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spk10: Good day, and welcome to the Progress Software Corporation Q2 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 Michike, Senior Vice President of Investor Relations. Please go ahead.
spk05: Thank you, Shuri. Thanks for your help. Always good to hear your voice. Good afternoon, everyone, and thanks for joining us for Progress' second quarter 2024 Financial Results Conference Call. On the line with me this afternoon is Yogesh Gupta, our President and CEO, and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over the 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 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. Additionally, please note that all the financial figures referenced on this call are non-GAAP, 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 second quarter of 2024, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our second quarter of 2024 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available in the investor relations section of our website at investors.progress.com. As Cherie mentioned, today's conference call will be recorded in its entirety, and it will be available via replay on the investor relations website after the call concludes. So with that, Yogesh, I'll turn it over to you. Thank you.
spk21: Thank you, Mike. Good evening, everyone, and thank you for joining us as we discuss the results of our second fiscal quarter of 2024. As you've seen in the press release, Progress posted solid results for Q2 with revenues and earnings well ahead of the higher end of guidance and estimates. Total revenue came in at $175 million, driven once again by steady demand and solid execution. Operating margins were above 38%, and earnings per share at $1.09 exceeded the high end of our guidance by 12 cents as a result of the strong revenue performance and good expense control. ARR grew 1% in the quarter to $579 million, and we saw a fractional increase in our net retention rate, which was 99%. Our balance sheet continues to benefit from very strong cash flows, and solid collections, ending the quarter with cash at $190 million and DSOs at 41 days, which is down from 50 days last quarter. We also repurchased around 1 million shares in the quarter, and we still have $122 million remaining under our overall repurchase authorization. Anthony, of course, will provide much more detail around the numbers, but I'm very pleased with our performance in Q2. As we cross the halfway point for fiscal 24, I believe we're well positioned for the rest of the year and feel confident in our ability to continue executing on our plan. Deflecting this confidence, we have raised our full year expectations for revenues and earnings. During the second quarter, Anthony, Mike, and I spent a lot of time talking with investors. Our meetings were excellent and it was good to be back seeing people face to face on a regular basis. There were three recurring themes, the first being AI, the second M&A, and the third, move it. So I'd like to discuss each of these today. Starting with AI, we're extremely excited about all of the AI work going on at Progress. At the core of our AI strategy, the core of our AI strategy is threefold. First, We continue to add capabilities to our products so that our customers can develop, deploy, and manage responsible AI-driven applications and experiences. Our products help customers accelerate their AI journeys by providing the tools and technologies to build Gen AI into their applications and to use AI-driven technologies to meet the needs of their business. Second, we're using AI to make our products easier to use and to drive tremendous efficiencies for our customers in their process of building, deploying, and managing experiences and applications. So embedding AI in our tools makes their job even easier. And third, we use AI internally to improve our own processes and operations to enable us to better serve our customers while driving efficiencies in our business. Newest Progress products offer advanced AI features and we're receiving positive feedback from our customers. Let me share some examples. Our new progress data platform, which is a result of integrating MarkLogic as well as progress technologies, features both semantic and vector capabilities to power RAG or retrieval augmented generation in AI applications. It also uses a semantic layer to validate the output of GenAI models. And the platform provides contextual links to corporate information and knowledge within the responses so users can see where the answers came from, what they mean, and how they are relevant to the business. This drives dramatically better results of Gen AI-powered responses and minimizes AI hallucinations. And it does so with a level of governance and auditability organizations need for their critical enterprise applications. And that's why a global chemical company and a large financial services company are realizing significant ROI by using these capabilities today. In our developer tools products, we offer UI components for easily embedding AI prompts and creating an AI-powered user experience for Gen AI applications. Our Sitefinity product uses Gen AI capabilities to enable marketers to rapidly create, improve, and personalize website content saving content editors tremendous time. Sitefinity also offers AI-powered conversion propensity scoring to make it easy to determine which customer segments are most likely to convert with which messages, dramatically improving the outcomes of targeting efforts. An event marketing company is using this capability to do just that, grow audiences at events. And for infrastructure security customers, the AI-powered version of FlowMon for anomaly detection helps cybersecurity professionals and IT operations managers detect, understand, prioritize, and respond to potential security events faster than ever before. This capability, now being used by over 1,000 cybersecurity experts at our customer sites, is demonstrating a greater than 50% reduction in the time it takes to analyze possible threat events, thereby significantly increasing the responsiveness of those organizations while making them even more efficient at the same time. Going forward, we'll share more about how we're continuing to incorporate AI into our products. We're incredibly excited about the value we're providing to our customers today and what we can provide tomorrow by enabling them to build AI-powered applications and experience. and we're thrilled to see the value we are driving for progress internally with more efficient and effective AI-powered operational systems and processes. Another topic we discussed often with investors was M&A, which remains at the core of our total growth strategy. Our investors trust us to remain patient and disciplined, making sure that any deal we do meets our stringent financial criteria. We have reviewed many companies and continue to do so looking for the right deal for progress. If you recall last quarter's earnings announcement, we included a press release that stated that we were in the process of due diligence for the potential acquisition of an Irish public company, MariaDB. Because we have to abide by Irish takeover rules, which mandate that all steps of any proposed acquisition must be disclosed publicly, everyone got to see parts of our corporate development process in action. And it was a good illustration of some of what we go through every day. We've had a steady flow of acquisition candidates, and at all times, there are numerous potential transactions we're exploring in various stages of viability. We continue to be positive about the M&A environment and our ability to find the right deals, and through diligent and disciplined M&A, which is a key pillar of our total growth strategy, we are confident that we'll deliver on doubling the size of our business in five years. A third consistent theme that came up was, of course, move-in. Last month, we passed the one-year anniversary of the attack on our customers' move-in environment. It is important to note that the business has remained solid. Move-in ARR has grown over that period. Customers continue to be pleased with the way we've been working with them. We previously disclosed that two international data protection agencies closed their investigations of progress and the Movit incident without taking any regulatory action, the UK in last November and Australia in March. Recently, on May 29th, the Spanish Data Protection Authority also informed us that no regulatory action against progress was required in relation to the Movit vulnerability. We continue to cooperate with regulators in a transparent manner because we're confident that progress acted appropriately and with the interest of our customers at the forefront in our response to the attack on their move-it environment. We remain grateful for the support of our customers, partners, and employees, and remain focused on executing our total growth strategy. So to wrap up, Q2 was another solid quarter for progress, marked by a continuation of good demand and outstanding execution in the field and internally. Our intense and unrelenting focus on customer success continues to provide progress with a strong, durable base of recurring revenues. I'm very pleased with the performance in ARR and net retention, along with our significant cash generation. Once again, our outlook remains positive. We continue to be optimistic about the potential for M&A, which remains our key strategic priority. When we find the right candidate at the right price, we will execute. Lastly, before I close, I want to mention that earlier this month, the Boston Business Journal recognized Progress for the fourth consecutive year as one of the best places to work in the Boston area. In addition, Forbes in Bulgaria recently recognized Progress on its list of best employers in that country. While we often discuss our commitment to our customers, these recognitions also demonstrate our commitment to our employees. And I'm really proud of our work environment, our culture, and our people. As always, I want to thank everyone at Progress for their hard work and consistent above and beyond efforts that led to yet another solid quarterly portfolio. Let me now hand it off to Anthony for his prepared remarks. Anthony?
