Good day, and welcome to the Progress Software Corporation Third Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Tom Barth, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Joyce. Good afternoon, everyone, and thanks for joining us for Progress Software's Fiscal Third Quarter 2012 Earnings Call. With me today is Jay Bhatt, President and Chief Executive Officer; and Melissa Cruz, our Chief Financial Officer. Before we get started, I'd like to remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives and other information that might be considered forward-looking. Please review our Safe Harbor statement regarding this, which is available in the Investor Relations section of our website at progress.com. Additionally on this call, we may refer to certain non-GAAP financial measures such as income from continuing operations and diluted earnings per share from continuing operations. You can find a tabular reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release, also in the Investor Relations section. Today, we published our financial press release on our website and furnished the information to the SEC in an 8-K filing. These documents contain the full details of our financial results for the fiscal third quarter, and I recommend you reference these documents for details. Today's conference call will be recorded in its entirety and be available on replay on our Progress website in the Investor Relations section. With that, I'd now like to turn it over to Melissa.

Thank you, Tom. First, I'd like to say that I'm really excited about being part of a results-oriented company that's undergoing a great transformation. When I joined, Jay's vision of progress was clear, and the company was already executing on the strategy that Jay outlined last quarter. Progress is a company with tremendous assets, including a global footprint, a broad partner ecosystem and motivated and talented employees, in addition to a strong cash position and an enviable recurring revenue rate. My 2 months on the job have validated that I joined a company and an executive team with the ability to execute and drive this company's top and bottom line performance in the long-term. Before I turn to the results, I'd like to discuss how our results are undergoing some changes over the next few quarters as we work through our transformation and our reporting within the accounting standards. So first, let me start by outlining our core and non-core results. We believe presenting key operating results for the core segment provides greater transparency around the financial performance and a better understanding of our company's go-forward prospects. And as Jay promised last quarter, we're now providing you greater detail regarding our core segment operating performance, including quarterly results for both revenues and operating income. As a reminder, these segments are constructed differently from our previous segments, and they represent the go-forward business, the core; and the to-be-divested business, the non-core. Core revenue declined 6% year-over-year on a constant currency basis. This compares favorably with our Q2 '12 decline of 10% and demonstrates traction towards stabilization and then growth in the core. On an actual currency basis, the core is essentially flat quarter-over-quarter. Our core operating margin for Q3 was 26%. It's down from 44% a year ago. Since our strategic…

All right. Thanks, Melissa, and hello, everyone. Last quarter, our tone was optimistic long-term, but cautious regarding the Q3 outlook. We felt this was prudent given the economy, seasonality within our business and the significance of the internal changes that we are experiencing throughout the year. Our Q3 results were in line with our expectations and reflect improvements on many fronts, but we still have much to do. As we said before, 2012 is a difficult year with a lot of moving parts. However, I believe we are making solid progress on what we promised regarding our new strategic plan. Although some of the disruption from the changes we've implemented is behind us, the type of transformation that we're undertaking does not happen overnight, and we expect to encounter continued turbulence for the remainder of fiscal 2012 and into 2013. However, we feel confident about the potential of our core products and expect the company to exit the year with positive momentum in our core, thanks in part to the investments we've made to date in the core business. Before I get into the details of Q3, I'd like to highlight several recent key hires. In July, we welcomed Melissa Cruz as our Chief Financial Officer. Melissa is a great addition to my direct team and brings a tremendous amount of operational and financial experience in both publicly traded and privately held companies. I announced Andy Zupsic last quarter as our new Head of Sales, and recently, we added several others to our sales leadership ranks. Mike Porter joined us recently as our new Head of Americas. Now Mike's had a longstanding track record of sales achievement at Juniper Networks and Microsoft and has closed his first quarter here at Progress. Additionally, we recently hired Kim King to lead the…

Thank you, Jay, and that concludes our formal remarks for today. I'd now like to open up the call to your questions. [Operator Instructions] Joyce, I'll now hand it over to you to conduct the Q&A session.

[Operator Instructions] We'll take our first question from Mark Schappel with Benchmark.

