Welcome to the Progress Software Corporation Q2 2022 Earnings Call. My name is Darryl, and I will 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 Mike Micciche. Mike, you may begin.

Okay. Thanks, Darryl. Nice to have you back with us this quarter. Good afternoon, everybody, and thanks for joining us for Progress Software's second 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 outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our acquisition of Kemp, the impact on our business of the COVID-19 pandemic and the sanctions against Russia 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 and 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 as 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 second quarter of 2022, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our second 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 is being recorded in its entirety and will be available via replay on the Investor Relations section of our website. With that out of the way, I'll now turn it over to Yogesh.

Thank you, Mike. Good afternoon, everyone, and thank you for joining our second quarter 2022 earnings conference call. I'm extremely pleased to share with you the details of another great quarter for Progress, where we again exceeded expectations across the board. Our results were driven by our Total Growth Strategy, which layers accretive M&A upon a highly profitable and predictable business, with strong recurring revenues and very high retention rates. Our disciplined execution of this strategy over the past several years has resulted in the consistent performance that is delivering meaningful returns to our shareholders. Against a challenging macro backdrop, our second quarter performance was strong and our outlook for the remainder of fiscal '22 and beyond remains healthy. A very important aspect of our business is its predictability and stability during times of economic turbulence. Demand for our product remains steady and positive as Progress products are mission-critical for most of our customers. Even when post-COVID demand helped to deliver upside to our guidance in the recent quarters, the reliable recurring revenues from our large installed base of global customers still form the foundation of our business. This, combined with the mission-critical nature of our products, leads to a high-visibility business model and provides a natural hedge against uncertainties that may impact the budgets of other types of projects. The results of our second quarter speak to this strength. Revenues and earnings again, finished above expectations and exceeded the top end of our guidance, thanks to the continuation of strong sales performance and the stickiness of our products. Total revenues during the quarter grew 19% year-over-year at constant currency. And operating margins came in at 41%, driven by the strong execution of our total growth model and healthy expense management. Annual recurring revenues continue to grow, up 13% on…

Thanks, Yogesh. Thanks, Mike. Good afternoon, everyone, and thanks for joining our call. As Yogesh mentioned, Q2 was another great quarter for Progress and our results reflect strong execution across our product portfolio, coupled with a strong and stable demand environment. Total revenue for the second quarter was $151 million or 17% growth over the year ago quarter and was approximately $3 million above the high end of the guidance range we provided back in March. In constant currency, our second quarter revenue exceeded $154 million or 19% growth on a year-over-year basis. The addition of Kemp is the biggest contributor to our year-over-year growth. However, many of our other product lines also contributed to growth, most notably our DataDirect and DevTools products. In addition, we closed the second quarter with approximately $486 million in annualized recurring revenue, representing 13% growth on a constant currency basis and 3.5% growth on a pro forma constant currency basis. Consistent with prior quarters, our growth in ARR was driven by virtually all products in our portfolio, led by OpenEdge, DevTools, Sitefinity and DataDirect. As we've mentioned many times before, the mission-critical nature of the applications we power and our consistent focus on improving the customer experience have resulted in a very stable and durable top line. At the end of Q2, our trailing 12-month net retention rate was approximately 101%, with improvements and strength evident across our entire product portfolio. Turning now to expenses. Our total costs and operating expenses were $89.6 million for the quarter, an increase of $10.1 million compared to Q2 of 2021. Virtually all of this year-over-year spend increase is driven by the addition of Kemp to our business. Operating income was $61.3 million for the quarter, up approximately 23% compared to Q2 of 2021. And our operating margin…

And our first question comes from Anja Soderstrom.

Congratulations on the good quarter. You mentioned you had a tough compare in the third quarter versus last year, but it's just a little bit -- was there some pull in to the second quarter from the third quarter as well? Or can you talk about the dynamics of the revenue base for this quarter?

No. So we...

Yes. Go ahead, Anthony.

No, I was just going to say, Anja, no, there was no pull in from Q3 into Q2. I think we had solid performance across multiple products in the quarter. But I don't think there was anything specific to timing that we called out, but you Yogesh, I'll let you add to that.

Yes. No, I was going to say exactly to Anja. And really, the timing happened last year , not this year. So this year, we have had a very steady business and no timing shift.

And in terms of the M&A activity, what do you see there in terms of the valuations? And also, who do you compete against? You said you're the acquirer of choice with many of your targets. But who do you compete against mostly these days?