spk05: Thanks, Yogesh. And good evening, everyone. Thanks for joining the call. As Yogesh mentioned, we're very pleased with our Q2 results, which again exceeded the high end of our guidance range on revenue and earnings per share. Turning to the numbers, we'll start on the top line with ARR. We closed the second quarter with ARR of $579 million, which represents approximately 1% growth on a year-over-year basis. Although no single product drove material growth in our total ARR, The 1% growth that we delivered was the result of modest growth in multiple products across our portfolio, including OpenEdge, DevTools, Sitefinity, Loadmaster, Flowmon, and Moovit. We also had another strong quarter for net retention with our Q2 rates coming in at 99%. In addition to our solid ARR growth, revenue for the quarter of $175 million was well above the high end of the guidance range we provided back in March. This better-than-expected revenue performance in the quarter was driven by stronger-than-anticipated demand from multiple products in our portfolio, including OpenEdge, DataDirect, and MarkLogic. Turning now to expenses. Our total costs and operating expenses for the quarter were $108 million, down 4% compared to the prior year, and generally in line with our expectations. The year-over-year decrease in expense was largely because our integration of MarkLogic was ongoing in Q2 of last year, and now that the integration is complete and cost synergies have been realized, we're operating at a lower cost base. Operating income was $67 million, consistent with the prior year quarter, and our operating margin was over 38%. compared to 38% in the second quarter of 2023. On the bottom line, our Q2 earnings per share of $1.09 is 12 cents above the high end of our guidance range. This overperformance relative to our expectation was driven by outstanding top line performance coupled with solid cost management across the business. Moving on now to a few balance sheet and cash flow metrics, We ended the quarter with cash and cash equivalents of $190 million and debt of $810 million for a net debt position of $620 million. This represents net leverage of roughly 2.2 times using our trailing 12-month adjusted EBITDA and roughly 2.0 times using our projected results for the full fiscal year 2024. DSO for the quarter was a bit ahead of our expectations at 41 days, an improvement from 50 days last quarter. Adjusted free cash flow was $64 million for the quarter, an increase of $16 million, or 33%, from the prior year quarter. I'd also like to point out that our adjusted free cash flow for the first half of fiscal 2024 stands at $136 million, which is an increase of 44% over the same period last year. During the second quarter, we repurchased $50 million of progress stock, including $25 million in connection with the issuance of our convertible notes in March. At the end of the quarter, we had $122 million remaining under our current share repurchase authorization. All right, now I'd like to turn to our outlook for Q3 and the full year 2024. When considering our outlook, we continue to see consistent strength in the demand environment for our solutions. And for the third quarter, we expect revenue between 174 and 178 million. and earnings per share of between $1.11 and $1.15. For the full year 2024, we expect revenue between $725 and $735 million, an increase of $3 million from our prior guidance. We expect an operating margin of 39% to 40%, consistent with our prior guidance. We expect adjusted free cash flow between $205 and $215 million, again, consistent with our prior guidance. And we expect earnings per share of between $4.70 and $4.80, an increase of 5 cents from our prior guidance. Our annual EPS estimate contemplates a tax rate of 20%. approximately 44.2 million shares outstanding, and the impact of $103 million in share repurchases. It's worth mentioning that the $103 million in expected share repurchases represents an increase from the $78 million that I noted on our last earnings call. In closing, we're excited to deliver strong financial results across the board in the second quarter. It's a continuation of the trend that we saw in the first quarter, and we believe we're very well positioned to deliver strong results for the remainder of 2024 and beyond. With that, I'd like to open the call for Q&A.
spk10: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Fatima Boulani with Citi. Your line is open.
spk12: Good afternoon. Thank you for taking my questions. Yogesh, I wanted to double click on one of your comments in your script regarding what you're doing from an AI perspective and infusing those capabilities within your portfolio. But you also made a mention that you are internally deploying AI powered operational systems, I think is the terminology that you use. We haven't heard many companies talk about this. So I'd be really curious to get your granular views on how AI is perhaps creating more expense leverage or operating leverage in the business, and how much of that is sustainable and durable and expandable. And then a follow-up for Anthony, if I may.
spk21: Thanks, Fatima. So we are actually using, and I think we, like many others, are probably in early stages of using this, but we are using AI fairly extensively across a wide range of functions. So let me share a few examples. We are using, of course, AI in content creation. So as I'm sure you can relate to this, the role of content creation and marketing is critical. Marketing is always behind the curve on trying to figure out how quickly they can get targeted content for audiences that we want to target our marketing messages to. And by leveraging AI, we are seeing significant changes improvements in the speed with which we can turn around content and be responsive to the needs of the business. So in a lot of these things, Fatima, it's not just sort of trying to sort of get operational efficiencies from a cost perspective. It is also kindliness of responses, accuracy of responses, more effective content, for example, and so on. Another area is, this is an interesting one from the perspective of tech support and dealing with our customer support issues. Very often, technical folks will answer questions, and then what we want to do is, of course, create knowledge-based articles that other customers for that particular question could find it automatically, right? And so that they don't have to talk to somebody. Now, that's a laborious task. Nobody really enjoys doing it as much. Again, we're using generative AI to automatically generate a knowledge-based article that then is edited and reviewed by the technical person who has answered the question to begin with, and thereby, again, simplifying and reducing the time it takes for that to be created. We're seeing, for example, in that scenario, 50% to 75% improvement in the responsiveness, how quickly we can get knowledge-based articles created for a particular issue. We are at the early stages of looking to apply GenAI to really analyzing our customer contracts. I mean, the opportunities are, to be honest, quite endless. And we are also deploying the Progress Data Platform internally as well for customers For example, the legal contract review process and other things so that we can leverage internal corporate data. One of the most key challenges with using AI today is how do you make sure that your information, your knowledge, your data stays secure, stays private, is governable, while at the same time you take advantage of LLMs and other AI technologies. And our data platform is actually designed to do just that. And so therefore, to us, being able to also use our own products and demonstrate that we can use them and we can be beneficiaries as well is also important. Early to say, Fatima, in terms of expense reductions and sustainability, but as we get data on those, we will come back and share that.
spk12: I appreciate that very detailed answer, Yogesh, and like to hear that you're drinking your own champagne. Anthony, just on the maintenance and services performance in the quarter, it was certainly much better than what we were modeling and what most folks were looking for. Wanted to ask if there's anything atypical or outsized to highlight here vis-a-vis any early renewals or timing of any contractual relationships and renewals That's it for me. Thank you.
spk05: Yep. No, Fatima, you know, I think it was a reasonably good quarter from a renewals perspective. You know, we did see a slight improvement in our net retention rates. And we saw, you know, if you were to look at the sequential movement in ARR, you know, there was a nice uptick from Q1 to Q2. And so it just felt like a you know, a slightly better quarter across the board when it came to renewal and net retention rates. So I would say nothing that looked like an anomaly, nothing really from a timing perspective that would have driven, you know, an outsized performance on the maintenance and service lines.
spk04: Thank you so much.
spk03: Thank you. One moment for our next question.
spk10: And that will come from the line of Pendulum Bora with JP Morgan.
spk19: Great. Hey, guys. Thanks for taking the questions and congrats on the quarter. One question for you, Yogesh. The MarkLogic acquisition, has that expanded? Would you say it has expanded your opportunity within kind of the GenAI RAC-based use cases? Is the intensity of those conversations with your existing customer base increasing? as they think about building Gen-AI workloads? And how does that compare to something like a Mongo or Elastic?
