Brian Flanagan - Senior Director, Investor Relations Phil Pead - President and Chief Executive Officer Chris Perkins - Chief Financial Officer.

Steve Koenig - Wedbush Securities Mark Schappell - Benchmark Rishi Jaluria - JMP Securities.

Good day, everyone and welcome to the Progress Software Corporation Q3 Earnings Call. At this time, I would like to turn the conference over to Mr. Brian Flanagan, Senior Director of Investor Relations. Please go ahead, sir..

Thank you, Rebecca. Good afternoon, everyone and thanks for joining us for Progress Software’s fiscal third quarter 2014 earnings call. With me today is Phil Pead, President and Chief Executive Officer; and Chris Perkins, our Chief Financial Officer.

Before we get started, I’d like to remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives or 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. Please review our Safe Harbor statement regarding this information, which is available both in today’s press release, as well as in the Investor Relations section of our website at progress.com.

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, we may refer to certain non-GAAP financial measures such as operating margin and diluted earnings per share.

You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release issued today. Today, we published our financial press release on our website and also furnished the information to the SEC in an 8-K filing.

These documents contain the full details of our financial results for the fiscal third quarter 2014 and I recommend you reference these documents for specific details. Today’s conference call will be recorded in its entirety and will be available via replay on our website in the Investor Relations section. With that, I will now turn it over to Phil..

Thank you, Brian. Good afternoon, everyone and thank you for attending our third quarter earnings call. Our third quarter performance continued to demonstrate positive momentum from the previous quarter. OpenEdge license revenue and total revenue were both up over last year’s third quarter as that business continues to perform strongly.

DataDirect and Corticon remained a work in progress. However, we continued to see very positive pipeline momentum, which signifies strong interest in both of these solutions. We are starting to see significant interest from our existing OEM partners in DataDirect Cloud.

As their customers mobile enable their workforces and as our OEMs continue to move their applications to the cloud, the need to securely access the vast amounts of on-premise business data is a growing challenge and risk. DataDirect Cloud provides access to all business data, no matter where it resides.

By essentially making data plug and play, DataDirect Cloud simplifies connectivity and reduces the cost and complexity of data integration. DataDirect Cloud offers another strong entry point to our Pacific platform which continues to gain momentum.

We are also excited about the growth of our Modulus deployment platform since we acquired it last quarter. We are seeing more and more developers use Node.js to develop their applications, a trend that has continued to accelerate.

In June, the number of application modules created for Node.js and stored in the Node Package Manager surpassed the total number of modules created for Java in the last 20 years. In fact, the Node Package Manager is now growing twice as fast as the repository for Java modules.

With our Modulus platform, we are excited to be a part of the Node.js community and to assist developers with the rapid growth of Node.js applications. While Node.js is ideal for building today’s data-intensive high transaction real-time applications setting up, running and maintaining the required infrastructure is complicated and time consuming.

Modulus provides a complete platform for deploying Node.js applications at scale without requiring dedicated development operations resources. These are exciting times for developers.

There is more freedom of choice in terms of the development platform they build on, their deployment options and ability to integrate with other applications and the number of data sources they can take advantage of.

We strongly believe that Progress can become the preferred destination for both control and productivity developers through our Pacific and Modulus platforms and our data and rules solutions.

By providing a richly functional and intuitive experience, we believe that developers will choose Progress solutions, because we enable them to focus on the app itself rather than having to deal with a large number of complexities associated with the building and deployment of the app.

For example, the increased demand for mobile applications has created unique challenges for developers. In order to compete effectively more and more enterprises are releasing their applications on both browser based and mobile platforms.

To do this however, they have needed to build two separate applications using different sets of tools for each resulting in a duplication of time, effort and expense.

With Rollbase Mobile, the productivity mobile development tool within our Pacific platform developers can now build an application once with a single set of tools which will run on both the browser and the mobile device.

This eliminates the duplication of effort and expense and dramatically decreases the time required to build and maintain their applications. We see the market also moving towards applications that can be build or modified by business units or citizen developers, another trend that we are positioned to benefit from.

