Progress Software Corporation

Today, ladies and gentlemen, and welcome to the Progress Software Corporation Q2 2021 Investor Relations Call. At this time, I'd like to turn the conference over to Michael Pichike, Vice President of Investor Relations. Please go ahead.

Thank you, Keith. Good afternoon, everyone, and thanks for joining us for Progress Software's second quarter 2021 Financial Results Conference Call. With us today is Yogesh Gupta, President and Chief Executive Officer, and Anthony Folger, Chief Financial Officer. Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial operating performance, corporate strategies, product plans, cost initiatives, our integration of Chef, the impact of the COVID-19 pandemic on our business, and other information that might be considered forward-looking. This forward-looking information represents Progress Software's outlook and guidance as of today only and is subject to risks and uncertainty. For a description of risk factors that may affect our results, please refer to our recent SEC filings, in particular the section captioned risk factors in our most recent form 10K. 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, 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 and is also available on our website. This document contains the full details of our financial results for the fiscal second quarter of 2021, and I recommend you reference it for specific detail. We also have prepared a presentation that contains supplemental data for our second quarter 2021 results, providing highlights and additional financial metrics. Both the earnings release and this presentation are available in the investor relations section of our website at investors.progress.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. With that, Yogesh, I'll turn it over to you.

Thank you, Mike. Welcome, everyone, and thank you all for joining our Q2 2021 financial results contest. We're very pleased with our second quarter performance, which exceeded our guidance across the board. We again benefited from increased demand and investment in IT and infrastructure software projects. The positive momentum we carried over from Q1 into Q2 is a validation of our strategy and confirmation of the strategic mission-critical nature of our comprehensive product portfolios. With growing confidence in the strength of our business and two consecutive quarters of strong results under our belt in fiscal 2021, we are again raising full year guidance for revenue, operating margin, EPS, and cash flow. I will provide a summary of the second quarter and some comments on how we're executing on our strategy, followed by an in-depth discussion of our results and outlook by Anthony. Demand for our solutions was again strong in Q2. We saw a continuation of improving demand in all markets in which we do business and across nearly every product line as our customers and partners continue to invest in systems built on progress technology to run their businesses. As more companies shift to cloud-first and mobile-first strategies for their applications, data, and content, our shift OpenEdge, Sitefinity, DataDirect, DevTools, and MoveIt products provide key technologies to address their challenges and support their efforts. What's more, the role of developers continues to grow in importance and complexity within the enterprise. Our applications development, DevOps, and data and infrastructure management products equip developers to develop, deploy, and manage mission-critical applications through their entire life cycle. We're proud to serve this critical ecosystem of over 3 million developers who rely on our products for their ongoing use. In terms of our top-line performance in Q2, OpenEdge once again led the way as the mainstay of our reps, driven by continued strength among our many ISD partners and direct sales efforts. Our other core products saw strength, as companies like news and data giant Thomson Reuters and global shipping company MSC made meaningful additional investments in our DevTools product. While our revenue performance for this quarter was again driven primarily by our core products, led by OpenEdge and the Ipswich products, MoveIt and WhatsApp Gold, our year-over-year top-line growth was driven primarily by the continued success we're seeing with Chef. With a tremendous growth in DevOps and DevSecOps spaces, Chef landed and expanded key relationships with more key customers. New customers for our Chef products include a competitive win at a major U.S. insurer and several significant renewals and expansions with customers in financial services and manufacturing industries, as well as cloud-native companies such as Yahoo! Japan, Rakuten, Etsy, and Pinterest. I'm very pleased that we've already reached the goals we set for expense synergies per share, several months ahead of