spk21: Yeah, so thank you, Pinjalim. And short answer is yes. I'll give you a slightly longer answer as well. You know, MarkLogic acquisition definitely brought us, and by integrating it with some of our own data platform technologies, data integration and intelligent decisioning technologies, that combination has created a really powerful solution to apply RAG, you know, to both from a semantic analysis perspective as well as vector to really make GenII applications much more accurate, much less error-prone, minimize hallucinations, and also provide the governance and security around it that people are looking for. So, yes, and I think it really does create an opportunity for us to – go back to our customers and work with them to make sure that they see that what we have and that they are able to actually leverage our offerings. The interesting part about this pendulum is that mission-critical applications and business-critical applications leveraging Gen AI is going to be a slow and longer process than folks think. It's easy to just use an LLM for simple questions and answers. but really integrating it into your data, doing it in a methodical way, coming up with a real business use case, and then spending the money on it always takes time. But we are looking forward to doing that. As I mentioned in my comments earlier, we actually have a couple of customers who are actively using this today in production, which makes us really delighted that we have made that much progress so far. The question for us is, you know, at what level are customers ready to adopt? And as that momentum builds, as we hope it does, we'll, of course, share details with you.
spk19: Yep, understood. One question for you, Anthony. The outperformance in Q, I was looking at the outperformance of Q2 versus kind of the Q3 guide. I'm wondering if there is anything to highlight in terms of timing of term renewal. Did anything pull forward from Q3 to Q2? Anything to highlight there?
spk05: Hey, Faisal. No, I would say not really. Like I said, Q2 was a very solid quarter. It felt like, in terms of momentum, maybe a slight step up from where we were in Q1. I think last year we definitely had some larger multi-year contracts that sort of moved some of the revenue around quarter to quarter. And obviously we're just coming off the MarkLogic acquisition in Q1 of last year. But, you know, I think the outlook for Q3 and the results from Q2, I really don't think there was any material timing issues there. Understood. Thank you.
spk10: Thank you. One moment for our next question. And that will come from the line of John DeFucci with Guggenheim Securities. Your line is open.
spk15: Thank you for taking my question. Both my questions, I think, for Yogesh. Yogesh, we just published a note today saying that the IT spending backdrop isn't going to get much better at all anytime soon. I guess two questions on that. If that's the case, How should we be thinking about progress in regards to your business and also the potential acquisition opportunities? And the second part is, and this goes back because, Yogesh, I've known you a long, long time. I consider you a very seasoned executive. That's a compliment. I can say that also because we're the same age. Thank you. But I guess when you look at this, and you've seen a lot of different cycles, I mean, there are secular tailwinds in IT, at least I believe that still. But when do you think the IT spending environment could get a bit better than it has been over the last couple of years based on your observations of the past? And sorry for the long-winded questions.
spk21: No, no, that's quite right, John. I think seasoned is good with me, so it's all right. You know, the interesting part about, you know, the sort of the environment out there today, and I'm speaking really for progress, right, because you said, hey, what do you think about progress? I actually think that, you know, if you look back over the last few quarters, we have not actually been pounding the table saying, oh, man, you know, the amazing first first strings are going to get opened and money is going to flood in. There were a lot of other people who expected that in 2024. We were very straightforward. We felt that there was a solid environment for our products and that we would continue to execute within that sort of spending environment. The interesting part about our products, John, is they are not nice to have products They really are essential products. The vast majority of our business, as you know, is existing customers who are either expanding their relationship with us or renewing with us, etc. And so therefore, you know, our net retention rates or ARR that comes from our existing customers is the solid foundation on which we build. You know, on top of that, we have... you know, some new acquisition that takes place, obviously, so that we get a little bit of ARR growth as we keep moving forward. So I think that the, you know, the market for our products looks good. You know, it isn't gangbusters, but it looks good. And I think it will continue to be very similar going forward for the next few quarters at least. You know, large macro trends and changing, I think, even though I've been around the block a few times, every time I try to predict that, I'm usually wrong. So I don't want to try to do something this time around either. But I think that your point that I think we are in a secularly good but not gangbusters growth environment, I think is probably true for some extended period. To be honest, You know, there's a lot of technology catalysts that are happening, so to speak. But, you know, on the business side, people are being very cautious, and I think they will continue to be cautious. Again, you know, my, you know, I shouldn't do any macro stuff ever. But, you know, I think that interest rates are not coming down soon, you know, anytime soon. I think people will be watchful on what they spend. I think they will spend on important stuff that is truly mission critical. which makes me feel, again, good about our business. So I'm sorry, John, I'm not really helping you with the long-term stuff, but, you know, you're asking me to go well beyond my abilities, so I'll stop talking.
spk15: No, you're too modest, Yogesh, and that was very helpful, and I really appreciate it. And keep up the good work. Thank you.
spk21: Thank you, John. Thank you.
spk10: Thank you. One moment for our next question. And that will come from the line of Itai Kidron with Oppenheimer. Your line is open.
spk07: Hey, guys. This is Herschel on for Itai. I guess just on the M&A front, just around the opportunities that the corporate development team may be vetting, is the velocity of opportunities that you're looking at starting to pick up? What are you hearing from founders, maybe both from VC-backed and PE-backed companies out there? And then you'll get – sorry, Anthony, just one – on the free cash flow guide. I know that was left unchanged, so if I just kind of look at the second half free cash flow performance, it does imply a bit of a step down. So just wondering if you can give us any puts and takes on the outlook there. Thank you.
spk21: So, you know, Harshal, on the M&A side, yes, I believe that the pace is greater than it has previously been. I think it goes back to John's last question as well. I think the macro conditions being what they are, the market conditions being what they are, I think more and more folks out there are realizing that this is sort of the new normal. And therefore, I think more assets are coming to market today. And to be honest, more chunkier assets are coming to market today than they were before, whether it is PE-backed or VC-backed. So we are very active. I am delighted with the amount of activity we are seeing. We are in the deal flow. And I think that's a really important thing for me to share. We want to make sure that we are in the deal flow that is taking place out there so that we get to see and that we get to decide whether we want to participate in something or not and to what level. So, Harshal, yes, I am much more excited about where the market appears to be shifting on M&A.
spk05: And to answer your second question on free cash flow in the guide, I guess a couple points I would make. One is when we acquired MarkLogic, we had mentioned that they had a January 31st fiscal year end and had a significant amount of billings and revenue in what would be our first quarter. And so from a cash flow perspective, I think what we're seeing now is, you know, Q4 is our biggest billings quarter, and then that's probably followed by Q1. And so, you know, with 40- or 50-day DSOs, that means our big cash collection quarters end up being Q1 and Q2. And so we've seen a little bit more seasonality to the front half of the year, I think, with the addition of MarkLogic. The other thing to keep in mind is that our tax payments that we make are generally weighted toward the back half of the year. I think you have some fillings that have been sort of seasonally the cash is going to get collected first half, and then we have some expenses where the seasonality is going to be in the second half. But nothing more than that. I think it was a great first half of the year for us in terms of cash flow. I think collections were very strong, kind of another indication of strength of our business and strength of our customer base when it comes to the essential nature of our products.
spk08: Got it. Very helpful. Thank you guys and congrats on the quarter. Thanks.
spk10: Thank you. One moment for our next question. That will come from the line of Lucky Shriner with DA Davidson. Your line is open. Great.
spk02: Thanks for taking my question. I wanted to dig deeper on the M&A market following up on the last question. I know you guys try to acquire about a company a year in terms of cadence. Can we maybe expect to see that cadence pick up here? And in terms of MariaDB, I know that one didn't close, but it was smaller in terms of revenue size than normal or than your previous four acquisitions. Could we see maybe a higher frequency of smaller acquisitions here moving forward? Thanks.
