Good day, and welcome to the Progress Software Corporation Q4 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Micciche, Vice President of Investor Relations. Please, go ahead.

Okay, great. Thank you, Sherry. Good afternoon, everyone, and thanks for joining us for Progress Software's fourth fiscal quarter 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 operating performance, corporate strategies, product plans, cost initiatives, our proposed acquisition of MarkLogic, 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 factors that may affect our results, please refer to the section captioned Risk Factors in our most recent Form 10-K and subsequent 10-Qs. 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. This document contains the full details of our financial results for the fiscal fourth quarter of 2022, and I recommend you reference it for specific details. We have also prepared a presentation that contain supplemental data for our fourth quarter 2022 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available in the Investor Relations section of our website at investors.progress.com. As Sherry said, today's call will be recorded in its entirety, and it will also be available via replay on the Investor Relations section of our website. So, with that out of the way, let me turn it over to Yogesh.

Thank you, Mike. Good evening, everyone, and thank you for joining us on our call today. We're happy to be back with you to talk about the results of our fourth quarter and full-year fiscal '22 and to look ahead to fiscal year '23. And we're excited that we can provide you with much more detail about our pending acquisition of MarkLogic. Anthony will discuss the financial results from FY '22, provide guidance for FY '23, and he will also walk us through the financial benefits, impact and timing of the MarkLogic deal. It's a lot to cover, so let's jump right in. Fiscal '22 was another outstanding and eventful year for Progress, during which we saw steady demand for virtually every product in every geography, and exceptional execution from all of our teams in the field throughout the year. Our ongoing efforts to invest in our products and in customer success continued to bear fruit and led to exceptionally high net retention rate of over 101%. We saw customers expand their use and re-commit to our products across the Board. In FY '22, many of our large Chef, OpenEdge and DataDirect customers significantly increased their annual spend with us. Our DevTools products continued to see best-in-class retention rates and products such as Sitefinity cloud and MOVEit cloud saw many new wins around the globe. Operationally, we fully integrated Kemp and folded the business into our existing sales, support, engineering, and customer success platforms as planned. Our workhorse products, OpenEdge and DataDirect, continued to perform solidly above plan, along with Sitefinity, DevTools, Chef, Loadmaster and Flowmon as customers continued to rely on our portfolio to run their mission-critical applications and manage their digital transformation efforts. All of this resulted in our finishing the fourth quarter on a very positive note,…

Thanks, Yogesh. Good afternoon, everyone, and 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 and the full fiscal year 2022, and we're also delighted to have signed a definitive agreement to acquire MarkLogic, which met all our M&A criteria and provides a larger-scale opportunity for significant value creation. Turning to the numbers, we'll start on the top-line with ARR, which we believe provides the best view into our underlying performance. As a reminder, our calculation of ARR is presented on a pro forma basis to include the results of acquired businesses in all periods presented, and in constant currency, with all periods presented at our current year budgeted exchange rates. ARR at the end of Q4 was $497 million, representing approximately 3.5% organic growth on a year-over-year constant currency basis. The growth in ARR was driven by multiple products including OpenEdge, DataDirect, Sitefinity, Chef, DevTools, and File Transfer. A consistent trend that continues to fuel our ARR growth is strong net retention with rates remaining at a record high in Q4, again, exceeding 101%. Revenue for the quarter was $159.2 million and represents 11% growth over the prior year, reflecting an incremental contribution from Kemp, which we acquired in Q4 of 2021, coupled with strong sales of our OpenEdge, DataDirect, Sitefinity, DevTools, and File Transfer products. It's also worth highlighting that on a constant currency basis, our year-over-year revenue growth for the fourth quarter increased from 11% to 15%. For the full year, revenue of $610.6 million represents 10% growth compared to 2021. This year-over-year growth is comprised of a full-year revenue contribution from Kemp and growth across multiple other product lines, most notably OpenEdge, DataDirect, and DevTools. Again, worth highlighting is the impact of…

Hi, Sherry, it's Mike, and everybody, I know Anthony's audio was breaking up while he was giving the MarkLogic guidance. Sheri, if it's okay with you, can - Anthony, do you mind reading the part, again, what I sent? It's in your chat and also, it's the paragraph begins next to our expectations for MarkLogic, and it ends with the paragraph where we - where the last words are, the comments about the term loan A.

Yes, sure. And which one was that one, Mike?