For example, one of our partners Akioma Software offers an OpenEdge based application for industrial order management enabling manufacturers to craft quotes and proposals that encompass myriad business rules, deal steps and custom parameters.

Akioma used Corticon to enable business analyst to easily model and deploy the complex business rules that their application requires without needing traditional programming skills.

With Corticon they were ultimately able to replace nearly 100% of the business rules coding required in the final application slashing development lead times from weeks to just days. Akioma also wanted to create a self service web based configurator feature that clients could deploy on their websites to engage with their customers.

Taking advantage of the dynamic messaging capabilities of Node.js deployed using Modulus Akioma now enables their clients to use drag and drop functionality to create custom configurators without having to write any code. We are proud to have Akioma as our partner.

With the proliferation of cloud and mobile applications another challenge for developers is how to connect to all the different data sources these applications require.

To help solve this problem, we recently announced that our DataDirect Cloud product will now support OData, a light weight interface that is more much aligned to cloud and mobile use cases. OData is rapidly becoming the standard data connectivity choice for cloud.

And mobile applications and through DataDirect Cloud, we are uniquely positioned now to capture this market.

Helping companies run their businesses using analytics and dashboards is also a challenge we are addressing, because of the disparate data sources involved generating comprehensive analytics is difficult and often requires a data warehouse to aggregate the information companies need to make decisions.

Easyl, our recently released data analysis tool within Pacific dramatically simplifies the process of accessing, blending and reporting on company’s organizational data.

Good Done Great, one of our existing Rollbase partners is currently integrating Easyl to pull data from many individual customer data bases into one dashboard view, which they will use to power their marketing and selling efforts. Easyl is making it much easier, cheaper and faster for them to get from data to dashboard than traditional technologies.

We have great solutions and it’s exciting to see how our customers and partners use our technologies to create a competitive edge.

We recently announced the creation of three business units OpenEdge application development and deployment and data connectivity and integration with each unit having dedicated sales, product management and product marketing functions.

While the audiences that these business units sell to and as a consequence their go-to-market strategies can be very different. There are also synergies between them.

By organizing into a business unit structure we achieved the focus and accountability needed to execute on our defined audiences and through our incentive structure we enable the synergies to occur.

Our product development corporate marketing and administrative functions will remain centralized allowing us to maintain consistent global messaging and branding and leverage our financial strength and engineering expertise across all of the business units while enabling each unit to be nimble and responsive within its respective markets.

For OpenEdge, this means maintaining, nurturing and growing our large diverse customer base. A dedicated business unit will ensure that we continue to provide the product enhancements and marketing support our partners need to sell more of their existing OpenEdge solutions to their customers.

They will also enable us to provide them and our direct end users with a clear path to develop their next generation of applications or extensions of their existing apps through the latest version of OpenEdge as well as through our Pacific and Modulus platforms.

Our application development business unit will target new customers for cloud-based application development.

With our visionary cloud platforms and market leading data connectivity capabilities, we believe that a separate business unit will enable our teams to be more nimble and responding to the rapidly changing needs of the developer and architect communities.

Our go-to-market is focused on executing on high velocity digital marketing together with an enterprise strategy which requires a higher touch. For data connectivity and integration, we are building on the changes we made earlier this year.

Our dedicated sales team is also now paired with product management and product marketing, which will once again enable us to better respond to market changes and provide for a more focused and accountable team. Data is at the core of every application with exponential growth in the number and volume of data sources.

Coupled with this added growth and complexity, however, is the expectation from developers and business units to easily connect and extract data from any source for use in their applications.

As I previously mentioned, we have market leading data connectivity and solutions and our data team will ensure that we execute the go-to-market strategy required to take advantage of the demand and interest we see from customers and prospects for these solutions.

This new structure is the evolution of our existing strategy and will bring our businesses even closer to our customers.

The three business units will have the flexibility to operate and adapt their go-to-market strategies as opportunities evolve within their respective markets and will provide us with the additional focus we need as we continue building our foundation for future growth.

I will now turn it over to Chris to review in more detail our third quarter performance as well as our expectations for the fourth quarter and for the full year.

