Good day and welcome to the Progress Software Corporation Q3 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, Investor Relations. Please go ahead sir.

Okay. Thank you, Shuri. It's always a pleasure to have you with us. Good afternoon, everybody. Thanks for joining us for Progress Software's third quarter 2024 financial results conference call. On the line with me today 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, our proposed acquisition of ShareFile, which we announced on September 9th, 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 closed today. This document contains additional information related to our financial results for the third quarter of fiscal year 2024 and I recommend that you reference it for specific details. We also have prepared a presentation that contains supplemental data for our third quarter 2024 results, provides highlights and additional financial metrics. Both the earnings release and the supplemental presentation, along with a copy of our press release and the supplemental slide presentation announcing the ShareFile acquisition on September 9th, 2024 are all available in the Investor Relations section of our website at investors.progress.com. Today's call will be recorded in its entirety and should be available for replay on the Investor Relations section of our website shortly after we finish. With that let me turn it over to Yogesh.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us as we share the results of our third fiscal quarter. The last few months have been busy and exciting and I'm glad to be here this afternoon to talk about all the great things happening here at Progress right now. To begin with, let's talk about the third quarter which was ahead of the high end of our guidance on both the top and bottom lines. Revenue grew by 2% year-over-year to $179 million and EPS grew 17% year-over-year, reflecting continued expense management. We ended the quarter with $582 million in ARR, up sequentially 1% and net retention rate held steady at 99% as some churn from late last year, which we have previously discussed, works through the trailing 12-month calculation. We generated excellent cash flows with DSOs at 45 days and our balance sheet remained healthy and strong, ending the quarter with over $230 million in cash. So on just about every metric, we had a strong quarter. I'm very pleased with our Q3 results and Anthony will provide more details on the financial metrics and dynamics in his remarks. And another important news during the third quarter, the SEC notified us that it has concluded its investigation into the MOVEit vulnerability with no enforcement action recommended. This news from the SEC in August was in addition to clearance decisions by data privacy regulators in the UK, Australia and Spain over the past year. We view all these decisions as positive indicators of how we've handled the MOVEit vulnerability from our rapid initial response and reporting transparency to our foresight cooperation with all regulatory inquiries and investigation. The third piece of exciting news which we announced two weeks ago is our signing of the agreement to acquire…

Great. Thanks, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh mentioned, we're very pleased with our third quarter results, which once again exceeded the high end of our previously issued guidance ranges. We're also thrilled that on September 9th, we announced the signing of a definitive agreement to acquire ShareFile from Cloud Software Group. I'll talk more about ShareFile and the acquisition in a bit. But first let's get into the numbers. Starting with ARR, which came in at $582 million and represented slight growth on a year-over-year basis and approximately 1% sequential growth over the second quarter. Although no single product drove material growth in our total ARR, the increase that we delivered was the result of modest growth in multiple products across our portfolio including OpenEdge, DevTools, Sitefinity, Loadmaster, Flowmon and MOVEit. We also had another strong quarter for net retention with our Q3 rates coming in at 99%. In addition to our solid ARR performance in the quarter, quarterly revenue of $179 million slightly exceeded the high end of the Q3 guidance range we provided in June and represents approximately 2% year-over-year growth. Our strong revenue performance in the quarter was driven by stronger-than-expected demand for multiple products in our portfolio, including OpenEdge. Turning now to expenses. Our total costs and operating expenses were $105 million for the quarter, a decrease of $3 million compared to Q3 of last year. This year-over-year decrease was driven by two factors. First is tight cost management across the business as our teams again executed well during the quarter. Second is the timing of certain expenses between the third and fourth quarters. Operating income for the quarter was $74 million, an increase of $6 million compared to the same quarter last year with an operating margin of…