the timeline we set for the integration when we announced the acquisition. Our progress to date validates our total growth strategy, which I will discuss in detail in a moment. Before doing so, I'd like to spend a moment talking about annual recurring revenue and net dollar retention rates. As you may recall, we introduced ARR, a net dollar retention rate metric, last quarter to provide investors better visibility into the recurring nature of our revenue and to provide more insight into our underlying performance. ARR of $437 million was up 23% year over year on a constant currency basis driven primarily by shares. Our net dollar retention rate exceeded 100% this quarter, driven again in large part by contributions from Chef, as well as DevTools and OpenEdge. These metrics highlight the strength, stability, and durability of our data. Turning to our total growth strategy, we're actively evaluating dozens of opportunities in the infrastructure software space. As we have discussed in other forums, Our deal pipeline is very strong, although we recognize that the market is competitive and valuations remain high. Despite these headwinds, we are pleased with the size, sourcing, and breadth of our pipeline, with the activity of our corporate development team, and with the activity our corporate development team is generating. We remain confident that our M&A strategy is the right strategy for us. I also want to mention that during Q2, we took an important step towards improving our competitive positioning in M&A. In April, we completed an offering of $360 million of senior unsecured convertible bonds, which further strengthened our balance sheet and made us even more competitive and nimble in our corporate development efforts, as it eliminates uncertainty around finance. I want to reiterate, though, that we remain committed to finding the right acquisition opportunity. Any target we consider must meet our strict financial criteria and include complementary products with a substantial mix of recurring revenue and high retention rates. We have demonstrated that when we deploy capital for an acquisition, we maximize city cash flows, optimize expenses and margins, and drive solid shareholder returns in excess of our cost of capital. We remain committed to this strategy because we believe it will allow us to compound shareholder returns well into the future. In addition to remaining patient and disciplined with our total growth strategy, we are committed to increasing shareholder value with focused capital allocation, which balances M&A with a shareholder-friendly capital allocation strategy. When we're not deploying capital for acquisitions, we use our significant free cash flow to return value directly to shareholders. For example, we're one of the few software companies who pays a dividend. We also have in place a meaningful share repurchase program. And, as Anthony will explain, upon the execution of the convert, we purchase capped calls to minimize the potential dilution to current shareholders. Consistent with our focus on shareholder value, our ESG efforts remain very important to asset progress. as we recognize their growing importance to our investors. We continue to monitor and evaluate new global standards for sustainability, metrics, measurement, and reporting, which enhance our already noteworthy corporate social responsibility program. In fact, two weeks ago, we announced the addition of our new Chief Inclusion and Diversity Officer, who will lead our inclusion and diversity efforts and programs around the globe. I'd like to close my formal comments by acknowledging the entire Progress team for their superb execution while at the same time preserving the inclusive culture and the positive environment that makes Progress a great place to work. And I'm so proud of the recognition we have received very recently. The Boston Business Journal highlighted Progress as one of the best places to work in Massachusetts. This came on the heel of Progress being named by Forbes magazine as one of America's best mid-sized employers. And for the second time in a row, Forbes chose Progress as the best employer in Bulgaria, where more than a quarter of our employees are based. We received numerous additional awards, which we've highlighted in the investor deck on our website. And we're immensely proud to have received a 2021 CV for our Progress for Tomorrow corporate social responsibility program. In all, It was an excellent second quarter, another proof point of the success of our total growth strategy. We're continuing to execute well and see strong demand across industries, product segments, and geographies as the world begins to move past COVID-19. With that, I will let Anthony provide the details of our Q2 financial performance, as well as our outlook for Q3 and the remainder of 2021. Anthony?

