Brian Flanagan - Senior Director, Treasury and Investor Relations Yogesh Gupta - Chief Executive Officer Kurt Abkemeier - Chief Financial Officer.

Steve Koenig - Wedbush Securities Mark Schappel - The Benchmark Company, LLC Matthew Galinko - Sidoti & Company, LLC Glenn Mattson - Ladenburg Thalmann Financial Services, Inc..

Good day, and welcome to the Progress Software Corporation Q4 Investor Relations Call. At this time, I’d like to turn it over to Brian Flanagan. Please go ahead..

Thank you, Kayla. Good morning, everyone, and thanks for joining us for Progress Software’s fiscal fourth quarter 2016 earnings call. With me today is Yogesh Gupta, President and Chief Executive Officer; and Kurt Abkemeier, 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 and yesterday’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, all of the revenue, operating margin and diluted earnings per share amounts we refer to are on a non-GAAP basis.

You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release issued yesterday. Yesterday, we published our financial press release on our website.

This document contains the full details of our financial results for the fiscal fourth quarter 2016, and I recommend you reference it 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. And with that, I’ll now turn it over to Yogesh..

OpenEdge, Dev Tools and Data Connectivity, are all offerings that customers and partners have historically used to build mission-critical business applications. Just as it has always been, our focus for these products will continue to be on providing the technology and support needed to succeed and grow in the future.

While I’m confident that the capabilities of our products, which are our primary drivers - revenue drivers, OpenEdge, Data Connectivity and Dev Tools, all compete in mature market, which have limited growth opportunity.

Recognizing this, our organization and operating principles for these product lines need to shift so that we continue to serve the customer base profitably while moderating our view of their growth prospects. OpenEdge is a great platform and thousands of organizations depend upon it as the foundation for their mission-critical applications.

For this reason and due to our ongoing focus on our existing partner and customer base, we expect continued strong maintenance renewals.

While our OpenEdge partners continue to modernize and sell their applications to new customers, we are not attracting additional partners to develop new applications on this platform, nor are we attracting new direct end-user customers.

Based on this profile, our expectation over time is for flattish revenue from OpenEdge, which we believe is a very good result for such a mature established business. We’re also moderating the growth expectations for our Dev Tools and Data Connectivity products. Our revenue from Dev Tools is heavily weighted towards the.NET platform.

And we do have the largest share of that market. However, the UI tools market for .NET is declining, as developers build more and more applications using Java, JavaScript, and other platforms.

While I certainly expect our non-.NET tools business to grow faster, that is a comparatively small piece of our Dev Tools revenue, and not meaningful enough to drive significant overall growth. Our bookings for Dev Tools decreased in FY 2016.

And going forward, our focus for Dev Tools will be to push our high-volume, low-touch, go-to-market approach, while investing in enhancing their functionality.

This approach will allow us to continue to attract new developers and retain our existing developer community, while optimizing our go-to-market spend, and our overall expectation is for modest growth going forward.

And while we’ve had some success in growing our data business over the past several years, as our existing OEMs renewed their distribution agreements and expanded the number of data drivers they purchase from us. And while FY 2016 performance of the data business was strong, the high growth was not indicative of what we expect going forward.

For example, our large OEM partner requested the early renewal of a multiyear deal in FY 2016, which contributed to the unusually high growth for this segment. As with the OpenEdge, we are not acquiring significant new OEM customers for data products.

Even though we are the dominant player in the relational database connectivity market segment and are embedded in the applications of almost every large software company, it will be difficult to sustain our recent growth with a static customer base. Data Connectivity and Integration will continue to provide a profitable revenue stream for us.

But again, I do not anticipate significant growth from this business going forward. So although our core products are positioned in relatively flat market, as I mentioned earlier, I do feel that we can leverage some of these existing assets to drive future growth for Progress.

In an increasing the digital world, enterprises will require ever more sophisticated business applications in order to remain competitive, and this presents a great opportunity for us. A key focus of mine and that of my team over the past 90 days has been to determine how we can take advantage of this opportunity.

Our conclusion is that our growth strategy needs to shift to better leverage our products, our customer and partner relationships, and our go-to-market capabilities and strengths. In addition to leveraging our strengths, the right growth strategy for us must target a market with the following three characteristics.

