Welcome to the Progress Software Corporation Q1 202 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 first quarter fiscal 2022 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, I'd like to remind you that during this call, we will discuss our future financial and operating performance, corporate strategies, product plans, cost initiatives, our acquisition 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 recent SEC filings, in particular, the section captioned Risk Factors in our most recent Form 10-K. 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 first quarter of 2022 and we recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our first quarter 2022 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 then will be available via replay on the Investor Relations section of our website. And so, with that, Yogesh, I will now turn it over to you.

Thank you, Mike. Good afternoon, everyone and thank you all for joining us. I'm pleased to be with you today to discuss Progress' first quarter fiscal 2022 earnings. We are extremely happy with our results, which continue to demonstrate the value creating power of our total growth strategy. We have assembled an impressive product portfolio to develop, deploy, and manage high impact applications and to help accelerate the digital transformation efforts of organizations. We started off fiscal 2022, continuing the robust momentum from FY 2021, which was our best year ever. We experienced strong demand for our products across the board, and we had outstanding execution across all regions. As you will see from our increased guidance, we expect the positive momentum from last year to continue in fiscal 2022. In fact, excluding the impact of the Russia embargo and the FX headwinds, our increase in revenue guidance is greater than the beat in our first quarter. More details from Anthony in his remarks. We are now four months into the integration of Kemp, which continues to be on track, and the business is performing very well. We remain confident about the synergies we expect to achieve, and the resulting shareholder value this acquisition will create. Before I get into the details of the quarter, I think it's important to take a moment to talk about the situation in Ukraine. We are truly horrified by the humanitarian crisis caused by the Russian invasion. Thankfully, we have no employees in harms way in the region. Our hearts and best wishes are with the friends and families of our employees, particularly those in Bulgaria and the Czech Republic. And we hope for a quick and peaceful end to the suffering of the people of Ukraine. Many of our employees around the world…

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 pleased with our progress integrating Kemp, which delivered results in line with our expectations in the first full quarter since the acquisition closed. Turning to the numbers. Our revenue for the quarter of $147.5 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 multiple products, including OpenEdge, Corticon, DataDirect. Consistent with our growth in revenue, we also saw growth in ARR to close the first quarter with $479 million in ARR to represent 12% growth on a year-over-year basis, and 3.5% growth on a pro forma year-over-year basis. To be clear, the pro forma results include Kemp in both periods. In addition to our strong ARR growth, our net retention rates should continued shrink in the first quarter, once again, exceeding 100%. Before moving on, I'd like to take a moment to highlight the fact that we report ARR in constant currency using our current year, updating exchange rates. And we apply those rates to all periods presented. As a result of updating exchange rates to our 2022 budgeted rates, the ARR was reported after periods have changed slightly. However, the changes in alter the trend in ARR growth or the net repentance that we've been reporting over the past several quarters. To illustrate this point, we include the slide in the supplemental presentation filed with our press release. Turning now to expenses. Our total cost and operating expenses for the quarter were $88.8 million, up 18%…

And our first question comes from Ittai Kidron from Oppenheimer. Go ahead with your question.

Thanks. Nice quarter guys. I guess, I wanted to you guys first perhaps touch on Kemp. It's nice to see that the progress. Orders kind of moving on track. Can you though elaborate how much of the synergies from Kemp are at this point more top line driven than bottom line? You've kind of -- you've -- you reached your 40% kind of margin target, and just kind of wondering if there's more to squeeze here on Kemp or from this point it's more top line. And if so, maybe you can talk about progress you've made so far in cross-selling Kemp into existing customers or up-selling any of your existing solutions into Kemp customers.

Ittai, thanks. And let me share sort of the way, we've looked at any acquisition including Kemp when we did the acquisition, right? So, our acquisition model that contemplates shareholder value creation does not take into account potential cross-sell opportunities. We are intentionally conservative about that. And so, when we talk about synergies or synergies on plan, we're primarily talking about expenses. We expect to take 12 months from the time of acquisition to fully realize the expense synergies. That said, I think, a significant amount of those synergies are well baked in and taken care of as we exited Q1, right? So, if you noticed it was only one month before the end of the year that we had our -- when we actually did the Kemp acquisition, so we only had one month. So, it took us, in the first quarter, we -- a significant period during which we were continuing to get the expense synergies. Anthony, did I miss something?

No, no. I think that's right, Yogesh. I think, we're -- I think we've made very good progress on the integration and capturing synergies. There's always more work to do from sort of a systems and process standpoint. But as you mentioned, we're on track. I think we feel our ability to get this completed certainly within 12 month timeframe we had mentioned previously.

Okay. Maybe as a follow-up. Yogesh, you've talked about how Russia is not a material part of your business, and that's good to hear. But maybe you can talk about Europe as a whole, what percent of revenue does it account for? And there are already data points that show significant deceleration in macroeconomic activity in Germany, and it's starting to kind of move into other adjacent countries. So, I guess, the question is, what have you seen from a pipeline, from a renewal rate specifically in that region? Are there any signs of change in behavior in customers that are based in Europe?

