Progress Software Corporation

Welcome to the Progress Software Corporation Q3 2022 earnings call. My name is Darrell and I'll be your operator for today's call. At this time, all participants are in a 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, VP of Investor Relations. Mike, you may begin.

Okay. Thank you, Darrell. uh good afternoon everybody and thanks for joining us for progress software's third quarter 2022 financial results conference call with us today is yogesh gupta the 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 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 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, in particular the section 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, 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 third quarter of 2022, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our third quarter 2022 results, providing highlights and additional financial metrics. Both the earnings release and this presentation are available in the investor relations sections of our website at investors.progress.com. Today's conference call will be recorded in its entirety. and it will be presented and will be available via replay on the investor relations section of our website. So with that, I'll turn it over to Yogesh and we can get started.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us as we discuss the results of Progress's fiscal third quarter 22. We're excited to report that we again exceeded the high end of our revenue and EPS guidance and recorded another strong performance across virtually all products and geographies. We remain confident about our revenues, operating margins, and free cash flow for the rest of the year. Despite strong FX headwinds, we're maintaining our revenue guidance and raising our EPS guidance for the full fiscal year 22. Our results continue to be driven by our total strategy, which combines accretive M&A with 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 continues to deliver consistent performance and meaningful returns to our shareholders. A very important aspect of our business is its predictability and stability. The mission-critical nature of our products result in a steady demand from our customers. This steady demand forms the foundation of our business in good times and in challenging times. leading to a high visibility business model and providing a degree of protection from uncertainties that may impact other types of software businesses. Our third quarter results speak to this trend. Annual recurring revenues continue to grow to $495 million, up approximately 13% year-over-year on an as-reported basis, and 4% year-over-year on a pro forma basis. Net dollar retention rate was again over 100%, coming in at 101.4%. Revenue of $153.1 million was above the high end of prior guidance, as was our EPS at $1. Free cash flow was also impressive for the quarter, and our balance sheet continues to strengthen. Two things to note. Recall that in our third quarter last year, several very large deals closed at the end of the quarter, giving us a huge beat and a tough compare. And of course, FX has had a very strong negative impact of over $5 million in this quarter alone. So in that light, our third quarter results are even more impressive and show that progress is managing well in a challenging macro setting. Demand for our products continues to be strong as our renewal rate. Our execution to meet this demand remains superb, with noteworthy strength in this quarter in Chef, OpenEdge, DataDirect, and Sitefinity. Anthony will provide more details on our numbers, including details on the impact of FX. But before that, let me share some commentary about our business and the macro environment. As we have discussed before, the three pillars of our total growth strategy are, number one, Splendor not profitable core businesses by investing in product innovation and customer success to maximize retention and drive organic ARR growth. Number two, focus on operational excellence to successfully execute and integrate acquisitions, run efficiently, and deliver world-class margins and cash flow. And number three, deploy capital to produce the highest shareholder returns, preferably through accretive acquisitions that are that fit our discipline criteria. We also return value to shareholders through share repurchases. We buy back our stock both as a calculated element of our capital allocation policy, as well as opportunistically if progress shares offer