Progress Software Corporation

Q1 2023 Earnings Conference Call


spk_0: this day and welcome of progress software's que one two thousand and twenty three earnings call at this time all participants are listen only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will meet the press star one one on your telephone you will then here an automated message advising your hands israel to withdraw your question press dar one one again please be advised to today's conferences being recorded or would not like the him the conference over the years speaker mr michael with the k vice president of investor relations please go ahead
spk_1: okay sure if thank you very much good afternoon everyone had thanks for joining up for progress or worse first fiscal quarter twenty twenty three financial result conference call with us today you'll get scooped up president and chief executive officer and anthony folger chief financial officer or before we get started look over staple for safe harbor speed man i'm doing this all we will discuss our outlook for future financial an operating performance cooper strategies product plans costs initiatives are integration of mark logic and other information that might be considered forward looking put forward looking information represent progress soccer'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 the risk factors in our most recent form ten k progress up where assumes no obligation to update the forward looking statements included in this call additionally on this call off the ball the financial figures we discuss our non get measures unless otherwise indicated and you could find a reconciliation of these non gaap financial measures to the most directly comparable gap numbers in our financial results press release which was is issued after the market closed today the document contains the full details of our financial results for the fiscal first quarter of twenty twenty three and i recommend that you reference it for specific details we have also prepare to presentation that contains supplemental data for our first quarter twenty twenty three results providing highlights and additional financial metrics but the earnings release and the supplemental presentation are available in the investor relations section of our website i did investors that progress dot com and today's conference call be recorded in it's entirety and will be available via replay on the investor relations section of our website so that other way let me turn it over to yoga
spk_2: thank you mike i'm good afternoon everyone would delighted that he joined us today for discussion of the results of a fourth quarter of go twenty twenty two
spk_1: as you like be fine i personally of the woman from the first quarter exceeded expectations and items with a continuation of healthy demand across the block across the board and strong indication of the field
spk_2: the integration of mark logic is gaining traction and will continue to exploit going forward we remain well capitalized with strong cash flow of thirty balance sheet managed to the leverage and we continue to drive positive trends and a out our and network and from bait and despite the changing of climate we remain optimistic about our business as you see from a increased forward guidance i looked out by selling some thoughts on the button business climate and how we feel didn't have performing in that environment i will been provide an overview of the forefront and an update on the mock logic acquisition with closed in early february after which i will discuss what we see the fifteen in the i'm in a market given that all happen in the last time we spoke recall that at this time last year a global events unfolded and the economy began to forefront of this where we discussed the attribute that to six of our business that help us whether difficult economic conditions our business does not depend on vast new project that acquire large budget to achieve our target and users of brothers products he by and paying for them often for decades before they started analogy to run their businesses and in times of come on august muslim partner depend particularly heavy on the reliability scalability and cost effectiveness of all the products in our portfolio
spk_3: the godly investing in a way to conquer product line
spk_2: are often don't need to be current and relevant to our customers and partners most important business applications this combined with our outstanding customer support and relationship effort especially when they need of the most continues to drive are remarkably high customer retention rate
spk_4: this ability of the man
spk_5: is what we have seen over the last several quarters
spk_2: even with the increasing global challenges historic inflationary pressures and upward inversely we mean confident about a business you don't go much has changed in the economy
spk_6: and in the world
spk_2: with systemic uncertainty of the new factors and even just a couple of months ago when we reported a dodgy for them
spk_3: let me address that last point for moment
spk_2: on march fourteenth really issued an eight game indicating that we have no more detail exposure to silicon valley bank or signature back while we do not like to admit that kind of instability my primary concern is for the financial well being of progress our customers by investors and our partners i am glad to say that i played facility if a stable and well funded and our ability to obtain financing generate free cash flow pay down debt and if the opportunities present themselves continue to make a fleet of deals remained strong
spk_5: anthony will provide more detail on that in a few minutes
spk_2: sharing some detail cannot not you wonder though the oklahoma to them once again evidence a cost nearly all product lines in virtually all geography or chief benchmarks a r our and neck with intimate would increase significantly aided in part by the contribution from want logic