Jay, starting with you, with respect to the non-core product line divestitures, what are some of the roadblocks that maybe running into or some of the challenges you're facing? Is it price? Maybe lack of buyers? Decisions on whether to sell products as a bundle or individually? Could you just walk us through that a little bit?

Sure, Mark. No, what I would say is, first, let me just remind, our guidance around the non-core divestitures was a culmination of the process some time end of next -- mid to end of next year. I don't think you should interpret anything I said to imply there are roadblocks. In fact, I would say the process is going extremely well. There's a lot of interest. I think it's a testament to the strength of the products. As I've said before, I said in April, I said again on the earnings call last quarter and I'll say again today, these products that we're selling, they're good products. They're very solid products. They're just not core to our strategic plan. And I think we're seeing that very clearly from the buyer populace out there and their reaction to it. So I'm feeling really good about the process. I'm feeling really good about the progress against the process. Unfortunately, when you're in the middle of the process, like we are, we're not able to disclose a lot of the details, but I don't really have any issues with the process right now.

Okay, thanks. And then as a follow-up, with respect to the $150 million in share repurchases that were scheduled for this year, are you still on target to meet that plan, or are things running a little bit tight for time?

No, like I said in my remarks earlier, we are still intending to execute on that and that $150 million share repurchase.

We'll take our next question from Greg McDowell with JMP Securities.

I do appreciate the increased transparency in the core and non-core breakout, thank you for that. I do want to ask about the non-core revenue guidance for the fourth quarter. And I know it's on a constant currency basis, and you're going to have another currency headwind. But even if sort of assuming sort of a negative 6 to negative 3 as-reported number, it still implies a pretty aggressive sequential improvement in non-core revenue from Q3 to Q4. So my question is, is there something special about this Q4 compared to previous Q4s that gives you the confidence that you could have such a strong sequential uplift in revenue?

Greg, are you talking about the core guidance because we're not guiding on non-core.

No, just core, core guidance.

Okay, you had mentioned non-core.

Sorry, I misspoke.

No problem. So yes, so we said negative 6% is what we achieved and our guidance is not negative 3, it's negative 2 to positive 1. So that's our guidance, that's our guidance range. Sequentially, it's a continued move to stability. I think in some -- we are -- we believe very strongly in the strength, in the foundation of the core. And there are a lot of things that we've encountered. If you think about what we're going through, I think it's a very unique set of circumstances around the kinds of divestitures, the activity that we have going on, separation of the business the way we've had to do to get to core and non-core while still running your core and driving it. And so I think that -- one of the things I'll point to is there were things that were happening in the third quarter that had to happen frankly, things like restructuring that started to occur in EMEA that we've delayed. If you recall, we talked about a second quarter restructuring around that $55 billion cut that we took, but it didn't affect EMEA until the third quarter because of some regulatory and unique situations to EMEA. So that would -- there are barriers around that. There are barriers -- we're still operating the non-core assets and through the third quarter, we had certain economic and compensation programs focused on continuing to drive the non-core that aren't necessarily going to be at the same level in the fourth quarter. So there are some things that give us a lot of strong feeling that we will have a movement toward that stabilization range. I don't think the guidance range we've given for the core is -- you know, that's not where we want it to be. We want it -- ultimately, it needs to go north of that as we continue to stabilize the core, but I think it shows a fantastic progression toward that stabilization and that strong foundation.

And just one quick follow-up on the operating margins. I mean, when I look back at 2010, the core segment margin was 49%. And as you mentioned, it was 26% in Q3, and you expect to exit 2013 around 35%. But I guess longer term, what's it going to take to get it back up to these almost 50% levels that we saw 7, 8 quarters ago?

Why don't -- I'm going to have Melissa describe the dynamic going on there in the margin, and then I'll jump in around sort of how we're -- what we're doing in the future around the business to achieve that 35% margin level as the second part of the question.

