Progress Software Corporation

Welcome to the Progress Software Corporation Q2 2022 earnings call. My name is Darrell, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchtone phone. I will now turn the call over to Mike Michike. Mike, you may begin.

Okay. Thanks, Darrell. Nice to have you back with us this quarter. Good afternoon, everybody. And thanks for joining us for Progress Software's second quarter fiscal 2022 financial results conference call. With us today is Yogesh Gupta, President and Chief Executive Officer, and Anthony Folger, our Chief Financial Officer. Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our acquisition of Kemp, the impact on our business of the COVID-19 pandemic and the sanctions against Russia, and other information that might be considered forward-looking. This forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties. For a description of the risk factors that may affect our results, please refer to our recent SEC filings and, in particular, the sections captioned Risk Factors in our most recent Form 10-K. Progress Software assumes no obligation to update the forward-looking statements included in this call, whether a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss 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 2022, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our second quarter 2022 results, providing highlights and additional financial metrics. Both the earnings release and this presentation are available in the investor relations section of our website at investors.progress.com. Today's conference call is being recorded in its entirety and will be available via replay on the investor relations section of our website. With that out of the way, I'll now turn it over to Yogesh.

Thank you, Mike. Good afternoon, everyone, and thank you for joining our second quarter 2022 earnings conference call. I'm extremely pleased to share with you the details of another great quarter for progress, where we again exceeded expectations across the board. Our results were driven by our total growth strategy, which layers accretive M&A upon a highly profitable and predictable business with strong recurring revenues and very high retention rates. Our disciplined execution of this strategy over the past several years has resulted in consistent performance that is delivering meaningful returns to our shareholders. Against a challenging macro backdrop, our second quarter performance was strong and our outlook for the remainder of fiscal 22 and beyond remains healthy. A very important aspect of our business is its predictability and stability during times of economic turbulence. Demand for our product remains steady and positive, as progress products are mission critical for most of our customers. Even when post-COVID demand helped to deliver upside to our guidance in the recent quarters, the reliable recurring revenues from our large install base of global customers still form the foundation of our business. This, combined with the mission-critical nature of our products, leads to a high-visibility business model and provides a natural hedge against uncertainties that may impact the budgets of other types of projects. The results of our second quarter speak to this strength. Revenues and earnings, again, finished above expectations and exceeded the top end of our guidance, thanks to the continuation of strong sales performance and the stickiness of our products. Total revenues during the quarter grew 19% year over year at constant currency, and operating margins came in at 41%, driven by the strong execution of our total growth model and healthy expense management. Annual recurring revenues continue to grow, up 13% on an as-reported basis and 3.5% year-over-year on a pro forma basis to $486 million. Net retention rate was again over 100%, coming in at 100.9% and continues to be a key driver for the business overall. Free cash flow was also ahead of plan, and our balance sheet continues to slim them. The develop, deploy, and manage software ecosystem we serve is vital to our customers, especially as they scrutinize their investments in new projects and other technologies. So it is increasingly important for Progress to continue innovating our products and remain relevant to our customers. As an example, we recently launched our new Progress Chef Cloud Security product, designed to help organizations around the world ensure that their native cloud, multi-cloud, and hybrid environments are safe and secure. This product builds on our commitment to deliver a unified and scalable platform that enables our clients to accelerate the delivery of secure and compliant application releases in any kind of environment. We also launched Movit 2022 with advanced capabilities to further secure and simplify the movement of mission-critical data across cloud and on-prem infrastructures. And we delivered Telerik UI for .NET MAUI on the same day that Microsoft made the .NET MAUI framework generally available. The impact of our ongoing drive to invest in our products and in customer support and success efforts is reflected in our retention rates and increasing recurring revenues. While we remain judicious with our investments in these line item costs, we invest where needed because we know that there's much more expensive to replace a customer