First, the market should be large enough and growing fast enough for it to have a meaningful impact on our growth, if we are successful. We believe that means a market that’s today about $1 billion in size and growing at a compound growth rate of over 25%.

Second, the market should be one in which we have credibility, which would give us permission to participate and compete. And lastly, it should not be a market, which has a large dominant player for whom that is the primary market. Given these criteria, we believe that Digital Factory is not the right growth strategy for the company going forward.

It does not meet these criteria. Our offering was not mature enough to compete effectively with the strong dominant players, for whom this is their primary market, making it exceedingly difficult for us to get traction. And I believe it is better for us to recognize this now.

Therefore, we are discontinuing all efforts on Digital Factory, and pivoting our strategy at this time to instead, focus on selling to markets and customers with whom we have credibility and experience. Providing the platforms on which mission-critical applications were built is core to Progress’ DNA.

We will leverage that DNA to do the same for business applications of tomorrow. Going forward, we will drive growth by building, selling, and supporting the leading integrated platform for developing cognitive business applications. Cognitive applications are the future. We’re living in a world where everything is connected.

The amount of data is exploding. Cognitive apps learn business characteristics and behavior from this data, and businesses are realizing that leveraging data is their key competitive advantage going forward. Cognitive apps connect to all the data, whether it is from Systems of Record, to IoT.

They support all types of user interactions, web and mobile today, chat box, voice, virtual reality and tactile interfaces of tomorrow. Our platform for cognitive applications will be an open and standards based offering that makes it easy for the broader market to build these new applications. It will include the following five capabilities.

First, our NativeScript technology, which allows developers to use JavaScript to build native iOS and Android applications, combined with our rest of UI tooling for other platform.

Second, a mission-critical backend as a service platform that runs on any cloud, is secure, high performant and highly scalable, while supporting all modern user interfaces. Third, automated and intuitive capabilities that democratize machine learning for the creation and delivery of Cognitive Apps.

Fourth, our data connectivity capabilities extended beyond Systems of Record to integrate with IoT and big data. And fifth, our easy to use business logic and rules capabilities. We are uniquely positioned to help ISVs build new cognitive apps to reenergize their business.

With nearly half of our OpenEdge partners focused on ERP, we see predictive maintenance as the first domain of that cognitive platforms target market. Over time, our cognitive platform will enable our customers to easily build and deliver smart applications for any vertical industry in a very scalable, secure and reliable manner.

The markets for back-end-as-a-service platforms is over $1 billion and it’s growing at over 25% with many players, none of whom has a large meaningful share. The market for cognitive application platforms is very fragmented by problem domain. And the predictive maintenance market alone is nearly $1 billion in size, growing at over 30%.

Competition is fragmented with no dominant player in this market either. The target audience for both of these markets is the developer of business applications, a group that we know well and have credibility with.

Our long history of providing developers with platforms, tools and data connectivity they need to build mission-critical apps, positions us well to compete and win in the market for Cognitive Apps.

Just as important, we already have many of the foundational elements we need for this strategy, from experience with mission-critical apps to a mobile platform, NativeScript, UI development tools, data connectivity, business rules and engine. We will need to build or acquire other pieces of technology to complete our strategic offering.

And we will make those decisions in investments in the coming months. If we do decide that acquisitions are required, our focus will be on purchasing first-class technology that leverages our current technical and go-to-market assets, and not on acquiring large revenue stream. It will take time before we begin to see growth from this strategy.

But I’m confident that it gives us the best chance for sustained success well into the future. Now, I’d like to talk about our expectations for FY 2017.

Since it will take time to see growth from a focus on cognitive business applications, we will decrease the growth expectations for our core products and we do expect revenue to be slightly lower in FY 2017 than last year.

However, through streamlining our organization and processes, we expect to deliver greater EPS and strong free cash flow from operations. Kurt will provide the specifics of our guidance in his remarks, but I want to walk you through the steps we will be taking this year to optimize our operations, while still investing in our future growth.

As I’ve said before, the stability of our core business is critical, and our commitment and focus will be to deliver the products and support our customers and partners need to stay competitive in their market.

However, since there is limited new customer growth in these businesses, going forward our go-to-market strategy will focus primarily on our existing customers and partners to drive retention.

This will allow us to run these businesses more efficiently and more effectively, and to simplify and streamline our processes, systems and go-to-market effort.

