Good day and welcome to the Progress Software Corporation Q4 2023 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. Mike Micciche, Senior Vice President of Investor Relations. Please go ahead, sir.

Okay. Thank you, Sherry. It's nice to have you with us again. Good afternoon, everybody, and thanks for joining us for Progress Software's fourth fiscal quarter 2023 financial results conference call. On the line with me this afternoon are Yogesh Gupta, President and CEO; and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over our Safe Harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives and other information that might be considered forward looking. Such 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 the risk factors in our filings with the Securities and Exchange Commission. Progress Software assumes no obligation to update the forward-looking statements included in this call. And additionally, please note that all the financial figures referenced on this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our financial results press release, which was issued after the market close today and is on our website. This document contains additional information related to our financial results for the fourth quarter of fiscal 2023 and I recommend that you reference it for specific details. We've also prepared a presentation that contain supplemental data for our fourth quarter 2023 results providing highlights and additional financial metrics. As I mentioned, both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Also today's conference call will be recorded in its entirety and will be available via replay on the Investor Relations section of our website. So with that out of the way, Yogesh, I will turn it over to you.

Thank you, Mike. Good afternoon, everyone, and thank you for joining our Q4 2023 financial results conference call. Fiscal 2023 was another great year for Progress. I'm extremely proud of everything we accomplished and how all our teams performed. I'll quickly take you through some highlights from the past year and then provide a look at the year to come. The fourth quarter was another strong one, marked by ongoing stable demand for many of our products, especially OpenEdge, DataDirect and Sitefinity. Top line revenues of $178 million remained robust. ARR grew 17% year-over-year. Our net retention rate was a solid 100% and operating margins were well above our expectations. For the year, we generated over $175 million of adjusted free cash flow on revenue of $698 million and finished the full year with operating margins of 39%. As you recall, we began 2023 with the announcement in January of the MarkLogic acquisition. At that time, we said that the MarkLogic acquisition would add over $100 million in annual revenue and would take about a year to fully integrate. I am delighted to share that virtually every milestone for the MarkLogic integration was completed before the end of fiscal 2023. This faster integration was a direct result of the continuous improvements we have made in our integration processes. As always, we gained new learnings from the MarkLogic acquisition that will help us further improve for the future. For instance, we had to maintain a separate entity to accommodate the unique requirements of the various US federal agencies who are our customers. Now that we have this entity, we see it as a vehicle not only to serve these existing customers, but to expand our relationships by addressing a wider set of their needs through our broader product portfolio. In addition…

Thanks, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh mentioned, our fourth quarter results were strong across almost every metric and we're very pleased to deliver such a strong close to fiscal 2023. Diving right into the numbers, I'd like to start with ARR, which we believe provides the best view into our underlying performance. We closed Q4 with ARR of $574 million, which represents approximately 17% growth on a year-over-year basis and 1% pro forma growth on a year-over-year basis. To be clear, the pro forma results include MarkLogic in both periods. The growth in ARR was driven by multiple products including OpenEdge, MarkLogic, Sitefinity, our DevTools products and MOVEit. And ARR was again bolstered by strong net retention rates of 100%. In addition to the strength in ARR, revenue for the quarter of $178 million was just above the high end of the Q4 guidance range we provided back in September and represents approximately 12% growth on a year-over-year basis. Our strong revenue performance in the quarter was driven by multiple products, led by OpenEdge, which continues to outperform our expectations. For the full-year, revenue of $698 million grew by $88 million and represents 14% growth over the prior year. This growth was driven by MarkLogic's topline contribution, combined with growth across multiple other products, most notably OpenEdge, Loadmaster, Sitefinity, MOVEit and our DevTools products. With customer retention rates remaining strong throughout 2023 and a strong demand environment fueling growth for a number of our products, we're thrilled with our top line results for the year. Turning now to expenses, our total costs and operating expenses were $115 million for the quarter, up 18% over the year ago quarter and $428 million for the full year, up 16% compared to fiscal 2022. The year-over-year…

Thank you. [Operator Instructions] And our first question will come from the line of Pinjalim Bora with JP Morgan. Your line is open.

Great. Hey guys, congrats on the quarter.

Thank you, Pinjalim.

I want to ask you on MarkLogic. Now that you have integrated MarkLogic, what are you hearing from the MarkLogic customer base in terms of innovation that they would like to see? And I know you don't focus on cross-sell as much, but is there any opportunity for cross-sell that you're seeing in that base? And one for Anthony, what is the dollar contribution for MarkLogic for the full year?

