Good day and welcome to the Progress Software Corporation Q1 2024 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.

Okay. Thank you, Sherry. Good to have you back with us. Good afternoon everybody and thanks for joining us for Progress Software's first quarter 2024 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. 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. This document contains additional information related to our financial results for the first quarter of 2024 and I recommend that you reference those for specific details. We've also prepared a presentation that contains updated supplemental data for our first quarter 2024 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Today's conference call will be recorded in its entirety and will be available for replay on the Investor Relations' section of our website. And with that, I will turn it over to you, Yogesh.

Thank you, Mike. Good afternoon everyone and thank you for joining us today as we announce the results of our first quarter of fiscal 2024. It was a busy quarter for us, so let's jump right in. Total revenue of $185 million in the first quarter came in above the high end of our guidance and represents 12% year-over-year growth. Once again, our top line benefited from steady demand across geographies and products. ARR came in at $571 million, which was up slightly year-over-year in constant currency and NRR was 99%, which again reflects the resiliency of our business and the strength of our customer relationships. Our operating margins were 42% ahead of our expectations and were driven by our strong top line performance, coupled with solid cost management and the realization of efficiencies as the result of the completion of the MarkLogic integration. EPS of $1.25 came in $0.09 above the high end of our latest guidance and adjusted free cash flow was $72.2 million. As you saw in our press release, we are raising guidance for both these metrics as our existing business remains strong on the top line, and we continue to run in [ph]. Our balance sheet remains strong and we finished the quarter with cash and cash equivalents of over $133 [ph] million. DSOs were 50 days versus 62 last quarter, which is reflective of the timing of collections we mentioned on the fourth quarter call in January. In other news, as you might have seen, we also announced a possible offer to acquire MariaDB, a New York Stock Exchange listed Irish open source database company, who reported fiscal 2023 revenue of around $53 million. MariaDB is used by over 600 enterprises around the globe for their mission-critical applications. As we've repeatedly demonstrated when we've…

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 very pleased to have recently completed a refinancing of our credit facilities and believe the amended facilities provide Progress with significantly more liquidity and flexibility to continue the execution of our total growth strategy. More on that in a few minutes. Turning to our results and starting with the top line, we closed the first quarter with ARR of $571 million, which represents modest growth on a year-over-year basis. This growth in ARR was driven by steady demand for several products across our portfolio, especially OpenEdge. Another factor that continues to contribute to the resiliency of our top line is strong net retention with Q1 net retention rates coming in at 99%. In addition to our solid ARR results, revenue for the quarter of $185 million was above the high end of our guidance range, with the over performance, driven by strong demand for multiple products in our portfolio. On a year-over-year basis, revenue growth of 12% was driven by a full quarter contribution from MarkLogic compared to only one month contribution in Q1 of 2023, and this growth was partially offset by the timing of renewals on multiyear subscription contracts. As I've noted on previous earnings calls, the timing of subscription contract renewals, especially multiyear subscriptions, can have a significant impact on our revenue in any given quarter and SKU results higher or lower. Using Q1 of 2024 to illustrate this point, if we were to exclude both MarkLogic's contribution and the impact from the timing of renewals on multiyear subscription contracts, our remaining business would have shown low single-digit…

Thank you. [Operator Instructions] And our first question will come from the line of Ray McDonough with Guggenheim Securities. Your line is open.

Great. Thanks. Yogesh, maybe for you, MariaDB is obviously based on open source technology. And throughout history, there's very few examples of companies that were successful in scaling businesses supporting open source technologies. Why is MariaDB different in progress is control? And how confident are you that you can ramp margins? When I just look at the filings that they have there, it seems like they're burning a good amount of cash right now. So, I just want to understand kind of what you're seeing in that business in terms of your ability to drive success and drive free cash flow generation?

