work with these vcs <unk> work with founders are slowly sort of saying look we really don't want to fund your next round and those businesses that need to raise around I think are all potentially.
Brent John Thill: Coming to market and I think they are they.
Brent John Thill: Our opportunity so that's one category.
And then the other category is.
Brent John Thill: Even other businesses that have been owned by sponsors or other entities for a significant media that they kind of look at it as a can we get some liquidity. So I think it is a time. It is a time timing issue for the investors for <unk>. It is a matter of focusing on their winters than not worrying too much about.
Brent John Thill: Yes.
Brent John Thill: Also the Ams.
Brent John Thill: Whereas in the case of sponsors it has some pressure from Lps around liquidity and so on so I think those are the pressures that are bringing the size of those businesses. We are looking at it into the market. We're not really looking at extremely large businesses, we look at businesses in general.
Brent John Thill: <unk>.
Brent John Thill: Plus or minus 20% of our size right, we ideally 15% to 25% of our size is the sweet spot will go somewhat smaller will go to a much bigger, but that's what we like in and so thats in that range, we are seeing quite a bit of activity.
Speaker Change: And then one quick clarification for Anthony I mean, your margins the last four or five years have been pretty much at cruise altitude high high <unk> low <unk> is that is that still kind of the range of of how youre thinking about running the business not maybe not too high so you get growth but.
Is the high 30, <unk> low 40 kind of the right framework to think about for the next couple of years.
Speaker Change: Yes.
Speaker Change: We're 39 to <unk> 40 for this coming year.
Speaker Change: We're not expecting a material change in the margin profile of the business, we've always said.
Speaker Change: We will maintain margins better than 35%.
Speaker Change: I think being in the high Thirty's is certainly.
Something that has that is manageable for us and it's sort of part of our part of our playbook.
Speaker Change: Great. Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And that will come from the line of Ryan Macdonald with Guggenheim. Your line is open great.
Great. Thanks for taking the question.
Anthony you mentioned billings timing was more backend loaded this quarter has that been a trend or was it driven by a few deals in the quarter and how do you think about that in 'twenty four as your business becomes more term license related and more dependent on renewal timing.
Anthony: Yes, it's a good question Ray.
Anthony: It was more a small number of deals we tend to do.
Anthony: There are lumpy deals in any given quarter and certainly in Q4, I think the Q4 dynamics around.
Anthony: The timing of bookings and billings, they usually are different than any other quarter just because it's we've got sales incentives that are.
Anthony: That are sort of focused around that Q4 timeframe.
And a lot of customers in year end or at their Q4 and they are doing.
Anthony: A lot of budget work and negotiation around the quarter. So I think Q4 tends to be.
More challenging just in terms of forecasting the timing of when things are going to come in.
Anthony: And we over achieved on the top line, which we're thrilled about it was a little bit later in the quarter and so that cash pushes into the following year.
Speaker Change: But I think you are right also that as we go into 'twenty four.
Speaker Change: Theres more parts of our business now that are on term based subscriptions.
To the extent that that more multi years come into play or the timing of certain contracts moves from quarter to quarter. It will have an impact on revenue things, maybe maybe lumpy from quarter to quarter.
Speaker Change: I think it will impact cash flow to a lesser extent.
Speaker Change: We could have a situation like we had in Q4, where theres a little bit of a timing issue.
Speaker Change: I think it's more of a revenue impact the way I think about it.
Speaker Change: Some cash flow impact, but but probably a little bit less.
Speaker Change: That makes sense and then maybe another one for Anthony and you guessed if you want to comment that would be helpful. As well. So as we think about just kind of where interest rates have gone and where most I think are expecting them to go which is down next year.
Speaker Change: You talked a little bit about absent an acquisition Youll get your net leverage down to about one five times.
Speaker Change: What do you view as an appropriate level of leverage if you do find the right business and I know it might be deal dependent, but just kind of where your guardrails in this interest rate environment.
Speaker Change: Around leverage.
Speaker Change: Yeah, I think that the interest rates drive a lot in our model right and the leverage levels are sort of the governor.
Speaker Change: In terms of how fast and how big we can go.
Speaker Change: And so I would say three five times net.
Speaker Change: We could creep a little bit higher than that to get a deal done.
Speaker Change: I think wed be comfortable doing that three and a half for I don't think we'd go much above that and I think if we were to take leverage up that high for the right deal.
Speaker Change: We would probably.
Speaker Change: The same as we did for Mark logic, we'd probably start to Delever pretty quickly. After the deal closed if you look back on the Mark logic deal, we probably taken more than a half a turn off of net leverage this year.
Speaker Change: And we started paying it back in Q2, we closed it in Q1, we started paying down that revolver in Q2 and by the end of 'twenty for that revolver would be gone and I think if we were to take.
Speaker Change: Take on a little more debt to do our next deal.
Speaker Change: It would be a similar playbook, where we may lever up to that three five times net or a little higher and once the deal closes and the integration starts we'd start delevering.
Probably pretty aggressively.
Speaker Change: Yeah.
Speaker Change: Makes sense, thanks for taking my questions.
Speaker Change: 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 any closing remarks.
Yogesh K. Gupta: Thank you everyone again for joining us.
Yogesh K. Gupta: We look forward to talking to you again soon have a wonderful evening Goodnight.
Speaker Change: Thank you all for participating. This concludes today's program you may now disconnect.
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