Good day. And welcome to the Progress Software Corporation Q3 2019 Investor Relations Call. At this time, I'd like to turn the conference over to Mr. Brian Flanagan, VP of Investor Relations. Please go ahead, sir.

Thank you, James. Good afternoon, everyone. And thanks for joining us for Progress Software's fiscal third quarter 2019 earnings call. With me today is Yogesh Gupta, President and Chief Executive Officer and Paul Jalbert, our Chief Financial Officer.Before we get started, I'd like to remind you that during this call, we will discuss our outlook for our future financial and operating performance, corporate strategies, product plans, cost initiatives and other information that might be considered forward-looking. This forward-looking information represents Progress Software's outlook and guidance only as of today, and is subject to risks and uncertainties. Please review our Safe Harbor statement regarding this information, which is available in today's earnings release, as well as well as in the Investor Relations section of our Web site at progress.com.Progress Software assumes no obligation to update the forward-looking statements included in this call, whether as a result of new developments or otherwise. Additionally, on this call, the revenue, operating margin, diluted earnings per share and adjusted free cash flow amounts we refer to are on a non-GAAP basis. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release issued today. Also, please note that all 2018 amounts have been adjusted to reflect ASC 606, which we adopted effective December 01, 2018, using the full retrospective method.Today, we published our financial press release on our Web site. This document contains the full details of our financial results for the fiscal third quarter 2019, and I recommend you reference it for specific details. Today's conference call will be recorded in its entirety, and will be available via replay on our Web site in the Investor Relations section.And with that, I'll now turn it over to Yogesh.

Thank you, Brian. Good afternoon everyone, and thank you for attending our third quarter earnings call. As you've seen in this afternoon's press release, we had a really strong Q3 performance, sustaining the momentum we've seen in our business throughout this year.Both revenue and EPS were well above the high end of our guidance range and cash flows were very solid as well. The over performance was driven by our OpenEdge segment, which included better-than-expected revenues from Ipswitch and by the timing of deals in our DCI segment. I continue to be encouraged by the performance of our core business.Based on our consistently strong execution and the opportunities we see within our segments, we are again increasing our annual guidance for both operating margin and earnings per share. In addition, despite additional FX headwinds as we head into the fourth quarter, we are increasing the midpoint of our revenue guidance by over $1 million.As I mentioned, Ipswitch performed very well during the quarter. And we remain ahead of expectations with our integration efforts and the realization of cost synergies, helping to drive both revenue growth and profitability upside. This was the first full quarter of Ipswitch operations within our results. And I'm more than convinced than ever that this acquisition is proving to be a winner for us.Paul will provide more detail on our Q2 results, but I would like to focus my remaining remarks on our strategy moving forward and on some of our financial goals for FY20 and beyond. Underpinning our strategy, of course, is our strong and stable core business, which has high levels of recurring revenue and as I've stated many times, a flattish revenue growth profile. And with the success of Ipswitch, we've demonstrated that accretive M&A can drive meaningful inorganic growth along with increased…

Thank you, Yogesh, and good afternoon, everyone. As a reminder, all financial results that I'll be referring to in my remarks are on a non-GAAP basis. I'm very pleased with our third quarter financial performance. Total revenue came in at $115.5 million, which was $3.5 million above the high end of our guidance range.Our over achievement was primarily driven by better-than-expected licensed sales for Ipswitch, higher maintenance revenue for OpenEdge, and the earlier than expected signing of several large OEM deals within our DCI segment. Our earnings per share was $0.75 for the quarter, $0.05 above the high end of our guidance range due to the higher than expected revenue.Looking at consolidated revenue for the quarter as compared to Q3 of last year, total revenue of $115.5 million was 25% higher than a year ago at actual exchange rates, and 26% higher on a constant currency basis. This includes a negative $1.4 million impact due to foreign exchange fluctuations, which was 400,000 greater than our expectations.License revenue was $30.8 million, increased by 35% from a year ago at actual exchange rates and by 37% on a constant currency basis. The increase was due to the license revenue from Ipswitch, as well as the renewal of higher number of multiyear term OEM contracts within our DCI segment as compared to last year.Our maintenance and services revenue was $84.7 million, an increase of 21% year-over-year at actual exchange rates and 23% on a constant currency basis. This increase was again primarily due to the addition of Ipswitch, but we also achieved slight maintenance growth in both our OpenEdge and AD&D products.Turning to our revenue by segment with all the comparisons at constant currency, OpenEdge revenue was $88.8 million for the third quarter, up 29% versus Q3 2018. Now as a reminder, Ipswitch…

Thank you, Paul. That concludes our formal remarks for today. I'd now like to open up the call to your questions. I ask that you keep your remarks to your primary question and one follow-up. I'll now hand over to the operator to conduct the Q&A session.

Thank you [Operator Instructions]. We'll take our first question today from Steve Koenig with Wedbush Securities.

So one quick one on Ipswitch, and then a follow-up so cost and revenue outperformance. So should we expect that they're on track for beating that $42 million that you're expecting this year? I believe that was a number on revenue. And can you give us any sense of contribution in the quarter?

So as you know, we are not, Steve, breaking out specific revenue contribution. But yes, they are ahead of the $42 million plan that you said, for the year.

And then on the -- so on the free cash flow guide. I'm wondering given the reduced investment in Kinvey and then the Ipswitch outperformance and OpenEdge did well in Q3 too. Maybe just some color on the potential for free cash flow upside, maybe why -- could the guidance -- why can't be better, I guess, is the question there? And if I could slip one in on the margin improvement for next year, that looks promising. And I'm wondering, are there catalysts for -- and as you continue to do acquisitions, are there catalysts for doing better than the rule of 40 as you gain critical mass and gain operating leverage as a result of that? Maybe just kind of how should we think about the long-term model?