Chris?.

Thank you, Phil and good afternoon everyone.

As a reminder and consistent with our previous earnings calls, all of the financial metrics I will talk about today are related to our continuing operations and exclude results from product lines that were divested in prior years, which are reflected in the press release as discontinued operations for all periods presented.

Total revenue for the quarter was $79 million compared to $78 million in Q3 2013. This was in line with our guidance range and represents an increase of 2% at actual exchange rates and flat on a constant currency basis. The year-over-year increase was due to growth in both license and maintenance revenue.

License revenue was $26 million in the third quarter, up 3% from Q3 2013 at actual exchange rates and 1% on a constant currency basis. The license revenue increase was in North America and Latin America primarily related to OpenEdge.

Maintenance and services revenue was $53 million in the quarter, up 2% from last year at actual exchange rates and flat on a constant currency basis. The maintenance and services revenue increase was in North America and EMEA.

Our maintenance renewals were in line with our expectations and we remain confident that we will continue to deliver renewal rates above 90%. For our revenue by product, on a constant currency basis, OpenEdge revenue for the third quarter increased by 2%, DataDirect revenue decreased by 10% and Corticon revenue was flat versus the prior year.

The increase in OpenEdge was due to growth in North America, EMEA and Latin America. The decrease in DataDirect year-over-year was primarily due to weakness in our pipeline from earlier in the year. Although our pipeline is getting stronger, it is not yet at sufficient levels needed to achieve our growth objectives.

As Phil mentioned in his opening remarks, we are starting to see significant interest in DataDirect Cloud from our existing OEM partners. While Corticon revenue was flat to 2013, growth during the quarter was impacted by several large deals that were booked in Q2 contributing to Corticon’s 81% growth last quarter.

These deals moved through the pipeline more quickly than we had expected, which we had noted during our Q2 conference call. For our revenue by geography, North America was $36 million for the third quarter, up 3% to the same quarter a year ago.

On a constant currency basis, EMEA third quarter revenue was $32 million, down 2%, Latin America was revenue was $6 million, up 3%, and APJ revenue was $5 million, down 6%. The decrease in APJ follows several quarters of strong growth and year-to-date revenue in that region has increased by 11%.

Non-GAAP operating margin in the third quarter was 37%, 9 percentage points higher than the third quarter of 2013. Non-GAAP operating expenses were $50 million, down $6 million from a year ago and down sequentially from $52 million in the third quarter of 2014.

The net reduction in operating expense year-over-year is primarily the result of our margin improvement initiatives during 2013. These initiatives lowered our 2014 operating expenses in most functional areas compared to 2013, somewhat offset by increased investment in product development as we continue to build out our Pacific platform.

After adjusting for the impact of software development cost capitalized in Q3 2014, total product development investment increased by 8% versus Q3 2013. We plan to continue making investments to build out and enhance our Pacific platform and other products throughout the year.

The net reduction of $2 million in non-GAAP expenses sequentially was primarily due to the timing of marketing programs. In addition, we moved into the detailed planning and execution phase of our reorganization into business units and the timing of some of our expected expenses shifted out of the third quarter.

Our third quarter non-GAAP EPS from continuing operations was $0.39 compared to $0.27 in the third quarter of 2013, an increase of 44%. This was above our guidance range of $0.32 to $0.35 primarily due to the lower sequential expense levels in Q3 discussed above.

Operating cash flow was approximately $26 million for the quarter compared to a use of cash of $2 million in Q3 2013.

The operating cash flow in Q3 of last year included restructuring charges of approximately $2.6 million associated with our margin improvement initiatives and $14.6 million in tax payments for the gain on divestitures of our non-core product lines. Adjusting for these charges, operating cash flow for Q3 2013 would have been approximately $15 million.

Adjusted free cash flow was strong at approximately $24 million for the third quarter compared to adjusted free cash flow of $15 million in Q3 2013. Our Q3 2014 free cash flow included capitalized software development cost of $1.1 million related to the ongoing software development of our Pacific platform.

