Welcome to the Progress Software Corporation Q4 2021 Earnings Call. My name is Darryl and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Michael Micciche. Mike, you may begin.

Okay. Thank you, Darryl. Good afternoon, everyone, and thanks for joining us for Progress Software's Fiscal, Fourth Quarter, 2021 Financial Results Conference Call. With us today is Yogesh Gupta, President and Chief Executive Officer, and Anthony Folger, 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, capital allocation, product plans, cost initiatives, our integration of Kemp, the impact of the COVID-19 pandemic 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. For a description of the risk factors that may affect our results, please refer to our SEC filings, in particular, the section captioned Risk Factors in our most recent form 10-Q. Progress Software assumes no obligation to update the forward-looking statements included in this call, whether a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss are non-GAAP measures, unless otherwise indicated. 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 and is also available on our website. This document contains the full details of our financial results for the fiscal fourth quarter of 2021 and the full fiscal year 2021 and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our fourth quarter and full fiscal year results, providing highlights and additional financial metrics. Both the earnings release and this presentation are available in the Investor Relations section of our website at investors.progress.com. Today's conference call will be recorded in its entirety and a webcast replay will be available on the Investor Relations section of our website. With that, I will now turn it over to you, Yogesh.

Thank you, Mike. Hello, everyone, and welcome. I'm very excited to be here today to discuss our results for the fourth quarter of fiscal 2021, the capstone to one of the best years ever for Progress. I will also share some highlights of the full-year and then talk about the success of our total growth strategy thus far and I will wrap with our outlook going forward. So let's get started. Following 3 straight quarters in which we beat our estimates and raised guidance, we delivered another standout quarter. Our fourth quarter results exceeded guidance for all metrics and did so without the benefit of timing of revenue recognition or large one-time deals. The results reflect the continued success of our go-to-market strategy and it's strong demand environment. Our Q4 and fiscal 2021 out-performance was evident across-the-board in virtually all of our product lines and across all geographies. We benefited from the generally strong economy, as well as from the renewed IT budgets of our customers. For example, a global financial organization significantly expanded its use of Chef with a seven-figure expansion deal. And Telerik DevTools closed the largest deal in its history. Sites new to cloud continue to see increasing of auction, winning customers across industries such as manufacturing, retail, and finance. And WhatsUp Gold took advantage of opportunities presented by customer seeking alternatives, network monitoring solutions, enabling it to build on the positive momentum from prior quarters. This strong, unprecedented demand and excellent sales execution, along with the contribution of Kemp, built on our growth trend for annualized recurring revenue or ARR, which grew by over 12% this quarter. We exited the year with $486 million in ARR, and our net dollar retention rate was again above 100% as customers remained committed to our products, and in many…

Thanks, Yogesh. Good afternoon, everyone. Thanks for joining our call. As I'm sure you heard in Yogesh 's remarks, we're very pleased with our performance in the fourth quarter with results exceeding the high-end of our guidance ranges on every financial metric. We're also delighted to close the acquisition of Kemp and we're pleased with the progress of the integration to-date. Turning now to the numbers and starting on the top line, our revenue for the quarter of $143.7 million represents 11% growth over the prior year reflecting stronger than anticipated demand of our OpenEdge, DataDirect, Chef and DevTools products. In addition to strong operating results, we closed the Kemp acquisition as planned, ensuring Kemp's contribution to Q4 was in line with our expectations. For the full year, revenue of $557.3 million represents 22% growth compared to 2020. This year-over-year growth is comprised of a full-year revenue contribution from Chef, a one month revenue contribution from Kemp, and growth across multiple other product lines, most notably OpenEdge. Consistent with our growth in revenue, we also saw growth in ARR throughout 2021, closing the year with $486 million of ARR which represents 12% growth on a year-over-year basis and 3.4% growth on a proforma year-over-year basis. And to be clear, the proforma results include Kemp in both periods. In addition, our net retention rates showed continued strength in the fourth quarter, once again exceeding 100%. With customer retention rates remaining consistently strong throughout the year and with an improved demand environment, fueling growth across our portfolio, we're thrilled with our top-line results for 2021. What's more, as Yogesh mentioned in his remarks, we remain optimistic that some of this increased demand will continue into 2022. More on that in a bit. Turning to expenses; total costs and operating expenses were $92…

And our first question comes from Ittai Kidron. Go ahead, Ittai.

