Good day, and welcome to the Progress Software Corporation Q2, 2020 Investor Relations Conference Call. At this time, I'd like to turn the conference over to Mr. Brian Flanagan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Nadia. Good afternoon, everyone, and thanks for joining us for Progress Software's fiscal second quarter 2020 earnings call. With me today is Yogesh Gupta, President and Chief Executive Officer; and Anthony Folger, our Chief Financial Officer. Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, the impact of the COVID-19 crisis on our business 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 in the Investor Relations section of our website 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. Today, we published our financial press release on our website. This document contains the full details of our financial results for the fiscal second quarter 2020, and I recommend you reference it for specific details. We have also published a presentation, that contain supplemental data for our second quarter 2020 results, providing highlights and additional financial metrics. This presentation is available in the Investor Relations section of our website at investors.progress.com. Today's conference call will be recorded in its entirety and will be available via replay on our website 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 Q2 earnings call. Let me start by saying that I'm thrilled with our results for the second quarter, especially in light of the ongoing macro-economic disruption caused by COVID-19. Progress’s business has proven to be incredibly durable, and I'd like to expand a bit on how we are continuing to execute through this unprecedented crisis. Our entire global workforce has been working from home for over three months now, without missing a beat. The infrastructure and systems we've had in place have enabled us to effectively run our business remotely. And our employees continue to exhibit great flexibility and dedication, working diligently to provide the high level of product, support and relationship management that our customers and partners need and expect. Keeping our employees healthy and safe and preventing the spread of the virus in our communities is a much higher priority for us than returning to the office. So our plan is to continue to work remotely for the foreseeable future. One of the reasons our business has been so durable, even in the face of the economic upheaval caused by COVID-19 is a long standing partner relationship. This includes the ISVs that built their applications on top of OpenEdge and the OEMs that embed DCI into their products. We've been in frequent contact with many of our ISVs and OEMs, and we believe that their businesses share many of the same characteristics that make Progress so strong. The products that they have built that utilize Progress technology have large established customer base. These customers provide them with high levels of recurring revenue and a measure of stability, during these uncertain times. With our own high percentage of recurring revenue and the mission critical nature of our…

Thanks, Yogesh. Thanks, Brian. Good afternoon, everyone, and thank you all for joining the call. Total revenue for the second quarter was $102.5 million, $1.5 million above the high end of our guidance range we provided back in March. As Yogesh mentioned, while much of this over performance was driven by favorable exchange rates relative to those contemplated in our Q2 guidance, we also saw a slightly better than anticipated performance across our product lines, as our teams executed well during the quarter. Overall, our topline is proven to be extremely durable and stable, even in the face of the current macro-economic downturn, caused by COVID-19. This is in large part, due to the high level of recurring revenue in our business, which has been largely unaffected by the recent economic downturn. Our net revenue retention rate on maintenance remains well over 90% and the SaaS-related revenue from our OpenEdge ISVs who have deployed their applications in the cloud continues to be solid and steady. On a year-over-year basis, total revenue decreased by 1%, but increased by 1% on a constant currency basis. A few things to keep in mind when comparing our Q2 results on year-over-year basis are the recent anniversary of the Ipswitch acquisition. We have a full quarter of Ipswitch revenue in our Q2, 2020 results as compared to only one month in Q2 of 2019. This positive impact from Ipswitch is partially offset by the second item, which is a year-over-year decline in DCI revenue, which is consistent with the expectations we outlined during our January and March earnings calls. As a reminder, the timing of DCI contract renewals with certain OEM partners can significantly impact our topline in any given quarter. ASC 606 generally requires immediate revenue recognition of our multiyear term license agreements, with…

Thank you [Operator Instructions] We'll take our first question from Steve Koenig from Wedbush Securities. Please go ahead.

Great. Thank you. Yogesh, Anthony, I hope you're doing well.

Thanks, Steve. I hope you're well too.

Yes. Hanging in there. Thanks Yogesh. Just wondering on OpenEdge, first off, as you look to renew some of your OpenEdge agreements and both in ISVs, but I was also thinking in terms of the direct sales as well as you have and chunky renewals coming up this year, what are you doing to manage in risk around those renewals getting done, around maintenance not being too impacted by COVID? And what are you seeing out there with regards to those issues?