spk_5: he are the first quarter of two thousand twenty three was up three point nine percent on a pro forma cost and both e who
spk_2: the five hundred and sixty nine million dollars from five hundred and forty seven million dollars a year ago an omnipotent and way to improve go hundred and two percent from one hundred and one percent a year ago revenues came into the hundred sixty six million dollars i had of the high end of guidance which of hundred fifty one million and only then did the water at one dollar my been sent or eleventh thing about the high end of guidance an operating margins what forty four percent also well above the wage we saw notables blimp in our data direct open edge as well as load master move it vitality and flow on products we don't need to be particularly pleased with the momentum apart by can it be a moving cloud products these easier to consume cloud offering give us a meaningful competitive advantage in the market well it's have a happy with customer when with load master employment the to products we acquired clock camp acquisition we're thing improving caption for these two products in broader geography and with more master or though partner mcconnell companies to go as we engage with them in norwegian around the world we also saw on demand for my existing customers who continue to expand the use of ah for products open edge data direct and chef i want to thank all employees around the globe who work tirelessly to drive our success speaking of employees we just completed a periodic company wide array
spk_1: of all our employees with a record participation rate of over ninety percent
spk_2: or employee engagement score of seventy nine percent match of the average of the popcorn pile of new tech companies and i employ net promoter score or the mps is forty which is better than many well known tech companies that have microsoft google and apple
spk_7: now let me down to mock logic for moment
spk_2: as we explain when the deal closed we did not expect mock logic to contribute more than a few weeks to the fourth quarter twenty twenty three and that was the case as the integration picks up momentum in the coming months we see the ongoing improvements in the expense line which we expect to remain manageable and are the guys at work and revenues will increasingly pick him to out the year do remember that moto x p biggest revenue month or december and january
spk_5: and also clear and in november
spk_2: so we still expect to see the biggest revenue him back into one of next year and the first full year of positive impact to the top line in are fully er f y twenty four with of in the meantime we're integrating mob logic employees into the promised family as quickly as possible we've met in person with many of them at well attended meet and greet specialist in california but union new york the uk and poland the field been enjoying and marketing as well as operational came from both sides are already working together and moving forward we are very excited the have a new be made on board and without a pretty warm welcome
spk_5: let's not talk about the changing i'm in a market
spk_2: when we embark on our total good strategy over forty years ago we said that the infrastructure software landscape is populated by thousands of potential target with technology of products that would complement by existing portfolio strong sticky customer bases high degree of the going revenue and have the potential to ramp margin significantly with the synergies that we can achieve both vast numbers haven't changed and as we have commented readily for the last year macro economic factors affecting the i'm in a market continue to me but in our favor more recently that i'm a dramatic events surrounding collapse of se be a causing further repercussion to out a privately funded company and the wifi about equity communities and software
spk_5: the economic reality of as a this video is that it is likely to excavate the need and the sense of urgency for liquidity even an exit strategies for many more companies which played and off it
spk_2: as always we remain disciplined patient and of culminating at least as to potential acquisition we will continue to be selected when it comes to evaluating opportunities as a position myself as the acquire of choice for the management customers investors and employees of the companies we target lastly i want to draw your attention to a fourth annual corporate social responsibility report which we publish just last week and is it is available on our website we have a proud of what we do here activists to help our people our global community and our planet and i happy to share all the ways in which progress in which book efforts have helped and continue to make
spk_8: a difference in the world
spk_9: so to wrap up
spk_2: goblet of mock another very good quarter the mandolin steady and execution across all aspects of our business continues to be support our outlook of positive for the rest of fiscal twenty twenty three and we look forward to the ongoing integration of my logic it always i continue to be grateful to the empire augustine for their efforts and i applaud that teamwork and professionalism
spk_5: with that let me turn it over to anthony for his of it
spk_1: anthony thanks you've yes good afternoon everyone and thanks for joining narco as you'll get mentioned we're very pleased with our q one results which again exceeded the high end of our guy these range on revenue in earnings per share were also very pleased to upload the acquisition of mark logic in the quarter which perform largely line our expectations despite the closing date be a few days later than anticipated thirty two the numbers would start on the top line with they are are which we believe provides the best view into our underlying performance as a reminder er calculation of they are are is presented on a pro forma de sus to include the results of acquired businesses in all periods and in constant currency with all curious presented and our current year budgeted exchange rates