Thanks, Yogesh. Thanks, Mike. Good afternoon, everyone, and thanks for joining our call. Q2 was indeed another strong quarter for progress. Our results reflect the continuation of the improving demand environment we mentioned in Q1. And again in Q2, we saw stronger than expected results across virtually all of our product lines. Total revenue for the second quarter was $129.2 million, reflecting 26% growth over the year-ago quarter and was $6.2 million above the high end of the guidance range we provided back in March. On a year-over-year basis, Chef is the biggest contributor to our growth. However, many of our other product lines also contributed to growth, most notably our OpenEdge and Ipswich products, MoveIt and What'sUpGold. In addition, we closed the second quarter with approximately $437 million in annualized recurring revenue, representing growth of 23% on a constant currency basis and 3.1% on a pro forma basis. Pro forma results include Chef's ARR in all periods. Our Q2 growth in ARR, although not as significant as our Q2 revenue growth, was still better than expected and primarily driven by our Chef, OpenEdge, SiteFinity, and DevTools products. The mission-critical nature of the applications we power 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 slightly above 100%, with improvement coming from multiple products, including OpenEdge, DevTools, and Chef. Turning now to expenses. Our total costs and operating expenses were $79.5 million for the quarter, an increase of $16.6 million compared to Q2 of 2020. This year-over-year increase is the result of two primary factors. First is the addition of Chef to our business, which makes up more than half of the year-over-year increase. And second are variable costs, such as commissions and bonuses, that are associated with our performance on the top line. Operating income was $49.7 million for the quarter, up approximately 26% compared to the year-ago quarter, and our operating margin was approximately 38 percent compared to 39 percent in the year-ago quarter. On the bottom line, our earnings per share of 82 cents for the quarter was 8 cents above the high end of our guidance range and approximately 30 percent above our earnings per share of 63 cents in the year-ago quarter. Moving on to a few balance sheet and cash flow metrics. I'll start with an overview of the convertible notes offering that we completed during the quarter. The total offering amount, including the over allotment option, was $360 million. The notes carry an interest rate of 1%, a five year maturity, and with privately negotiated capped call transactions, they have an effective conversion premium of $89.88, or 100% of the closing price of our shares on April 8th. The net proceeds from the offering and capped call transactions are $306.1 million. We utilized $20 million of these proceeds to repurchase shares and then used $83.5 million to repay our existing revolving credit facility after the transaction closed. I'd also like to mention that our ending debt balance for Q2 does not reflect the early adoption of ASU 2020-06, the new convertible accounting debt standard. Because of our November 30th fiscal year end, we're precluded from adopting this standard in fiscal 2021. As a result, fair value of the conversion premium on the notes will initially be classified as shareholders' equity, and over time will flow through our GAAP P&L as non-cash interest expense, and at the same time, gradually increase the face value of the debt on our balance sheet. We expect to adopt ASU 2020-06 using the full retrospective method on December 1st, 2021, and expect the updated standard will have the effect of reducing our GAAP net interest expense in our income statement and increasing the carrying value of our convertible debt on our balance sheet to the principal value, less any unamortized debt issuance costs. Adoption of the new standard in fiscal 2022 will have no impact on our reported non-GAAP net income or cash flow from operations. We ended the quarter with cash and short-term investments of $363 million, and having paid down our revolving credit facility during Q2, we also have approximately $100 million in untapped capacity for total liquidity in excess of $460 million. ESO for the quarter was 44 days, an improvement of three days compared to Q2 of last year. Adjusted free cash flow was $55 million for the quarter, up 17 million, or 44% from Q2 of last year. The increase in free cash flow was driven primarily from increased profitability and improved collections in the quarter. As mentioned previously, we repurchased $20 million of stock during the second quarter and at the end of Q2 at $155 million remaining under our current share repurchase authorization. I'd now like to turn to our outlook for Q3 and for the full year 2021. For the third quarter of 2021, we expect revenue between $129 and $132 million, and earnings per share of between 81 and 83 cents. For the full year 2021, we are increasing our revenue guidance to be between $529 and $535 million. The increase is largely due to Q2 strength and our confidence in the remainder of the year. We are raising our operating margin outlook to be approximately 39%, an increase of 100 basis points from our prior guidance. We are projecting adjusted free cash flow to be between $158 and $162 million, an increase of $2 to $3 million from our prior outlook. And we are increasing our guidance for earnings per share to be between $3.46 and $3.50. with the increase driven by continued top-line strength and confidence in our ability to manage costs. Our annual EPS estimate contemplates a tax rate of 20 to 21 percent and approximately 45 million shares outstanding with no additional share repurchases for the rest of 2021. In closing, We're thrilled with our Q2 results and the resurgence that our business has demonstrated. We're well positioned for the balance of 2021 and feel we can continue to execute our total growth strategy with great results. With that, I'd like to open the call for Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. Using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause just a moment to assemble our phone queue. We'll take our first question from Ken Wong with Guggenheim Securities. Please go ahead.