than it is to retain one. Let's talk a bit about inflation. First, inflation has created an opportunity to increase effective prices wherever possible. A significant portion of progress revenue comes from over 1,700 ISVs who embed our products in their offerings and have either revenue sharing or some form of royalty arrangements with us. As many of these companies raise the prices of their products, we indirectly benefit. We also have a variety of contract agreements with a large number of customers and partners which results in a variety of methods by which we pursue price increases. For example, in some cases, we may increase price at the time of renewal, and in other cases, a price increase may take the form of reduced discounts. We've successfully begun to implement this where we can, and we continue to look for more opportunities. On the expense side, the labor market remains tight. Experienced personnel are harder to find. and command a higher premium. We believe that it's significantly better for our business and less expensive to keep good employees instead of recruiting and training new ones. So we focus our energies on employee retention. We continue to be rewarded by a turnover rate which has averaged about 1% per month over the past 12 months. This is well below the norm of 2% or more among many tech companies, and we are proud of it. We are also proud of our amazing employee engagement, which is a key driver of strong retention and is demonstrated by the positive results of our broad employee surveys. Further, Progress has won 10 third-party awards for employee engagement and corporate social responsibility in the first six months of this year alone. Just last week, Progress was once again honored by the Boston Business Journal as one of the top five companies to work for in the Boston area, making this our second consecutive year of being included on this list. We were also selected by Forbes as one of America's best midsize employers of 2022 for the second year in a row, and by Inc. Magazine for its 2022 Best Workplaces list. Further, we took home our second consecutive CV for Achievements in Diversity and Inclusion and our third consecutive International CSR Excellence Award. And we recently announced the winners of this year's Progress Women in STEM Scholarships, which went to four outstanding young ladies in Bulgaria, India, and the U.S. I'm incredibly proud of these awards and the work it took to achieve them. And I'm very grateful to the whole Progress team for their ongoing contributions to the success of our company. Before moving on to the impact of changing macro environment on our M&A effort, let me share that the integration of our latest acquisition, Temp, which closed last October, is going well. Recall that Temp acquired Flomon in late 2020 and kept the two businesses largely separate. So our TELP integration has essentially been two simultaneous integrations. And I'm happy to report that we've overcome some unique challenges with no major issues or setbacks. The integration is progressing according to plan, and we remain on track to complete it over the next several months. And our optimism continues to grow regarding M&A, the most significant driver of our total growth strategy. Progress remains well-positioned both from a financial and strategic perspective. We're well capitalized, with the vast majority of our current financing facilities fixed at very low rates. Our balance sheet continues to strengthen. Our base of recurring revenues is stable and growing. And our outlook for free cash flow is favorable. All this, combined with our prior successes integrating acquired companies, equips us well to remain active in the M&A market as an acquirer of choice. Further, as we shop for the right kind of infrastructure software businesses, we're seeing early signs of a shift towards a more buyer-friendly environment. The IPO window appears to be closed for now. Funding is getting more scarce, and higher interest rates may negatively impact the ability of many of our competitors to lever up. All of these factors will give us the ability to focus on acquisitions that meet our discipline framework for financial returns, product compatibility, and overall fit. So we're happy to remain patient and be very selective in where and how we choose our capital to work. The strength of our capital allocation policy is that it is multifaceted, and we continually evaluate options to select those we believe will generate the highest return for our shareholders. I'm happy to say that compared to the broader markets, progress talk has done well. So we've had relatively few occasions to buy back shares opportunistically amid dramatic market turmoil. Even so, we bought back $26.5 million of our shares in the second quarter, and we'll continue to repurchase shares whenever buybacks produce compelling returns. In all, our second quarter was another solid one. and I'm very pleased with the results. I'm also optimistic about our outlook for the rest of 2022. Q3 is off to a good start, and despite a tumultuous market and an economy with increasing macro risks, I am confident that progress is well positioned to deliver stable and predictable results. With that, I'll turn it over to Anthony to provide details on the numbers for Q2 and the forward outlook. Anthony?