spk_10: i should mention that consistent with as practice we've updated a are using our two thousand and twenty three budgeted rates and as a result the a are that was reported in prior period has changed slightly
spk_1: the changes and material and doesn't alter the trend in a our our growth or the net retention rates that we've been reporting over the past several quarters and to illustrate this point we've included a wide and the supplemental presentation filed with our press release with that we close the first quarter with a or are of five hundred and sixty nine million dollars which represents twenty percent growth on a year over year basis and three point nine percent pro former growth on a year over year basis
spk_10: to be clear the pro forma growth include mark logic and but periods
spk_1: as get mentioned the growth in a our was again driven broadly across our product portfolio by multiple products including open edge mark logic data direct identity move it and are dev tools products a trend that continues to fuel our our our growth is strong that retention with key one race at one hundred eighty two percent in addition to our strong our our growth revenue for the quarter of one hundred and sixty five point six million was well above the high end of the guidance range we provided back in january and represents twelve percent growth on a year over year basis
spk_10: the better than expected performance in the quarter was written by two primary factors first and representing the majority of our over performance was stronger than expected demand for multiple products including open edge data direct move it and love master beyond the product level over performance timing was also a factor in that some revenue that we expected to recognize in the second quarter came in early and was recognized he one
spk_1: this cute to to que one shift with not deliberate and does not impact are fully a results but i highlighted because it contributed a few million dollars of additional revenue to an already strong core turning now to expenses are total carbs and operating expenses for the quarter where ninety three point two million dollars of five percent compared to the prior year and generally in line with our expectations the year over year increase was driven by the acquisition of mark logic and to a lesser extent and expected increase in compensation costs across the rest of our business which we discussed in previous quarters operating income with seventy two million dollars up fourteen million compared to the prior year quarter and are operating margin was forty four percent compared to forty percent in the first quarter of two thousand and twenty two
spk_5: on the bottom line earnings per share of one dollar and ninety cents for the quarter represent growth of twenty two cents year over year and is eleven cents above the high end of our guidance range this over performance relative to our expectation was driven by solid cost management across the business coupled with the pie
spk_1: previously mentioned over performance on the top line our outlook for the mark logic integration is unchanged and we expect to recognize all synergies by the end of the fiscal year moving on now to a few balance sheet and cash flow metrics we ended the quarter with cash cash equivalents in short term investments of one hundred and twenty three million dollars and debt of eight hundred and twenty one million dollars for a net debt position of six hundred and ninety eight million this represents net leverage of roughly two point six times using our forecasted fiscal two thousand and twenty three adjusted ebitda and if we pro forma that even have to consider mark logic synergies arnett leverage crops even further i should also mention that during the first quarter we drew down one hundred and ninety five million dollars from are evolving line of credit to partially fund the acquisition of mark logic our dfl for the quarter was forty two days and improvement of twenty days when compared to last quarter an improvement of ten days when compared the first quarter of two thousand and twenty two adjusted free cash flow was forty seven million dollars for the quarter an increase of two million compared to the prior year this increase in free cash flow was largely attributable to are stronger operating performance compared to the prior your whore during the first quarter we repurchased fifty million dollars of progress start and at the end of the poor we had two hundred and thirteen million dollars remaining under our current share repurchase authorization okay now like the time to our outlook for teaching and the full year two thousand twenty three when considering our outlook for due to it's important to reiterate the point i made earlier about our cue one performing from the fact that some revenue we expected to recognize in the second quarter was instead recognize in first while the timing issues can impact quarterly results again they don't affect the full year with that for the second quarter of two thousand and twenty three we expect revenue between one hundred and sixty eight and one hundred and seventy two million dollars and earnings per share of between eighty eight and ninety cents for the phone year we continue to see strength from the demand environment for are solutions and we're also aware of the macro environment may become more challenging as such for the full year we expect revenue between six hundred and eighty and six hundred and eighty eight million an increase of four million from the midpoint of our prior guidance we expect an operating margin of between thirty eight and thirty nine percent generally consistent with our prior guidance adjusted free cash flow between hundred and seventy five and one hundred and eighty five million again consistent with our prior guidance and earnings per share of between four dollars and nine cents and four dollars and seventeen cents concert and our prior guidance our annual a ps estimate contemplate tax rate of twenty to twenty one percent approximately forty four point six million shares outstanding and the impact of thirty million dollars of share repurchases we're targeting to complete by the end of two thousand and twenty three in closing we're excited to deliver another strong quarter of financial results across the board a continuation of the trend that we fall for much of two thousand and twenty two were thrilled that we'd close the acquisition of mark logic and we believe we're very well positioned to deliver strong results for the remainder of two thousand and twenty three and beyond