spk21: Lucky, thanks for the question. So, you know... I think I've said this before, and I'll repeat. I think from an operating perspective, from the way we run our business perspective, I do believe we can do more than one transaction in a year. It's not just doing the deal, right? The question is, can we integrate it, right? And I think that's where, you know, over the last several years, as we have done these acquisitions and integrated them, I think we've gotten better and better and better at that. And so, therefore, I believe that, yes, we can acquire and integrate more than one business. That said, obviously, the market has to be such that deals do come up that we are really interested and excited about. In terms of the size, MariaDB was on the smaller size, but I think we've always said that our sweet spot is 10 to 20, 10 to 25% of our revenue. MariaDB was slightly lighter than 10% of our revenue. but it was a right asset for us. I think the size criteria we are a little bit flexible on, but we in general are looking to buy businesses that obviously provide us with the ability to deliver some meaningful return to our shareholders. And so therefore, we are not going to do extremely tiny ones. They just are a lot of work for very little return, to be honest. But at the same time, yes, we could do a deal of the size of MariaDB or or one smaller, one larger, or whatever. So we are actively looking, and yes, if the right opportunities come along, we will do more than one in a year.
spk02: That makes a lot of sense. Thank you. And then a follow-up on some of your earlier comments on the AI capabilities and customers already getting an ROI from that. I think there's a discussion on how pricing for AI is going to look moving forward. What are your thoughts on how you're going to recognize, you know, are you just going to increase prices for customers in the future? Or, you know, how is that going to actually drive your revenue moving forward? Thanks.
spk21: Lucky, I think that's a really, really good question because I think we are all in this industry trying to figure out what is the best way for us to, as you yourself pointed out, price our products for the value we are generating, right? And Reality with software historically has been that pricing has been done by some metric that is sort of data or consumption or capacity or users or seats or servers or whatever, right? It is a measurable quantity on sort of some metric that is very different. And something like this kind of capability, it really, when you think about it, the business value, if it is meaningful and significant, it often is not related to things like those. So we, I think, are experimenting is I think the best answer I can give you because I think that is the honest answer. And I think that the business models for this are going to evolve over the coming year or two in our industry. Now, some products, it's easy, right? Personal productivity is easy. You know, you're Microsoft. You come out with Copilot for Office. You know, everybody who has an office, if you use Copilot, this is what we charge you more for that on a per-person basis. But this is not like that, right? This is business value. And you might have a fairly small number of users, and you might suddenly see, you know, hundreds of thousands or millions of dollars of benefit every year. So how do you, you know, it isn't on a per seat basis. It isn't on data volume basis. It's truly on the value delivered to the end customer basis. And I think that that's where, you know, what do you tie that to becomes a really key question. So great question. I wish I had a hard, you know, specific concrete answer for you. I don't, other than the fact that we are experimenting as we speak. We are working with these customers and others to basically figure out What is the best way to price these things so that they get the value and they recognize that they pay us for the return we're generating for them?
spk02: I appreciate the answer. And I can squeeze in one more, actually. You know, now that the MarkLogic acquisition is closed or that integration is complete, sorry. Is there anything to call out that you learned from that integration? I know you guys improve on your process every time. And maybe is there an opportunity, help me understand, can AI, the advances in AI help you increase your integration, the speed of the integration process?
spk21: So I think I'll give you the second part first. I think the AI helping with speed of integration, I think that's a little premature. As you know, with a lot of these AI capabilities, you need a lot of data before they do something right and meaningful. I don't know anybody who can say I've got a database of a thousand acquisitions done right in the enterprise software industry that I can leverage for helping with my AI. I think it can help on some superficial incidental work, like doing some analysis of for example, contracts or something like that or customer contracts that a business might have and those kind of things, and we're looking at that. But overall, I don't know whether it can actually dramatically help. So I just, you know, at least right now, we're not sure it can. On the what did we learn from MarkLogic, I think one of the things that, you know, we were not as prepared for, to be honest, when we did the MarkLogic acquisition is, we didn't fully realize the level of complexity around the government, the federal government business that MarkLogic had that was with three-letter agencies, which was extremely classified, which meant that we had to create processes inside Progress to keep that information very, very contained and sort of keep it from those folks in the company who are not cleared. And this is really a non-trivial thing, and it's a really critical thing for those federal agencies who require security clearances. So, you know, most of the folks at Progress don't even know the names of those customers. We use code names for those customers because even the names of those customers are confidential and secure. So, luckily, I think that was a wrinkle that we did not expect. We've learned how to work around that and figure out how to do the right things there. And we've created a very strong governance model around it to make sure that we keep the secure information secure, yet conduct our business in a way that we can do our governance and our policies and our processes. So it took us a little bit longer in the first part of that acquisition, and that's what we learned out of it. We always learn something new with every single one. So thank you for asking.
spk02: Yeah, great to hear, and thanks very much for taking my question.
spk10: Thank you. One moment for our next question. And that will come from the line of Brent Thill with Jefferies. Your line is open.
spk09: Hey, guys. Thanks for taking my question. Santonio Venturamon for Brent. I wanted to ask, given your diverse portfolio of companies and markets that sort of fall in your preview, Can you maybe give your puts and takes on what you're seeing across sub-segments of your portfolio? Are you seeing differences in behaviors maybe across seat base versus consumption and markets or changes in trends in your relational versus NoSQL databases or on-prem versus cloud customers? Anything that sort of stuck out to you in the quarter that may have surprised you relative to expectations?
spk21: Antonio, you know, it's interesting, right? So we don't really have consumption-based pricing in our products, to be honest, right? You know, you could potentially say, okay, you know what? Our OEM relationships are, quote, consumption-based, but they're not really. They're not consumption-based in the true sense of the word. You know, the OEM, you know, they find new customers or they expand their customer base and they get more licenses from us. But that's not consumption-based the way you know, the market talks about consumption base where they say, you know, more users using it or more data being put through it or those kind of, or more transactions going through it. So really, you know, for us, it is a more traditional enterprise software business. We are continuously strength in our cloud as well as on-prem offerings. So nothing sort of unusual there for us. But again, You know, we are not selling cloud apps that basically somebody has to go, hey, I need a new project to put in a new HR system or a new financial system or a new this or a new that, right? What they are looking to say is, you know what, how do I better manage what I have? How do I secure it more? How do I deploy these things well? How do I expand my applications? How do I add capabilities to my applications? How do I leverage my data? How do I integrate that data into my business processes? How do I make my business processes more intelligent? So how do I have better user experiences for my customers? I mean, all kinds of things. So all those things are around sort of the infrastructure and the mission-critical applications that they have that run on that infrastructure. And so therefore, you know, what many of those guys out there are seeing that are dependent on, quote, new projects, right, is I think a very different market segment overall than what Progress plays in, and which is one of the reasons why Progress has been a very resilient company throughout. I know that a lot of people, including myself, weren't here when the Great Recession took place. But even during the Great Recession, if you look at historic results of Progress, they were extremely good compared to what happened to the rest of the industry and the rest of the tech market from a business perspective, from a revenue and those kind of perspectives. And so, the reason is that it is a very resilient business, and our customers are, you know, using our software, which is essential software, and it is about, you know, sort of, you know, continuing to work with them and winning some new, right? If you look at our business, obviously, we win some new because we see ARR growth, right? And it's rather... small, but for us it is important. And so we continue to win some new customers and we win them across the board. So no specific segment specific or market specific or product specific. I mean, again, you heard Anthony's commentary on how Operaworks performed, many of which did well this quarter. It's always quite often a different set of products every quarter, but overall, you know, very solid business and continue to see the same type of demand going forward.
spk06: Awesome. Thank you, guys.
spk10: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.
spk21: Thank you, Sherry, and thank you, everyone, for joining us. Really appreciate it, and we look forward to talking to all of you again soon. Have a good night.