To align our operations with this strategy, we are undergoing a strategic restructuring in the first quarter, with a significant reduction in our headcount, in large part due to the discontinuation of the Digital Factory offering. We’re also consolidating facilities, and lowering our spend on marketing and other discretionary expenses.

This streamlined operational structure will enable us to reduce our go-to-market cost, without compromising the excellence of our core products and support, and allow us to fund our growth strategy whilst still maintaining healthy operating margin.

As we mentioned in the earnings release, Jerry Rulli, our COO will be leaving our company at the end of the first quarter. Jerry has been instrumental in helping us solidify and simplify our core business. And I want to thank him for his contribution.

So to summarize, I’m confident that our focus on providing platforms and tools for developers to build cognitive business applications will be the key to our future growth. This strategy leverages our core strengths and capabilities in application development, and our historical credibility within the development community.

As we work towards growth, we’re also taking appropriate steps to optimize our operations, which will position us for enhanced profitability and cash generation. I’m thrilled to be the CEO here at Progress and excited by the opportunities we have in front of us. We value input from you, our investors.

And I look forward to meeting with many of you in the coming months to hear and understand your views on our strategy and operation. I’ll now turn it over to Kurt, to review our Q4 performance in more detail and our expectations for FY 2017.

Kurt?.

Thank you, Yogesh, and good morning, everyone. As I suspect most of you have noticed this is my first quarterly earnings call as the CFO here at Progress. I look forward to updating you on the inner workings of the company going forward, and hopefully, meeting with many of you in person over the next few weeks and months.

We got a lot to cover and I want to make sure we don’t miss anything, so let’s dive right in. As Brian mentioned, all of the revenue, operating income and earnings per share amounts, to which I will be referring in my remarks, are on a non-GAAP basis. And for our full GAAP results, you should refer to the earnings release.

Now, I’ll review our fourth quarter and full-year results. For our fourth quarter, total revenue was $118 million, an increase of 2% at actual exchange rates and 3% on a constant currency basis. Our Q4 revenue came in below our guidance range, primarily due to some large license deals that closed at lower values than expected.

Our fourth quarter EPS was $0.62, an increase of 17%. This was above the high-end of our guidance range, but I will note that had included a one-time $0.05 income tax benefit related to the release of a valuation allowance that is no longer required.

Excluding this one-time benefit, fourth quarter EPS would have been $0.57, which is toward the high-end of our range. Also reflected in our Q4 results is the negative year-over-year impact from currency translations due to the strengthening of the U.S. dollar, which was $1.1 million on revenues and $0.01 on EPS.

Moving on to more detail for full-year results, for the full-year revenue was $407 million, a decrease of 1% at actual exchange rates and flat to last year on a constant currency basis. Full-year EPS was a $1.65 per share, an increase of 4%.

Excluding the fourth quarter, one-time tax benefit of $0.05, full-year EPS was $1.60 per share, an increase of 1%. The year-over-year impact of exchange rates on our full-year results was negative $6 million on our 2016 revenues and $0.05 on EPS. Revenue includes acquisition related revenue adjustments for Telerik, totaling $2 million.

As discussed in our September earnings call in consistent with previous quarters, GAAP rules require us to eliminate certain pre-acquisition revenue classified by Telerik as deferred revenue. But we include this revenue in our non-GAAP reporting, to better reflect our true business performance on a normalized basis.

License revenue was $49 million for the quarter, an increase of 8% at actual exchange rates and 9% on a constant currency basis.

The increase in license revenue for Q4 is primarily due to a multimillion-dollar perpetual license deal for our Rollbase product within our AD&D segment, an increased revenue from our DCI OEM partners as the result of an earlier-than-expected OEM renewal.

For the full-year license revenue was $135 million, a decrease of 3% at actual exchange rates and 2% on a constant currency basis. The decrease is due to lower OpenEdge license sales, partially offset by strong license growth from our DCI segment.

Maintenance revenue was $60 million for the quarter, a decrease of 3% at actual rates and 2% on a constant currency basis.

The decrease was primarily due to lower OpenEdge maintenance revenue in both North America and EMEA, in part due to a new multiyear distribution agreement that we signed with one of our OpenEdge partners in the fourth quarter of 2015.