meaningfully better returns. In the third quarter, we bought back shares worth $24 million. Expanding a bit on our acquisition strategy, we have been steadfast in our commitment to only doing deals that meet our strict criteria. That means identifying strong enterprise software businesses with a durable recurring revenue model, high retention and renewal rates, and ones we are confident that we can rapidly integrate within our operating model. It also means acquiring them for the right price, such that the expected return on invested capital exceeds our cost of capital. As a result of our stringent standards, we have passed on numerous deals that did not meet recurring revenue or retention rate criteria. Some sellers have tried to re-engage at significantly lower asking price, but we have remained disciplined because any business we buy must deliver strong returns that are sustainable over the long haul. And while deteriorating macro factors are working in our favor with respect to valuation multiples, private company valuations are still not where we believe they should be. While lower than a year ago, their valuation expectations remain out of line with public markets. So we will be patient and not overpay for the assets we acquire. We continue to be an extremely active contender in the M&A market and seek to be a buyer of choice for companies looking to sell. In order to enhance our ability to efficiently integrate acquired businesses and better serve our customers, we're working to realign our go-to-market product and operational teams. This will improve collaboration among the teams that develop, sell, and support our products. The work we're doing to realign some of our teams will also centralize some shared services, lead to greater systems uniformity and increased operating efficiency. All of this also supports an important element of our total growth strategy, which is operational excellence. Switching to the topic of macroeconomic conditions and inflation. The largest expense drivers in our business are employee-related expenses. and we've worked hard to ensure that we can pay our employees competitively while at the same time managing costs across our business in order to protect our margins. We've done this by focusing on employee engagement. Elevated employee turnover can increase expenses in a business significantly because hiring and training new employees is much more expensive than retaining the great talent we have. We continue to work hard to make progress the kind of place where employees find the work fulfilling, the environment inclusive and authentic. Our employee engagement scores continue to be in the top quartile in the tech industry, and we're proud that our employee turnover remains significantly below the industry average. I want to thank our employees for their ongoing commitment to the success of the company and for making progress such a great place to work. On top of all this, we continue to diligently manage other costs to ensure that we can sustain our margins during this unprecedented inflationary period. For example, earlier this year, we sold our headquarters building and reduced our fixed costs significantly. We also continue to keep a close eye on maintaining some of the benefits of pandemic error reductions in travel and marketing expenses. Our focus on employee engagement and our efforts to continually streamline operations will help us retain our talent while at the same time position as well as we move forward towards 2023. Let me wrap up with a few highlights from our recent global customer event. Just a couple of weeks ago, we hosted Progress 360 in Boston, our largest event in the last three years. CIOs and other executives from our customers and partners, as well as developers, IT ops, and SecOps practitioners from around the globe, joined Progress team members for two days of strategy discussions, training and education, product demonstrations, and collaboration. For me personally, it was wonderful to connect face to face with technologists and business people who use our products to make a positive impact in the world. Most importantly, it was a reaffirmation that our customers love our products and are as enthusiastic as ever about working with us. So to wrap up, Progress is having an excellent year so far. I'm pleased with these outstanding results for the third quarter, and I'm confident we will finish FY22 on a strong note as our guidance reflects. And with that, I'll now turn it over to Anthony.

Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call. As Yogesh mentioned, the third quarter was another exceptionally strong one for progress. Even more impressive is the fact that these results were delivered in the face of significant foreign exchange headwinds and general economic uncertainty, further demonstrating the incredible strength and durability of our business. Jumping right into the financials, I'd like to start 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 Q3 was $495 million, representing approximately 4% organic growth on a year-over-year constant currency basis. The growth in ARR was driven by virtually all our products and was again bolstered by net retention rates, which in Q3 reached a record high, exceeding 101%. In the past, we've talked about the investments we've made in our products, which are aimed at improving the customer experience, and our net retention rates in Q3 illustrate the continuing benefit of those investments. Revenue for the quarter was $153.1 million, which is approximately $3 million above the high end of the Q3 guidance range we provided in June. Relative to our guidance, we saw better than expected results from our DataDirect, OpenEdge, Sitefinity, and Chef product lines. Moreover, movements in foreign exchange rates during the third quarter alone resulted in a revenue headwind of approximately $1.5 million, without which we would have landed $4.5 million above the high end of our guidance range. On a year-over-year basis, revenue increased slightly. However, there are multiple factors that make the year-over-year comparison difficult, including the timing of revenue recognition and contract duration, which we covered in last year's Q3 earnings call, movements in foreign exchange rates, and the addition of CHEMP to our 2022 results. When we consider all these factors, our year-over-year revenue growth in Q3 is reasonably consistent with the growth in ARR mentioned previously. We've provided additional details on the Q3 year-over-year revenue comparison in the slide presentation accompanying our press release I'd encourage you to look at slide number 11 in that presentation for a clear illustration of this point. Turning now to expenses, our total cost and operating expenses were $93 million for the quarter, an increase of $11.6 million compared to Q3 of 2021. The year-over-year increase is the result of two primary factors. First is the addition of KEMP to our business, which makes up the vast majority of the year-over-year increase. And second are increased wages and travel costs. Like most other companies, we are experiencing wage inflation. However, cost management in other parts of our business is helping to offset those increases. Also, we're seeing travel return to a more normalized level in 2022. Not quite where it was pre-pandemic, but certainly elevated from 2020 and 2021. This is something we anticipated coming into the year, and just like wage inflation, solid cost management in other parts of our business is helping to offset these increases. Operating income was $60.1 million for the quarter, an operating margin of 39% compared to 47% in the year-ago quarter. As previously mentioned, our results in the third quarter of 2021 were significantly impacted by the timing of revenue recognition, and as such, year-over-year comparisons are less meaningful. Turning to the bottom line, our earnings per share of $1 for the quarter were two cents above the high end of our guidance range. Moving on to a few balance sheet and cash flow metrics. We ended the quarter with cash and short-term investments of $225 million and approximately $300 million in untapped capacity under our revolving line of credit for total liquidity of $525 million. DSO for the quarter was 48 days, an improvement compared to 54 days in the year-ago quarter. Deferred revenue was $251 million at the end of the third quarter, down slightly from the second quarter, reflecting normal seasonality in our business, coupled with the impact of foreign exchange rates on deferred revenue. Adjusted free cash flow was $39 million for the quarter, up $4 million, or 11%, from the year-ago quarter. During Q3, we repurchased approximately $24 million of progress stock, and at the end of Q3, we have approximately $80 million remaining under our current share repurchase authorization. In the fourth quarter, we will continue to evaluate the market price of our shares along with other factors in determining whether to make additional share repurchases. In the first three quarters of 2022, we have repurchased a total of $75.5 million of progress stock. Okay, now I'll turn to our outlook. At different times in my remarks, I've mentioned the impact of changes in exchange rates on our reported results, and I'd like to provide a little more insight. The primary point I'd like to highlight is the mix of currencies in which we transact is different than the disclosed geographic mix of our business. So when it comes to transacting in different currencies, it's worth noting that more than 70% of our revenue and approximately two thirds of our expenses are denominated in US dollars. This mix of currencies results in a hedge on our operating margins, meaning our operating margin is generally much less exposed to movements in foreign exchange rates than our revenues, and this has been the case during 2022. Now, shifting back to our outlook and starting with the full year 2022, we're maintaining our revenue guidance to be between $609 and $617 million, This outlook includes an increase to our revenue guidance of approximately $4 million, which is offset by a $4 million foreign exchange headwind. To help illustrate this point, we've included a slide in the presentation that accompanies our press release, and I'd encourage you to look at slide number 14 for a clear illustration of this point. We're maintaining our outlook for operating margin for the year at approximately 39 to 40%. We're maintaining our outlook for adjusted free cash flow to be between 185 and 190 million. And we're increasing our outlook for earnings per share to be between $4.08 and $4.12. Our guidance for full year EPS assumes a tax rate of 20 to 21%. and approximately 44 million shares outstanding. For the fourth quarter of 2022, we expect revenue between 157.6 and $165.6 million, and earnings per share between $1.06 and $1.10. In closing, we're thrilled with our financial performance and our outlook for the balance of 2022, And we believe the clear strength in our business and our balance sheet positions us very well to continue to execute on our total growth strategy. With that, I'd like to open the call for Q&A.

