Progress Software Corporation

Good day and welcome to the Progress Software Corporation Q1 2024 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, 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. Mike Michique, Senior Vice President of Investor Relations. Please go ahead.

Okay. Thank you, Sheree. Good to have you back with us. Good afternoon, everyone, and thanks for joining us for Progress Software's first quarter 2024 Financial Results Conference Call. Online with me this afternoon are Yogesh Gupta, President and CEO, and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over our safe harbor statements. 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 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 filings with the Securities and Exchange Commission. Progress Software assumes no obligation to update the forward-looking statements included in this call today. Additionally, please note that all the financial figures referenced on this call are non-GAAP measures, unless otherwise indicated. You can find a reconciliation of 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. This document contains additional information related to our financial results for the first quarter of 2024, And I recommend that you reference those for specific details. We also have prepared a presentation that contains updated supplemental data for our first quarter 2024 results, providing highlights and additional financial metrics. Both the earnings relief and the supplemental presentation are available in the investor relations section of our website at investors.progress.com. Today's conference call will be recorded in its entirety and will be available for replay on the investor relations section of our website. And with that, I will turn it over to you, Yogesh.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us today as we announce the results of our first quarter of fiscal 2024. It was a busy quarter for us, so let's jump right in. Total revenue of $185 million in the first quarter came in above the high end of our guidance, and represents 12% year-over-year growth. Once again, our top line benefited from steady demand across geographies and products. ARR came in at $571 million, which was up slightly year-over-year in constant currency, and NRR was 99%, which again reflects the resiliency of our business and the strength of our customer relationships. Our operating margins were 42% ahead of our expectations and were driven by our strong top-line performance, coupled with solid cost management and the realization of efficiencies as the result of the completion of the marked logic integration. EPS of $1.25 came in 9 cents above the high end of our latest guidance, and adjusted free cash flow was $72.2 million. As you saw in our press release, we are raising guidance for both these metrics as our existing business remains strong on the top line and we continue to run lean. Our balance sheet remains strong and we finished the quarter with cash and cash equivalents of over $133 million. DSOs were 50 days versus 62 last quarter, which is reflective of the timing of collections we mentioned on the fourth quarter call in January. In other news, as you might have seen, we also announced a possible offer to acquire MariaDB, a New York Stock Exchange-listed Irish open source database company who reported fiscal 2023 revenue of around $53 million. MariaDB is used by over 600 enterprises around the globe for their mission-critical applications. As we've repeatedly demonstrated when we've acquired other enterprise software companies, we focus on serving the needs of our customers as evidenced by our net retention rates of around 100%. This makes us the right home for MariaDB. Our possible offer of 60 cents a share represents an enterprise value multiple of under 1.5 times revenue. We believe that this valuation would represent a truly compelling offer for MariaDB's shareholders as it is a significant premium to their recent stock price. We are disciplined buyers and will only proceed if the terms generate value for progress shareholders. Turning to our products and markets, we're seeing customers respond positively to our AI-powered products as these products enable them to rapidly realize the business benefits of AI technologies. For example, MarkLogic and Semaphore enable sophisticated generative AI applications through RAG, or retrieval automated generation. The retrieval augmented generation, RAG, is becoming the most popular method to contextualize and to dramatically improve the accuracy of generated responses. MarkLogic and Semaphore enable our customers to leverage their own proprietary data and content to augment the GenAI capabilities of LLMs. We continue to make advances with AI in our digital experiences products as well. Sitefinity 15 introduced out-of-the-box generative AI capabilities based on Azure Open AI that allows content editors and marketers to generate, improve, optimize, and personalize content at the click of a button. And last quarter, we released our AI-powered observability product, Flowmon ADS, for anomaly detection to help cybersecurity professionals detect, understand, prioritize, and quickly respond to security events. IT operations managers are facing an ever-growing volume of increasingly sophisticated cyber attacks. Flowmon ADS uses AI to analyze the increasingly complex network operations data to pinpoint issues and to provide context around a potential intrusion to help inform an effective