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.