So Steve, actually, the OpenEdge business is running really solid. We are seeing our renewals, staying in the same renewal rates on maintenance, both for direct and indirect in the same range that they have been prior to COVID-19. So, really, really a solid business. Obviously, if there were some opportunities to maybe do the deal and renew something a bit earlier, those may not happen. So we might have the timing differences for us in terms of exactly when the renewals happen. But we don't expect renewals to be any different in terms of going forward. And the reason very simply, as you know Steve is that, our OpenEdge platform is used both by ISVs as well as by our direct customers in mission critical applications. And these mission critical applications are ones that maintenance is something that is considered critical for them to have. It is their ability to reach out to us and ask for help when needed. It provides them with all of the updates and fixes and all kinds of things. So there's tremendous value in what we deliver in our maintenance in addition to the upgrades that they get, but even in the ongoing support, bug fixes and help. So we feel very good about the maintenance aspect of OE and not just OE, actually the entire portfolio, we continue to see solid maintenance renewal.

Cool. Thanks for that, Yogesh. If I may ask one follow-up, I would love to get color on the $10 million to $13 million COVID impact for the full year, which is unchanged, can you give us some color, maybe a little granularity on that? Is that mostly the license? And are you seeing -- your ISVs from OpenEdge are -- they sell into the kind a lot of the SMB markets in manufacturing, but in other verticals. Maybe just some color on where is the bulk of that impact coming from? And kind of geographically in your businesses, where does it show up as well? When I say geographical, I'm kind of thinking more around product lines as well?

Yes. And I can answer that one, Steve.

Great. Thank you.

When we did our assessment last quarter, we started with sort of the vertical analysis and really wanted to understand, if we are exposure to any industry that might be hit unusually hard. And I think the answer to that, there was not exposure to travel leisure, oil and gas, things like that. And so, we then went through on a product by product basis, and really made an assessment of how we're making money on these products. Is it through retention and expansion? Or do we have to continue to sell a lot of new licenses? And for businesses like OpenEdge and even DCI to an extent, it's about retention and expansion, we do sell some net new deals, but it's largely retention and expansion. And I think, based on the relationships we have with the partners and the OEMs that are selling those products and building applications on top of those products, I think we've got comfortable that there was not quite as much impact there. And so we looked at a lot of the other product lines, those that tend to be more transactional and maybe a slightly lower price point, especially those that are long and a lot of more net new license sales. And that's really where we make the assessment to take the bookings and revenue down -- bookings and revenue assumptions down for the year. Geographically, it was predominantly U.S. and EMEA, where we play. I would say was -- for the for the non-OpenEdge and DCI product lines, it was both direct and indirect. I don't think we felt that there was no risk in either channel, and it probably was spread maybe weighted a little more heavily towards license sales, but we also contemplate a little bit of impact on maintenance and that was probably across the board. So that's how we -- I guess I would say that in the second quarter, the results were probably a little better than we anticipated. I think all the product lines held out very well. And so the outlook, I think remains largely the same for the potential impact and we'll just have to continue to monitor as we move through the year.

Got it. That's super helpful, Anthony, and thanks a lot for your answers.

Thanks, Steve.

Thank you for questions. We're now going next to Anja Soderstrom from Sidoti & Company. Please go ahead.

Hi, Yogesh and Anthony, and congratulations on a good quarter. I hope you guys are doing well. If you can, I mean acquisition is going to be a strong driver and you touched on the pipeline. Can you just maybe speak a little bit about how that the environment has changed since we last spoke? It's maybe like three months I think, since the COVID broke out. So, how has that affected the environment?

Anja, thank you. As I alluded to a little bit, I think the environment is more favorable to Progress. And it's more favorable to us on three different points the way we see it. I do think that a lot of the investors out there who have been looking at their businesses and saying which of their companies they want to continue to invest in, and which they should maybe decide to sell. I think that is creating a bit of an opportunity for more opportunities to come to market. We have also on secondly seen a decline in the valuation expectations from companies that are considering a fail. And so again, that creates additional opportunity for us to find assets at the right value from our perspective. And lastly, we continue to be financially strong. And because we continue to be financially strong, we believe that we are a more attractive and credible acquirer during these times, with the cash that we have, with the balance sheet that we have than some of our other folks that might be in the market looking to acquire businesses. So we see a healthy market, we see opportunities. And we continue to be optimistic about our ability to execute in the current environment.