Yes. So, we're going to start again and just go through the MarkLogic guidance, with the paragraph starts to next to our expectations from MarkLogic and MarkLogic's contributions, and then go right to the end where we talk about the term loan A.

Yes. Okay. All right. So, I will go a take two. And next, our expectations from MarkLogic and MarkLogic's contribution to 2023 are driven off an assumption that the deal will close during February 2023, thereby contributing less than 10 months of MarkLogic activity. Once integrated, we expect MarkLogic to contribute more than $100 million to our top-line annually. It's important to understand that MarkLogic has a revenue model driven by term-based license agreements, which can result in uneven recognition of revenue. It's also very important to understand that MarkLogic has a January 31 fiscal year-end, and seasonality in the business results in roughly one-third of all MarkLogic activity being booked in December and January of any given year. Because of this seasonality, we expect MarkLogic to contribute approximately $70 million of revenue to our fiscal 2023, and to deliver an operating margin of approximately 25%. As previously mentioned, we expect the integration of MarkLogic to continue throughout 2023. Therefore, we expect to recognize cost synergies gradually during the year and to exit the year with an operating margin from MarkLogic of more than 40%. We anticipate drawing on our revolving line of credit to finance a portion of the MarkLogic purchase price. And while our pro forma net leverage levels are expected to remain modest, increased interest rates will impact our borrowing costs, resulting in interest expense of roughly $0.20 per share associated with the MarkLogic revolver drawdown and another increase in interest expense of $0.11 per share on our existing term loan A. Hopefully, that one was a lot more clear.

It was. Thank you, Anthony. Sorry to throw that on you at the last second. Now, I think if you guys are good, Anthony, Yogesh, we can open up to Q&A?

Sounds good.

[Operator Instructions] And today's first question will come from the line of Pinjalim Bora with JPMorgan. Your line is open.

Hi, thank you, guys, for taking the question. One question for Anthony first on MarkLogic. The seasonality that you're talking about with one-third bookings in, I think you said December and January, how does the rest of the year flow? Is it very minimal in Q1 and it kind of goes through the year?

Yes. Pinjalim, are you talking from a revenue perspective or just overall on the business?

Yes, from a revenue perspective. I'm just trying to think how to model it next year quarterly.

Yes. I would say you're going to pick up. What we would see in the first quarter as a contribution is going to be minimal. And certainly, because we close during February, end of February is our Q1, and because so much activity gets booked in December and January, so, I think, spreading things relatively evenly over the remaining three quarters is pretty much a safe bet.

I see. Okay. Got it. One question for Yogesh. I checked the MarkLogic's website. They were talking about an OEM partnership as well. What portion of the business is OEM-related? And it seems like they have a general SI channel. And now with Kemp, I guess, you have two companies with a broader SI channel. Would love to hear what - you were talking about the plans of kind of developing that broadly across the business, where do we stand today? Maybe help us give us an update on that. That's all from my side.

Happy to do so Pinjalim. Thank you. The OEM business is relatively small for MarkLogic, as you know that in our DataDirect business, the OEM business is the lion's share. That's not the case in MarkLogic. MarkLogic does have an OEM business, but rather small. The SI part is really interesting because our relationships with SI started actually also in connection with Chef. Chef was sort of the first one where SIs have been playing a very important role in winning customers and helping customers be successful. And then that further expanded with Kemp, as you likely recalled, and then now it further helps expand that channel for us with MarkLogic. So, it is to me a really important channel as you're aware, system integrators do enormous amount of work in terms of making customers successful, having trusted partnerships with system integrators who are well-versed with products, who have certified folks on their teams, who know the products and can do wonderful things for the customers with them, who actually have a practice around products is truly beneficial. And so, we are happy that we're able to expand that relationship, Pinjalim. And again, the opportunity in my mind is really the key opportunity is to be able to go to somebody who is an SI for a particular product and have them do some work on other product. Just as an aside, by the way, we also have - and I - we don't call them SIs because these are - these guys do more than system integration work, we have digital agency ecosystem around our Sitefinity and the whole online presence with our product portfolio around building and developing and targeting and doing the online analytics for online customers. Then those digital agencies, they play a big role in the success of Sitefinity as well, which includes the part of those digital agencies also have some system integration capabilities as well. So, we actually are building a really solid SI ecosystem in addition to our standard go to market with our own business as well as the sort of the channel business, which is much more reseller distributor two-tier channel. So, we're really excited about that as well.