As discussed in our second quarter conference call, we did not begin to capitalize software development cost until Q4 2013. So, there were no development costs capitalized in Q3 of last year.

As Phil mentioned in his remarks, we recently announced the creation of three business units OpenEdge application development and deployment, data connectivity and integration. Each business unit President will be responsible for the profitability of his or her respective unit.

And as a result of this realignment, we will adopt segment reporting for the three business units beginning in the fourth quarter. We incurred $1.5 million of restructuring costs in the third quarter primarily related to several positions that were eliminated in conjunction with the creation of business units.

These restructuring costs are excluded from our Q3 non-GAAP results. We repurchased 740,000 shares in the third quarter at a cost of approximately $18 million as part of the $100 million share repurchase program authorized by our Board of Directors in January 2014.

For the fiscal year-to-date we have repurchased 2.3 million shares at a cost of $53 million. The company ended the quarter with a strong balance sheet with ending cash, cash equivalents and short-term investments of $261 million and no debt. During the third quarter we received unsolicited bids for all our remaining auction rate securities.

Based on the strength of the bids relative to historical and recent valuations, we decided to sell all of our auction rate holdings. We received a total of $26.2 million. And since the par value of these securities was $28.8 million, we have recognized a realized loss of $2.6 million in the quarter.

This $2.6 million loss is excluded from our non-GAAP results for Q3. Net DSO for the third quarter was 66 days, up 1 day from 65 days in Q2 2014 and up 4 days from the prior year quarter. The quality and aging of our receivable remains very good. We ended the quarter with just over 980 employees, an increase of 2% sequentially versus Q2.

Moving to our guidance for our fiscal fourth quarter, we expect revenue to be between $96 million and $100 million, a year-over-year increase of 6% to 10% and non-GAAP earnings per share of between $0.44 and $0.47, a year-over-year increase of between 2% and 9%.

For fiscal year 2014, we expect revenue to be between $331 million and $335 million, which represents a year-over-year change of between minus 1 to flat versus 2013. The low end of our guidance range is unchanged from the guidance we provided during our Q2 earnings call, while the high end has been narrowed from $338 million.

For non-GAAP earnings per share, we expect between $1.47 and $1.50, a year-over-year increase of 24% to 26%. Our earnings per share guidance includes the dilutive impact of the Modulus acquisition of approximately $0.02 to $0.03 in the second half of 2014 and the impact of shares repurchased in the first three quarters of the year.

We expect non-GAAP operating margin for 2014 to be approximately 34%, free cash flow to be between $79 million and $81 million, and non-GAAP effective tax rate of between 32% and 33%. The low end of our free cash flow guidance range is unchanged, while the high end has been narrowed from $83 million to $81 million.

Our guidance is based on our revenue for fiscal 2014 being derived primarily from our on-premise business. We do expect a modest contribution from Pacific and Modulus, where near-term revenue growth is somewhat lower due to the impact of subscription revenue recognition for cloud-based applications.

For operating margins, our guidance includes investments we will continue to make in product development and marketing to support our future growth.

Although the planning and execution of our business unit strategy did have some positive impact on our operating expenses in the third quarter, as discussed earlier in my remarks, our reorganization into three business units is not expected to have a meaningful impact on our future cost structure.

In summary, we are pleased with our Q3 financial results and remain confident in our strategy and products. We are committed to executing on our internal plans in both on-premise and cloud-based application development and continue to see positive future growth opportunities in our business. With that, I’d like to hand it off to Brian for Q&A..

Thank you, Chris. That concludes our formal remarks for today. I’d now like to open up the call to your questions. I ask that you keep your remarks to your primary question and one follow-up. I will now hand over to the operator to conduct the Q&A..

(Operator Instructions) And your first question will come from Steve Koenig with Wedbush Securities..

Hi, gentlemen. Thanks for taking my questions. Yes.

So, I am wondering if you can remind us on the license guide, you did moderate it – excuse me, on the revenue guide for Q4, you did moderate it essentially at the high end somewhat, but it still looks like a much bigger year end ramp than certainly last year kind of remind us what are the factors behind that?.