And if anyone has a question, it's 01 on your touchtone phone. Once again, it's 01 on your touchtone phone if you have a question. And our first question comes from Phil. Fatima Bulani from Citi. Go ahead, Fatima.

Good afternoon. Thank you so much for taking my questions, gentlemen. Yogesh, I'll start with you. Last quarter you did allude to or offered an inclination towards increasing prices across your portfolio. So I just wanted to get a quick update on that in terms of how you're thinking about the parameters of these price increases. And particularly in the context of the inflationary environment where you are absolutely managing costs, but just curious on sort of the top line inputs from just outright pricing increases across your suite of solutions. And then I have a follow-up for Anthony, if I could.

Hi, Fatima. Thank you. And yes, we did talk about the, you know, what we could do with respect to price increases. And let me share with you sort of the three parts to that answer. Part one is that we have, with many of our software vendors who are our partners, they embed our software in their software, we have long-term relationships and a revenue share relationship where effectively we don't really change the prices or can't really change prices. It's a percentage of what revenue they get. and we collect a percentage of that. So there is a segment there that we can't touch at all. There's a second segment of our customers who, of course, have multi-year contracts. And so when those contracts come up for renewal, we basically continue to look at opportunities, and we are increasing prices. But again, I would like to make folks aware that we have a larger number of multi-year contract customers than one-year contract customers. So, Fatima, we have made changes to some of our prices, some of our product prices. We do have a third category of products, which are in what I would call extremely price-competitive markets, and there we are careful about increasing prices. We sometimes reduce our discounts and so on. So we're trying to use the lever on price the best we can, but I do want to point out that it isn't as though we can take our entire business and go, hey, let's increase price X percent across the board and see that X percent show up in the next 12-month cycle. Did that explain it a bit?

That's very helpful. So we should more or less expect a gradual visible impact versus anything pronounced or anything seasonally pronounced. Okay. Excellent. Thank you. Anthony, just for you, just on the net retention rates, a record high, as you mentioned. Can you remind us the key vectors of expansion on this metric and maybe sketch out the priority sequence of factors that'll help drive and even sustain net risk or net retention rates in excess of 101 percent? And that's it for me. Thank you.

Sure. Sure. Thanks, Bettina. Yeah, the big driver on net retention really is upsell. You know, we We upsell within existing relationships and we continue to grow relationships with customers. I think we tend to be very, very close to our customers. We've got a very strong account, you know, sort of account-based management model in place, a good customer success organization in place, and we invest in the technology so that we understand where our customers are going. And so most of what we're doing to drive improvement in net retention rate has to do with, you know, continuing to grow with customer relationships and continuing to invest in the product so that we're not giving customers an excuse to churn out. So really, I think we're increasing the gross retention rate slightly, and then we're continuing to grow relationships with our existing customers. And really that, you know, for us, You know, there may come a time in the future where we're able to do more with cross-selling products. We don't do a lot of that right now. And so the focus really is on really a level of intimacy with our customers that helps us know where they're going. We make the right investments in our products and continue to grow those relationships. And so, you know, I think that's what our organizations are designed around, and we'll continue to focus there going forward.

I appreciate that detail. Thank you.

And our next question comes from John DeFucci from Guggenheim. Go ahead, John.

Thank you. So I think this is for Yogesh, but maybe, Anthony, you might want to chime in, too. You beat the high end of the revenue guidance by easily this quarter, and you maintain guidance. And I get the $4 million foreign exchange impact since you gave guidance, but you actually beat our numbers by more than that. I guess what does that say about your views on the macro backdrop? I just – just get your sense on that. And I know your business is really steady, but you, you know, I'm sure you're still close to your customers and you talk to them about what they're doing.

Hey, so John, you know, we feel really confident about the way our business is shaping up. I think, you know, Anthony mentioned, you know, I think a slide 14 or something that sort of shows, you know, how, every quarter the FX has continued to negatively impact what we've been able to guide. And so even though the expectation at midpoint looks at the same point, the numbers have gone up in constant currency quite a bit. So we are seeing a healthy demand. We are not seeing demand fall off, which, I mean, if you think about it, over the last three quarters, every single quarter, Especially in constant currency, we have raised our top line guidance every single time. To me, that's just an indication of that. Speaking for customers, we had this great customer conference. People are really engaged. The products that they're using from us are solving real business problems for them that are mission critical. What that means is they stick to us and stick with us and continue to expand as their needs expand. I am really positive about and bullish about where our business is going. You know, obviously, you know, can't do much about FX, but that's the way the world goes. Anthony, do you want to add anything?