spk_0: with that i'd like to open the call for tuna thank you as a reminder to ask a question please try one one on your telephone and wait for your name to the and now to withdraw your question please press or one one again time restraints we ask that you please limit yourself to one question a one follow up question you may then returned to the key please them by while we compile the kill on a roster
spk_11: and our first question will come from the line of sassy my belongings with city your line is open the good afternoon that if it hadn't watched question and that i shall start with new am i wanted to go back to some of your comments around the current level of consistency you saw with respect and the kitchen an ma molokai product adoption and is the and specifically curious on another more and call it technical product that heater t the developer immunity and we've all been there has been sweeping reduction than a head count on that are and encroaching the the technical headcount category for a lot of large companies through i'm curious the can get your perspective on how that is or maybe if not impacting your new a renewal monica beach
spk_2: and prof that for some of those very developer oriented solutions where the headcount trended have actually been very objective would recommend just the follow rampantly i'm down to good for our puppy my thank you for the question for a been a couple of sort of interesting the ones who their that make our business to be honest a little more resilient than the overall good developer ecosystem ah let me share what i mean by that so first of all the vast majority of our what are sort of more you know the developer end developer a products are really are used by a relatively small paint it isn't as the we have you know in large organizations that have an illicit thousands of people using that product and and therefore you know when they cut back the you know that we see meaningful changes their so so we we really are seeing a good slump in our developer tools our business actually over the spent with this this backwater ah be products like open edge you know the development team for small and be not how you know the product from a price from on number developers their place more on transactions and database capacity and so on so many of our developers developer centric products are more platform on which be applications long and therefore we charge for those so to be actual sort of football the the number of for a product them directly out exposed to bjorn developer seeds is very very small and their contribution to brothers was relatively modest and secondly do those are small pains and organizations and for therefore really that in a will not seem to be honest ah a an impact their to date of now you know we we continue to watch that way carefully it is a it is a portfolio that that part of our portfolio is something that ah he is is
spk_11: we were we have fairly short field cycles and and where the short when you have high cost and so we get visibility quite quickly into that but so quiet all looks good not and and he just for you on the free cash flow time i suspect i'm a lot of this has to deal with and the a reiteration on there for your mps targets as well but just curious around and how we should think about the free cash flow cadence over the course of this year has very very strong license quarter this quarter you talk about the pulled forward the dynamic fear our but it it's not terribly apparent as to why for cash flow wouldn't see better follow three own any help keeping kind of give us their with respect her needy or back seat analogy from here at know how that could potentially be dug kill in interpret cash
spk_1: well and that's it for me thank you young you don't generally speaking you wanted the is a reasonably strong order for us and i think on year over year basis because flow was you know my with a little bit better and probably reflected you know that better operating performance are you know when we look at the full year ah there certainly is uncertainty and i would say it's around you know ah increase tax payments with such an once every four that we talked about last quarter arm and are arriving interest rates right at because of to two areas where you know for be somewhat conservative arm it's probably due to some of the uncertainty around from those macro factors but i think as it relates to are operating performance and and performance around the fo the towards franklin the balance sheets ah i'm we felt good about where to one was and you know feel pretty pretty upbeat about the full year i would say
spk_12: the uncertainty around interest rates and the taxes around section one seventy four would be two factors that will keep an eye on
spk_0: make them thank you
spk_13: thank you one moment
spk_0: request that
spk_14: and that will come from the line at ray mcdonald with guggenheim your line is out great thanks for taking the u yes maybe maybe for you to start obviously there's been a lot of changes in the private market says as he mentioned in your script
spk_2: maybe you can talk about your capacity to perhaps to another acquisition not only from a leverage standpoint standpoint a financial standpoint but from an operational standpoint you feel like you're in a position to be opportunistic even as you integrate mark logic over the next couple of quarters