Sure. So from 2010 through 2011, we were operating under different segment structures, of course, you know. And when we look at the comparison for how we're operating now, that was we were not in the process of investing in these particular product groups at that time. So what we've done, because we were following the RPM strategy, right? So what we've done now is we've increased our investment in the core products, and that really causes the expense -- the margin reduction. At the same time, you have to look at the revenue side of that. We've had revenue declines in the core during that same period. So that's a double effect on the margin rate during that period. When we're going forward, we're still focused on the 35% exit margin for Q4 of 2013. But in terms of going from 35% up to 40%, I'll give that one back to Jay.

Yes, well, I think also given that 35%, there are things like operating costs and strand -- things -- costs -- not stranded costs, but operating costs that relate to a larger company that don't relate to the smaller company that we're becoming as we divest these assets that ultimately get allocated to the core. And so I think there are things you have to look at to say, "How do -- we're not through the transition out of the non-core yet, and there's still some work to be done as we get on that glide path, if you will, to that 35% margin in Q4. We feel very confident on the exit margin at 35%. In terms of getting back up to 46%, I don't think a healthy company -- I think what you see in those margins from -- the historical margins is a business that wasn't investing in, frankly, its core -- these core assets. And ultimately, the result that I identified when I got here, which was not a lot of growth and not a lot of innovation going on around them was the result of that lack of investment. I don't think in the software universe, many companies are able to grow and deliver that kind of level, 45%, 50% margins. And so my objective, as I've said for the last 4 or 5 months is to achieve a continuous improvement in margins starting at the 35% level when we get to Q4, so I want to see those margins improve, but I also want to see investment going back into the business so we can drive the top line which ultimately is critically important to us. So recall, Greg, we're stabilizing the foundation, we're stabilizing the margin. And then we're going to start to invest as we get to this sort of second prong or phase 2 of our plan, which is around aPaaS.

And we'll take our next question from Scott Zeller with Needham & Company.

Could you tell us about the renewal rate for maintenance in the core business, please?

Sure, the renewal rates for the core business is in the low 90% range.

Okay, and how does that compare, trending over the last few quarters?

Consistent.

Okay, and I believe I heard at the end of the prepared remarks that the target of 5% top line growth, core business -- was that maintained? Could you repeat that?

Well, what I said was the right -- obviously, given the circumstances I mentioned in the remarks on the fourth -- on the decision to widen the guidance on fourth quarter, we really need to see how fourth quarter unfolds. We're not able to confirm 5% for next year. We want to see how fourth quarter unfolds. But we're going to revisit that and talk about that on the fourth quarter, sort of fiscal year 2012 call in January.

And what exactly is...

One thing I do want to say is, I just want to reiterate though, we are confirming the 35% exit margin for Q4. So just to be clear, that's a top line discussion, not a margin discussion.

And I wanted to ask again on the fiscal fourth quarter guidance that you referenced. We did previously hear a target of $90 million to $95 million. Now it's negative 2% to negative 1%. But what is the actual previous fiscal November core revenue that you're referring to? Just so we're all on the same page.

Sure, it's negative -- the previous range we gave was in the 0% to 1% range, so 0% to plus 1%. We're now widening to go negative 2% to plus 1%, not negative 1%. So the range is negative 2% to plus 1%, a 3% range. Melissa, do you want to talk about that in the context of...

Sure, so last year's reported revenue for core was $93.5 million. When we're talking about a constant currency basis, the equivalent of that in current -- constant currency would be $91.7 million -- so you're looking at growth rates around -- starting with a 0 point of $91.7 million for your math.

We'll take our next question from Steve Koenig with Wedbush.

So first question would be I'm wondering if you all can give me just a bit more color on core revenues. And I'm sorry, I had to miss the first -- very first part of your call, so I'm sorry if you're repeating yourself. But I'm wondering, can you give any sort of sense even if just directionally, which geos or products saw a better year-on-year comparison? Were there -- was there much in the way of OpenEdge direct deals? Were there any large ones, et cetera? Just any color would be appreciated there.

I don't -- well, we didn't break down core by geo in the call. What I can -- there are a couple of things we can say. The core currently is -- Melissa, do you want to talk about the core breakdown? Do you have that there in terms of total revenue by geography, not growth rates, but total revenue?