So, Ittai, right now, we feel good about the way performances in Europe. We continue to see solid performance. Literally we are not seeing the potential impact that others might be seeing. I can't speak for others. We -- Europe performed really well in Q1, and the European business leaders and our folks in Europe are confident about the rest of the year as well. We -- our business maybe, Ittai, is maybe somewhat different. I don't know whether that's -- what we are saying is applicable to everybody else. Anthony, do you know what percentage of our business, I know it's in the upper 30s, but I don't know the exact percentage of Europe business.

Yeah. Yogesh, I think that's right. You're -- as we look at say the full year of 2022, in terms of a percentage -- bear with me, but -- yeah, I think we're about 34%, so a third or a little bit more than a third is based in EMEA. And to your point, Yogesh, the majority of that is maintenance. So, there's big maintenance base over there. There's a lot of subscription renewals coming in from that region as well. And so, I think we tend to see a reasonable stability there, maybe less of a dependence on net new customer acquisition, maybe compared to some other folks.

Got it. And maybe last one for me. You talked about your intention to raise prices, just making sure, Anthony, that nothing in the guide includes that, but can you be a little bit more specific on timing and magnitude. And is it just across the portfolio or specific products or specific regions? Any color on that.

So, I can start and then Anthony -- go ahead.

Yeah. No, I was just going to say, I think, Ittai, the first point is there's nothing baked into our outlook that contemplates increased in prices. And the way I would characterize our perspective on this is we've got to look region by region, product by product, and even channel by channel in some cases and figure out what's appropriate. There may be some instances where there are contracts up for renewal, whether they're maintenance or subscription and perhaps price increases warranted. We're evaluating those opportunities. There are other parts of our business where perhaps the best way to achieve an increase in price is to reduce discounting, and we're evaluating those opportunities. But I think because we've got such a broad product portfolio and different routes to market that we leverage, it's not sort of that simple approach where we can press a button and drive 5% price increase across the board for our entire install base. I think we're going to have to be -- we'll be selective. We'll do -- we'll look at price increases where it's appropriate. And I think we're going to have to be thoughtful as to region, channel and product type.

Very good. Appreciate it. Thanks.

And our next question from Pinjalim Bora from JP Morgan. Go ahead.

Great. Hey, guys. Thank you for taking the questions, and congrats on the quarter. I wanted to talk about OpenEdge. It seems like it was out performer in the quarter. Could you maybe update us on what is the OpenEdge mix at this point in time and what's driving the outperformance, is maintenance, renewals ticking higher? Are you seeing just the secondary variables of -- some of your ISV partners doing well, seems like?

Yeah. So, Pinjalim, thank you. The biggest driver for the OpenEdge business is and has always been the ISV business, right? So, our ISV partners are the lion share of that business and with them, it -- we have these revenue share models where we get a piece of their business and over time, they have continued to do well. They have modernized their applications on top of our OpenEdge platform. They have cloud enabled their products and actually offer cloud offerings folks like QAD do. And so, as their business performs better, we get a piece of that business as well. So, when you look at some of the examples I gave in my prepared remarks, QAD, COINS, Revolution, et cetera, these folks are all seeing interesting increasing opportunities in the market, their businesses are doing well. And as a result of that, we are seeing increasing royalties from them. So, that's the primary driver within the OpenEdge business, Pinjalim.

Got it.

And just …

… understand the mix?

Yeah. I was just going to add to that, Yogesh. I think, thinking about the business for the full year 2022, Pinjalim, OpenEdge is right around 40% of our total business. And then that, as you might expect, has come down over the past several years as we've seen a little bit of growth in other product lines. And we've acquired a bunch, the mix really has come down there, but it's -- the business nonetheless is very stable, but as a percentage of the whole, it's around 40%.

Got it. Very helpful. And last question for me. Yogesh, I think during the Kemp acquisition, you had highlighted an aspect kind of leveraging Kemp's go-to-market motion. I think you had said they had kind of a two tier sales motion, and you were looking to kind of expand that to other parts of Progress' portfolio. What have you learned so far? It's been six, seven months, have you started rolling that out towards some other parts of the business yet?

So, Pinjalim, we spent the first few months primarily making sure that things were on track with the business in the Kemp business itself and making sure that we got our cost synergies in place and so on. We have begun to see what products we can actually place through the two tier channel. But I think we are early, Pinjalim, to speak to it at this point. So, I would not conclude anything meaningful at this point about us leveraging that channel for other products. There is definitely that opportunity, but we have not made significant progress in that area at this point.

Understood. I'll get back in the queue. Thank you.

Thanks Pinjalim.

Our next question comes from Tyler Radke from Citi. Go ahead, Tyler.