response. This product has only been available for a few months, and it's already on the shortlist in two categories of 2024 Cloud Security Awards, namely Cloud Security Innovator of the Year, and Best Network Security Solution. We also continue to offer new SAS AIOps products to complement our existing portfolio. For example, LoadMaster 360 is a SAS control plane for large LoadMaster deployments. The product provides telemetry data that will allow customers to realize the value derived from LoadMaster deployments, which in turn will lead to expansion opportunities and greater renewal rates. Released only a quarter ago, the subscription product is already seeing meaningful customer adoption. And Chef SaaS, which was released in the second half of 2023, has also been embraced by many enterprise customers. Amazon recently announced that the AWS OpsWorks platform will be discontinued, and several of those customers have moved to Chef SaaS. Lastly, we also released a subscription-only version of WhatsApp Gold, which our partners have embraced enthusiastically. We've had several customers sign up within a month of launch and expect that the product will drive adoption of WhatsApp Gold even further. And as always, our workforce product, OpenEdge, performed extremely well as the revenues remained robust and customers remained steadfast in their commitment to that platform. Turning to other recent news, at the very end of the quarter, you likely saw that we announced a convertible notes offering, which was upsized to $450 million and a new $900 million revolving credit facility. These transactions will lower our interest rate and give us more flexibility and greater scale for accretive M&A by fortifying our balance sheet even more. To provide a bit of detail, we used the proceeds of the convertible notes to pay off all of our previously existing bank debt, which carried a variable interest rate slightly above 7 percent. With that bank debt refinanced into lower-cost convertible notes, we were able to amend our bank facilities and put in place a new $900 million revolving line of credit. This new revolving line of credit is three times the size of our prior revolver, and has less restrictive terms, which reflect our solid recurring revenues, durable cash flows, and strong record of executing well on acquisitions. Anthony will go through both transactions in more detail, while I want to share that we're very pleased with the outcome and how it positions us to continue executing our strategy going forward. I want to emphasize that while we now have access to more capital, which we can deploy with greater flexibility, our discipline around our total growth strategy will remain unchanged. We will still target infrastructure software companies that have excellent technology, a sticky customer base, solid recurring revenues, and opportunities for synergies that will allow us to quickly reach our operating margin targets. Likewise, we intend to remain extremely disciplined with respect to how much we pay for a company to ensure that our return on invested capital exceeds our weighted average cost of capital and be watchful of our net leverage ratio. So while we have access to more capital and the ability to move quicker on opportunities, we do not intend to change the model that has been working well for us so far. The opportunities for M&A remain robust, and we remain active vetting deals within our target areas. We continue to feel confident, not only in the availability of quality companies, but also in our ability to execute more than one transaction in a year. Before handing off to Anthony, I'd like to take a moment to talk about Moovit. As you know, we have been very transparent about the Moovit vulnerability in our disclosures, including our recent 10K. As we have previously shared, the attack primarily impacted the on-prem version of Moovit, which is deployed in our customers' environments and where we have no insight. Nevertheless, we rapidly patched and proactively communicated to our customers to help them defend against the attack on their move-it environments. And while move-it represents less than 4% of our total revenues, for progress, every move-it customer is important. We have received very positive feedback regarding our response to the situation And I believe that our customer-first approach to everything that we do has helped us navigate a difficult situation and minimize the impact to our business. It is also important to note that while the SEC and other governmental entities are conducting fact-finding inquiries into the attack on Move-It, the investigations do not mean that Progress or anyone else has violated any laws or that these entities have a negative opinion of Progress. Progress has been fully cooperating with the SEC and other governmental entities in their investigations. While we are currently unable to quantify any potential impact from future proceedings or government investigations, we're grateful for the continued support of our customers, partners, and employees, and we will continue to be transparent, proactive, and cooperative. So to finish up, it was another solid quarter for progress, and our outlook remains positive. Accretive M&A combined with solid execution remains our top priority, and we look forward to the rest of the year with confidence. As always, I want to thank my fellow progressors for their hard work and our investors for their continued support. With that, I'll turn it over to Anthony.