Yeah, I would just say, you know, John, we, as has been the case with Progress for a number of years, you know, we probably don't see the same peaks and valleys as other software companies. And so, you know, when When money's free and everything is frothy, you know, maybe progress doesn't see the same upside or same growth in terms of the customer base that we have. But, you know, the flip side is that when times are tough, because of the mission critical nature of the products that we have, you know, the values tend to be a lot more muted for us too. And I think that's what we're seeing right now. We're certainly not blind. to what's going on out there in the macro, and we're staying close with our customers. But I think, you know, the mission-critical nature of the products that we have and the close relationships with our customers have given us the ability to just continue to grow with them. And so, you know, we'll stay on top of it. Obviously, everyone is going to continue to monitor the macro pretty closely, and, you know, progress is certainly going to continue to do that as well. But I think that's where things have been for 2022.

That all makes sense. And if I could, Anthony, one for you, just sort of last quarter, you were really clear that there was a large renewal pulled forward in the year-ago period. So when we're thinking about the compare, although, you know, you put up some really good numbers here. But as we contemplate guidance going forward, is there anything like that that we should be thinking about, any pull-forwards or anything unusual about the renewal basis?

No, nothing unusual. You know, obviously, if you were to look at that Q3 comp last year, that was, you know, revenue that moved from Q4 of 2021 into Q3 of 2021. There's about $10 million of that. And so, you know, when we normalized for that year, I think it provides a reasonably healthy outlook for 21, but also for Q4 of 22. And you also think about the fact that Kemp was part of the business in Q4 of last year. So the incremental contribution from Kemp in Q4 is a lot smaller. So our view is the Q3 results when you normalize them are really strong. The Q4 outlook is strong. As we think about 2023. Obviously, we're not guiding there today, but we'll be sure to call out any, you know, any anomalies in the revenue distribution when we get closer there.

Great. Okay. All clear, guys. Thank you very much. Thanks, John.

And our next question comes from Itai Kidron from Oppenheimer. Go ahead, Itai.

Hey, guys. A couple of questions for me. Maybe, Yogesh, if you... I do want to go back to John's question on macro. Are you seeing any elongation in sales cycles and renewal activity? Do you see customers requiring a few more signatures on closing on renewals? Are you seeing customers maybe reconsidering renewals or pushing them out or downsizing as a result? Anything that I guess you can see that you're seeing out there would be by region as well. If there's any specific call related to that, that would be greatly appreciated.

To be honest, we're not really seeing much of that. I'm sure there are some internal scrutiny going on in organizations, but from our perspective, we've had business close on time that we expected to close in Q3. Obviously, otherwise, putting up the numbers we put up would have been not possible. You know, we've had people expand their relationships with us and continue to do so. You know, I am actually, you know, I know that that is something that I've heard from other organizations and other companies. I think the difference is that, you know, our business is primarily focused around You know, renewals and our expansions are primarily focused around the capacity of the work that people are trying to do. So let me give you an example. If somebody is using Chef for, you know, their environment and their environment scales up because they've actually ended up doing more with their environment and now they have a bigger environment and now they need, you know, more technology. more effectively capacity for deploying software securely or deploying the infrastructure securely using Chef, the deal with Chef becomes bigger with us. So it is because we are in the IT ops side as well as on application development, which is more on the runtime side rather than developing new things, we really see a really solid business right now. So I know that I'm probably going against the stream with respect to what the rest of the world is talking about. But for progress software, that's actually one of our core strengths. Having mission-critical software that people need even when times are tough makes us such a stable.