Sure, Ray. Thank you. So, two things, right? First of all, we do have Chef, which is also an open source product, and we have demonstrated that we can do well with a business like Chef, both from the perspective of customer retention, ARR growth, margin expansion, and so on. So, we have an example of an open source company that we have done this before with. With respect to MariaDB, a couple of points there, last year's financials actually do not reflect some of the restructuring that they announced at the very end of last year. So, they have done a significant restructuring. I think they publicly announced that they were eliminating at least 28% of their employee headcount. They have also talked about the fact that they have exited two very, very small, but highly unprofitable businesses. And they also have, to be honest, public company costs that if you can imagine a $50-something million revenue company, dealing with a full public company expense structure, which is further opportunity for us. We believe that we have tremendous opportunity here to create truly significant meaningful value for our shareholders Ray.

That makes sense. And then maybe just a follow-up for Anthony. In your comments around guidance, you mentioned you're aware the macro might become more challenging as we move forward. I'm just wondering, one, is there anything behind those comments in terms of what you're seeing out of your customer base in any sort of product category? And two, maybe just kind of help us understand what level of prudence you're putting in the guidance here and what could go wrong and what could go right or what could be better in the macro and what that would mean in terms of achieving your high end of your guidance?

Yes, sure. I think -- we continue to see inflation still running through from a cost perspective, Ray. And so I think that was the -- probably the point that we were making is that that's still a bit of a challenge for us and for a lot of companies out there. I think we're pretty good at managing costs and being forward-looking in terms of how our cost profile is going to develop. And I think it's just a nod to the fact that we're going to have to continue with that because we still see some of the same inflationary pressures in the market and in our business. And we'll continue to stay disciplined in managing that and managing our margins.

And to sort of just to add a bit, I think from a demand side, we are not seeing, to be honest, anything different. We continue to see steady solid demand across the portfolio.

Great. Thanks for taking the questions.

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

Hi, good afternoon. Thank you for taking my questions. Yogesh, I have one for you to start and a follow-up for Anthony. Over the course of last year, one of the themes that we had discussed was this opportunity for MarkLogic to enjoy some cross-sell synergies with your very sticky, very large OpenEdge installed base. I'm curious with now a full year under your belt and having been very conservatism -- or having been very conservative rather on your ability and expectation to kind of cross-sell -- or cross-pollinate into those bases. I'm curious if you're going to take any deliberate or material steps to actually derive behavior this year? And then just a follow-up for Anthony, please.

So, Fatima, our efforts around cross-sell are modest because, as you know, our efforts around go-to-market are in general, modest, right? I mean one of the things that the trade-off that we make is the trade-off between what happens on the spend on go-to-market efforts and what we deliver in terms of our margins. So, I think fundamentally, we continue to do what I would call targeted efforts around cross-sell. But we have always modeled every single one of our acquisitions with -- to be honest, right? And we said this publicly, no cross-sell is modeled in our modeling. We think of these businesses as having to standalone to deliver value for our shareholders and if we can actually do some cross-sell, then that's upside. So, from our perspective, Fatima, I don't see, to be honest, any real, meaningful cross-sell that sort of moved the top line needle in a meaningful way. We will continue to do some cross-sell, we are doing cross-sell. And it's not just actually cross-selling MarkLogic into OpenEdge, it's even cross-selling other products into the MarkLogic customer base. So, whether it is our Chef product for managing those environments and the deployment and DevOps for those environments, whether it is something like a Sitefinity and other digital experience products that end up front-ending a MarkLogic application. So, we see opportunities there as well as we see opportunities with MarkLogic going into OpenEdge customer base. But really, again, I keep saying this, and I guess I repeat myself over and over, we really don't see a meaningful impact from that on our business.

I appreciate that Yogesh. And Anthony, can you -- on the net retention rate at 99%, now just a nitpick that is shy [ph] below your internal threshold at 100%. So, any nuances you can offer to us on why that step down? You've been pretty consistently at 100, 100-ish level, 100%-ish. So, just wanted to get maybe some additional context around that slight compression this quarter? Thank you.

Yes. Sure Fatima. The -- I would say the compression because we measure our net retention rates on a trailing 12-month basis, you sort of have to look back over that trailing 12-month period and figure out the ins and outs. And we mentioned in Q4 that we had a couple of contracts churn out. One of them was due to M&A, frankly, where we ended up losing a customer. And that impacted us in Q4, brought the net retention rate down a little bit. And that contract is still in the denominator of our calculation. It will be there for a couple more quarters. So, we're not surprised to see things at 100% or 99% for a little bit, certainly doesn't change our long-term outlook from a net retention and a target perspective of being 100% or better.