For the full-year, maintenance revenue was $240 million, down 2% at actual exchange rates and flat on a constant currency basis. And maintenance renewal rates for our businesses continue to be strong. Moving onto our revenue by geography, North America was $69 million for the fourth quarter, down 3% from the same quarter a year-ago.

This was primarily due to lower OpenEdge maintenance revenue I mentioned earlier. As for the international regions for the fourth quarter, all at constant currency, EMEA was $37 million, up 7% due to increases in all of our segments with particularly strong growth in DCI and AD&D.

Latin America was $8 million, up 118% due to a multimillion-dollar OpenEdge license compliance deal. And APJ was $5 million, down 17% due to the lower license revenue from OpenEdge direct enterprises.

For the full-year, North America was down 3% versus the prior year, primarily due to lower OpenEdge license sales and decreased maintenance revenue from Telerik, partially offset by strong license sales from our DCI segment.

EMEA was up 6% versus the prior year at the constant currency, primarily due to growth in Telerik license and maintenance revenue. Latin America was up 26% versus the prior year at constant currency, primarily due to the multimillion-dollar OpenEdge deal closings at fourth quarter noted earlier.

And APJ was down 16% at constant currency, primarily due to several large OpenEdge deals that were closed in 2015 that did not recur in 2016. Turning to our revenue by segment, again all changes at constant currency, OpenEdge revenue was $79 million for the fourth quarter, a decrease of 3%.

Both license and maintenance revenue were down versus last year, when we closed a large multiyear distribution agreement with one of our OpenEdge partners. For the full-year, OpenEdge revenue was $282 million, down 5% when compared to 2015, primarily due to lower license sales to both our ISP partners and direct enterprise users.

The decline in license revenue from our ISP partners was primarily in the fourth quarter, as I just discussed. For our direct enterprise users, license revenue actually increased in the fourth quarter, but was lower for the full year, as the volume and size of large enterprise deals were down versus 2015.

OpenEdge maintenance renewals were well over 90% for both the fourth quarter and the full year. And revenue from OpenEdge partners, who deploy their applications in the SaaS model, continued to grow. SaaS influenced revenue was $5 million for the quarter, growth of 10%, and $19 million for the full year, growth of 8%.

Our DCI segment had a healthy year, with revenues up 13% for the year and 27% for the full year. However, as Yogesh mentioned, this performance is not indicative of what we expect going forward. Our multiyear license backlog at the end of the fourth quarter is $25.2 million, a decline of 14% sequentially, but an increase of 41% year-over-year.

Turning to our AD&D segment, bookings were $24 million for the quarter, a decrease of 1% versus the fourth quarter of last year. The decrease is due to a 14% decline in bookings from our Telerik products, partially offset by the large Rollbase perpetual license deal that I discussed earlier in my remarks.

For the full year, bookings were $85 million, flat to last year. Revenue for our AD&D segment was $23 million for the quarter, an increase of 22% versus last year and $83 million for the full year, an increase of 6%. Operating expenses were $75 million, up less than $1 million from a year ago.

The net increase in operating expenses year-over-year is due to higher compensation and benefits expense, and increased marketing programs, all associated with the Digital Factory strategy, partially offset by decreased costs for external services. Operating margin in the fourth quarter was 36%, up 100 basis points versus last year.

For the full year, our operating margin was 30% compared to 29% in the prior year, primarily due to lower G&A expenses related to decreased cost for external services.

Moving on to a few balance sheet and cash flow metrics, the company ended the quarter with a strong balance sheet with ending cash, cash equivalents and short-term investments of $250 million. After making scheduled principle payments during the quarter our ending debt balance for the fourth quarter is $135 million.

Note that the scheduled principle payments will double during 2017 compared to 2016 from $7.5 million per year to $15 million. Net DSO for the fourth quarter was 50 days, up one day sequentially and down two days from the fourth quarter of 2015.

We had a strong collections performance during the fourth quarter across all of our geographies and businesses, including Telerik, and the quality and aging of our receivables continues to be very good. Deferred revenue was $138 million at the end of the fourth quarter compared to $134 million in the fourth quarter of 2015, an increase of $4 million.

The increase was driven primarily as a result of Telerik bookings. As a reminder, sales from our Telerik products and services are generally billed and collected upfront, while revenue is recognized ratably over the term of the arrangements.