So, I'll take the first part and then Anthony can talk about the revenue contribution in FY 2023. So Pinjalim, a couple of interesting things. One that has come out loud and clear is that, the MarkLogic product and MarkLogic and Semaphore combined, it's really designed as an underlying database system and it really requires a fair bit of work to start getting value out of it. The time to value is a bit longer than we would like to see. So we've actually been working on throughout this past year and the team has been and we've just sort of in the process of coming out with a fast-track option as an add on to the product to really accelerate the ability for our folks to be able to create data driven applications rather than start from scratch. So, that's something that we're tremendously excited about in terms of the type of innovation. The other type of innovation, the request that we have gotten that we've actually already addressed was how can they use MarkLogic and Semaphore to take their existing data and potentially augment. And to be honest, make the generative AI answers from standard generative AI tools that are out there to be specific to their business, how do they make it without having that data go out of their environment. And so, we have created sort of additional offerings around that to make it easy for folks to leverage their internal data and therefore create in context relevant to their business, non-hallucinogenic ChatGPT type of answers. So that is -- those are two of the things that we've already done. In terms of cross-sell, Pinjalim, as you know, when we build our business models for these things, we do not take into account cross-sell because we…

Yes. And to take the second question, Pinjalim, when we acquired MarkLogic, we had mentioned that it was roughly $100 million business, maybe a little bit more. And we thought they would do probably $70 million for the year in 2023. And the business came in just slightly ahead of that, so just north of $70 million in fiscal 2023 was the number.

Got it. Thank you very 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.

Thanks guys. Maybe I'll start with you, Yogesh. Last earnings call you sounded very upbeat on the potential for M&A. Sounds like that valuations are finally starting to come in the direction you want them to come. And we're now literally a year since MarkLogic. Maybe you can give us an update on what you see out there and how would you rate the odds of another acquisition in 2024?

So, Ittai, you're absolutely right. We have been very active in the M&A space. We are looking at companies, we are competing for them. We're actually -- interestingly enough, we have said no to a lot of them because we felt that they just did not meet our criteria of being really solid businesses that we wanted to own at any price to be honest. And given where we are and given what we are seeing, I feel truly confident that we will do an acquisition in FY 2024. Now with that, I also want to make sure people do understand that it takes, you know, two to tango as they say, right? And so the sellers have to align with us as well. But yes, we feel good. We feel really good about the pipeline. We feel really good about the activity. We feel really good about the conversations we've had over the last second half of FY 2023 to feel that whenever we have engaged, they have been meaningful and they have been something that we've been truly in the middle of and thick of things. So I am confident, Ittai, that we will do something in FY 2024.

Okay. And then on the financial side, you gave a quite interesting review on the enhancements you've made at the portfolio. But tying this to Anthony's comments on the year, it sounds like there's literally zero core growth that you are expecting with the business outside of the incremental contribution from MarkLogic that didn't -- was not caught in 2023. So, the guide meaning, we really assumes zero growth in the core. I'm just trying to think why, with all the changes in the portfolio, there's no better opportunities for you to monetize these? Maybe going back to the first question, all the generative AI enhancements, are none of them revenue generating? Are they all just experience enhancing? Is there no better way to squeeze a little bit more out of this?

Yes. Hey, Ittai, it's Anthony and it's a good question. Part of this really is -- and I mentioned a little bit, the timing of contract renewals within the business in 2024, we do have a lot more term based -- sort of the on-prem, term-based subscription model. And so the timing of when those contracts renew or when they're set to renew will influence the revenue quarter-to-quarter. But again, I also alluded to the fact that we had pretty good ARR growth last year. Multiple products contributed to that growth. And we expect stability in a demand environment. So, again, quarter-to-quarter things may move a little bit, but over the course of the year, I would expect to see ARR growth. That's relatively consistent with 2023.

Very good. Thank you. Good luck.

Thank you, Ittai.

Thank you. One moment for our next question. And that will come from the line of Fatima Boolani with Citi. Your line is open.

Good evening, gentlemen. Thank you for taking my questions. Either for Anthony or Yogesh, it was interesting to hear that MOVEit had a strong performance in the quarter. It was enough for you to call it out in your prepared remarks. And appreciating that it was an incident for the business, I'm very curious as to how customers have responded. I mean, it seems almost counterintuitive that it was a contributing factor to some of the strength you saw. So I just wanted to unpack that a little bit because it seems counterintuitive [indiscernible]. And then I have a follow-up, please.