That's great. Great to hear. And then, Anthony, just on the operating margin, I guess you're closing on a year now on CAMP. Maybe you could talk about what's left to squeeze out of there from a margin or cost standpoint and You know, before Kemp, you had higher operating margins. You're kind of reiterating the same operating margins into the fourth quarter. What will it take for you to get over 140% again from an operating margin standpoint?

Yeah, you know, I think there's probably not much left to do with Kemp as we get into the fourth quarter here. I think from an integration perspective, we've done everything that we need to do. I think the business is performing well. You know, I think as we look out and start to see the contribution for Q4, I think it's a pretty solid contribution, probably generally in line with the business case that we've put out. You know, Kemp will be affected by foreign exchange rates, just like the rest of our business will be, so we'll keep an eye on that. You know, and I think our business generally is a little bit impacted by those foreign exchange rates, and there's probably a little bit of, you know, slight margin there. compression there, not anything like what we would see on the revenue line. I talked a little bit about having more of a natural hedge on the operating income line. We're probably 75% hedged, 75% to 80%, generally speaking, from the negative impact on revenue. But I think Kemp is pretty much chugging along on plan. We'll see how our margins evolve in Q4 and going into 2023. But I think we're feeling like the margin profile is as stable as it's been in a long time for us. Very good. Excellent. Thank you. Yep.

And our next question comes from Anya Soderstrom from Sidoti. Go ahead, Anya.

Hi. Thank you for taking my question. So I'm just curious. You said you have made investments in improving the customer experience, which seems to be very important for you considering you're dependent on your current customer base. Can you just elaborate on what kind of improvements you've done there and what we can expect from those?

Yeah, so Anja, we continually look for better ways to engage with our customers. So there are two areas of investment. One area of investment is in our products, continuing to innovate and making sure that our products continue to be relevant and market-leading for our customers, right? So, for example, you know, right now, for example, our DevTools products for Blazor are absolutely the best on the market. And we continue to see interesting, you know, customer successes. You know, one of the Blazor users, which happens to be the S&P Global Market Intelligence team, you know, the MD there basically spoke about how it has helped them make their apps much more engaging. Obviously, they deal with billions of dollars of fundraising that companies do either through IPOs or secondaries or debt offerings or whatever. I think one of that is, as I said, around product investment and innovation. The second area is around customer success and customer intimacy. Anthony spoke about the fact that our customer intimacy efforts are the ones that basically allow us to keep our customers engaged with us and to us be engaged with them. And so that's where we make investments. But these are not – I don't want you to think of these as incremental investments. We've been making these investments all along, and we'll continue to make these investments. So I don't want to imply, Anya, that we are increasing investments. It's not that. We're continuing to invest the way we've been investing in the past.

Okay, thank you. And then can you also tell us what you see in the M&A market? Are you sort of much more active there now, or you're waiting to see when the prices come down, or what's your sort of approach right now to further M&A?

So we are extremely active, Anya. An interesting thing happened this year, I think, which was quite unusual, I think, a little bit. you know, in July and August for a couple of months in the summer, it seemed like everybody wanted to take a vacation given that they were, you know, in 2020 and 2021, people weren't taking summer vacations. So the deal flow slowed down, right? So the amount of activity in the M&A market in terms of even deals coming on the market slowed down. But that didn't mean that, you know, we didn't stay engaged, just less deals showed up. And we've seen it already pick up this month. So a We are extremely active. We are not waiting. We are looking at the right opportunities and the right type of businesses. And, you know, where it makes sense, we compete, you know, to the right value that we feel is right for our shareholders. I think that's the fundamental process that we go through. So we are extremely active.

Okay. Thank you. That was all for me. Thank you, Anu.

And our next question comes from Brent Phil from Jefferies. Go ahead, Brent.

Hey, guys. This is Phil Yin for Brent. Thanks for taking the question. I guess, you know, could you talk a little bit about the mix of enterprise, you know, versus mid-market customers on your platform today? And where do you want to see this trend over time?