Sure. Yes. Historically, we have had strong performance in our fourth quarter, but as you mentioned, Steve, it is a growth of 6% to 10% over the Q4 performance of last year.

We have been building our pipeline over the last two quarters and that’s going to positively contribute to our growth for Q4 and all of our product lines and we feel we have got some good momentum developing in all three of our business units.

So, it’s going to be contributed really by all product lines and we have got growth expectations in several of our regions that are contributing..

Okay, great. Thank you, Chris. Yes.

So for my follow-up I think what I will focus on here is the business unit structure, you went from multiple segments to one segment and now back to multiple segments, maybe could you elaborate a little bit on what’s changed in your thinking and a little bit more on what’s the logic of these three segments being operated under one roof and do they have to be operated under one roof?.

Yes. Let me take that, Steve. This is Phil.

As we looked at the really the go-to-market strategies for each of our audiences be it OpenEdge or net new application developers or the data audience for OEM and direct end users, it became more and more evident that it’s more difficult for us to organize ourselves to respond to those audiences the way in which we had our organization which was of course very functional and horizontal.

By focusing our organization around the audiences that we sell to and the go-to-market strategies that they will employ to respond to the market demands I think will make us much more nimble. We will be more responsive. I think we will have the groups be more accountable for their respective revenue profiles.

And I feel that we will get a much better sense of control associated with that. We have got really good leaders of each of the business units.

The fact that we put product management and product marketing as well as sales under these business unit leads and then for them to have P&L responsibility means that they start to better control and design the product roadmaps.

It means that the marketing dollars that they have will be specifically focused on driving the value propositions in each of their segments.

With App Dev for example focused on net new, it means that they are going to rely much more heavily on the high velocity model particularly for our Pacific platform, but they will also enable add-ons for their rules and for data.

So we don’t lose the focus on the fact that App Dev will continue to sell solutions that are also contained in other business units because that’s the way the developers will be looking to build their applications.

And then for data it just really again aligns the business unit with the market and enables each of them to respond to their needs with having control over their product roadmap as well as their product marketing and their sales organization. So I will tell you that there is great excitement.

I was understandably concerned about making a decision like this in mid-quarter, but the functional teams that were in place at that time did a fantastic job at making sure that we focused on the quarter and didn’t lose any momentum. And now going into the fourth quarter which is our biggest quarter of the year we have all the people in place.

We have the incentive comp as being designed to create the sense of urgency to accomplish their goals for the fourth quarter. And I am really excited about where the company is at this point with the decision that we made to reorganize around business units..

It sounds good. Thanks a lot, gentlemen. I appreciate your help..

Thanks Steve..

And from Benchmark we will go to Mark Schappell..

Hi, good evening. Thanks for taking my call. Just a follow-on question to Steve’s question, Phil in the past when the company had the separate business units incentivizing cross-selling between the different groups was often very difficult and challenging.

And I was just wondering if maybe you can just give us an idea of some of the measures you are putting in place or the processes you are putting in place to see that the cross-selling continues and moves forward?.

Yes. Look I will not deny that cross-selling is always a challenge. And the challenges come when you – I believe try and force a solution into a marketplace that isn’t readily accepting of it, number one.

Number two is when you have different revenue profile, so for example if you have sales folks that have quotas larger than you would achieve by selling a subscription-based solution, then they are going to clearly gravitate towards the on-premise perpetual license that’s recognizable upfront that enables them to meet their numbers earlier and therefore achieve accelerators and so on.

So, essentially as we go into Q4 and more importantly 2015, the go-to-market strategies for each of these groups, obviously, they are going to derive the majority of their focus from their respective audiences, but for the OpenEdge unit, for example, there is really strong interest in continuing with the Pacific platform as our OpenEdge partners and direct end users access the back end data in their OpenEdge databases using our Rollbase productivity platform, for example.

And so there is going to be an incentive for each of our sales reps to sell in our OpenEdge category, for example, the new technologies that are contained in the App Dev space as well as our data integration and rules and we will do it through an incentive program that maps to their particular comp plans, but also responds to the market demands of our customers.

