Progress Software Corporation

Good day and welcome to the Progress Software Corporation Q3 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Michique, Vice President of Investor Relations. Please go ahead, sir.

Okay, great. Thank you, Cherie. Good afternoon, everybody, and thanks for joining us for Progress Software's third quarter 2023 financial results conference call. On the line with me this afternoon are Yogesh Gupta, President and Chief Executive Officer, and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over our safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today, and it's subject to risks and uncertainties. For a description of the risk factors that may affect our results, please refer to the risk factor section in our most recent form 10-K and 10-Q for the quarter ended May 31st, 2023. Progress software assumes no obligation to update the forward-looking statements included in this call. And additionally, please note that all the financial figures that we're gonna reference on this call today are non-GAAP measures unless otherwise indicated. You can find a reconciliation on these non-GAAP financial measures to the most directly comparable GAAP figures In our financial results press release, which was issued after the market closed today, the document contains additional information related to our financial results for the third quarter of 2023, and I recommend you reference that for specific details. We've also prepared a presentation that contains supplemental data for our third quarter 2023 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available on the investor relations section of our website, and the address is investors.progress.com. As Sheree mentioned, today's conference call will be recorded in its entirety and will be available via replay on the investor relations section of our website. And so with that out of the way, Yogesh, I'll turn it to you.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us. We're delighted to have a chance to discuss our fiscal third quarter 23 results, share some details about our business, and provide our outlook for the remainder of fiscal year 23. As you've probably seen, progress delivered another excellent performance in our third quarter, during which we hit or exceeded all of our targets. And we have raised our guidance for FY23. So let's jump right in. Our strong performance in Q3 was driven, once again, by sustained demand for our products across all geographies and solid execution from all of our teams. Diligent attention to expenses and total management of our cost structure in an environment of pervasive inflation allowed us to meet our operating margin targets. OpenEdge continued to provide significant strength as our workhorse product, while our digital experience products also performed extremely well. In addition, our digital experience products received Gartner's highest customer choice distinction in the 2023 Voice of the Customer report, Evaluating Digital Experience Platforms, which was published at the end of August. MarkLogic is performing in line with our expectations, integration of the business is on plan, and going forward, we expect MarkLogic to meet the timeline we laid out when the deal closed. This quarter's outperformance again demonstrates that our customers continue to rely on progress technology to run their mission-critical businesses, especially as the level of economic uncertainty increases. Our employees remain highly engaged and motivated. Our ability to attract and retain top talent remains at industry-leading levels. And during this quarter, our employee retention rate improved even further. Anthony will break out all the numbers for you in a minute, but I'm very pleased with our execution on the top and the bottom line, as well as the growth in ARR and our net retention rates, which once again came above 100%. Now, if you recall back to January of 22 on our Q4 21 earnings call, we listed several ways in which progress would show strength through what was then becoming a much different environment than the prior two years, which were broadly dominated by super low interest rates, non-existent inflation, and pandemic-driven spending. We discussed the reliability and cost-effectiveness of our products and the value they deliver to our customers, especially in more difficult economic circumstances. We also talked how the culture at Progress enables market-leading employee retention, which helps us keep our high-quality, highly skilled and experienced people who focus intensely on customer success and drive our high customer retention rates. Because of our continued focus on our employees, Progress once again received numerous awards in Q3, including another Stevie for Achievements in Corporate Social Responsibility and recognition by B2B Media Business Awards by equality and employee care. Driven by employees' efforts, our business has remained largely remarkably steady while the overall economy and market has changed significantly. We will continue to stay focused on our execution and remain extremely vigilant in managing expenses in every part of our business. As for M&A, we still believe that the market for great acquisitions is favorable and improving for us, and we're as busy as ever sourcing and assessing potential acquisitions. Among the trends in the M&A market, the number of private equity deals continue to fall in the quarter along with the valuations of the companies acquired. And with VC-backed companies, down rounds are becoming more common, capital invested is shrinking, and leverage is becoming scarce. VC deal sizes have tended down hard in 2023, especially for late stage rounds. And deal counts are even lower than they were in 2017. So while infrastructure software valuations remain somewhat high, which speaks to the value of the