Thanks. A couple of questions for Yogesh and Anthony. I'll start with you Yogesh. Maybe from a big picture standpoint, you talked about the demand environment still being very strong. Maybe you could talk about 2 things Number 1, how is Omicron impacting demand or just kind of out of curiosity? It's been -- so many people have been hit by this. I guess it's a question of whether you're seeing customers slow down in the way they move forward just because people are missing, are not around. And then second, maybe you could talk about the revenue synergies in Kemp. I would assume that a lot of the progress there is cost-driven first but maybe you could talk about the cross-selling opportunities there. How far down the road are you in exploiting those?

Ittai, thanks so much and great to have you on the call. Regarding the first question about Omicron, we actually right now are not seeing any meaningful change in the business trajectory. You're right. Obviously, lots of people are getting hit and when people are out of pocket, that sometimes slows things down. But so far, we continue to see good momentum in our business. There is nothing in our business that makes us believe that Armycron is going to basically have a negative impact -- or meaningful negative impact at this point. So again, who knows which way this goes, Ittai, and how the world changes and whether it has a more serious impact over the next several weeks or not. But so far so good, and I think we're really pleased with what we've seen so far in the first 6 weeks or so. Switching over to the Kemp integration and the opportunity to cross-sell. I mean, as you know, and as you yourself highlighted, our approach to this M&A and the total growth strategy is an extremely disciplined approach where we focus on expense synergies as the primary driver of shareholder value creation. And so that is where we are heavily focused on. It is correct. You are right in pointing out that, of course Kemp products have some interesting synergies in terms of potentially selling together with things like WhatsUp Gold and Flowmon for example, and so on. But that's much farther down the road. And from our perspective, we want to make sure that we execute on the integration, that we make sure that the people come onboard, that the customers continue to move forward, that our retention rates don't suffer, that the business continues to function well while we put together the expense synergies that we need to put together in place as we integrate those businesses. So I would say, Ittai, right now we are not planning any meaningful revenue synergies through cross-sell between those products and ours.

Got it. Very good. And then a follow-up for you, Anthony. Maybe it's me but it feels like you're certainly -- I don't think M&A is a potentially more immediate way for you to continue to drive growth which makes sense. I guess my question is, the market is contracted quite substantially especially in growth names and in technology. Are you getting a sense that -- from your discussions with potential targets that there is now a greater flexibility and openness, and eagerness perhaps is the right word, to do something just given how strong the correction has been? Has that already worked its way into the mindsets of potential sellers?

Again, it's hard to say, Ittai. We -- I would say that the pipeline continues to be very robust and we are actively managing opportunities just on a continual basis. And so there's a lot of activity out there. But yeah, I think for sure the correction in the public markets, I think ultimately will trickle to some of the private company evaluations. And frankly, we think that to the extent rates rise a little bit, that may tilt the competitive dynamic a little bit back towards us. Money has been so cheap for so long and it's allowed multiples to really -- to push a lot higher than they had been previously, sometimes to a place where we're not willing to go. But I think we're feeling pretty optimistic about how this may present for us in 2022 and beyond.

Very good. Good luck, guys. Thank you.

And our next question comes from Ken Wong. Go ahead, Ken.

Thanks for taking my question. Yogesh, I wanted to touch on your remarks about the strong demand environment sustaining up -- I guess, obviously, given what we've seen in the markets with expectations for software companies, do you feel it's broader software in general where demand is holding up or more infrastructure where you guys are focused? Any sense from your conversations with customers, whether or not it is a more of a progress dynamic?