Right, so the total revenue for the consolidated company, the total revenue for Americas is 58% in Americas, 35% in EMEA and 7% in APAC. And the core is similar to that with a slightly more...

Yes, the other thing I would say is that the Americas business -- all businesses -- obviously, you're following and writing on a number of software companies and you're seeing some of the macro weakness in particularly the EMEA region. And we see that as well. We're not specifically reporting growth rates by region right now. But we -- what I will tell you is that we're not inconsistent with some of our brethren out there. We are seeing some positive signs on pipeline building in the Americas, pipeline building in Europe, around the OpenEdge business, around the Decision Analytics business. So there's good size in it, I think indicative of -- if a company announces a plan at the end of the second quarter, is it executed through the third quarter, and you're starting to see some of our programs stabilize with some of the things that we need to stabilize happen so that we can convert pipeline and build pipeline, et cetera. And you're seeing that in all geographies.

I think the other thing to add to that is when you're looking at the overall license numbers, you're seeing a license decline of about 20%. We can tell you that the core license was materially better than that as you'd expect, that the larger decline was in the non-core, right? So the core license was actually up sequentially in the Q3. And that's part of the reason we're encouraged that we're making this progress.

Okay, all right. If I may get a follow-up question in there, I'm wondering, in terms of -- you were pretty clear on the last question that you'd be looking for Q4 results to determine what you're going to do with fiscal '13 top line guidance. Specifically, what metrics will you be looking at? And if it's license, would you be looking at the overall number, or would you be looking at the trajectories for specific products? Just what's going to cause you to figure out where to put that guidance?

Yes, well, let me just add to the things -- well, we're looking at a lot of things not just fourth quarter. I mentioned that on the answer specifically around sort of the trending of guidance. But we're in the middle of our strategic planning process, we have a -- just as many companies do, we have a fairly in-depth fall planning process. And that planning processes is revisiting the April plan and trying to understand exactly what -- as you would expect, what's working, where we want to double down, where we want to focus. So we want to get through our planning process, and that goes through our fall time frame here before we're able to really adequately and accurately start to make predictions on next year. I think the other -- I think the things we'll look at, the things we're looking at and planning are just as you'd expect. The partner channel is a big part of the -- the OpenEdge business is a big part of the core. The partner channel is a big part of the OpenEdge business, so we're focused on the partner channel. We're trying to understand the direct end-user on the OpenEdge side, and do we have the coverage on the direct end-user? Are the programs that we're running affecting the direct end-user? What we're seeing is the partners were less affected in the transition than the direct end-user on the OpenEdge side. So that's something that we're trying to analyze and understand and figure out if it's an execution challenge or otherwise. I think the other thing you got to remember is prior to the April plan, we were running a business that was focused on something called RPM. And there are components of the core that we retained that were a part of that RPM suite, if you will. And that includes Apama and Corticon. And so when we announced the separation of the non-core, there was some work that we have to do around customers and around pipeline, around trust, et cetera to really start to build that progression back. So we're really watching that business as well. There's some things we're doing on the DataDirect side in terms of investment in the business around Web, in lead gen, better seasoning. So we're trying to understand sort of the pace of the seasoning. I think it's a situation where these things don't -- as I tried to say in my statements, these transitions, these really dramatic transitions, aren't overnight things. And we want to have -- we really want to see the fourth quarter and have a really good solid quarter of data around the stable core to better understand fiscal year's prospects -- fiscal year 2013's prospects.

Great, that's very helpful, I appreciate the transparency and look forward to kind of your take on those sorts of results after Q4.

We'll take our next question from Brian Murphy with Sidoti & Company.

Melissa, did you give us how much you spent on share repurchases in the quarter?

We did not spend anything on share repurchases in the quarter.

Okay. And Jay, you mentioned that your ISVs are doing more cloud development. Do you anticipate many of them changing their pricing models to be more ratable? And if so, any thoughts on how that might flow through to your P&L?