Great. Thanks for taking my question and a solid quarter, guys. I guess the first thing, I'm not sure if Yogesh or Anthony, that's making more sense for either of you guys, but you highlighted chef tracking ahead of schedule on both growth and profitability. Just wondering kind of anything you've seen in the last couple of quarters that would potentially steer you in the direction of maybe, you know, fueling a little more growth or potentially, you know, kind of digging in and extracting more leverage. Any color there would be great.

So I'll start, Ken, and thank you. And, you know, I'll have... Anthony, follow-up. You know, from our perspective, you know, as we said, we've actually accomplished the expense synergies that we were targeting with the Chef acquisition. And, of course, originally the target was that we would get to that, get to those synergies by end of this fiscal year. We've gotten to them sooner. You know, from our perspective going forward, Ken, as you know, our overall target business, you know, continues to be flattish, right? That's where we characterize it, right? And, you know, we might have some times when we do a little bit better than flat and sometimes when we do a little bit worse than flat. But in general, it is a flattish business. I don't think that over the long haul, at least at this point, you know, we see any reason to change that. We are tremendously confident of the way the rest of the year is shaping up. But I think that's about all. I would like to stay on that topic. And, Anthony, I don't know whether you have something to add.

Yeah, no, I think that's right, Yogesh. I think we, you know, we've kind of been on the positive side of Flattish this year, which, you know, we'd certainly prefer to be on that side. And Chef has certainly been a contributor to that, you know, but as have some of our other products like OpenEdge and some of the Ipswich products. So I think we're continuing to execute our plan with Chef. It's a really good quality asset. It's got some growth characteristics. It's ahead of plan on profitability. I wouldn't say that we're necessarily deviating in any way with what we had originally set out to do there.

Got it. Okay, super helpful. And then perhaps just wanted to dive in a little bit on net revenue retention. Seeing that coming above 100%, that's quite positive, a nice step up from last quarter. Should we think that that particular metric has a lot of volatility or just any color on what you think kind of the right range is for that number?

Yeah, you know, it's a good question, Ken. We've been pretty consistently, let's say in the, you know, I would say 97 to 100%. There hasn't been a lot of volatility. Maybe it's been, you know, improving a bit over the past couple of years. So I think you're right. You know, the way we calculate it, it is a trailing 12-month number. So there won't be a lot of quarter to quarter volatility. But, you know, obviously, if the trend changes, I think that'll be apparent in the numbers. But, you know, on the flip side, I think from a business perspective, it's been a very deliberate effort, even since before I got here, to invest in our technology, to invest in customer experience. And those types of investments are things we're going to continue to do. And, you know, I think we're seeing some results from that in terms of, you know, some slightly better retention rate. So, you know, I don't expect, you know, wild swings in the number. And, you know, I think we feel pretty good about the investments we've made to get the number where it is.

Got it. And then if I could just squeeze in one more, and then I'll pass the mic to my peers here. Yo, guys, just wondering, as far as, you know, kind of the business or the product segments, benefiting from just a return to normal on a macro basis. Are there any particular areas that you would say are still lagging that we could potentially see some sort of a tailwind as we look to the back half of the year?