sticky install base and high recurring revenue that comes with good infrastructure products, our corporate development team continues to vet a very encouraging pipeline of targets. In the meantime, we continue to focus on integrating MockLogic, paying down debt, and maintaining adequate financing as we look for the next deal. We've been very active and aggressive throughout the year, and we're ready to pull the trigger again, operationally and financially, when we find the right asset. As previously mentioned, for MockLogic specifically, the integration remains on track and is nearing completion on our planned timeline. As in every other acquisition we've done so far, we've learned some new things and had some new challenges to overcome with MarkLogic, and we're extremely satisfied with the progress we've made. So all in all, the third quarter was right where it should be, and we continue to execute on our total growth strategy. While we aren't immune to the effects of the current environment, the other companies have felt more acutely, we are pleased once again to beat numbers and rate our guidance even in the face of growing macroeconomic uncertainty. Switching gears, after we reported our second quarter back in June, we received a number of questions on how we were using AI, which at that time was making daily headlines. As we know, AI and generative AI are technologies that capture many people's imaginations because they offer real potential for operational efficiency gains as well as opportunities for product advancement. We at Progress have been working pragmatically to use AI where we see potential tangible benefits to our business. AI has been actually near and dear to my own heart for decades. And I came to the U.S. many years ago to do a Ph.D. in AI. I hold a patent in the field of neural networks. And while I was CTO at CA, we devoted significant energy to researching AI and used it in a network management product. Many progress products have been using AI long before AI became the lead story on CNBC every morning. For example, Flomon uses analytic AI to detect and predict network anomalies before they negatively impact the business of our customers. Our Sitefinity product, a key component of our digital experience offering, offers AI-driven customer engagement and personalization of digital content to drive engagement and conversions. And SmartLogic. which we recently acquired in our MarkLogic acquisition, perform semantic AI analysis of data. What is new is generative AI, or GenAI, and larger language models, or LLMs as they are called. We view the GenAI opportunity in two broad categories. First, we're developing ways to use GenAI to make progress more efficient and to be able to grow our top line while controlling cost. We've started using GenAI to help our people do their jobs more efficiently in many functions, such as finding new customers, providing support, benefits administration, talent management and recruiting, legal and contract management, just to name a few. Second, we're leveraging market opportunities created by GenAI. For example, one of the challenges facing businesses when using GenAI is to augment the language large language models with proprietary data in a secure manner to make the output of GenAI specific to that business. Our data platforms combined with MarkLogic products directly address this challenge. Our products make it possible for businesses to augment the generic LLMs with their own information so the output is contextual and relevant to their specific business while keeping their proprietary information secure. Another example is to help application developers build applications more easily. Developers in our digital experience business have been recently working on building a conversational interface tool that uses Gen AI to automatically generate forms, such as a mortgage application, say, from textual prompts. In both the operational and product categories, our efforts in AI are fueled by the excitement and creativity of our teams. But we will only invest where we believe we can drive real, tangible benefits for our business, whether it is product innovation or efficiency improvement. Lastly, let me take a moment to discuss the current status of Moovit. As we detailed in our last earnings call, at the end of May, threat actors exploited a zero-day, which is a previously unknown vulnerability, in Moovit to attack the Moovit environment of our customers. Upon learning of the attack, we quickly patched Movit Cloud and created a patch for our on-prem Movit Transfer customers. Several third-party organizations, including cybersecurity experts and industry publications, have given Progress high marks for our rapid response. As we indicated in our 8K filing, Movit Transfer and Movit Cloud represent less than 4% of our revenue. And while we're incurring expenses related to legal responses and the investigation of this attack, there was minimal impact to our business in the third quarter. It is too early to assess the impact of any litigation. We will continue to provide updates in our Form 10Q filing as we did last quarter. I am very proud of our teams for all their efforts in responding to the vulnerability and helping our customers while still delivering great results across the business. Going forward, as always, we will continue to focus on our customers and keep taking steps to help mitigate risks throughout the company. So to wrap it up, our third quarter was an excellent quarter for progress. We're moving ahead with our total growth strategy, meeting our goals in the overall business while nearing the full integration of MarkLogic. We remain well capitalized and continue to hunt aggressively for the next right M&A deal. With that, let me turn it over to Anthony for detailed financial review and outlook. Anthony?