I have -- thank you for that question. I actually think that that's -- you're right. I think not every software company is the same, Ken. From our perspective and our conversations, they're primarily focused around infrastructure-related discussions, Ken, and what we're seeing is that the product offering that we now have which does cover the whole -- the broader DevOps cycle of develop, deploy, and manage including really strong offerings, so application experience, phenomenal offering for DevOps and DevSec Ops, an amazing product for building and delivering wonderful experience and applications digitally. I think those -- all those things are really resonating with our customers and we are seeing demand for that. I think that when it comes to packaged applications, we really aren't a good sort of indicator of whether those things are seeing equally good demand or softer demand. So I can't really speak to that. But from our perspective, we're seeing demand continue. We're not seeing, really other than as Anthony mentioned, some of the COVID pent-up demand than that changing rest of it, the demand environment seems to be and appears to be really strong. So we're confident about the way 20FY2022 is shaping up and I feel really good about our business.

Got it. And I think you mentioned Chef in the largest deal in history if I heard correctly, would you associate that with it being part of Progress and perhaps your sales force and your scale help deliver those kind of higher deal sizes? Or is this more just a large customer came in and obviously pick -- delivered a large signing. Any color in terms of maybe some of the drivers that got you to that level?

Ken, just to clarify. The Chef deal was a very large deal and it was a 7-figure expansion but it was not the largest deal in Chef's history. The largest deal in one of our products history was around our DevTools products which is the Telerik DevTools products for building great UI but -- which was also another 7-figure deal. But the Chef, let me talk though, however, to the parts of your question about how this came about. One of the things that is happening as we have continued to improve the capabilities of Chef both in DevOps and DevSec Ops, this was a large financial institution. The financial institution has been a user of Chef. We were able to deliver new capabilities that allowed them to come up with new use cases that they could use across their global enterprise and thereby have a really large seven-figure deal with us for Chef. Could Chef have done this on its own? I don't know. I think one of the things that we have done is actually put more resources on the product side in Chef than even Chef had by itself. And we've been able to do that because we have shifted significant amount of those costs to India. And so while the costs are significantly less, the actual number of people on the product is significantly greater. And we have been able to serve the enterprise customer's needs as well as the needs of the open source community really well by doing so. And I think I mentioned in the last quarter's call that -- when we had our Chef comps, that there was an amazingly positive reaction from across the board, from our customers and the open-source community. So I think it is that focused investment and that focused effort around solving enterprise customers’ problems as well as staying focused on the open-source community as well. That combination has served us really well on Chef and I continue to be extremely excited about its future prospects as well.

Got it. And then maybe the last one if I could sneak this one for Anthony. Revenue growth next year, 8% to 10% and I know ARR is not really an area that you guys guide on. But any way to think about whether or not there are headwinds, tailwinds that would move that number higher or lower than that revenue range that you guys had already put out?

Yeah. Hey, Ken, it's -- you are correct, we're not guiding on ARR yet at this point, but we put out the Pro Forma ARR numbers each quarter for the past year. So on the slide deck that we put out with the earnings release, there's sort of a quarter trend in there now. And I guess what I would say is that the trend we've seen generally in ARR has been some growth up into the right and it's been generally pretty tightly aligned to what we've seen on revenue. I would say, if anything, revenue can be a little more erratic because we may land some multi-year deals with some of our subscription products like Chef or DataConnect. But absent that, I would expect the 2 to move in relatively consistent trend lines.

Perfect, really appreciate the help. Thanks a lot, guys.

Thanks, Ken.

Thanks.

And our next question comes from Pinjalim Bora. Go ahead.

Great. Hey guys. Congrats on the quarter. I had a question on future acquisitions. It seems like a devaluation reset might help you. But as you look forward, is there any particular area of focus for this year? Observability is one area you have been getting a lot of assets. Is that something that you might double down on or is that the DevTools side? What are a couple of areas that you're looking at?