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

Thank you. One moment for our next question. That will come from the line of Ray McDonough with Guggenheim Partners. Please go ahead.

Great. Thanks for taking my questions. This is Ray McDonough on for John DiFucci. Yogesh, maybe to start, you mentioned that business was strong across all business lines, and I was hoping you could parse that out a bit. Was there anything in the portfolio that was a little softer than another? I'm thinking OpenEdge is probably more stable in this environment and maybe you're seeing more softness or even cracks in something like Chef perhaps. I'm just trying to get a sense for how the portfolio performs relative to each other, if that makes sense.

Yes. So, thanks for asking, Ray. Actually, if you look at our business - and again, FX makes the - look business look different than really in constant currency it was, I mean, there was a significant amount of outperformance throughout the year. And it did come across pretty much the entire portfolio. I mean, you think about the - whether it is Chef or whether it is OpenEdge or whether it is DataDirect or Sitefinity and DevTools, if there's one product which I would say didn't show same level of outperformance, it's our network management product, WhatsUp Gold. And I think that's because in 2021, there was significant tailwind in the market because of what had happened to SolarWinds at the end of 2020. And as everybody knows, 2021 was a really turbulent year for SolarWinds and I think a lot of SolarWinds customers went looking for alternatives in 2021, which led to some additional outperformance on our part with WhatsUp Gold. And I think it's back to sort of more of its regular cadence that it had before that happened. So, I think that would be the only area where I would say we did not see the level of performance - really outperformance and strength that we saw across everything else.

Great. Thanks for the color. And then maybe for Anthony, as I think about you taking on more leverage for MarkLogic, how should we think about the use of capital going forward to either pay down debt? And where - what levels are you comfortable at in terms of your net leverage if you see an attractive M&A opportunity in the next six months to 12 months where you really feel like you should be pulling the trigger, where do you think you feel comfortable bringing that leverage in light of a rising interest rate environment here?

Yes. Ray, it's a good question. And I talked a little bit about the impact of increasing rates on the outlook for the year. But even having said that, I think with what we will draw down or what we anticipate drawing down from MarkLogic, I would expect the leverage levels sort of on a pro forma basis to remain well under three. I would expect that probably debt repayment will come into the calculus on capital allocation during the year. We'll do some a little bit of calculus on rates and other potential uses of capital. But I suspect we're going to want to pay down. And like I said, the drawdown is not so much. So, if we were to go up to say 2.5 times leverage on a pro forma basis, you'd probably see that under two as we go into 2024. So, I would expect that we start to de-lever from this one pretty quickly. And I think we'd be comfortable a bit, to do a deal maybe up at three times net. But, again, that's at a point in time to get a deal done and similar to what we would do with a deal like MarkLogic, we'd probably look to de-lever in a rate environment like this pretty quickly.

Great. That's helpful. Thanks for taking the questions.

Thank you. One moment for our next question. That will come from the line of Fatima Boolani with Citi. Please, go ahead.

Hi. Good afternoon. Thank you for taking my questions. And Happy New Year. Yogesh, I'll start with you. There was a cyber incident at the firm, and I understand you're taking a couple of charges just with respect to that incident. So, I'm curious if you could just expand upon that a little bit and - to the extent that lead you up and margins maybe creating a little bit more - maybe a little less stability, if you will, in terms of the growth expectations for the non-MarkLogic portfolio. And then I have a follow-up for Anthony, if I could, please.

So, as you are aware, and I think as we have mentioned before, the investigation into the incident is still open and ongoing. So, we really can't comment on it any further other than basically we've said before, and we can reiterate that we do not expect any material impact to our business, operational, financial results, etc. From a product-specific perspective, I don't see there - this causing a product-specific impact, otherwise we would have talked about it, right? So, I don't think that the growth aspects of our projections for FY '23 are related to that. As Anthony mentioned, right, the - we're expecting stable revenues this year from the base products. Obviously, 2021 and 2022 saw some phenomenally wonderful demand for us. And I think the overall macro is slightly different or maybe hugely different depending on what you think, right? And so, we are being very straightforward about the fact that, yes, we expect there to be stability in our business this year rather than significant growth. We do expect ARR to grow, by the way, Fatima, right? So - and we said that we do. And we'll expect it to grow modestly. And we think that our core business is truly solid across the board.