Yes. So, Anja, two parts to your question, right? So the first is around the -- what are we seeing with respect to the environment. So as we all know, the public markets have really changed in terms of valuation metrics. We are beginning to see some of that change in the private markets. By the way, just to highlight something, the first 6 months of this year, we were busier with M&A activity and reviewing deals and pursuing transactions more than we have ever been in the prior -- any prior 6-month period. So it really -- there's a lot of activity going on. But we are being very disciplined. We want to make sure that we find the right assets and that we pay the right amount that delivers the kind of shareholder return that we expect to deliver and that our shareholders expect us to deliver. So we actually find that on the second point, with respect to competitive landscape, many times, the other buyers are private equity-owned businesses. Some of them are strategic themselves, but it was primarily -- it is primarily private equity-owned businesses that actually are participating in these transactions on the other side.

And one last one. Given the such long economy, are you starting to see any change in behavior among your customers in your conversations with them? Or...

So interestingly enough, Anja, we are not, right? We are -- we continue to be confident. We are seeing that our customers continue to invest in the businesses and the products that we offer them. What's interesting, Anja, as you know, right, the vast majority of our business is recurring revenue and retaining customers. And really, that strong foundation allows us to feel good about the way our whole year is continuing to shape up, right? So, we are confident we're not seeing anything from our customers that is different today. I think the COVID demand was last year -- that pent-up demand went away last year, but other than that, no difference in this quarter compared to the last couple of quarters.

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

You made some comments during your prepared remarks that you're seeing some customers pull back on other spending categories. I was wondering if you could elaborate on what those categories are and where you see customers kind of making the biggest cutbacks to spending?

So, Tyler, I don't know whether we can comment on other people's businesses as much as we can on ours, right? Most of our customers, from our perspective, are focused on cost control measures at this point. There's a significant focus on businesses to make sure that technologies that can help them reduce cost or where they are willing to continue to spend. And because Progress products are all structured that way, right? So, we are -- whether we are about increasing the productivity of developers or those that are building great digital experiences or those that are deploying and running great digital experiences and managing them in cloud and on-prem environment, it is about doing things more efficiently, it is doing things more effectively and more securely that we support. And so, I think we are seeing continued demand, Tyler. I think when it comes to some kind of new projects that potentially might have been planned, I think there is some hesitation in the customer base. And those are related to potentially maybe new projects to do some things that might have helped with the top line. But from our perspective, we primarily help drive expense control with our products and make the organization more efficient and more successful, which is why we find that our products are actually consistently in good shape.

Great. And just a follow-up on the price increase commentary. Could you help quantify what percent of your businesses has seen price increases? And just give us a sense on maybe the blended ASP increase that you've seen?

Yes. So, Tyler, absolutely. So first of all, about 60% of our business is indirect, right? Whether it is to the ISVs or whether it is through the channel, the two-tier channel, right? So there, there isn't a direct increase that we can affect because we basically have relationships with these, which are, as I said, with ISVs around royalties or revenue sharing or with even the two-tier model, where there's a price that they basically get a discount from us and then they basically charge something different to their customers. And that's really not in our hand. So really, what we have is about 40% of our business is really possibly where we can affect change. The other interesting thing to realize is that those changes only happen when there is a contract that comes up. So, when the renewals come up and in many of our products, we have 3-year contracts. So, it isn't something that happens instantly, Tyler. It is something that we will see the benefit of over time, which is why we have not included that in our guidance for the remainder of 2022. Usually, the price increases are rather modest. They might be 3% to 5% a year. But again, as I said, because a small percentage of them get touched every year, and it's a small percent of a 40% pool to begin with. The impact is not that significant.

Our next question comes from Benjamin Bora (sic) .

This is Pinjalim. Thanks for taking the questions and congrats on the quarter. Yogesh, I want to ask you a high-level question. When I was looking back at Progress Software in 2008, 2009, how it did, I know the business has changed a lot. Is there a way to help kind of compare the business today versus during the Great Financial Crisis? And how resilient do you expect the core organic business to be going into any potential macro slowdown next year or in the future?