So, you know, Ken, as we've said, right, actually the first two quarters of this year, the first half, you know, we've seen, you know, really outperformance across the entire product portfolio, right? It has been a really sort of interesting to see that as businesses have sort of gotten their head out of the challenges of trying to deal with COVID-19 and started looking forward as to how they want to invest in their longer-term IT projects, we've seen the benefit across the board. We're confident that we will continue to see that. I don't think there's any particular area that is more or less. Obviously, you know, OpenEdge is our biggest product. So from an actual individual dollar perspective, it has been the biggest contributor. But overall, across the board, we're seeing interest. And we're seeing interest whether it is in our network management product with what's of gold. As you know, one of the competitors has had some security challenges there and that has opened up the market for other products like ours. And I think so It has been a set of tailwinds around our products as people move to the cloud, as people go mobile first. They're modernizing their applications. I want to reiterate Anthony's point. Over the last five years, we have talked about the fact that we invest in R&D so that our products are ready so that when our customers want to move forward, our products are available and ready to help them move forward. And that investment, whether it was in, you know, OpenEdge 12 or whether it is in the pre-releases that we do every year with DevTools or now pre-releases we do every year with Chef and all those things are really, you know, our investments in Ipswich products such as MoveIt and WhatsApp Gold, they're all sort of demonstrating that, you know, we have kept our product current and made it so that, they truly benefit and address the challenges that our customers and users face. So I think it's an across-the-board, you know, good conditions and good demand for our products. I don't think there's any specific area that I would highlight first.

Great. Thanks a lot, guys. Thank you, Ken.

We'll take our next question from Daniel Ives with Wedbush. Please go ahead.

Yeah, thanks, and great quartering guide. Thank you. Yeah, so can you talk about with Chef, I mean, what surprised you so far? Because obviously it seems like being coming out of the gate is really working a lot better than maybe even you thought. So as you're talking to customers, what you're hearing from the field, I mean, just give us some sort of anecdotal what you're hearing.

Sure. So I think a couple of, you know, really positive surprises. I shouldn't say surprises, but really sort of positive anecdotes that I want to highlight. You know, when one acquires a company like Chef, you know, Chef is an open source product. There's a large community out there of open source developers that do a phenomenal job of, you know, continuing to innovate in the Chef ecosystem. And so one of the concerns we had was how would both the community of our customers and the community of that open source community, how will they react to progress? And on both those fronts, we have been very pleased that those communities have embraced progress taking over Chef. Some of the larger customers who we've had the pleasure of speaking with, they are all really, really happy that Chef is now backed by a publicly traded software company, that we are a profitable business, that they know that we invest in R&D, that we will continue to invest in Chef, and that we will continue to invest in the open source community as well. And so really phenomenally positive things. I mean, I think, you know, by the way, I think one of the – SAP is a very large user of Chef. I think they publicly put out a blog that says that there are 11 million assets in the cloud. And when I say clouds, I really mean rural clouds for SAP. They are in every cloud you can imagine, including SAP's own. And so they're, I think, like five or six different clouds. You know, they're managing 11 plus million assets, and they have really, really, you know, been excited about the fact that Progress acquired Chef. So I think, to me, that part has been really positive. And I think the open source community, I think, you know, we had an open source community event just about a month ago. Phenomenal success. The open source contributors are continuing to contribute aggressively. So I think, Dan, I'm really happy both on the customer-facing side as well as on the product side. The last part that I want to touch on, and I know that this quite often is ignored. In the end, it is our people that make this happen. And the team that has come over from Chef and the team that we have at Progress that is working with them and the combined teams, the new joint chef team at Progress, that has done an amazingly wonderful job across the board. So I think to me it's just been a very, very positive experience for us. And that has allowed us to do things like we said, you know, get to the synergies, continue to do well on both customer retention as well as, you know, winning new customers and so on.

Now let me ask a question. Does this set a pretty high bar for Anthony and the M&A team to make sure they continue to match the next one? No, because that's what I'm thinking. I mean, for the next one, I feel like the bar is pretty high. Is there a little more pressure on the Anthony team?