Fair enough. Anthony, just shifting gears to the cash flow. I appreciate some of the commentary you've shared about some of the tax and regulation changes on R&D expensing. But I wanted to ask about potentially other impacts of the cash flow inclusive of, if there is a linearity or collections consideration for MarkLogic. And then just generally, I think you called out sort of back end loaded performance. So, just curious as to why you did see linearity shift to the back end of the quarter and how that should sever into our cash flow expectations, considering the R&D expense and dynamic and potentially what we need to stay mindful of on MarkLogic's impact to the cash flow. And that's it for me. Thank you.

All right. Yes. So, there's a lot there sort of packed into that question. And I guess, the largest item in terms of the '23 cash flow to call out, really is that $15 million in incremental cash payments that we'll make under Section 174. And like I said, it doesn't affect our rate in any meaningful way. So, it really just is an acceleration of cash out to the IRS. So, that has an impact in '23. I think MarkLogic, for sure, when they're booking, let's say, a third of the business in December and January, that certainly will impact sort of the linearity or seasonality of cash flow. We won't realize the benefit of that, I think, until we roll into to next year into our fiscal '24. But certainly, along with the top-line seasonality and the amount of activity that's packed into December and January, we should see something similar from a cash flow standpoint. And then the last comment, I think, that you were sort of driving at was the [technical difficulty] year-over-year for the fourth quarter and now we've had pretty good [technical difficulty] looking for.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Harshil Thakkar with Oppenheimer. Your line is open.

Hi, guys. This is a Harshil on for Ittai. Can you hear me?

Yes.

Yes, we can.

Great. Thanks for taking the questions. So, Yogesh, you've talked about previously how there are parts of the portfolio that kind of operating these price-competitive markets where you're a bit careful on conducting price increases. And then there are other parts where you'll be a bit more proactive. Can you just describe where you think MarkLogic fits within that spectrum and how we should be thinking about price increases for that business going forward? And then as you look at the renewal pipeline for 2023, how are you thinking about price increases there?

Yes. Absolutely, Harshil. Happy to do that. So, Harshil, again, MarkLogic has by and large a business that, as Anthony mentioned, is multi-year term licenses that renew, let's say, three years at a time of somewhere in that range. And so, you end up with, again, only about a third of the business coming up for renewal in any given year. So, that's point number one. Point number two`, based on what we know, and our due diligence, the - not every one of their contracts has the ability to have meaningful price increases in it. As you know, they have a significant government business and there are limits to how much you can do in terms of price changes with the government - federal government contract. So, it is - again, it is, I would say, given the fact that it is only about three quarters of the business in terms of three fiscal quarters, given the fact that it's only about 70% or even slightly less than 70% of their overall business and the one third of the business doesn't come in, in FY '23, and given the fact that only about a part of the business will be up for renewal, I don't think it is a very large number. I would say, maybe on an annualized basis, it would be about 20% of their revenue for MarkLogic, where I think there's an opportunity to do some price increases. The product is very strong and is excellent. So, I think in those cases, we may be able to do some reasonable price increases. Again, the goal, Harshil, for us is customer retention matters more than the actual price increases. So, that's our philosophy. It has always been. And we will continue to focus on that. Going back…

Got it. Thank you.

You're welcome.

And one moment for our next question. And that will come from the line of Anja Soderstrom with Sidoti. Your line is open.

Hi. Thank you for taking my questions. Lot of my questions have been addressed already. But I'm just curious after sort of bidding your guidance for the year, you're coming in at the lower end. Was there anything in the fourth quarter that sort of surprised you?

Not really. We had a solid fourth quarter. We were within our guidance for revenue. We were above our guidance for EPS. I think, Anja, we had a solid quarter. I do think that we executed well. Again, Anthony, I don't know if you have something you want to add.

Yes. I would just say that we - coming into the fourth quarter, we probably left our range on the top line a little wider than we might otherwise. And the reason for that was because we were just whipsawed on foreign exchange rates last year, like a lot of companies were. And so, there was a bit of uncertainty going into the fourth quarter about how that would all land. So, the range might have been a little bit wider than would have ordinarily been the case. But to Yogesh's point, otherwise, it was, from our perspective, just solid across the board.

Okay. Thank you. And I'm just also curious for the MarkLogic with the term-based licenses. How long are the duration of those? Are those one-year contracts or...

Yes, a lot of multi-year. So, I'd say, yes, a lot of three-year contracts, some longer than that. But by and large, we end up with a lot of multi-year term-based license deals.