So let me start with the second one first, and then I think, Paul, can discuss the cash flow, Steve. So we actually see our margin expectations going up, as you said, in part due, of course, our reduced investment in our Kinvey platform and in part due to our ongoing focus on running our business as efficiently as possible.We of course, expect our margin next year to be 100 to 200 basis points higher than the 37% guidance for FY '19.We believe that our margins at that level are extremely competitive, but we also always strive to run our business as well as we can. And as we pursue our accretive M&A and scale the business up, we'll continue to look for additional opportunity, Steve. So that's the way we see it going forward.

Steve, on your question of cash flow, you're right. So we're guiding 125 to 130, right, so about $92 million year-to-date. We think given the actions that we're taking and most of those are in the fourth quarter, you're not really going to see the cash benefits of that until 2020. So as I said it before, our guidance, we're comfortable with the 125 to 130 for the year.

Next we'll hear from Matthew Galinko with National Securities.

Do you think, just given the pivot out towards M&A and away from the organic growth strategy is there sort of Ipswitch sized, kind of remember we should be thinking about? Or do you have the infrastructure in place to do a little bit more than that? I'm just kind of curious how you think about your capabilities now?

So Matt, first of all, we think that we have a very strong team in place, and we have the right infrastructure in place to be able to do these acquisitions with on a regular basis and in a repeatable model. In terms of the size of the acquisition, the sweet spot for us is 10% to 20% of our revenue. That doesn't mean we won't do something slightly smaller if it shows up, or if something bigger shows up that is really going to make the right impact, we would look at that as well.So we're not hard constrained on the 10% to 20% range, but that is a very effective range in terms of what we can acquire and integrate, as you saw with Ipswitch as well. So that's our sweet spot. We actually continue to be very disciplined about looking for these. And so when you are that disciplined,you actually are looking at it, of course, many more than we actually go after because of the discipline that we have. And because of that, size can be somewhat bigger or smaller.

And then, maybe a little bit more on Ipswitch. Now, that you've operated it for a little while. I'm curious if you're willing to go into a little bit more detail on which of its products are outperforming? I assume it's not necessarily the legacy stuff and maybe it's sort of the newer stuff. But just kind of curious what you're seeing and what you're learning about how you're selling into the customer base, and how that matches with your existing channels? Thank you.

So as you know, there are two main product lines at Ipswitch in two specific market segments they're in; one is in the area of the data movement; and the other is in the area of network management. Wonderfully for us, both those businesses are doing well. So we are really excited about that. Our go-to-market for Ipswitch has a significant indirect component to it through distributors and resellers. And I think that being part of a larger publicly traded company, I think that creates a level of comfort there as well in our organization, both the Ipswitch folks that have come on Board, as well as the progress people that are working with them.I have done a really, really good job of working with our indirect channels to continue to the momentum that we have there. We are also selling direct. So I don't want to imply this only in direct. There is a direct component to that business as well, both sides of those channels are doing well. So we're actually quite excited about this, Matt that Ipswitch products are performing well across the board.

We have a question from Mark Schappel with Benchmark.

Yogesh, with respect to your prepared remarks around the Kinvey business. I was wondering if you could just go into some further detail of why you're scaling that business back so meaningfully. I mean, obviously, you're seeing some deterioration in your pipeline, or just as a materially. Is it materializing the way you thought it would? I was wondering if you just go into a little bit more detail there. And also to any options, maybe different options around the Kinvey business, like moving it off to a channel or even selling the business, per se?

Yes so, of course. So, yes, as you know, as we have ramped up our investment in this area beginning late last year, we did see increased lead flow and pipeline building. And so we have an expectation that bookings would begin to accelerate in the six to nine month later or Q2 timeframe of this year. However, we have not seen the steady acceleration of deals and new customer wins that would justify our level of investment and effort. And so we now see quite strongly that reducing our investment is the right move for our shareholders at this time.We're not abandoning it by any stretch of the imagination. So we continue to support our customers. We continue to have this effort still ongoing, but a significantly reduced level. And we believe that there are opportunities for us within modern application development going forward as well. But we don't see a meaningful contribution in the foreseeable future. So given all that, it is our strong belief that our shareholders are better served at this time by our ongoing focus on running our business as efficiently as we can, and augmenting that by accretive M&A to deliver greater value.

Paul, question for you. Given the good quarter and the increased guidance for the fiscal year here, I was surprised to see that free cash flow guidance was not being raised. Any thoughts there?

Yes. I think, as I mentioned to Steve, right. So year-to-date, we're at $92 million and we guided $125 million to $130 million. We're comfortable with that there. I think some of the savings that are coming about as the reduction in our investments in Kinvey, are not really going to be fully seen until 2020.

At this time, there are no further questions. I will now turn the call over to Mr. Flanagan for any additional or closing remarks.

Thank you all for joining the call today. As a reminder, we plan on releasing financial results for our fiscal fourth quarter of 2019 on Thursday, January 16, 2020, after the financial markets close and holding a conference call the same day at 5 p.m. Eastern time.I'll now turn the call back over to Yogesh for his closing remarks.

Thank you, Brian. We've had a great first three quarters and are well positioned for success in 2019 and beyond with continued strong execution and a focus on repeatable accretive M&A. This is an exciting time for Progress, and we thank you for your continued support. Thank you for joining us on our call today. And I look forward to meeting and speaking with many of you over the coming months. Bye, bye.

That does conclude today's conference. Thank you for your participation. You may not disconnect.