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

Thank you for taking my questions. First one, I think, a question for Anthony. And then I'd like to ask a follow-up to Yogesh. So, Anthony, really nice cash flow in the quarter and you reduced the annual guidance by $10 million even though ShareFile impact, it was negative $15 million to $20 million. So I just want to make sure my math is right, it's easy math, but that implies excluding ShareFile effect, you would have raised it $5 million to $10 million, the cash flow guidance, and I just want to make sure is that correct? And then I know you've talked about this, I mean, you're talking about profit and getting things up to normal levels. But and you've proven yourself in M&A, Progress has, your team has done that. But can you go through some of the detail of why you're confident in bringing ShareFile profit metrics and I'm really focused with free cash flow to your level to your normalized level over the next 12 months. The reason I ask on this one, I know you said you're going to do that and you have done in the past. But this is a big one right? And it's a little different regarding the core customer base relative to a lot of your other acquisitions? Sorry for the long winded question.

No, that's great, John. Thank you. And you're correct. The first question about free cash flow, yes, there's an implied increase to our cash flow guide for the year that gets netted down by the ShareFile impact in Q4. So your math there is correct. When it comes to our confidence in the ShareFile integration, you're right. It's a larger acquisition, but as our business has grown, ShareFile is about a third of our revenue. And so it's really not that far out of what we would normally target. It feels like it's manageable to us. The business already is profitable. It's running, let's say, between 15% and 20% operating margins. And they already have, you know, one of the things that was attractive to us is it's a cloud platform operating at scale. They've had gross margins better than 80% at least in terms of the diligence we were able to dig into. And all of those things, I think having already an ability to operate cloud infrastructure at scale like that to do it as a solid gross margin. And the fact that this is an asset deal and it's really a carve-out from Cloud Software Group. We have a sizable DX business already, a digital experience business. I think there's a lot of resources that we will bring to bear. I think our DX business is used to a transactional type of heavy volume business. So there's an element within Progress that ShareFile looks very familiar to. And I think bringing it over with really strong gross margins and very good net retention rates gives us a lot of confidence that we're going to be able to drive margins where we would expect to in our model and to maintain similar cash flow conversion metrics in this business.

Okay. Thank you. And then, Yogesh, to that point about the digital experience business you have, ShareFile, a lot of exposure to the SMB, the similar customer base here, right? But we're starting to see at least indications of in the market a bit of a rollover. The SMB has been really strong, right? And I just starting to see a little bit of weakness out of that cohort in the market. Can you comment on your thoughts regarding this and your recent experience regarding your businesses that do sell into sort of an SMB customer base.

Happy to, John. So in our Digital Experience business, right, we also have a very, very large number of customers. I mean I think it's quite often not well known that we have more than 20,000 customers in our Digital Experience business ourselves. It also is a high velocity small repeatable deals business. We continue to see strength there. We continue to see the business doing well. John, from our perspective, business has been solid is the way I would characterize it. I know that some folks were seeing really, really meaningful upside with the SMB side. We saw just a steady solid business and we are not seeing changes there in what we do. The ShareFile business is a very interesting one, right? It targets really a business user that is using it for the core part of their business, which is collaborating with their clients and making sure that their business functions, right. If you're an accountant, if you're a lawyer, if you're a doctor, if you are a, any of the business services people that use this, they are using it to exchange mission-critical from their perspective, business critical information in a secure reliable way, do workflow on it, make sure that multiple people can work on it in a secure way, make sure that there is versioning and ability to audit and track who did what. And many of these industries are highly regulated. So it is a very stable business. The business has had a track record of stability, right. So we know that from looking at what has been shared with us. So we feel good. It isn't just that suddenly the business was doing well over the last couple of years, so we thought it was a good time to buy, John. So…

Well, you guys have done it every time. So thanks for all this. Thanks.

Thank you, John. Thank you.

Thank you. One moment for our next question and that will come from the line of Lucky Schreiner with D.A. Davidson. Your line is open.