spk10: Thank you. This concludes today's program. Thank you all for participating. You may now disconnect. you Thank you. Good day and welcome to the Progress Software Corporation Q2 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 Michike, Senior Vice President of Investor Relations. Please go ahead.
spk05: Thank you, Shuri. Thanks for your help. Always good to hear your voice. Good afternoon, everyone, and thanks for joining us for Progress' second quarter 2024 Financial Results Conference Call. On the line with me this afternoon is Yogesh Gupta, our President and CEO, and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over the 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 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. Additionally, please note that all the financial figures referenced on this call are non-GAAP, 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 second quarter of 2024, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our second quarter of 2024 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available in the investor relations section of our website at investors.progress.com. As Cherie mentioned, today's conference call will be recorded in its entirety, and it will be available via replay on the investor relations website after the call concludes. So with that, Yogesh, I'll turn it over to you. Thank you.
spk21: Thank you, Mike. Good evening, everyone, and thank you for joining us as we discuss the results of our second fiscal quarter of 2024. As you've seen in the press release, Progress posted solid results for Q2 with revenues and earnings well ahead of the higher end of guidance and estimates. Total revenue came in at $175 million, driven once again by steady demand and solid execution. Operating margins were above 38%. and earnings per share at $1.09 exceeded the high end of our guidance by 12 cents as a result of the strong revenue performance and good expense control. ARR grew 1% in the quarter to $579 million, and we saw a fractional increase in our net retention rate, which was 99%. Our balance sheet continues to benefit from very strong cash flows, and solid collections, ending the quarter with cash at $190 million and DSOs at 41 days, which is down from 50 days last quarter. We also repurchased around 1 million shares in the quarter, and we still have $122 million remaining under our overall repurchase authorization. Anthony, of course, will provide much more detail around the numbers, but I'm very pleased with our performance in Q2. As we cross the halfway point for fiscal 24, I believe we're well positioned for the rest of the year and feel confident in our ability to continue executing on our plan. Deflecting this confidence, we have raised our full year expectations for revenues and earnings. During the second quarter, Anthony, Mike, and I spent a lot of time talking with investors. Our meetings were excellent and it was good to be back seeing people face to face on a regular basis. There were three recurring themes, the first being AI, the second M&A, and the third, move it. So I'd like to discuss each of these today. Starting with AI, we're extremely excited about all of the AI work going on at Progress. At the core of our AI strategy, the core of our AI strategy is threefold. First, We continue to add capabilities to our products so that our customers can develop, deploy, and manage responsible AI-driven applications and experiences. Our products help customers accelerate their AI journeys by providing the tools and technologies to build Gen AI into their applications and to use AI-driven technologies to meet the needs of their business. Second, we're using AI to make our products easier to use and to drive tremendous efficiencies for our customers in their process of building, deploying, and managing experiences and applications. So embedding AI in our tools makes their job even easier. And third, we use AI internally to improve our own processes and operations to enable us to better serve our customers while driving efficiencies in our business. Newest Progress products offer advanced AI features and we're receiving positive feedback from our customers. Let me share some examples. Our new progress data platform, which is a result of integrating MarkLogic as well as progress technologies, features both semantic and vector capabilities to power RAG or retrieval augmented generation in AI applications. It also uses a semantic layer to validate the output of GenAI models. And the platform provides contextual links to corporate information and knowledge within the responses so users can see where the answers came from, what they mean, and how they are relevant to the business. This drives dramatically better results of Gen AI-powered responses and minimizes AI hallucinations. And it does so with a level of governance and auditability organizations need for their critical enterprise applications. And that's why a global chemical company and a large financial services company are realizing significant ROI by using these capabilities today. In our developer tools products, we offer UI components for easily embedding AI prompts and creating an AI-powered user experience for Gen AI applications. Our Sitefinity product uses Gen AI capabilities to enable marketers to rapidly create, improve, and personalize website content saving content editors tremendous time. Sitefinity also offers AI-powered conversion propensity scoring to make it easy to determine which customer segments are most likely to convert with which messages, dramatically improving the outcomes of targeting efforts. An event marketing company is using this capability to do just that, grow audiences at events. And for infrastructure security customers, the AI-powered version of FlowMon for anomaly detection helps cybersecurity professionals and IT operations managers detect, understand, prioritize, and respond to potential security events faster than ever before. This capability, now being used by over 1,000 cybersecurity experts at our customer sites, is demonstrating a greater than 50% reduction in the time it takes to analyze possible threat events, thereby significantly increasing the responsiveness of those organizations while making them even more efficient at the same time. Going forward, we'll share more about how we're continuing to incorporate AI into our products. We're incredibly excited about the value we're providing to our customers today and what we can provide tomorrow by enabling them to build AI-powered applications and experience. and we're thrilled to see the value we are driving for progress internally with more efficient and effective AI-powered operational systems and processes. Another topic we discussed often with investors was M&A, which remains at the core of our total growth strategy. Our investors trust us to remain patient and disciplined, making sure that any deal we do meets our stringent financial criteria. We have reviewed many companies and continue to do so looking for the right deal for progress. If you recall last quarter's earnings announcement, we included a press release that stated that we were in the process of due diligence for the potential acquisition of an Irish public company, MariaDB. Because we have to abide by Irish takeover rules, which mandate that all steps of any proposed acquisition must be disclosed publicly, everyone got to see parts of our corporate development process in action. And it was a good illustration of some of what we go through every day. We've had a steady flow of acquisition candidates, and at all times, there are numerous potential transactions we're exploring in various stages of viability. We continue to be positive about the M&A environment and our ability to find the right deals, and through diligent and disciplined M&A, which is a key pillar of our total growth strategy, we are confident that we'll deliver on doubling the size of our business in five years. A third consistent theme that came up was, of course, move-in. Last month, we passed the one-year anniversary of the adapt on our customers' move-in environment. It is important to note that the business has remained solid. Move-in ARR has grown over that period. Customers continue to be pleased with the way we've been working with them. We previously disclosed that two international data protection agencies closed their investigations of progress and the MOVID incident without taking any regulatory action, the UK in last November and Australia in March. Recently, on May 29th, the Spanish Data Protection Authority also informed us that no regulatory action against progress was required in relation to the MOVID vulnerability. We continue to cooperate with regulators in a transparent manner because we're confident that progress acted appropriately and with the interests of our customers at the forefront in our response to the attack on their movement environment. We remain grateful for the support of our customers, partners, and employees, and remain focused on executing our total growth strategy. So to wrap up, Q2 was another solid quarter for progress, marked by a continuation of good demand and outstanding execution in the field and internally. Our intense and unrelenting focus on customer success continues to provide progress with a strong, durable base of recurring revenues. I'm very pleased with the performance in ARR and net retention, along with our significant cash generation. Once again, our outlook remains positive. We continue to be optimistic about the potential for M&A, which remains our key strategic priority. When we find the right candidate at the right price, we will execute. Lastly, before I close, I want to mention that earlier this month, the Boston Business Journal recognized Progress for the fourth consecutive year as one of the best places to work in the Boston area. In addition, Forbes in Bulgaria recently recognized Progress on its list of best employers in that country. While we often discuss our commitment to our customers, these recognitions also demonstrate our commitment to our employees. And I'm really proud of our work environment, our culture, and our people. As always, I want to thank everyone at Progress for their hard work and consistent above and beyond efforts that led to yet another solid quarterly performance. Let me now hand it off to Anthony for his prepared remarks. Anthony?
