Progress Software Corporation (NASDAQ:PRGS) Q1 2023 Earnings Call Transcript
Progress Software Corporation (NASDAQ:PRGS) Q1 2023 Earnings Call Transcript March 28, 2023
Operator: Good day and welcome to the Progress Software's Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Micciche, Vice President of Investor Relations. Please go ahead.
Michael Micciche: Okay Sherry, thank you very much. Good afternoon everyone and thanks for joining us for Progress Software's first fiscal quarter 2023 financial results conference call. With us today is Yogesh Gupta, President and Chief Executive Officer; and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over our Safe Harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our integration of MarkLogic, 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 factors that may affect our results, please refer to the Risk Factors in our most recent Form 10-K. Progress Software assumes no obligation to update the forward-looking statements included in this call. Additionally, on this call, all the financial figures we discuss are non-GAAP measures unless otherwise indicated and you can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after the market close today. This document contains the full details of our financial results for the fiscal first quarter of 2023, and I recommend you reference it for specific details. We have also prepared a presentation that contains supplemental data for our first quarter 2023 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. And today's conference call will be recorded in its entirety and will be available via replay on the Investor Relations section of our website. So, with that out of the way, let me turn it over to Yogesh.
Yogesh Gupta: Thank you, Mike and good afternoon everyone. We're delighted that you've joined us today for our discussion of the results of our first quarter fiscal 2023. As you likely saw in our press release, our performance in the first quarter exceeded expectations and guidance, with a continuation of healthy demand across the Board and strong indication in the field. The integration of MarkLogic is gaining traction and will continue to accelerate going forward. We remain well-capitalized with strong cash flow, a sturdy balance sheet, manageable leverage, and we continue to drive positive trends in ARR and net retention rate. And despite the changing business climate, we remain optimistic about our business as you see from our increased forward guidance.
I will start by sharing some thoughts on the current business climate and how we see our business performing in this environment. I will then provide an overview of the quarter and an update on the MarkLogic acquisition, which closed in early February, after which I will discuss what we have seen in the M&A market, given that all has happened since the last time we spoke. Recall that at this time last year, as global events unfolded and the economy began to show signs of distress, we discussed the attributes and characteristics of our business that help us weather difficult economic conditions. Our business does not depend on vast new projects that require large budget to achieve our targets. End users of Progress' products keep buying and paying for them often for decades, because they trust our technology to run their businesses.
And in times of turmoil, our customers and partners depend particularly heavily on the reliability, scalability, and cost effectiveness of all the products in our portfolio. Because we invest and innovate across our product line, our offerings continue to be current and relevant to our customers' and partners' most important business applications. This, combined with our outstanding customer support and relationship efforts, especially when they need us the most, continues to drive our remarkably high customer retention rates. This stability of demand is what we have seen over the last several quarters, even with the increasing global challenges, historic inflationary pressures, and upward interest rates. We remain confident about our business even though much has changed in the economy and in the world, with systemic uncertainty as a new factor since even just a couple of months ago, when we reported our Q4 results.
Let me address that last point for a moment. On March 14th, we issued an 8-K, indicating that we have no material exposure to Silicon Valley Bank or Signature Bank. While we do not like to witness this kind of instability, our primary concern is for the financial well-being of Progress, our customers, our investors, and our partners. I am glad to say that our credit facility is very, stable and well-funded and our ability to obtain financing, generate free cash flow, pay down debt, and if the opportunities present themselves, continue to make accretive deals remain strong. Anthony will provide more detail on this in a few minutes. Sharing some details on our Q1 results. The outperformance was once again evident across nearly all product lines in virtually all geographies.
Our chief benchmarks, ARR and net retention rate, both increased significantly, aided in part by the contribution from MarkLogic. ARR in the first quarter of 2023 was up 3.9% on a pro forma constant currency basis to $569 million from $547 million a year ago. And our net retention rates improved to 102% from 101% a year ago. Revenues came in at $166 million, ahead of the high end of guidance, which was $161 million, and earnings ended the quarter at $1.19 or $0.11 above the high end of guidance range back in January and represents 12% growth on a year-over-year basis. We saw a notable strength in our DataDirect, OpenEdge, as well as Loadmaster, MOVEit, Sitefinity, and Flowmon products. We continue to be particularly pleased with the momentum of our Sitefinity and MOVEit cloud products.