Hi. Awesome. Thanks for taking my question. I know you guys probably don't like this question. But since you mentioned ShareFile and MOVEit, sorry, MOVEit have similar customer base as some of them both use the products. Is there a cross-sell opportunity here that you see? Any color there would be helpful.

So there are some common customers of MOVEit and ShareFile, Lucky, from our perspective, whenever we do these transactions and look at these acquisitions. Our business model is all done based on assuming no cross-sell because we believe that cross-sell is often much, much harder than it looks on the surface. We will see what happens over time. And if, obviously, if there is an opportunity and if we do see some traction, we will share with you transparently. But our plan at least at this point does not contemplate any cross-sell. And it just makes it for a, to be honest, a more conservative realistic plan so that we get to the targets we need to get to the way we want to.

Yes. I appreciate that. That makes sense. Maybe then on any additional color you can give on the average contract length for ShareFile and maybe what the renewal process will look like here in the future?

Sorry, your line was a little scratchy. Were you asking about average contract size?

Average contract length, the duration of the contract for ShareFile and how renewals might trend here in the future?

Yes. So they have, you know, so they do both. The vast majority of them are annual. And Anthony please correct if I'm wrong. They also have credit card-based auto renewals of their contracts. Some of their billings are annual, some of their billings are monthly I believe.

That's right.

So it is a mix, Lucky, as to the contract length as well as the billing cycle. But nothing is multiyear build upfront. So it is either built or maybe de minimus.

Got it.

Yes. Okay. So de minimus is a multiyear build upfront. So there isn't in terms of the kind of lumpiness you see year-over-year for our billings in our other products, you won't see that here.

Yes. Perfect. Appreciate you taking the questions.

You're welcome, Lucky.

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

Hey, guys. This is Bo on for Brent. Thanks for taking the question. You guys typically you know you guys have acquired businesses in the 15% to 25% of your rev base like that range. But clearly ShareFile was much bigger. And so what gives you the confidence in your ability to integrate that deal in the same timeframe as previous smaller acquisitions? And should we be looking at this as an indicator that perhaps going forward the M&A pool could be beyond that 25% range? Thanks.

Yes. So, Bo, good question. So first of all, right, you are correct that we've historically done deals that are being 15% to 25% of our size and revenue that is our sweet spot. But we've also said, you know, if the right opportunity comes along, we might go a little smaller, we might go a little bit bigger. As you know it wasn't that long ago that we were looking at a business that was not even quite 10% of our size, right, which became public because of the way Irish stuff works. But so really, from our perspective, being about a third of our revenue is not that far off. The integration challenge is really not on revenue, right. When you think about it, the integration challenges around people, it's around systems, it is around processes. That's fundamentally what is the challenge. And when it comes to scale, the biggest scale challenge can be people. So one of the things that we always look for is what is the headcount ratio between our company and the acquired business because if that is, as I like to say, it's four of us, and we're bringing in one new for every four we have, which is what approximately this is the ratio between ShareFile employees and Progress employees, it's about four of us to one of ShareFile. That makes it easier to sustain our culture, that makes it easier for the people to be brought on board and integrated into our organization. It allows for much easier go-forward success. And that's why we feel that bringing in 25% additional folks in our organization is really very doable. So, Bo, integration effort or integration complexity, people are probably the single biggest, always the single biggest thing to watch for. And we're really excited about bringing in the ShareFile people. The people we have met have been all delightfully wonderful and I can't wait to welcome them and to welcome the ShareFile customers into the Progress family.

Thanks for that. And maybe a quick one on international. It looks like EMEA was a little softer this quarter and you had some outperformance in Asia Pacific. Just anything to call out there in terms of productivity levels from sales reps between the different regions?

No, I don't think so, Bo. I think it was probably generally in line with what we expected. I don't think anything unusual to speak of.

Great. 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.

Thank you, Shuri. Thank you, everyone, for joining us for this call. We're excited about what lies ahead and we look forward to speaking with you soon. Thank you very much and have a wonderful evening.

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