spk05: Thanks, Yogesh. And good evening, everyone. Thanks for joining the call. As Yogesh mentioned, we're very pleased with our Q2 results, which again exceeded the high end of our guidance range on revenue and earnings per share. Turning to the numbers, we'll start on the top line with ARR. We closed the second quarter with ARR of $579 million, which represents approximately 1% growth on a year-over-year basis. Although no single product drove material growth in our total ARR, The 1% growth that we delivered was the result of modest growth in multiple products across our portfolio, including OpenEdge, DevTools, Sitefinity, Loadmaster, Flowmon, and Moovit. We also had another strong quarter for net retention with our Q2 rates coming in at 99%. In addition to our solid ARR growth, revenue for the quarter of $175 million was well above the high end of the guidance range we provided back in March. This better-than-expected revenue performance in the quarter was driven by stronger-than-anticipated demand from multiple products in our portfolio, including OpenEdge, DataDirect, and MarkLogic. Turning now to expenses. Our total costs and operating expenses for the quarter were $108 million, down 4% compared to the prior year, and generally in line with our expectations. The year-over-year decrease in expense was largely because our integration of MarkLogic was ongoing in Q2 of last year, and now that the integration is complete and cost synergies have been realized, we're operating at a lower cost base. Operating income was $67 million, consistent with the prior year quarter, and our operating margin was over 38%. compared to 38% in the second quarter of 2023. On the bottom line, our Q2 earnings per share of $1.09 is 12 cents above the high end of our guidance range. This overperformance relative to our expectation was driven by outstanding top line performance coupled with solid cost management across the business. Moving on now to a few balance sheet and cash flow metrics, We ended the quarter with cash and cash equivalents of $190 million and debt of $810 million for a net debt position of $620 million. This represents net leverage of roughly 2.2 times using our trailing 12-month adjusted EBITDA and roughly 2.0 times using our projected results for the full fiscal year 2024. DSO for the quarter was a bit ahead of our expectations at 41 days, an improvement from 50 days last quarter. Adjusted free cash flow was $64 million for the quarter, an increase of $16 million, or 33%, from the prior year quarter. I'd also like to point out that our adjusted free cash flow for the first half of fiscal 2024 stands at $136 million, which is an increase of 44% over the same period last year. During the second quarter, we repurchased $50 million of progress stock, including $25 million in connection with the issuance of our convertible notes in March. At the end of the quarter, we had $122 million remaining under our current share repurchase authorization. All right, now I'd like to turn to our outlook for Q3 and the full year 2024. When considering our outlook, we continue to see consistent strength in the demand environment for our solutions. And for the third quarter, we expect revenue between 174 and 178 million, and earnings per share of between $1.11 and $1.15. For the full year 2024, we expect revenue between $725 and $735 million, an increase of $3 million from our prior guidance. We expect an operating margin of 39% to 40%, consistent with our prior guidance. We expect adjusted free cash flow between $205 and $215 million, again, consistent with our prior guidance. And we expect earnings per share of between $4.70 and $4.80, an increase of 5 cents from our prior guidance. Our annual EPS estimate contemplates a tax rate of 20%. approximately 44.2 million shares outstanding and the impact of $103 million in share repurchases. It's worth mentioning that the $103 million in expected share repurchases represents an increase from the $78 million that I noted on our last earnings call. In closing, we're excited to deliver strong financial results across the board in the second quarter. It's a continuation of the trend that we saw in the first quarter, and we believe we're very well positioned to deliver strong results for the remainder of 2024 and beyond. With that, I'd like to open the call for Q&A.
spk10: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Fatima Boulani with Citi. Your line is open.
spk12: Good afternoon. Thank you for taking my questions. Yogesh, I wanted to double click on one of your comments in your script regarding what you're doing from an AI perspective and infusing those capabilities within your portfolio. But you also made a mention that you are internally deploying AI powered operational systems, I think is the terminology that you use. We haven't heard many companies talk about this. So I'd be really curious to get your granular views on how AI is perhaps creating more expense leverage or operating leverage in the business, and how much of that is sustainable and durable and expandable. And then a follow-up for Anthony, if I may.
spk21: Thanks, Fatima. So we are actually using, and I think we, like many others, are probably in early stages of using this, but we are using AI fairly extensively across a wide range of functions. So let me share a few examples. We are using, of course, AI in content creation. So as I'm sure you can relate to this, the role of content creation and marketing is critical. Marketing is always behind the curve on trying to figure out how quickly they can get targeted content for audiences that we want to target our marketing messages to. And by leveraging AI, we are seeing significant changes improvements in the speed with which we can turn around content and be responsive to the needs of the business. So in a lot of these things, Fatima, it's not just sort of trying to sort of get operational efficiencies from a cost perspective. It is also timeliness of responses, accuracy of responses, more effective content, for example, and so on. Another area is, this is an interesting one from the perspective of tech support and dealing with our customer support issues. Very often, technical folks will answer questions. And then what we want to do is, of course, create knowledge-based articles that other customers for that particular question could find it automatically, right? And so that they don't have to talk to somebody. Now, that's a laborious task. Nobody really enjoys doing it as much. Again, we're using generative AI to automatically generate a knowledge-based article that then is edited and reviewed by the technical person who has answered the question to begin with, and thereby, again, simplifying and reducing the time it takes for that to be created. We're seeing, for example, in that scenario, 50% to 75% improvement in the responsiveness, how quickly we can get knowledge-based articles created for a particular issue. We are at the early stages of looking to apply GenAI to really analyzing our customer contracts. I mean, the opportunities are, to be honest, quite endless. And we are also deploying the Progress Data Platform internally as well for For example, the legal contract review process and other things so that we can leverage internal corporate data. One of the most key challenges with using AI today is how do you make sure that your information, your knowledge, your data stays secure, stays private, is governable, while at the same time you take advantage of LLMs and other AI technologies. And our data platform is actually designed to do just that. And so therefore, to us, being able to also use our own products and demonstrate that we can use them and we can be beneficiaries as well is also important. Early to say, Fatima, in terms of expense reductions and sustainability, but as we get data on those, we will come back and share that.
spk12: I appreciate that very detailed answer, Yogesh, and like to hear that you're drinking your own champagne. Anthony, just on the maintenance and services performance in the quarter, it was certainly much better than what we were modeling and what most folks were looking for. Wanted to ask if there's anything atypical or outsized to highlight here vis-a-vis any early renewals or timing of any contractual relationships and renewals That's it for me. Thank you.
spk05: Yep. No, Fatima, you know, I think it was a reasonably good quarter from a renewals perspective. You know, we did see a slight improvement in our net retention rates. And we saw, you know, if you were to look at the sequential movement in ARR, you know, there was a nice uptick from Q1 to Q2. And so it just felt like a you know, a slightly better quarter across the board when it came to renewal and net retention rates. So I would say nothing that looked like an anomaly, nothing really from a timing perspective that would have driven, you know, an outsized performance on the maintenance and service lines.
spk04: Thank you so much.
spk03: Thank you. One moment for our next question.
spk10: And that will come from the line of Pendulum Bora with JP Morgan.
spk19: Great. Hey, guys. Thanks for taking the questions and congrats on the quarter. One question for you, Yogesh. The MarkLogic acquisition, has that expanded? Would you say it has expanded your opportunity within kind of the GenAI RAG-based use cases? Is the intensity of those conversations with your existing customer base increasing? as they think about building Gen-AI workloads? And how does that compare to something like a Mongo or Elastic?