These easier to consume cloud offerings give us a meaningful competitive advantage in the market. We're also very happy with customer wins with Loadmaster and Flowmon, the two products we acquired through our Kemper acquisition. We're seeing improving traction for these two products in broader geographies. And with Loadmaster, our Dell partner channel, continues to grow as we engage with them in more regions around the world. We also saw strong demand from our existing customers who continue to expand their use of our core products OpenEdge, DataDirect, and Chef. I want to thank all our employees around the globe who work tirelessly to drive our success. Speaking of our employees, we just completed a periodic companywide survey of all our employees with a record participation rate of over 90%.
Our employee engagement score of 79% matches the average of the top quartile of new tech companies. And our employee Net Promoter Score or eNPS is 40, which is better than many well-known tech companies such as Microsoft, Google, and Apple. Now, let me turn to MarkLogic for a moment. As we explained when the deal closed, we did not expect MarkLogic to contribute more than a few weeks to the first quarter 2023 and that was the case. As the integration picks up momentum in the coming months, we will see ongoing improvements in the expense line, which we expect to remain manageable and have already guided for and revenues will increasingly kick in throughout the year. Do remember that MarkLogic's biggest revenue months are December and January, and our fiscal year ends in November.
So, we still expect to see the biggest revenue impact in Q1 of next year and the first full year of positive impact to the topline in our full year FY 2024 results. In the meantime, we're integrating MarkLogic employees into the Progress family as quickly as possible. We've met in person with many of them at well attended meet-and-greet sessions in California, Virginia and New York, the UK, and Poland. The sales and engineering and marketing as well as operational teams from both sides are already working together and moving forward. We are very excited to have our new teammates on Board and wish them a very warm welcome. Let's now talk about the changing M&A market. When we embarked on our total growth strategy over four years ago, we said that the infrastructure software landscape is populated by thousands of potential targets with technology and products that could complement our existing portfolio, strong sticky customer bases, high degrees of recurring revenue, and have the potential to ramp margins significantly with the synergies that we can achieve.
Those vast numbers haven't changed and as we have commented regularly for the last year, macroeconomic factors affecting the M&A market continue to move in our favor. More recently, the dramatic events surrounding collapse of SVB are causing further repercussions throughout the privately funded companies and the VC and private equity communities and software. The economic reality of SVB's failure is that it is likely to accelerate the need and the sense of urgency for liquidity events and exit strategies for many more companies, which plays in offence. As always, we remain disciplined, patient, and discriminating as we sift through potential acquisitions. We will continue to be selective when it comes to evaluating opportunities as we position ourselves as the acquirer of choice for the management, customers, investors, and employees of the companies we target.
Lastly, I want to draw your attention to our fourth Annual Corporate Social Responsibility Report, which we published just last week and which is available on our website. We are very proud of what we do here at Progress to help our people, our global community, and our planet and are happy to share all the ways in which Progress -- in which Progressers have helped and continue to make a difference in the world. So to wrap-up, Progress has marked another very good quarter. Demand remains steady and execution across all aspects of our business continues to be supported. Our outlook is positive for the rest of fiscal 2023 and we look forward to the ongoing integration of MarkLogic. As always, I continue to be grateful to the entire Progress team for their efforts and I applaud their teamwork and professionalism.
With that, let me turn it over to Anthony for his prepared remarks. Anthony?
Copyright: welcomia / 123RF Stock Photo
Anthony Folger: Thanks Yogesh. Good afternoon everyone and thanks for joining our call. As Yogesh mentioned, we're very pleased with our Q1 results, which again exceeded the high end of our guidance range on revenue and earnings per share. We're also very pleased to have closed the acquisition of MarkLogic in the quarter, which performed largely in line with our expectations despite the closing date being a few days later than anticipated. Turning to the numbers, we'll start on the topline with ARR, which we believe provides the best view into our underlying performance. As a reminder, our calculation of ARR is presented on a pro form a basis to include the results of acquired businesses in all periods and in constant currency with all periods presented at our current year budgeted exchange rates.