Yeah. Thanks for taking the question. I wanted to just clarify your comments on some of the challenges you're seeing on the inflation side. Is that just kind of the general observation on the macro environment? Or is this manifesting itself through specific headwinds, either in customer negotiations or on certain costs or payments that you're having to make? Just help expand on that a little bit. Thank you.

Yes. So, I'll start and Anthony, please add to it as well. The -- Tyler, the main -- so, there are no -- from a customer perspective, absolutely nothing. In fact, as we said, I think there might be some opportunities for us because of the inflationary environment to potentially even raise prices in certain cases with certain customers, depending on timing of contract renewals and so on. So, that's not where we would see the impact for us. The challenge arises from the combination of employees. The retention is a large, huge thing right now for software companies or companies of any size, to be honest. And so, wage pressures, I think, is the primary challenge that we are observing and we're watching carefully. We, however, today, feel very good about where we are. And I don't think that this is in any way, shape or form going to be something that is unmanageable. And I, in fact, think that so far, we have a good handle on it, and we continue to be vigilant around it. So -- but we wanted to make sure that we understood that this is an area that is something that we are watching closely. Anthony, did you want to add something?

No. I would just say, Yogesh, that we've -- I don't think we've seen too heavy an impact in our Q1 numbers from inflation. We have baked incremental impact into the rest of the year. And even with that, to Yogesh's point, we feel as though it's a manageable problem right now. But certainly, one we're keeping an eye on.

Great. And maybe just a follow-up to that. I mean, obviously, the margin performance in the quarter and the guide looked pretty strong. Is there -- I guess, philosophically, if wage pressure tracks ahead of your expectations, are you kind of offsetting that with cuts to other areas of the budget? And then, I just had one follow-up on the M&A strategy.

Yeah. Short answer is yes. I mean, we're -- Yogesh mentioned in his remarks earlier that maintaining the best-in-class operating margins really is a hallmark for us, and we're going to look to continue to do that. I think we will be pretty thoughtful about trying to manage expenses across the business so that we can do the right things for our employees, retain our employees and make sure that we're competitive from a market perspective. So that is absolutely in our sights, for sure.

Okay. Great. And just on the M&A environment, you talked about the -- I assume the result of the valuations coming down, that making it more favorable. How should we think about that in terms of your M&A strategy, whether it's the pace and what you're pursuing these deals are the volume? Would you be opportunistic and maybe look to accelerate the pace of M&A in the near-term to take advantage of the improved environment?

Again, the short answer is yes, Tyler. The longer answer is, of course, opportunities come along when they come along. And we've got to get the deals happening and then making sure we do the deals. But yes -- and I think that we have the ability to do that. We have the ability from an operational perspective. And, of course, we have the ability from a financial perspective. But I think to me, I've always looked at this as what can we operationally absorb and run well and integrate well once we do the actual transaction. And so, I -- we absolutely are looking to accelerate the pace of M&A, given where the market is.

Thanks.

Thanks Tyler.

Our next question comes from Anja Soderstrom from Sidoti. Go ahead.

Hi. Thank you for taking my questions. A lot of my questions have been asked and answered already. But can you just speak a bit to the organic growth you see? It seems like that has picked up a little bit in the past quarters. How did you see that in this quarter? And how do you expect that to play out in the coming quarters?

So, Anja, thank you. It has picked up and it continues to do well. As you can see in this quarter, really the primary outperformance really was on the organic side -- the vast majority of the outperformance was on the organic side. So, we feel really good about what is happening with our organic business. Our ARR is up or apples-to-apples 3.5% year-over-year in 12 months. So that gives you a feel for what is going on in the business. So, we feel really good about this. We feel really good that we have a 40% operating margin business, with an organic growth that on the ARR side that is looking like we've done 3.5% to twice now in a row and that has steadily picked up over the last couple of years. So, we continue to feel confident and we think we have a strong business with good solid demand in the market.

Thank you. And I just wanted to also ask you -- you said you might offset inflationary pressures with price increases. What's your history of the price increases?

So, Anja, interestingly enough, right, there's a part of our business that is royalty based and I was mentioning that for an earlier question that I was answering as well. When you look at the royalty based businesses, there is really no opportunity to change prices, because it's a percentage of their revenue, right? So, that doesn't really change unless we can put more products into that same particular ISV partner. So -- but with everybody else, historically, we have not raised prices in quite some time. We've actually been good about that from the perspective of our customers. So, I think that if we were to find the right products on the right opportunities and raise some prices, I don't think we would get pushed back in any more meaningful way than usual. So, we are looking at that. And as Anthony pointed out, we'll have to be selective, both in terms of opportunities, as well as geographies and products and channels. So, this is not a broad brush across the board, let's raise prices by X percent.

Okay. Thank you. That was all for me.

Thank you, Anja.

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

Well, thank you everyone for joining our call, and we look forward to speaking with all of you again. Thank you.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may all disconnect.