spk_5: so away i think that's a really good question you know so we have a little the way we are organized you know or product portfolio that that of the way the target up article toyota prius specific sub markets with a name for such a software a space at one is allowed sort of the front end development and by
spk_2: i am and than the distal expedient that we deliver our and and to and brought if the support that and platform from the that another do that on the data and an application platform side of things open edge mark logic be that direct fit in there and abilities around the hole in the deploy a manage the the in by and debat def the opposite federal this chef and and up plum on and lord master and and and dove or other network management brought up what's supposed it so so we'll be please sort of groups of products and we have that the themes that actually go to market and and originals a do all the a work around out running that business and as as individual full teams and so apparently the mock logic product of courses in be is isn't the application and beat up platform side business but the data black woman application platform business and so therefore the other two area i think we can easily be and acquisition and and have the operational capacity to integrate ah obviously you know a in it it'll just doing a deal that really doesn't happen overnight
spk_5: so you know if we were to do a deal like we would be ready by the time of that he actually closed so i we actually feel really good about it we can continue to look
spk_2: the one of the things that we have done which i'm truly proud awful with the last three or four years is he agrees die ability to be able to help walk and chew gum at the same time in the sense of integrate one business while the opportunity may arise to to talk while another and if if you notice
spk_1: you know and pointed out that it be complete energy than the integration of fuck my logic facilities will be complete by end of the fiscal year which is less than ten month if you actually look at it ah used to be taught eighteen months and and for we'd be continually reduce that flighty call personally if the short answer is absolutely yes ah be be be answered on the addendum level friday night and company already mentioned that we are in actually quite good shape on the capital side and and and the acquisitions we do especially with the fact that the creative and they generate cash flow themselves i think it not only can be do it but actually they to generate significant castro on their own
spk_14: which increases our capacity to do more self so we feel good about it on both fronts three read the tell for maybe if i could for for anthony the of our third of the team as question i i want to get an understanding for what might be conservative and your guide and cursor because i'm in your guns i should say ah versus some the mechanics in the model especially on on the margins side obviously revenue outperformance performance helped in the quarter but you also called out of control of the wondering how should we think of
spk_10: out the reiteration of of prior guidance on the operating margin side and and where the levers of for upside could potentially come from as as it seems like cost controls were in part of the upside at least in this quarter
spk_1: yeah you're right i think when it comes to and yeah i guess i'll break it up and debt to bed right there's at the operating margin line and then at the dps mine and so from an operating margin perspective i think we felt good about our ability to control costs were certainly aware of tom you know of the uncertainty in the macro as we look forward you know as relates to inflation and and what our cost me wrong to and so we felt like they were that a little bit about signing he won in a good like real performance upside ah i'm and so perhaps where i'm a little conservative that the operating large in line and based on where the macro is ah when you get down to dps wine i think you know that interest expense certainly is something that saw that outside of our control and there's more uncertainty there and i think that rides the you know sort of holding after he won even at a throng he one ah with earnings guide so you know we we sorted counted up and with about wines and i think those were two factors that you know where we would say we feel really good about strengthen the top line
spk_14: ah there's a lot of uncertainty out there and so you know comfortable taking the top line up a little bit we want be a little bit conservative on the on the margins side both operating and dps
spk_0: for it makes sense they have thank you one moment my next question
spk_15: and that will come from the line as pendulum boy i was thinking like and you live without are you guys are thanks for taking the questions and congrats on a quarter i would go to a number seems like a subscription gross margins did really well well was wondering what extended price increases tape player in the performance in the corner and and second part yogesh you have done a good market realignment
spk_2: que three he talked out of that organization has the best best kind of settled and hurricane of nearing an hour mark logic he has up into them i just want to make sure i heard the questions clearly that with a little bit of a challenge hearing you for the first part i think are you asking about whether price increases and what kind of an impact they might have had on the top line i believe and the second part of question was related to the
spk_15: operational realignment that we did around three product portfolio than and how's that going right