spk21: Yeah, so thank you, Pinjalim. And short answer is yes. I'll give you a slightly longer answer as well. You know, MarkLogic acquisition definitely brought us, and by integrating it with some of our own data platform technologies, data integration and intelligent decisioning technologies, that combination has created a really powerful solution to apply RAG, you know, to both from a semantic analysis perspective as well as vector to really make Gen AI applications much more accurate, much less error-prone, minimize hallucinations, and also provide the governance and security around it that people are looking for. So, yes, and I think it really does create an opportunity for us to, again, go back to our customers and work with them to make sure that they see that what we have and that they are able to actually leverage our offerings. The interesting part about this pendulum is that mission-critical applications and business-critical applications leveraging Gen AI is going to be a slow and longer process than folks think. It's easy to just use an LLM for simple questions and answers. but really integrating it into your data, doing it in a methodical way, coming up with a real business use case, and then spending the money on it always takes time. But we are looking forward to doing that. As I mentioned in my comments earlier, we actually have a couple of customers who are actively using this today in production, which makes us really delighted that we have made that much progress so far. The question for us is, you know, at what level are customers ready to adopt. And as that momentum builds, as we hope it does, we'll, of course, share details with you.
spk19: Yep, understood. One question for you, Anthony. The outperformance in Q, I was looking at the outperformance of Q2 versus kind of the Q3 guide. I'm wondering if there is anything to highlight in terms of timing of term renewals. Did anything pull forward there? from Q3 to Q2? Anything to highlight there?
spk05: Hey, Faisal. You know, no, I would say not really. Like I said, Q2 was a very solid quarter. It felt like, you know, in terms of momentum, maybe a slight step up from where we were in Q1. You know, I think last year we definitely had some larger multi-year contracts that sort of moved, you know, some of the revenue around quarter to quarter. And obviously, we're just coming off the MarkLogic acquisition in Q1 of last year. But I think the outlook for Q3 and the results from Q2, I really don't think there was any material timing issues there. Understood. Thank you.
spk10: Thank you. One moment for our next question. And that will come from the line of John DeFucci with Guggenheim Securities. Your line is open.
spk15: Thank you for taking my question. Both my questions, I think, for Yogesh. Yogesh, we just published a note today saying that the IT spending backdrop isn't going to get much better at all anytime soon. I guess two questions on that. If that's the case, How should we be thinking about progress in regards to your business and also the potential acquisition opportunities? And the second part is, and this goes back because, Yogesh, I've known you a long, long time. I consider you a very seasoned executive. That's a compliment. I can say that also because we're the same age. Thank you. But I guess when you look at this, and you've seen a lot of different cycles, I mean, there are secular tailwinds in IT, at least I believe that still. But when do you think the IT spending environment could get a bit better than it has been over the last couple of years based on your observations of the past? And sorry for the long-winded questions.
spk21: No, no, that's quite right, John. I think seasoned is good with me, so it's all right. You know, the interesting part about, you know, the sort of the environment out there today, and I'm speaking really for progress, right, because you said, hey, what do you think about progress? I actually think that, you know, if you look back over the last few quarters, we have not actually been pounding the table saying, oh, man, you know, the amazing first first strings are going to get opened and money is going to flood in. There were a lot of other people who expected that in 2024. We were very straightforward. We felt that there was a solid environment for our products and that we would continue to execute within that sort of spending environment. The interesting part about our products, John, is they are not nice to have products They really are essential products. The vast majority of our business, as you know, is existing customers who are either expanding their relationship with us or renewing with us, etc. And so therefore, you know, our net retention rates or ARR that comes from our existing customers is the solid foundation on which we build. You know, on top of that, we have... you know, some new acquisition that takes place, obviously, so that we get a little bit of ARR growth as we keep moving forward. So I think that the, you know, the market for our products looks good. You know, it isn't gangbusters, but it looks good. And I think it will continue to be very similar going forward for the next few quarters at least. You know, large macro trends and changing, I think, even though I've been around the block a few times, every time I try to predict that, I'm usually wrong. So I don't want to try to do something this time around either. But I think that your point that I think we are in a secularly good but not gangbusters growth environment, I think is probably true for some extended period. To be honest, You know, there's a lot of technology catalysts that are happening, so to speak. But, you know, on the business side, people are being very cautious, and I think they will continue to be cautious. Again, you know, my, you know, I shouldn't do any macro stuff ever. But, you know, I think that interest rates are not coming down soon, you know, anytime soon. I think people will be watchful on what they spend. I think they will spend on important stuff that is truly mission critical. which makes me feel, again, good about our business. So I'm sorry, John, I'm not really helping you with the long-term stuff, but you're asking me to go well beyond my abilities, so I'll stop talking.
spk15: No, you're too modest, Yogesh, and that was very helpful, and I really appreciate it. And keep up the good work. Thank you.
spk10: Thank you, John. Thank you. Thank you. One moment for our next question. And that will come from the line of Itai Kidron with Oppenheimer. Your line is open.
spk07: Hey, guys. This is Herschel on for Itai. I guess just on the M&A front, just around the opportunities that the corporate development team may be vetting, is the velocity of opportunities that you're looking at starting to pick up? What are you hearing from founders, maybe both from VC-backed and PE-backed companies out there? And then you'll get – sorry, Anthony, just one – on the free cash flow guide. I know that was left unchanged. So if I just kind of look at, you know, the second half free cash flow performance, it does imply a bit of a step down. So just wondering if you can give us any puts and takes on the outlook there. Thank you.
spk21: So, you know, Harshal, you know, on the M&A side, yes, I believe that the pace is greater than it has previously been. I think it goes back to John's last question as well. I think the macro conditions being what they are, the market conditions being what they are, I think more and more folks out there are realizing that this is sort of the new normal. And therefore, I think more assets are coming to market today. And to be honest, more chunkier assets are coming to market today than they were before, whether it is PE-backed or VC-backed. And so we are very active. I am delighted with the amount of activity we are seeing. We are in the deal flow. And I think that's a really important thing for me to share. We want to make sure that we are in the deal flow that is taking place out there so that we get to see and that we get to decide whether we want to participate in something or not and to what level. So, Harshal, yes, I am much more excited about where the market appears to be shifting on M&A.
spk05: And to answer your second question on free cash flow in the guide, I guess a couple points I would make. One is when we acquired MarkLogic, we had mentioned that they had a January 31st fiscal year end and had a significant amount of billings and revenue in what would be our first quarter. And so from a cash flow perspective, I think what we're seeing now is, you know, Q4 is our biggest billings quarter, and then that's probably followed by Q1. And so, you know, with 40- or 50-day DSOs, that means our big cash collection quarters end up being Q1 and Q2. And so we've seen a little bit more seasonality to the front half of the year, I think, with the addition of MarkLogic. The other thing to keep in mind is that our tax payments that we make are generally weighted toward the back half of the year. So... I think you have some billings that have been sort of seasonally the cash is going to get collected first half, and then we have some expenses where the seasonality is going to be in the second half. But nothing more than that. I think it was a great first half of the year for us in terms of cash flow. I think collections were very strong, kind of another indication of strength of our business and strength of our customer base when it comes to the essential nature of our products.
spk08: Got it. Very helpful. Thank you, guys, and congrats on the quarter. Thanks.
spk10: Thank you. One moment for our next question. That will come from the line of Lucky Shriner with DA Davidson. Your line is open. Great.
spk02: Thanks for taking my question. I wanted to dig deeper on the M&A market following up on the last question. I know you guys try to acquire about a company a year in terms of cadence. Can we maybe expect to see that cadence pick up here? And in terms of MariaDB, I know that one didn't close, but it was smaller in terms of revenue size than normal or than your previous four acquisitions. Could we see maybe a higher frequency of smaller acquisitions here moving forward? Thanks.