Thank you.

Yes.

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. Thanks for taking the question. This is Antonio Venturim for Brent Thill. It looks like you guys had an overall strong quarter on the top and bottom-line. Can you just give us your puts and takes on the delta between ARR growth sort of being flat to slightly up versus revenue growth growing in the double-digits? If you could just give us puts and takes on that, that would be great.

Yes, sure. Sure, Antonio. I can take that. So, for the quarter, MarkLogic if you sort of take a look at the year-over-year, we only got a month contribution from MarkLogic last year, and we get a full quarter this year. So, that drove the vast majority of our growth. But there was an offset to that, right? We did have some multiyear subscription contracts that executed last year. They renewed last year. We didn't have the same opportunity this year in the quarter. So, when you're looking at revenue on a year-over-year basis, I think the right way to reconcile it is you've got some growth from MarkLogic, it gets offset a little bit by the timing of contract renewals, some of those subscription deals. And so you can still sort of reconcile down to low single-digit growth on the revenue, but ARR just ends up being, I think, a more accurate reflection this quarter of what's going on in the business fundamentally.

And what's interesting is that when you look at ARR year-over-year, last year, the pro forma ARR of MarkLogic was included in last year's results. So, when you think about it that way, right, when we compare ARR, we include acquisition prior ARR as though it was part of our business. So, the growth in ARR is really sort of the real growth of the business or the real trajectory of the business, whereas until you have a full 12-month cycle, the actual reported revenue looks significantly higher because MarkLogic is adding to this quarter for a full quarter, whereas last year, as Anthony said, was just about a month.

Thanks for taking the question and congrats on the quarter.

Thanks.

Thank you. [Operator Instructions] One moment for our next question and that will come from the line of Pinjalim Bora with JPMorgan. Your line is open.

Great. Thanks for taking the questions. I want to ask you on MarkLogic, I heard throughout the word RAG along with MarkLogic, -- it's -- I know it's a document database, but can you remind us what has MarkLogic developed so far from a RAG standpoint? Have they created a Vector DB store? Is there a search layer in there? Maybe help us understand that -- are you seeing customers look at that more seriously as -- for their RAG use cases?

Great question, Pinjalim. So, what we have done -- so if you think about MarkLogic, of course, is really unstructured data. But Semaphore on top of that, right, is the semantic analysis of that information. And so the question becomes when you get information out of an LLM, how do you contextualize it? So, yes, we have actually created capabilities, and we have -- I don't want to say customers in production, but we have customers who are looking to figure out how to use it to actually leverage their content and their data using both MarkLogic and Semaphore on top of their information and then augmenting any receivable that they do through LLMs of any generative content, right? So, you get -- the LLM will do its thing. Basically, they augment the generation with information from MarkLogic/Semaphore and therefore, provide more contextual answers. I wish we get to the point where we have production customers, we can talk about it.

Interesting. Yes, thank you for that Yogesh. One for Anthony. I hear you on the comment that you made about kind of the customer churn -- you had a couple of customers churn last quarter, and that's kind of impacting NRR. But when I see the sequential decline in ARR seems like it's a little bit more than maybe a year ago or even maybe last quarter. Just want to make sure that there is no incremental gross dollar churn that you're seeing at this point? Thank you.

Sure, Pinjalim. Yes, I would say that the trends for us have been generally consistent. We do see sort of a seasonal move in ARR because we're a software company where contracts can lapse, we've generally seen a step down from Q4 to Q1. It's not uncommon for us in terms of ARR. And so we saw that again this quarter. I think it may be slightly higher than what it was last year. But from our perspective, in terms of what comes back into the tail [ph] in Q2 and just trends in the business, I don't see it as anything meaningful in terms of incremental churn in the quarter.

Got it. 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 any closing remarks.

Well, thank you, everyone, for joining our call, and we look forward to speaking with you again in a quarter. Thank you. Bye, bye.

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