spk_2: correct and and how much larger and of fit into that realignment how the hama but not a perfect so alinea over the first course it's pretty straightforward a pendulum as you know come by and large for the vast majority of our products and we have certain relationships where our price increases are even not possible or are rather limited are needed these a multiyear contract ah and and and and fifty or oh yum contracts or i have three contract you know they're based on often on percentage of their revenue and so long so for those things really don't don't have aren't really conducive to to price increases up that said you know we have increased some prices on tomahawk products ah we are not seen ah a ah a lot of far they just don't from the customer based in in those areas but it's not a huge amount and not enough to really have a meaningful impact on our brought up on the overall revenue i think it's a you know the number of contract that come up every year for when you are only quarter that come up for renewal apple or expansion is is is not as much as and stuff as as the whole portfolio isolate it just it well it's i'm i'm more than one year cycle it's actually close to two to three a cycle that we would have to go through sort of the spread if is over a fairly large billion and what we are beginning to see a little bit of advantage from it but i i i let anthony for the to clarify if any anything else as the on that one now you get i think that's right our i don't think we're seeing it really pulled through and the numbers at this point but you know more come yep on the on the early alignment they realignment went really well as i mentioned you know will be aligned ourselves into these freaks plotted boots and be much larger product ah has been moved into the application and beat up platform business though it isn't the same business as data direct as well as open it which my accents right if you think about open ended the database product book an application development language that is specifically in a platform specifically for that database and and and business applications that are built around that much logic is complex data processing and and a database of in it's own right and actually has access to their data ah from the image using language languages like sql so you can actually have a ah a and open a database and an open it application even access my closet betas so we see potentially that that that is something that potentially the market can can now can you may be invested in as you know been doing when we do acquisitions we don't really count on process right that's not that's not our intent but at the same time we still want to make sure it isn't the right place we also see significant as opportunities to leverage bought into direct technology to support and expand the data hub capabilities of mark logic
spk_15: so to all of that being together those two products made a lot of sense and for that's where it is and it is rather early here you know it it's been six weeks since we closed the activision so we're early in the integration phase and then does so far things are things are going well
spk_16: gotta think about
spk_0: us
spk_17: thank you one moment by next question and our next question comes on a line of breath cell with jeffrey july this out
spk_2: hey guys this is though yen on the brand building carried in the question i guess he have any for you your yes on the operational side you provide us with a color on and any your plans headcount bet and where you been focusing on investments in from early and and navy how that breaks down with you your product development and and thousand like an organization
spk_18: so you know their lives a what's interesting is that i'm in terms of i had calmed
spk_2: when we unlike most other software companies you know saw almost a year ago that the world was changing i'm it was relatively obvious i think of ah and so we changed our the hiring dramatically and we ah have made sure that we did not get ahead of us keys unlike unlike many others who did so so we've actually continue to have really really well managed teams and then when we were and then when we brought these products together under please please korea this is than timely are we basically made sure that we had the right level of folks in our in be to continue doing it to make sure that a products could be innovated that the us was could be supported and that we could stay relevant to them ah entered the same time we had enough people in the and go to market side
spk_17: both to retain and expand as well as do some of the new deal that we do need to do made it isn't that that part of the businesses zeal so up so we we feel really good about the balance we have across the business of a you know we are you know we're looking forward to integrating be ah much logic people in into various functions as well and bow and moving forward i i don't see us making significant changes due to headcount in in any part of our business at this point okay grey and maybe a follow up on as good as dead the differently and all performance that and looking at the different and national league and i did you guys that have ah
spk_1: i'm for there are a former without on up you look at it author it more across the entire up your profile that any fighter yeah sure i think they're from a regional perspective on we probably have the most strength in the americas and europe i think age of was was in in line with our expectations but ah you know with all of the activity going on you know sort of across the continent europe certainly with the the conflict still ongoing
spk_19: it's something we're keeping an eye on but i think performance across europe for us across the me a region with strong so yeah i think it in terms of distribution geographically i i don't think that there was any particular geo that really ah drove outsized games or out cause performance it was
spk_0: in a priest wrong across the board
spk_20: okay thank you
spk_21: i'm friends with this time our now it's internal combat our to mr youngest scooped up running cleansing
spk_0: oh thank you operate on thank you everyone for joining on r r r q one earnings all i really appreciate your support and look forward to speaking with you again in three months of and if not sooner

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