So, good to hear from you, Fatima. I'll answer part of it, maybe Anthony can add as well. From my perspective, right, we have actually done everything in our power to help our customers harden their environments, deal with the incident that they faced and move forward and we continue to do so. I am really proud of what the team has done and we're really proud of being able to keep our customers and the customers have been loyal to us. It's been a really wonderfully positive set of outcomes. Obviously, huge challenge and still a lot of unresolved legal issues and regulatory issues. But from a customer perspective, we continue to be very positive about MOVEit. Anthony, do you want to [indiscernible].

No, I would agree. I think there's -- MOVEit performed well certainly in the first half of 2023 and it held up in the second half of 2023. I would say we keep an eye on the pipeline and we want to make sure that we can continue to close deals. And retention rates have, I think, remained fairly strong, but we'll measure that over the course of the year, right. We want to see how the retention plays out over time, so I'll dial back, Yogesh, a little bit. I'll be the conservative one to say. Yes, it was a very good year and I think we're very pleased with the outcome of the topline. But we're still cautious. And we're still -- I would say very focused on where our customers are at and wanting to understand renewal trends and also wanting to make sure that we can continue to build the pipeline. So I think it's -- it held up well for sure. Yes.

Okay, that's helpful. And since you brought up retention rates, it's a good segue into my question around what you're thinking about net retention rates underneath the hood as you tell us and talk to us about consistent ARR growth trends consistent with this year? And the spirit of the question really is, we did see net retention rate this quarter dip about 100 basis points, so it's not dramatic. I think you've been operating in the 101, 102 zip code pretty consistently. So, maybe to ask the prior [Technical Difficulty] we expect some of those innovations in the portfolio pull up the socks so to speak on net retention rate or any other commentary you might be able to share as you think about net retention rate trajectory in 2024?

Yes. Sure, Fatima. I can take that. I think in the back half of 2023, we do have churn from time to time. And I think Yogesh has mentioned this before. Sometimes it's factors that are outside of our control like M&A. And so, I think any slight dip we saw in the back half of the year was associated with a very small number of contracts and one, in particular, where there was two global financial institutions merged and the party that was using our technology did not come out on top in the integration. And so sometimes those things happen. And we measure net retention rates on a trailing 12-month basis. So I think as we move through the first half of 2024, we would expect retention rates to be maintained and then start to sort of normalize and improve in the back half of the year again. I think that would be a projection on where the estimate would be there. I don't want to guide to a specific number. We still are happy. 100% or better for us is great. I still think for the full year of 2024, there can be some improvement there.

Perfect, thank you so much.

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

Thanks. Curious if you could just address the demand environment and how you would characterize how customers are feeling today versus six months ago, a year ago, what are you seeing in terms of their overall attitude to spend and how you're feeling about the pipeline?

So, Brent, we continue to see, as we even said in our prepared remarks, right, sort of stable, continued demand. It is a -- we have a product portfolio that is very much relevant to the businesses, even more so today than it was a year ago, which was even more relevant than the year before and so on, right. As we pick up these new products that address additional areas that we can help them with. So demand remains good. We are not seeing any sort of meaningful change up or down, right. I want to be careful about that, right. I don't think that people are suddenly going, oh, maybe there will be no recession and therefore let's spend money like drunken sailors. We're not seeing that. We're not expecting that. I think budgets continue to be watched. I think people are cautious about their spend. But because of our product portfolio, which helps people optimize expenses, run things better, improve efficiency of engineering and development organizations, improve IT operations, improve security, improve the development lifecycle, all those things actually play towards that. So, I think we see more of the same in 2024 as we did in 2023 at this point.

And on M&A, a number of your peers are saying kind of the same things you're saying. I'm curious if -- is there one or two points that you would add to what's enabling this M&A environment to pick back up? Is it just more reasonable evaluation? Is it hey, we've had such a stall out for so long that it's just kind of natural pent-up demand? What do you think is causing this now?