I should mention that consistent with past practice, we've updated ARR using our 2023 budgeted rates and as a result, the ARR that was reported in prior periods has changed slightly. The change is immaterial and doesn't alter the trend in ARR growth or the net retention rates that we've been reporting over the past several quarters. And to illustrate this point, we've included a slide in the supplemental presentation filed with our press release. With that, we closed the first quarter with ARR of $569 million, which represents 20% growth on a year-over-year basis and 3.9% pro forma growth on a year-over-year basis. To be clear, the pro forma growth includes MarkLogic in both periods. As Yogesh mentioned, the growth in ARR was again driven broadly across our product portfolio by multiple products including OpenEdge, MarkLogic, DataDirect, Sitefinity, MOVEit, and our DevTools products, a trend that continues to fuel our ARR growth is strong net retention with Q1 rates at 102%.
In addition to our strong ARR growth, revenue for the quarter of $165.6 million was well above the high end of the guidance range we provided back in January and represents 12% growth on a year-over-year basis. The better-than-expected performance in the quarter was driven by two primary factors; first, and representing the majority of our over performance, was stronger than expected demand from multiple products, including OpenEdge, DataDirect, MOVEit and Loadmaster. Beyond the product level over performance, timing was also a factor in net sum revenue that we expected to recognize in the second quarter came in early and was recognized in Q1. This Q2 to Q1 shift was not deliberate and does not impact our full year results, but I highlighted because it contributed a few million dollars of additional revenue to an already strong quarter.
Turning now to expenses. Our total cost and operating expenses for the quarter were $93.2 million, dollars up 5% compared to the prior year and generally in line with our expectations. The year-over-year increase was driven by the acquisition of MarkLogic and to a lesser extent, an expected increase in compensation costs across the rest of our business, which we've discussed in previous quarters. Operating income was $72 million, up $14 million compared to the prior year quarter and our operating margin was 44% compared to 40% in the first quarter of 2022. On the bottom-line, earnings per share of $1.19 for the quarter, represents growth of $0.22 year-over-year and is $0.11 above the high end of our guidance range. This over performance relative to our expectation was driven by solid cost management across the business, coupled with previously mentioned over performance on the topline.
Our outlook for the MarkLogic integration is unchanged and we expect to recognize all synergies by the end of this fiscal year. Moving on now to a few balance sheet and cash flow metrics. We ended the quarter with cash, cash equivalents, and short-term investments of $123 million and debt of $821 million for a net debt position of $698 million. This represents net leverage of roughly 2.6 times using our forecasted fiscal 2023 adjusted EBITDA and if we pro forma debt EBITDA to consider MarkLogic synergies, our net leverage drops even further. I should also mention that during the first quarter, we drew down $195 million from our revolving line of credit to partially fund the acquisition of MarkLogic. Our DSO for the quarter was 42 days, an improvement of 20 days when compared to last quarter and an improvement of 10 days when compared to the first quarter of 2022.
Adjusted free cash flow was $47 million for the quarter, an increase of $2 million compared to the prior year. This increase in free cash flow was largely attributable to our stronger operating performance compared to the prior year quarter. During the first quarter, we repurchased $15 million of Progress stock and at the end of the quarter, we had $213 million remaining under our current share repurchase authorization. Okay. Now, I'd like to turn to our outlook for Q2 and the full year 2023. When considering our outlook for Q2, it's important to reiterate the point I made earlier about our Q1 performance and the fact that some revenue we expected to recognize in the second quarter was instead recognized in the first. While those timing issues can impact quarterly results, again, they don't affect the full year.
With that, for the second quarter of 2023, we expect revenue between $168 million and $172 million and earnings per share of between $0.88 and $0.92. For the full year, we continue to see strength in the demand environment for our solutions and we're also aware that the macro environment may become more challenging. As such for the full year, we expect revenue between $680 million and $688 million, an increase of $4 million from the midpoint of our prior guidance. We expect an operating margin of between 38% and 39%, generally consistent with our prior guidance; adjusted free cash flow between $175 million and $185 million, again consistent with our prior guidance; and earnings per share between $4.09 and $4.17, consistent with our prior guidance.
Our annual EPS estimate contemplates a tax rate of 20% to 21% approximately 44.6 million shares outstanding and the impact of $30 million of share repurchases we are targeting to complete by the end of 2023. In closing, we're excited to deliver another strong quarter of financial results across the Board, a continuation of the trend that we saw from much of 2022. We're thrilled that we've closed the acquisition of MarkLogic and we believe we're very well-positioned to deliver strong results for the remainder of 2023 and beyond. With that, I'd like to open the call for Q&A.
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