Okay. Thank you. That was all from me.

Thank you. One moment for our next question. And that will come from the line of Brent Thill with Jefferies. Your line is open.

Hi, guys. It's [Antonio] on for Brent here. Thanks for taking the question. About 20% of your revenue is invested back in R&D. And I was just wondering if you could talk a little bit about where those investment dollars are going. I'm wondering that you guys are working on now. And then maybe some key points you'd like to highlight for us.

Yes. So, Antonio, the - as we've said before, right, that our - we have a tremendous emphasis on customer retention. And so, the question becomes, what can you do to drive net dollar retention of your customers and retain them and expand business with them and continue to build with that, right? And so, we actually basically spend and invest more in R&D to make sure that our products stay ahead of the curve that - and this is across the board, right, this is across our portfolio, to make sure that our customers stay with us because it's much, much easier, much, much cheaper for us to retain customers that way than to win new ones. And so - and of course we spend significantly less, again, relatively speaking, on sales and marketing, which is why if you look at our overall operating margins, they truly are world-class, right? A company our size and scale in the software industry just doesn't have the percentage operating margin that we do and the kind of cash flow generation that we do. So, I think that, to me, it becomes - and to us, it becomes very much a question of where do you put in your dollar to invest with shareholders. And we believe that investing in the product side is much better than trying to not invest in the product side and then try to clean up with all the other effort that would be needed. And so, that's where we invest, and we continue to look for the right level of investments to continue to make sure that our products are leading edge. And it really is across our entire portfolio.

Awesome. Thanks for that. And maybe one quick follow-up or more of a clarification. I think you mentioned Kemp in your opening remarks. But where are we with that acquisition? I know you have to integrate Kemp and Flowmon together. Are we done with that or is there still a little more work to be done?

No, yes. I mean, we are done integrating Kemp. I think I might have said that in the opening remarks as well. Our integration of the Kemp business, both the products, Kemp and Flowmon products, and the business is complete. They are a key part of our infrastructure management portfolio, and they are - they have been integrated on our platform. And we're now looking forward to closing the MarkLogic deal and beginning that integration.

Awesome. Well, thank you, guys, and good luck on integrating...

Thank you so much.

Thank you. One moment for our next question. And that will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Hi, guys. I just want to follow up on a couple of financial things, Anthony. First on the - on MarkLogic. Can you talk about how you're going to incorporate them in ARR since they're so lumpy? What is the financial exercise you'll do to normalize that into an ARR number?

Yes. Sure, Ittai. I think we would expect that once the deal closes and we get to Q1, we would incorporate all of the ARR. So, we would effectively be able to provide [technical difficulty]

So, Ittai, let me try to repeat what Anthony was saying, just to see if - so you can hear it this time around. So, basically, as you know, when we complete - I mean, when we close the deal, then in the first reporting period which would be at the end of Q1, we basically take the historic ARR of that business and we do a pro forma across the history and current, and we use that going forward. Of course, for multi-year term licenses, we analyze those. Obviously, the maintenance becomes - or any other recurring revenues is annualized, of course. So, what we would expect to do is we would expect about $75 million increase to show in the ARR once the deal closes. And then we expect the ARR from MarkLogic to continue to grow. We have seen a steady growth in the ARR over the last three years, and we expect that trend to continue.

Okay. And then last one for me, on the revenue guide for the year, when you take out MarkLogic from this exercise, and I assume that your guidance for '23 includes already the $675 million to $685 million, does that include or does not include MarkLogic, just to be clear?

It's included in that number.

Includes? So, if you exclude your comments on MarkLogic from that number, you're basically guiding a shortfall of about $20 million roughly plus, minus on the year. Can you talk about break that down a little bit more, say, as to the components of that, and what is your underlying macro assumption that you've taken into account in your guide?

No. We're actually guiding, Ittai, if you were to take out $70 million, I think you'd be showing, and also if you factor in, say, I think $1.2 million in exchange rates that we mentioned, you'd be showing a little bit of growth at the midpoint. I mean, it would be slight, but growing a little bit. And I think from a macro perspective, that's sort of leads to the consistency we talked about in terms of what we're seeing in the demand environment.

Okay. Very good. Thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for closing remarks.

Well, thank you, again, everyone, for joining for the call. And we look forward to speaking to you again soon. Thank you and have a good night.

Thank you all for participating. This concludes today's conference call. You may now disconnect.