Yes, I think that the -- it's really interesting. It's really interesting to see the transition and dynamic going on in our own ISVs and just generally in the application software world. Because there are a lot -- first of all, there are a lot of companies that got the subscriptions and annual sort of recurring contracts that aren't sort of -- that don't look like enterprise contracts prior to the emergence of SaaS. And so the transition to a SaaS model was less disruptive for many software companies than you'd expect. I think those that are sort of running a quasi SaaS model through subscription are helpful. We have a bunch of those in our ISV base. But I think everybody's looking at business model and trying to understand how does this transition from on-premise to hybrid to cloud? How does it roll? What's the pace of it? And then how are people going to start to digest cloud apps? Are they going to be Web services? Are they going to be add-ons to your on-premise implementation? Are they -- how quickly do they replace your on-premise implementation if at all? And so everybody's really studying this. I think some of our elite partners, some of our sort of top end partners are further along than most. I know when I was running a large application business in my last role, we had a large business we were transitioning. We were thinking about how to transition to SaaS, and we had a subscription business, and so the business model transition wasn't as disruptive as sort of the whole infrastructure and operational component of how to maintain a SaaS application base as opposed to an on-premise base. So there's a bunch of stuff going on. And I think we're in the middle of that, a lot of that with our partners, we're advising, we're helping them work through those business models, which is exactly where you want to be as a platform provider to these companies.

And we'll take a follow-up from Scott Zeller with Needham & Company.

I wanted to ask about the outlook, Jay. You'd mentioned earlier in your comments that the 35% exit for fiscal '13 for operating margins is reiterated, I believe. But could you talk about the pace at which you expect margins to expand throughout fiscal '13 given the information you shared with us about top line for fiscal '13?

Scott, it's Melissa. As we're going through our internal planning process, the other thing we're doing is we're marrying up our revenue expectations with what we call the glide path. So we are in the process of trying to assess the most appropriate way for us to move from the 26% that we have this year to our guided range of 25% to 30% in Q4 and then moving into next year to the 35%. So we will have some incremental improvements along the way, but we're not in a position to guide exactly what those look like until we come out with our glide path, which is based on our investment strategy for next year.

We will take our next question from Aaron Schwartz of Jefferies & Company.

This is Fatima on behalf of Aaron. Just a quick question from me. Just given the stability that you're foreseeing into Q4 with respect to your core revenue, could you provide a little bit of color as to the dynamics of deal slippage? Are you seeing that trend sort of slow down and revert back to normal trends?

Yes, I would say, what we're seeing -- I think what we're seeing -- there has been deal slippage. I think there was deal slippage in the second quarter and in the third quarter due to the disruption and the confusion. It's interesting, when you announce a plan like we announced, that you had a bunch of moving parts and should be very positively perceived or embraced by the constituents that are -- that we're going forward with, they still have questions. These groups that are -- the buyers of products that are part of our core still have lots of questions and lots of concerns around how this really works. What does an investment in the portfolio mean? How -- and so we've had to be out in the field a lot this quarter trying to help our customers understand the transition. And I think that's why you see -- I think we've seen deal slippage. We have not seen lost deals very -- we have not seen an aggressive lost deal pace. We've seen -- if there's anything that we've seen, we've seen some deal slippage into Q4. But I do think that will slow and stabilize as we get through Q4 and back into fiscal year as the plan and the focus and our roadmap -- we released -- we're starting to talk about our 2013 roadmaps with our customers. That's a critically important component of creating confidence in the customer base that we're going forward with. So I think there is -- there continues to be some deal slippage. And I think as customers get more faith and -- not faith, but understanding of where we're going with our products and our business, I think you'll start to see that stabilize.

Okay, all right. Well, thank you very much. I want to thank all of you for joining the call this afternoon. As a reminder, we plan on releasing our financial results for our fiscal fourth quarter and fiscal 2012 year end on Thursday, January 3, after the financial markets close and holding the conference call the same day at 5:00 p.m. Eastern time. We look forward to speaking with all of you again soon and have a great day.

And that concludes today's conference. We thank you for your participation.