So Pinjalim, the reality is that across our entire portfolio, we continue to look for opportunities to either consolidate or buy, find other assets that are complementary to what we have. So you're right, the -- 2 out of the 3 of our acquisitions, whether it was Ipswich about 2.5 years ago or Kemp, just a couple of months ago, were both in the observability space. The -- Chef was obviously in the DevOps and DevSec Ops space. And -- so I don't want to just say that we're looking at only 1 or 2 spots. We really are looking at the entire lifecycle from a develop, deploy and manage. So whether it is additional DevOps, DevSec Ops and related assets and companies that would help there, whether it is application development, front-end development tools, back-end infrastructure, data movement. Data is one of the areas where, by the way, we don't talk about it too much but MOVEit that came to Progress through the Ipswich acquisition has bolstered our offering there We used to have, and still do, the world's best real-time data access solution with DataDirect. It is literally the gold standard in the market. And then we acquired MOVEit through Ipswich and that basically gave us the ability to securely move information in bulk. And therefore, now we have both real-time access to data through DataDirect and the bulk moving of data on a periodic basis through MOVEit. So data is another area which is the foundation of analytics, which is the foundation of really any work that business is trying to do today. So we see us continuing to work across all of these areas within the infrastructure, software space, whether it is the observability side and then application experience delivery side, whether it is the DevOps, DevSec Ops piece, whether it is the data access and data integration piece, or whether it is the actual application development and deployment of the platform itself. And then a lots of assets as you said, and so there's opportunistic aspect to it as well, Pinjalim. Whatever shows up as long as it makes sense. The key for us, even more than the specific domain, is really about the characteristics related to how strong the product is, what's the customer base like, what's its recurring revenue, what's the retention rates. As you know, in FY 2021, we had a net retention rate of over 100%. We want to sustain extremely high net retention rates. And so we look for really strong businesses. To be honest, even more so than specific domains.

Understood. Thank you for that. One for Anthony on that retention rate point and a little bit nitpicking. But it's -- your retention rate stood at an elevated level. Pretty good to see above 100% but sequentially, when I look at it, it would downtick a little bit. Now, you're layering in Kemp, I guess. So is that a function of Kemp? If we remove Kemp, how has been the retention from Q3 to Q4 for the core business? If you can talk about that as well as how has gross churn held up?

Yeah, sure. Thanks Pinjalim. I think Kemp came over at, as Yogesh mentioned, roughly added 40 million of ARR into the mix. And when I look at where the movement was, you're right. It was not much of a movement quarter-to-quarter. Kemp might have slightly lower net dollar retention rates than the rest of our business and we knew this coming in. We understood that from a gross perspective, they were probably in the low 80s and net perspective were probably in the high 80s. And I think that was very similar to what we saw with Ipswitch when we acquired Ipswitch back in 2019 and we viewed that as an opportunity. So yeah, there might be an ever so slight tick down when you add Kemp into the mix. But we don't expect that it's going to be diluted over the long run, we think we're going to be able to drive the net retention rates for Kemp up to the same levels where Ipswich and a lot of our other products are. And we're -- like Yogesh said, a 100% is great and we're going to continue to try to make the right investments to maintain that.

Got it. Thank you very much.

And our next question comes from Anja Soderstrom. Go ahead, AnJa.

Hi everyone. Thank you for taking my question and congratulations on another great quarter. A lot of good questions asked already, but just curious about price increases. Have you done any price increases? Is there room for you to do that or is it all demand-driven for you?

So Anja, thank you. And we -- so as you are aware, many of our customers on their contracts, we have a little bit of a cost of living type of increase type of structure built-in, the CPI type of an increase. But in general, we have not had price increases and we have not done price increases across our portfolio. Is there an opportunity to do so? I think to us right now, the way we see our ability to continue to drive growth is to offer better products and continue to do better there, serve our customers better and solve a broader need that they have and expand that way. We don't see pricing as a very important tool because among other things, that's an infrequent tool. You use it, sometime it look -- makes it look good for a short time but the question is, can we provide sustained growth? But we always look for opportunities if we can do that in a sustained way, we're willing to do that. But in general, we have not done price increases and right now we're not contemplating those.

Okay. Thank you. And given you serve a lot of different end-markets, was there anything that stood out to you in terms of any surprises among your customers in a specific end-market?

Not really. I mean, I think we felt really good at the end markets across the board, all our geographies globally did well. Business was strong across all of our products. I mean, it's a -- we are seeing strength that is not limited to just 1 or 2 things. And so that's what makes us confident about 2022 as well. So AnJa, nothing specific to highlight. It's a -- I think it is just strong execution on our part, solid demand across the board. A really, really great execution by the Progress team on multiple fronts. So, steady as she goes.