Pinjalim, absolutely, yes, right? And I can do it at a high level. Obviously, I wasn't here 15 years ago. But when you think about the Progress products then, right, they were primarily products that were at the tail end of their life cycle from the perspective basically relevance, right? While they were continuing to be relevant to the existing customers, the relevance in the market at that time had significantly declined. That is not the case today, if you look at sort of what has happened, especially over the last 3 years with what we have done in terms of acquisitions and over the last 5 years in terms of what we have done with our investments. So we have cloud-enabled our products. We have acquired products like Chef, which are truly relevant in this modern cloud DevOps space from a deployment and configuration management and secure infrastructure scalability. When you look at what we have acquired with Ipswitch and Kemp around observability and high availability and delivering performance and making sure that the infrastructure continues to perform well and sort of resilience to failures and those kind of things, those offerings are much more relevant today. But then again, all those offerings are also applicable not just on-prem but to cloud. Those things are much more relevant today going forward. And as you realize, right, that, that business is now approaching 40% of our overall business. So you have these sort of the legacy business, which, by the way, has become much stronger. Our retention rates even there have gone up significantly. We have 101% retention rate, which we never had in 2008 or 2007. As far as I can recall or as far back as I can talk to people who can recall. So Pinjalim, I think we're in a very different spot. I feel really confident about our business. I mean, look at, for example -- I mean, I remember 2 years ago, March 2020, right, we were the first software -- enterprise software company that actually announced results because we -- last week of March, right, which was basically 2 weeks after the pandemic. And we basically said maybe a 3% impact is what we would expect. And we actually ended up having a 1.5% impact, right? But to us, that 3% was very measured. It wasn't just a random number out of the hat, right? And since then, we've acquired Kemp and we are a stronger business because of that. So I actually am really confident about our business.

One for Anthony. The guidance for Q3 seems to suggest like an air pocket in Q3 and a big ramp in Q4. I understand what you're saying with respect to a year ago, maybe consensus got it wrong, but is that it? Are you baking in some extra level of conservatism as well, given where the environment is at today? Are you baking in some kind of an acquisition in Q4? Help us understand kind of unpack it a little bit.

Yes. No, yes, sure, Pinjalim. It's a great question, and thank you for that. I would say no, we're not really baking -- I mean, there's always a little bit of conservatism in the guide. But I really -- if you look at the different variables on a year-over-year basis, whether it's the impact of foreign exchange, if you sort of take Kemp if you want to sort of take it out of both years, and then just look at the business on a pure sort of year-over-year comp basis, I guess I would say Q3 to us, especially relative to the over performance we saw last year, which was a bit anomalous, feels incredibly steady and pretty solid, Q3 of '22 versus Q3 of '21. And also, when you sort of consider all the factors, like I said, FX and the addition of Kemp, when you sort of normalize for those things, even our annual guide is really up from Q1 to Q2. I mean, FX is sort of eating the uptick in our guide. But you can -- I mean, we put out the constant currency numbers. I mentioned the $12 million FX headwind on a year-over-year basis. And when you look at that from quarter-to-quarter and how it's trended, you can kind of see that FX has sort of steadily continued to increase or eat into the increase in our guide. But despite all those macro factors, we've been able to hold the range for the year. And I think we view that as a good demonstration of durability of the business. So I know there's a lot to it, and there's a lot to unpack there. But fundamentally, I think we feel really, really good about the outlook.

Should we move on to the next question?

Yes, please.

I got our next question, Ittai Kidron.

This is on for Ittai. I just wanted to ask around new customer adds. And is that still primarily being driven by OpenEdge? Or are you seeing other parts of the portfolio becoming more prominent landing points?

So , definitely, we are seeing much more new customer ads on products like Chef, the Kemp products, the Ipswitch products such as MOVEit and WhatsUp Gold. OpenEdge itself doesn't land new customers directly for us. What it does land is the ISVs that use our products, use OpenEdge and they have built their applications on top of OpenEdge. They go out and land additional customers for their offerings, those business applications. And so we indirectly benefit from that. But really, for us, the way we go out and win new customers ourselves, it's primarily around the DevTools business, the Chef business, the MOVEit and WhatsUp Gold businesses that we acquired from Ipswitch and the Kemp products, Loadmaster and Flowmon.

Got it. And then just on Kemp, I know you said that most of the integration so far has still really been on the cost side, but have you begun to see any cross-selling materialize between Kemp and maybe WhatsUp Gold or any other parts of the portfolio?

So , that's another good question. When we model these acquisitions, we do not include any cross-sell synergies in those. We believe that those are not always realizable. And we know that we can realize the expense one, so we focus on the expense synergies. It's been the first 6 months. I think it's really still early. We are beginning to see a little bit, but not in any meaningful way of cross-sell between products like WUG and Kemp, like Flowmon. Really Flowmon is the main product that would go well with WhatsUp Gold. But I think as I said, it's rather early.

And we have no more questions at this time. I'll pass it back to the speakers for closing comments.

Thank you, Darryl. Thank you all for joining our call today. I look forward to speaking with you soon. Thanks again, and goodbye.

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