We can get those two things aligned. I think it will take away a lot of the friction that is inherent I think in any cross-selling..

Okay, thank you.

And then with respect to Pacific, where does that fall into, what business unit does that fall into?.

So, essentially Pacific will remain in the App Dev unit, because it has all the components that is required for developers who want to build an application whether it is a productivity – whether they are seeking a productivity platform or whether they are seeking a control platform, but the key here is that these developers are looking to build something or they maybe looking to integrate their application into several different data sources or they would be deploying their app on the Modulus platform.

So, if you think about the way in which we structured our App Dev organization, net new developers who want to build an application or want to integrate with data sources or deploy their application would make use of our Pacific and Modulus platforms. And that will be in the App Dev space..

Okay, thanks.

And then moving on last question here and I will let somebody else get on, but with respect to Pacific, could you just talk a little bit about what you are doing in the marketing front? I mean, it seems like the product side is coming together quite nicely, but still a little – there are still some concerns with respect to marketing in that product?.

Yes, it’s still ramping up, Mark. Clearly, we would have had a – I think that the momentum that we have got in the Pacific platform, I continue to see – what’s encouraging to me, I continue to see net new logos signing on, which is fantastic. We have got new customers that come to the platform and start building their applications.

I think equally exciting for me is the fact that we have a growing number of OpenEdge customers now that are making use of the Pacific platform, particularly with OpenEdge and connected to Rollbase, where Rollbase is accessing the OpenEdge database to get the data. Rollbase Mobile is another area that I think we could lead in.

And as I mentioned in my prepared remarks how complicated it is now for developers to build in a browser as well as on a mobile platform.

So, I am really encouraged that the start that we made with the announcement last year of our platform as a service and the positioning that we received in the Gartner Magic Quadrant as a visionary, and now moving all that into a business segment that is entirely focused on developing that further and penetrating into the marketplace and applying marketing dollars to support that strategy I think is very exciting at this point..

Thank you..

And your next question will come from Greg McDowell with JMP Securities..

Hi. This is Rishi Jaluria dialing on behalf of Greg McDowell. Thank you for taking my question.

Just wanted to think about the different segments, first of all, how much autonomy do you think that each unit is going to have? And second, do you think incremental investments are going to be spread evenly across business units or are they going to change?.

The autonomy is clear. I mean, their defined responsibilities include sales which of course is significant. Each of them will have their sales number. They will own their P&L. They will have product management, which defines the short-term roadmap for their respective markets and they have product marketing.

The investments that we make in each of those business segments, is really around the need that we have to grow the respective business segments.

The audiences are very different and the required dollars associated with those investments will vary, but we put some meaningful R&D dollars this year and we will continue to do that in our Pacific platform. We see that as a significant growth strategy for us.

At the same time, we have significant investments growing out the technologies within OpenEdge. As you can see in our results, OpenEdge continues to be a really strong performer for us and it’s really our ISVs, our application partners selling a lot more of their products, making use of our technologies.

They are very encouraged by our focus on the OpenEdge product, which we will continue to nurture and maintain and grow.

And then finally, in our data segment, we continue to invest and as you can imagine, there are now an exponentially growing number of data sources, but enterprises are looking at data, not just from I need connectivity to a particular database, but they are looking much more holistically at their data needs as social becomes more and more integral, as they are trying to make their market intelligence of how they should approach their customers more intelligible for their dashboards.

All this just lends itself perfectly for our data business and we need to invest and continue to invest appropriately in each of these segments depending on our growth strategy for each of them. That’s probably the best way to look at it..

Okay, thank you very much..

You are welcome..

And at this time, there are no other questions in the queue..

Great. Thank you all for joining the call today. As a reminder, we plan on releasing financial results for our fiscal fourth quarter of 2014 on Tuesday, January 13, 2015 after the financial markets close and holding the conference call the same day at 5 PM Eastern Time. We look forward to speaking with you again soon. Have a good day..

And with that, ladies and gentlemen that does conclude today’s presentation. We do thank everyone for your participation..