I think, Brent, it's all of the above. I think that, you know, when you look at -- so, one of the examples is VC backed companies, right. If you look at VC backed companies, their main plan is IPO exits, right? And you look at enterprise software IPO exits over the last 24 months. And boy, it is sparse, right? So, if you have a business and you're a VC and you have a business that is absolutely not a rock star business, you're not thinking IPO in 2024, right? So the question is, what do you do? You've had two years behind you. And 2022 and 2023 were disasters from an IPO perspective. Now, 2024 looks like it's gone for that kind of a business. And it's unclear whether business that is growing, let's say, single digits in revenue is ever going to be able to IPO. So what do you do, right? So I think people are beginning to get there. And I think that founders who work with these VCs and these VCs who work with founders are slowly sort of saying, look, we really don't want to fund your next round. And those businesses that need to raise a round, I think are potentially coming to market and I think they are opportunities. So that's one category. And then the other category is, even other businesses that have been owned by sponsors or other entities for a significant period and they kind of look at it as a can we get some liquidity? So, I think it is a time issue for the investors. For VCs, it is a matter of focusing on their winners and not worrying too much about their [indiscernible] whereas in the case of sponsors, it is some pressure from LPs around liquidity and so on. So I think those are the pressures that are bringing the size of businesses we are looking at, right, into the market. We are not really looking at extremely large businesses. We look at businesses in general plus or minus 20% of our size, right. We -- ideally 15% to 25% of our size is the sweet spot. We'll go somewhat smaller. We'll go somewhat bigger, but that's what we like. And so that's -- in that range, we are seeing quite a bit of activity.

And then one quick clarification for Anthony. I mean, your margins over the last four, five years have been pretty much a cruise altitude, high 30s, low 40s. Is that still kind of the range of how you're thinking about running the business, not -- maybe not too high so you get growth? But is the high 30, low 40 kind of the right framework to think about for the next couple of years?

Yes, I mean, we're -- 39 to 40 for this coming year. We're not expecting a material change in the margin profile of the business. We've always said, we'll maintain margins better than 35%. I think being in the high 30s is certainly something that is manageable for us and it's sort of part of our playbook.

Great, thank you.

Thank you. One moment for our next question. And that will come from the line of Ray McDonough with Guggenheim. Your line is open.

Great. Thanks for taking the question. Anthony, you mentioned billings timing was more back end loaded this quarter. Has that been a trend or was it driven by a few deals in the quarter? And how do you think about that in 2024 as your business becomes more term license related and more dependent on renewal timing?

Yes, it's a good question, Ray. I think it was more a small number of deals. We tend to do -- there are lumpy deals in any given quarter and certainly in Q4. I think the Q4 dynamics around the timing of bookings and billings, they usually are different than any other quarter just because it's -- we've got sales incentives that are sort of focused around that Q4 time frame and a lot of customers in year-end are at their Q4 and they're doing a lot of budget work and negotiation around the quarter. So I think Q4 tends to be more challenging just in terms of forecasting the timing of when things are going to come in. And we overachieved on the top line, which we're thrilled about. It was little bit later in the quarter and so that cash pushes into the following year. But I think you're right also that as we go into 2024, there's more parts of our business now that are on term-based subscriptions to the extent that more multi years come into play or the timing of certain contracts moves from quarter to quarter, it'll have an impact on revenue. Things maybe lumpy from quarter to quarter. I think it'll impact cash flow to a lesser extent. We could have a situation like we had in Q4 where there's a little bit of a timing issue, but I think it's more of a revenue impact the way I think about it. Some cash flow impact, but probably a little bit less.

That makes sense. And then maybe another one for Anthony. And Yogesh, if you want to comment, that would be helpful as well. So, as we think about just kind of where interest rates have gone and where most I think are expecting them to go, which is down next year, you talked a little bit about absent an acquisition. You'll get your net leverage down to about 1.5 times. What do you view as an appropriate level of leverage if you do find the right business? And I know it might be deal dependent, but just kind of where are your guardrails in this interest rate environment around leverage?

Yes, I think the interest rates drive a lot in our model, right? And the leverage levels are sort of the governor in terms of how fast and how big we can go. And so I would say 3.5 times net, we could creep a little bit higher than that to get a deal done. I think we'd be comfortable doing that, 3.5, 4. I don't think we'd go much above that. And I think if we were to take leverage up that high for the right deal, we would probably -- the same as we did for MarkLogic, we'd probably start to delever pretty quickly after the deal closed. If you look back on the MarkLogic deal, we've probably taken more than a half a turn off of net leverage this year. And we started paying it back in Q2, right. We closed it in Q1. We started paying down that revolver in Q2. And by the end of 2024, that revolver would be gone. And I think if we were to take on a little more debt to do our next deal, I think it'd be a similar playbook where we may lever up to that 3.5 times net or a little higher. And once the deal closes and the integration starts, we'd start delevering probably pretty aggressively.

Makes sense. Thanks for taking the questions.

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 any closing remarks.

Well, thank you, everyone, again for joining us. We look forward to talking to you again soon. Have a wonderful evening. Good night.

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