Okay. And do you expect valuations to come down further? What are you waiting to execute on something right now?

What are you waiting for? That's a good question, Anja. We continue to look at opportunities, right? And really to us, it isn't whether the valuations in a broad basis needs to come down further or not, it is asset by asset. What is it that an asset is available at? What is it that we can do with it? And as you know, we have very strict financial criteria regarding our deals. So we want to make sure that any deal we do has high levels of recurring revenue, has excellent renewal rates that we can take out enough cost so that the both synergies, their margins are going to be consistent with our margin structure. And of course, the most important aspect is we want to make sure that we generate a ROIC that is above our WACC. And to me, all those things, I mean that we look at each opportunity carefully, and when it is right, we participate, and when it is not, we’re also happy to move on. And so, I don't see us waiting so to speak for valuations to come down further. I don't think that's sort of what it is. I think it is just identifying the right assets and making sure that we do our hard work and make sure that it does fit us. And again, we've said this all along Anja, we are very aggressive about this, but at the same time, we're also very disciplined. And I have said this over and over, I'd like to do one deal a year, maybe 10% to 20% of our revenue. And if we can do that consistently do some hundred million dollar deals, we can actually in five years double the size of the company. And we feel confident that we can do that.

Okay, thank you for that additional color. And then just curious for your recurring revenue. How long does those contracts tend to be? And how sticky is that?

So, that sort of varies a little bit by portfolio. So let me share with you, the DCI portfolio has probably the longest contract. In fact, definitely the longest contracts on the average. Many of the ISVs that OEM, DCI will find five year contracts. That's not unusual. Three years to five years is the vast majority of them. OpenEdge is a bit less. But OpenEdge is different. OpenEdge the ISV business is really -- it doesn't bring you all in the same sense. The ISV business is an ongoing relationship that basically is a revenue share model for the vast majority of them. And so it's more about they basically collect their maintenance revenue from their customers, and they pay us a piece of that. Or if they expand their footprint at a customer and sell additional licenses that they can sell us and give us a piece of that as our revenue. So there it is, actually, really -- they are quite long-terms as well. These are not short-term agreements, because these people have built their business applications on top of our platform. And these are mission critical to their customers and they are business critical to these businesses, because they are bread and butter for their businesses. The direct side of OE, again, I would say three years is probably the most common term there. But when you come to the Dev Tool side and Ipswitch product portfolio, Whatsup Gold and MOVEit those are typically shorter agreements. Many of them are one year agreements and some are two and three year agreements, but many of them are one year agreements. So, again, it varies with our portfolio. And as we've said before, our maintenance renewal rates are above 90% for the whole business. And with products like OpenEdge, they are well into the 90s.

Okay. Thank you. And then I'm also curious, you being a tech company, I assume you have a lot of foreign workforce. And now with this new executive order on foreign visa, how do you anticipate that impacting your business? Do you have a lot of [Multiple Speakers]?

Yes. So Anja, interestingly enough, we don't really have a lot of employees that come to the U.S. from abroad that are on the kind of visas of the extended work here type of visas. Our international employees actually work out India office and Bulgaria office, as well as other European and Asia-Pacific, as well as the CALA offices, the Central and Latin American offices. So these folks primarily come for business visits. Of course, none of those business visits are taking place right now. We're working from home, we're not doing any travel. But those visas are very different than the work visas that have been put on hold. So we don't really see a meaningful impact for us actually because of this.

Okay, thank you. That was good color. And that was all for me. Thank you so much.

Thank you, Anja.

Thank you. That concludes today's question-and-answer session. We'll go ahead and hand it back to the speakers. And before that, we have Mark Schappel from benchmark who'd like to ask one last question.