spk21: Lucky, thanks for the question. So, you know... I think I've said this before, and I'll repeat. I think from an operating perspective, from the way we run our business perspective, I do believe we can do more than one transaction in a year. It's not just doing the deal, right? The question is, can we integrate it, right? And I think that's where, you know, over the last several years, as we have done these acquisitions and integrated them, I think we've gotten better and better and better at that. And so, therefore, I believe that, yes, we can acquire and integrate more than one business. That said, obviously, the market has to be such that deals do come up that we are really interested and excited about. In terms of the size, MariaDB was on the smaller size, but I think we've always said that our sweet spot is 10 to 20, 10 to 25% of our revenue. MariaDB was slightly lighter than 10% of our revenue. but it was a right asset for us. I think the size criteria we are a little bit flexible on, but we in general are looking to buy businesses that obviously provide us with the ability to deliver some meaningful return to our shareholders. And so therefore, we are not going to do extremely tiny ones. They just are a lot of work for very little return, to be honest. But at the same time, yes, we could do a deal of the size of MariaDB or or one smaller, one larger, or whatever. So we are actively looking, and yes, if the right opportunities come along, we will do more than one in a year.
spk02: That makes a lot of sense. Thank you. And then a follow-up on some of your earlier comments on the AI capabilities and customers already getting an ROI from that. I think there's a discussion on how pricing for AI is going to look moving forward. What are your thoughts on how you're going to recognize, you know, are you just going to increase prices for customers in the future? You know, how is that going to actually drive your revenue moving forward? Thanks.
spk21: Lucky, I think that's a really, really good question because I think we are all in this industry trying to figure out what is the best way for us to, as you yourself pointed out, price our products for the value we are generating, right? And reality with software historically has been that pricing has been done by some metric that is sort of data or consumption or capacity or users or seats or servers or whatever, right? It is a measurable quantity on sort of some metric that is very different. And something like this kind of capability, it really, when you think about it, the business value, if it is meaningful and significant, You know, it often is not related to, you know, things like those. So we, I think, are experimenting is I think the best answer I can give you because I think that is the honest answer. And I think that the business models for this are going to evolve over the coming year or two in our industry. Now, some products is easy, right? Personal productivity is easy. You know, your Microsoft, you come out with Copilot for Office. You know, everybody who has an office, if you use Copilot, this is what we charge you more for that on a per person basis. But this is not like that, right? This is business value. And you might have a fairly small number of users and you might suddenly see, you know, hundreds of thousands or millions of dollars of benefit every year. So how do you, you know, it isn't on a per seat basis. It isn't on data volume basis. It's truly on the value delivered to the end customer basis. And I think that that's where, you know, what do you tie that to becomes a really key question. So great question. I wish I had a hard, you know, specific concrete answer for you. I don't, other than the fact that we are experimenting as we speak. We are working with these customers and others to basically figure out what is the best way to price these things so that they get the value and they recognize that they pay us for the return we're generating for them.
spk02: I appreciate the answer. And I can squeeze in one more actually, you know, now that the MarkLogic acquisition is closed, or that integration is complete, sorry. Is there anything to call out that you learned from that integration? I know you guys improve on your process every time. And maybe, is there an opportunity, help me understand, can AI, the advances in AI help you increase your integration, the speed of the integration process?
spk21: So I think I'll give you the second part first. I think the AI helping with speed of integration, I think that's a little premature. As you know, with a lot of these AI capabilities, you need a lot of data before they do something right and meaningful. I don't know anybody who can say I've got a database of a a thousand acquisitions done right in the enterprise software industry that I can leverage for helping with my AI. I think it can help on some superficial incidental work, like doing some analysis of, for example, contracts or something like that, or customer contracts that a business might have and those kind of things, and we're looking at that. But overall, I don't know whether it can actually dramatically help. So at least right now, we're not sure it can. On the, what did we learn from MarkLogic? I think one of the things that, you know, we were not as prepared for, to be honest, when we did the MarkLogic acquisition is we didn't fully realize the level of complexity around the government, the federal government business that MarkLogic had that was with three letter agencies, which was extremely classified. which meant that we had to create processes inside Progress to keep that information very, very contained and sort of keep it from those folks in the company who are not cleared. And this is really a non-trivial thing, and it's a really critical thing for those federal agencies who require security clearances. So most of the folks at Progress don't even know the names of those customers we use code names for those customers because even names for those customers are confidential and secure. So, Lucky, I think that was a wrinkle that we did not expect. We've learned how to work around that and figure out how to do the right things there, and we've created a very strong governance model around it to make sure that we keep the secure information secure, yet conduct our business in a way that we can do our governance and our policies and our processes. So, It took us a little bit longer in the first part of that acquisition, and that's what we learned out of it. We always learn something new with every single one. So thank you for asking.
spk02: Yeah, it's great to hear, and thanks very much for taking my question.
spk10: Thank you. One moment for our next question. And that will come from the line of Brent Phil with Jefferies. Your line is open.
spk09: Hey guys, thanks for taking my question to Antonio Venturamon for Brent. I wanted to ask, given your diverse portfolio of companies and end markets that sort of fall in your preview, can you maybe give your puts and takes on what you're seeing across sub-segments of your portfolio? Are you seeing differences in behaviors maybe across seed base versus consumption end markets or know changes in trends in your relational versus no sql databases or on-prem versus you know cloud customers anything that sort of stuck out to you in the quarter that may have surprised you uh relative to to expectations hey antonio you know it's interesting right um so we don't really have consumption based pricing in our in our products to be honest right and
spk21: You know, you could potentially say, okay, you know what, our OEM relationships are, quote, consumption-based, but they're not really. They're not consumption-based in the true sense of the word. You know, the OEM, you know, they find new customers or they expand their customer base and they get more licenses from us. But that's not consumption-based the way, you know, the market talks about consumption-based where they say, you know, more users using it or more data being put through it or more transactions going through it. So really, for us, it is a more traditional enterprise software business. We are continuously strength in our cloud as well as on-prem offerings. So nothing sort of unusual there for us. But again, we are not selling cloud apps that basically somebody has to go, hey, I need a new project to put in a new HR system or a new financial system or a new this or a new that. right? What they are looking to say is, you know what, how do I better manage what I have? How do I secure it more? How do I deploy these things well? How do I expand my applications? How do I add capabilities to my applications? How do I leverage my data? How do I integrate that data into my business processes? How do I make my business processes more intelligent? So how do I have better user experiences for my customers? I mean, all kinds of things. So all those things are around sort of the infrastructure and the mission-critical applications that they have that run on that infrastructure. And so therefore, you know, what many of those guys out there are seeing that are dependent on, quote, new projects, right, is I think a very different market segment overall than what Progress plays in, and which is one of the reasons why Progress has been a very resilient company throughout. I know that a lot of people... including myself, weren't here when the Great Recession took place. But even during the Great Recession, if you look at historic results of progress, they were extremely good compared to what happened to the rest of the industry and the rest of the tech market from a business perspective, from a revenue and those kind of perspectives. And so the reason is that it is a very resilient business and our customers are using our software, which is essential software, And it is about, you know, sort of, you know, continuing to work with them and winning some new, right? If you look at our business, obviously we win some new because we see ARR growth, right? And it's rather small, but for us it is, you know, important. And so we continue to win some new customers and we win them across the board. So no specific segment specific or market specific or, you know, Product-specific, I mean, again, you heard Anthony's commentary on how our products performed, many of which did well this quarter. So it's always quite often a different set of products every quarter, but overall, very solid business and continue to see the same type of demand going forward.
spk06: Awesome. Thank you, guys.
spk10: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.
spk21: Thank you, Sherry, and thank you, everyone, for joining us. Really appreciate it, and we look forward to talking to all of you again soon. Have a good night.
spk10: Thank you. This concludes today's program. Thank you all for participating. You may now disconnect.
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