Yes.

The good news is, Dan, I think we will, you know, I think that we've got Jeremy Siegel leading the M&A group and Jeremy's fantastic I think the entire team is disciplined around, you know, what the requirements are and sort of what the financial criteria are for us, you know, to close on a deal. And so I think, you know, the company is aligned around it. And, you know, I think we'll be patient. We will find the right asset. And, you know, the team's done a great job really building out the pipeline. And so our ability to source the number of companies we are tracking and You know, there's just been dramatic improvement in all of that over the past 12 months. So the bar is high, but I think we've certainly got the team to get over it. Great. Thanks again.

Thank you, Dan.

Thanks, Dan.

We'll take our next question from Anya Soderstrom, Sedodian Company. Please go ahead.

Hi, and thank you for taking my questions, and congratulations on another great quarter. I have a follow-up on the Chef success. How much of that do you think is attributed to Chef-specific drivers rather than your playbook being more refined, having done other acquisitions before Chef?

I think, Ania, you know, the two aspects, right? On the expense synergy side and getting to them as quickly as we did, that is obviously, you know, our core competence, right? I mean, we have refined that. You know, we did it switch. We did a really good job with that. We'll continue to refine it since and we were able to do it. with Chef as well and get it done faster. So I think that's what we bring to the table. I think there's also core competence and progress around certain interesting areas, like how we do marketing and demand gen and so on and so forth. That said, I think the Chef team itself is really remarkably good and strong. And they have done a great job. And it's in a good market. I mean, the DevOps and DevSecOps markets is a market that is growing, is a market where we see continued demand, is a market where, you know, as people move to the cloud and try to deploy their mission-critical systems in the cloud, you know, they need products like Chef. And we have an amazing product. So I think it's a combination of things, Anya. I think progress can take some pride that you're bringing some things to it. And I think the folks that came over from Chef can take pride that they are bringing something to the table. And we happen to also have an asset in a really good market. So I think it's an all-round, really good asset for us.

Okay, thank you. And also, in terms of the M&A environment, how has that changed over the past couple of months with a little bit more... Warning about the inflationary environment and things like that. Has that affected the M&A pipeline at all?

I'm not sure I understood the last part of your question, Anya. What part of the environment?

So if there's going to be a more sustainable inflationary environment, is that affecting your M&A pipeline at all? And how has it evolved over the last couple of months?

I think, as we said earlier, the valuations continue to be high. What that means is that we continue to be disciplined. It's kind of an interesting thing. This is one of the reasons why we feel confident about our strategy. We have a strong pipeline and we have a team that is doing a great amount of deal flow and continuing to nurture and grow that pipeline. And at the same time, as Anthony mentioned, we have a leadership team that is truly disciplined around making sure that we stick to our criteria and that we deliver the shareholder returns that our investors expect from us. And I think that's really the key. So we will continue to be patient. we will look for the right assets and we will make sure that we, when we find the right assets, that we execute on it with the same level of rigor that we have with Chef lately and Ipswich before that.

Okay, thank you. And then just last one. Is there anything you can call out in terms of the performance in terms of the different geographic regions you're working

Again, we saw strong performance across geographies. I think if you think about it, the U.S. I think is actually probably in the best shape when it comes to moving beyond COVID. I think Europe is coming along. I think parts of Asia Pacific are still a little bit you know, behind in terms of timing. And I think Latin America is probably the slowest to recover because, I mean, I'm sure everyone's heard, you know, the challenges in Brazil, right? And Brazil is the single largest technology market in Latin America for progress. So I think, but overall, I think, you know, we look across the board. I think we see improvements happening everywhere.

Okay. Thank you. That was all from me. Thank you, Anya.

We'll take our next question from Mark Chappell with Benchmark. Please go ahead.

Hey, guys. Hey, Mark. Thanks for taking my question and nice job again on the quarter. Yoga, starting with you, with respect to the open edge strength in the quarter, was it principally driven on the ISV side of the business?