Well, thank you. That was all from me. Thank you.

Thank you, Anja.

And our next question comes from Tyler Radke. Go ahead, Tyler.

Hi. This is Boyoung Kim for Tyler Radke. Thank you for taking our question. So organic growth has been continuing to come out on the higher end of where you've been managing the business. So I was wondering if you could comment on any presence or expectation of impact from a pull forward dynamic that seems like the strength that you've seen over the past 12 months is really durable. So if you could give us any examples that has helped you internally discern what's pull-forward versus what's sustainable, that would be really helpful. Thank you.

So let me start with a little bit and then Anthony can potentially add further as well. So we did not have any foot forward this year. We actually feel really good about the quality of our business this year. What we did have though, is some pent-up demand from 2020. So it was really pushed later from 2020 to 2021 that helped with the organic growth to some degree. But then in addition to that we also saw general strong demand. The general strong demand we're continuing to see and we expect to continue to see, obviously the 2020 push-forward of COVID-related pent-up demand, I think that is largely behind us. We've been really pleased with the way our organization has been very disciplined. We do not do full-forwards and we did not do full-forwards this year. And as I said, we did not have anything -- I think I even have that in my prepared remarks that we did not have any full-forward or any large deals being pulled from Q1 to Q4 or anything like that. It has been a really strong, steady, disciplined execution.

I would agree with that.

It's all right. Sorry.

No, I was just going to say I -- just the only thing I would add though is that Yogesh is dead on in terms of the 2020 COVID demand that sort of came into 2021 earlier in the year. When we talk about sort of sustaining a strong demand environment and seeing some growth ahead in 2022, it's slight growth. And for Progress, even I think slight growth is a pretty big statement. I mean, since I've been here, I don't think the outlook from an organic perspective has done this strong, in fact, I know it has not been this strong. So for a business that may have been tilting more on the negative side from the growth perspective for the past couple of years to be out looking something even slightly positive is an important move, we think. So we're optimistic about it.

Okay, thank you. And then I also wanted to double-click onto an earlier comment you made about improving net retention rate within the Kemp business but since you are focused more on the cost synergy side, could you tell us more about where the expected improvement in net retention will be coming from?

Anja, again, let me start and then again, Anthony can jump in. From my perspective, if you look at Ipswitch, so we acquired Ipswitch in May of 2019, so about 2.5 years ago. Its net retention rate was in the upper 80s. Today it's well into the 90s and in fact mid 90s. And the reason is very simply that we do synergies, but we do them around the aspects of the business. There are more around new customer acquisition and of course, operational efficiencies from the perspective of leveraging our platform and being able to run it more smoothly. So, Bo, that's the reason why we were able to actually make more investments in WhatsUp Gold and move it on the R&D side. So also our R&D investments are usually greater. It may not look like that from a dollar perspective but it is that way from a people perspective and the number of headcount on it. And so we do that and we also have a very strong customer relationship management organization that works closely with enterprises to have them stay with us, to understand their needs and address those needs so that they will stick with us longer. It's a whole host of effort around both the way we do our go-to-market, which is different, and the way we do our product engineering and that allows us to increase retention while at the same time reducing costs. And then it's a fascinating thing but it is about paying attention to the details related to what drives customer retention, which is also not the same thing that drives revenue growth. But Boyoung, that's what we're focused on. We continue to focus on retaining customers more than anything else. And we feel confident. We have done this with Ipswitch, we have sustained it with Chef. Chef came will already high net retention rates, so we didn't have to try to push it any higher. They were phenomenal. But we believe that we will be able to do the same with Kemp. It comes from having that experience with a very similar profile of products, with a similar go-to market that we have with Ipswitch as we did with Kemp in particular.

Thank you very much.

Thanks.

And we have no more questions at this time. And I'll turn it back to Yogesh for closing comments.

Hey, thanks, Darryl. Thank you, everyone, for joining us today. We couldn't be happier with our performance in FY202021, and we're excited to carry the momentum forward in FY202022. I look forward to talking to you all soon. Thank you again, and goodbye.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.