So, you know, the vast majority, so, again, you know, our businesses, I would say I want to break down our business into two major segments first, right? There's a segment about, you know, approximately a third of our business, let's say 30% of our business is other software companies. We have 1,700 other software companies whose products are built on top of our products. They embed our products into their products and then they license those to all kinds of companies, large enterprises as well as mid-market companies. And And, you know, those software companies range from the largest names you can imagine, including Microsoft and Oracle and Adobe and IBM and SAP and others, as well as a whole host of mid-market software companies around the globe. So that's one audience. And really, their customers can be enterprise customers or they can be mid-market customers. Then direct to the market business where we sell to the business, the vast majority of our business is mid-market. We, of course, have phenomenal enterprise customers, and 90% of the Fortune 500 are our customers. I don't imply that we don't have great large customers, but in terms of revenue impact, the vast majority of our business is mid-market customers. And we like that, by the way. We actually believe that instead of elephant hunting, we like the fact that we're able to do mid-market deals and we're able to work with businesses and grow with them as they grow and have a broad base that cuts across a whole bunch of different industries. So we have resilience to a specific vertical industry doing well or not doing well. We have resilience to geographies. We have resilience to sectors. So it is really an important thing for us. And we primarily focus on growing our mid-market presence around the world.

That's very helpful. Thank you. And maybe just one more. Could you just remind us of, you know, the split between the contribution of ARR coming from existing and new customers? And, you know, with Kemp, is that anything different that you saw in Q3?

Yeah, I don't think we've broken out the ARR contribution coming from existing versus new. Obviously, with a business like ours, the vast majority is going to be coming from existing. So I would say significant majority. Kemp, I would say nothing sort of unusual or different in the third quarter. But Kemp overall, when we acquired the business, you know, we expected it to be probably close to 70 million in revenue. And the mix of recurring revenue was a little bit lower than, you know, than what we have in our business. But that was sort of known coming in. And I think there was a drive to improve customer retention rates and net retention rates. And I think we've, you know, I think we're seeing some success with the integration. So nothing, I think, unusual with their ARR model or their ARR makeup relative to the rest of our business.

Understood. Thank you.

And our next question comes from Pendulum Bora from JP Morgan. Go ahead, Pendulum.

Oh, great. Thank you, you guys. Congrats on the quarter. I wanted to ask you about the – go back to the price increase question, which was, I think, one of our first or second questions in the queue. But when I look at the pro forma ARR sequential additions, I think it's something like 9 million. It seems probably the highest in the last eight quarters, at least in my model. Are you seeing any impact of price increase at this point that's kind of helping that number a little bit?

I think, Pendulum, thank you. I think the price increase has a very, very tiny contribution to it. I don't want to say it's zero. I don't want to imply it is zero. There is some impact. But no, it was quite small compared to the rest of it. It's hard for me to estimate that in any quantifiable way, but I think it's extremely small.

Okay, got it. And then, Yogesh, I think you alluded to a go-to-market realignment in your script. I wanted to ask you if you can elaborate on that. Is that kind of folding Cam's two-tier sales motion into the broader organization? Is it something else? Help me understand what you're talking about.

Yeah, so I think it is about a better way to go to market. So we are basically saying which products that we now – we've acquired three companies over the last three years. And when we acquired them, we were sort of running them differently than we would like to run them because we see that certain products can go to market better and we can serve our customers better that way and go to market better. We also want to be ready for – M&A and actually be able to do M&A across our entire portfolio in a much more rapid way and be able to integrate M&A more rapidly. So both those things are driving what we are doing. It really is primarily realigning some of our functions and, you know, not more than that.

Got it. Thank you.

And we have no more questions at this time. I'll turn it back to the speakers for final comments.

Well, thank you very much for joining us on our call today. We look forward to talking to you again soon, and have a wonderful evening. Goodbye.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.