Hi, good evening. Thank you for taking my question. And nice job on the quarter in this typical environment here. Yogesh, my question for you. I just had a question on the share buyback program. With such a strong balance sheet, why suspend the buyback? If I recall correctly, you spent about $20 million last quarter on share repurchases. But maybe just give us a little bit of a thought process on suspending the buyback this quarter.

Sure. And I'll let Anthony add as well. But from our perspective, it was purely prudence around making sure -- I mean, Mark as you know, right, in March, the world was looking very uncertain, right? And we felt very confident about our business, but at the same time, it made sense to be prudent and not go ahead and do buybacks and preserve cash for the time being. We did remarkably well in the quarter, I'm truly excited about it. Thank you for your compliments. But we were just prudent in the in the quarter and being cautious, just to make sure that we didn't go out and do something that we would later on regret. As simple as that, no other reason.

Okay, great. That's great. Thanks. And then just to follow-up on your DCI business. You've had some really nice wins over the last year or so in DCI, which is a pleasant surprise for renewal business. If you could just give us a few additional details if you could on two new DCI deals this quarter?

Yes. Mark, thank you. It's actually an interesting business. In general it is a, as you said, it's a maintain, renew business. That really is what it is in the vast, vast majority of it, right. What these two deals are, are basically -- so let me talk about them separately. There's a large U.S. financial and media company that needed to connect it's analytics information and their front end applications to some of their data that they really were challenged in doing. They did not want to build the bridges themselves. They, of course, looked at whole everything else that was out there being a financial institution, security and reliability were at the top of the list. And so, we turned out to be the winners and we're really happy about that. Similarly, the global e-commerce company, there also is an interesting case. They are also a user of Salesforce. They also have some other technologies and they wanted to again, access data both from on-prem and cloud data into one place for their own internal business supporting and business analysis. And, again, they found that we were the best solution for them as well. Their scale and performance were probably the bigger drivers, not the security is ever not a driver. Everybody wants something to be secure, but their actually scale and performance was the more key thing. So we're really proud that we win these. But at the same time, Mark, we win one or two a year. I actually tell people that it is great when we win one or two, but that's the way it goes. And it just helps us with a little bit of churn we have on the -- it helps us with a little bit of churn we have with our other parts of this business.

Look, I remember a period of five plus years where I don't think the company won a single DCI deal. So one or two year is a very nice business here but on DCI Yogesh. Is this an outbound outreach that you're trying to generate this business? Or are these companies coming to you in DCI?

I think it's a little bit of both. We're doing a little bit of online demand gen stuff, through e-mail marketing and so on. And then that's how the leads show up. And then we engage. It's primarily an inside sales effort to begin with and then with some of these large ones, we might even have a meeting. But of course, in these current my last 90 days, there were no meetings. What's interesting about this Mark is, I think, actually what has been driving that the few deals that we'll be able to pick up over the last couple of years is really that the investment we've made in R&D. If you think about it, we have now expanded our BCI capabilities to both do cloud and ground to cloud applications, data from cloud applications, data from cloud databases, data from on-prem applications, data from on-prem databases. And availability of that data connectivity of the data to cloud applications and to on-prem systems. So both ways, right? And I think that has tremendously been useful. We've actually added things like REST API's and so on. And plus we have a very broad portfolio of technologies we connect to. So these are few and far between. But, yes, we are currently happy that over the last couple years, we have made a few new wins.

Great. Thank you. That's all for me.

Thanks, Mark.

Thank you very much. That concludes today's question-and-answer session. I'd like to give the conference back over to Mr. Brian Flanagan. Please go ahead, sir.

Thank you all for joining the call today. As a note, we plan on releasing financial results for our fiscal third quarter of 2020 on Tuesday, September 29th, 2020 after the financial markets close and holding the conference call the same day at 5:00 PM Eastern time. I'll now turn the call over to Yogesh, for his closing remarks.

Thank you, Brian. With a solid Q2 behind us and despite the current level of uncertainty, we look forward to continued strong performance in the second-half of 2020. Our company is financially strong and healthy, and we continue to execute aggressively on our strategy to drive long-term value through accretive M&A in the infrastructure software space. I want to thank all of you for joining us today, and I look forward to speaking with you again during our next quarters conference call. Stay healthy and safe.

This concludes today's call. Thank you for your participation. You may now disconnect.