Again, Mark, on both sides. Of course, ISPs had a continued strength as well, but even the direct side of the business. It's an interesting thing, Mark, what is happening. I think businesses are recognizing that they have their mission-critical applications sitting on a platform that is truly... a lowest cost platform, the most efficient platform, and a platform that we have continued to evolve and keep modern. And so what we're seeing is, I think to some degree, I think actually, you know, COVID made people look at their, you know, sort of investments and say, you know, where is it that we have investments that are truly delivering great results? And maybe we should do a little bit more with that. So we're seeing both direct and ISPs. Of course, ISPs are doing well, you know, so that's always wonderful. But we're also seeing strength in direct.

Okay, great. Thanks. And then shifting to Chef, if I recall correctly, when it was acquired, it was a mid-single-digit grower. And based on the good two key results, is it fair to assume that Chef continues to grow at at least that rate?

I was just going to say, yeah, we don't break it up separately, but I said the trend line really hasn't changed.

Chef continues to perform well, and so on a year-over-year basis, I don't think we've seen a change in the trend line there.

Okay, super. And then Shifting gears to DataDirect, very little commentary about DataDirect, if at all, in the prepared remarks. Any color on that business that maybe you could add? So, for example, renewals coming in as planned?

Absolutely. Yeah, this is performing very much as planned. You know, as you know, Mark, with DataDirect, the quarters are lumpy because of the fact that there are multi-year contracts with large ISPs, right? And so in that sense, this was a, you know, relatively straightforward, quiet quarter. You know, it did well, but nothing, you know, nothing to sort of highlight one way or the other. You know, we, by the way, you know, in Q1, right, we had actually won a couple of new customers on the direct side, on the direct enterprise customers with DataDirect, which was a positive surprise, and we talked about it. This quarter was just a normal, pretty straightforward quarter down the middle.

Okay, great. That's all for me. Thanks. Good job again.

Thank you again, Mark. Appreciate it.

We'll take our next question from Atai Kidron with Oppenheimer. Please go ahead.

Thanks, guys. Great quarter. Very nice performance there. I just had one question for you, Anthony, on the free cash flow. Great quarter. Great performance there. But your annual guidance suggests a big deceleration here in the second half of the year. So help me think about the puts and takes of your annual free cash flow guide.

Yeah. It's a great question. You know, the free cash flow in the quarter was really strong. And, you know, obviously for the first half of the year, we've delivered about $102 million in free cash flow, which is you know, a heck of a lot further along than we thought we would be. And, you know, a little bit of that is sort of better collection activity. And I think when we look out to the back half of the year, you know, we're probably a little bit more cautious, assuming that we may get back to things like travel and get back into the office a little bit. So, you know, we felt comfortable taking that guide up a little bit but probably also holding a little bit back, just wanting to see, you know, how much of the travel comes back and how much of the in-office operating expenses come back. So, you know, if it's not sort of a linear move, maybe with margin or something like that, I think that's really the reason why.

Got it. So it sounds like you're expecting, I guess, margins to – you actually raised your outlook on margin actually for the year, though, to 39. So it doesn't sound like you're modeling much in your assumptions as a decline in operating margin the second half of the year.

Yeah, no, not from where we are now, perhaps a little bit relative to where the back half of 2020 margin shook out. Got it.

Very good. Thanks. Thank you.

Ladies and gentlemen, this does conclude today's question and answer session. At this time, I'd like to turn the conference back to Yogesh Gupta for any additional or closing remarks.

Thank you. Thank you for joining our call today. I'm genuinely excited about our performance in Q2, and I'm pleased to share our confidence in the outlook for the rest of 2021 with you. I'm especially proud of the dedication of our entire organization and their continued hard work. which really positions us well as we continue to execute our total growth strategy. I look forward to talking to you all soon. Thanks again, and goodbye.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.