Adjusted free cash flow was approximately $32 million for the quarter, a 14% increase when compared to the fourth quarter of 2015. The strong cash flow performance for the quarter was driven primarily by the continued strong collections I discussed earlier, prudent expense management during the quarter and improvements in working capital.

Our full-year adjusted free cash flow for 2016 was $101 million. We repurchased 287,000 shares in the fourth quarter at a cost of approximately $7.7 million. For the full-year, we repurchased 3.1 million shares at a cost of approximately $79 million.

Now, I would like to provide some comments on the $92 million write-down we took this quarter on goodwill related to our Telerik acquisition. Annually, we evaluate or test goodwill and intangible assets related to each of our business segments for impairment. As part of this test, we determined that goodwill in our AD&D segment was impaired.

The impairment is primarily due to a more moderated view of the future potential and economic returns of this business. However, the AD&D business will still meaningfully contribute capabilities, technologies and experience to the new strategic direction of the company articulated by Yogesh.

Next, before getting into guidance for 2017, I’d like to provide some more commentary on the restructuring that Yogesh noted earlier. This restructuring will impact approximately 450 positions or over 20% of our employees as well as reduce some other operating expenses.

As a result of these top but necessary restructuring efforts, we will achieve annualized expense savings of approximately $50 million. Factoring in new investments to strengthen our core business and growth strategy as well as fully funding our variable compensation plans, we expect net annual operating savings of approximately $20 million.

We expect to incur restructuring charges of approximately $20 million during 2017, with the bulk of the charges being incurred during the first quarter with significantly lesser amounts in subsequent quarters. I’d now like to discuss our business outlook and guidance for 2017.

First, I want to give some color on the impact of currency translation on our 2017 outlook. The strengthening of the U.S. dollar continued somewhat during 2016, creating some headwind for us in 2017 related currency translation of our non-U.S. revenues.

As we’ve discussed previously, approximately one-third of our revenues are invoiced in currencies other than the U.S. dollar, and based on current exchange rates we expect a negative currency translation impact of approximately $7 million on our 2017 revenues relative to 2016.

Also for 2017, we will continue to include pre-acquisition deferred revenue in our non-GAAP quarterly reporting, which will better reflect our true business performance on a normalized basis. Our full-year 2017 guidance includes approximately $700,000 of non-GAAP revenue.

Keeping this in mind, we expect 2017 revenue to be between $388 million and $396 million, which represents a year-over-year decrease of 3% to 5% at current exchange rates and a decrease of 1% to 3% on a constant currency basis.

This guidance reflects our overall moderated view of the growth potential from our core products as Yogesh mentioned earlier. In addition, we expect 2017 revenue to be impacted by headwinds from some of the larger DCI and AD&D deals we closed this year as well as the lower level of Telerik bookings in 2016.

To further elaborate on the year-over-year comparison of revenue, provide context for the guidance range for 2015, while we reported $407.4 million at currency rates, that same 2016 annual figure at current currency rate, which were used in developing this guidance, would be $400.5 million.

I think that insight should help you to roll your models forward for 2017 and beyond. Moving to our earnings per share guidance, our EPS outlook for 2017 is also impacted by the strengthening U.S. dollar and related currency translation of our non-U.S. based revenues and income.

That being said, because a meaningful portion of our cost base is also denominated in foreign currencies, we do get some translation benefit on our operating expenses from the strengthening of the U.S. dollar. This is a natural currency translation hedge in our business, based on the global diversity of our cost structure.

The net negative currency translation impact on our 2017 operating income outlook is approximately $3 million or approximately $0.04 on our EPS. Taking currency translation into account, we expect earnings per share of $1.64 to $1.69, a change versus 2016 of between negative 1% and positive 2%.

Excluding the one-time Q4 2016 cash benefit of $0.05, 2017 EPS growth would be 3% to 6%. As of the end of our fourth quarter, we had approximately $135 million remaining under the $200 million share repurchase authorization of our board in March 2016.

Our EPS guidance for 2017 assumes a level of share repurchases that will offset expected dilution from our equity programs, subject to market conditions. In order to achieve the EPS growth noted above, we expect our operating margin for 2017 to be between 32% to 33% compared to 30% in 2016.

Adjusted free cash flow to be between $95 million and $100 million compared to a $100.6 million in 2016 with an effective tax rate of approximately 33% compared to just under 30% in 2016, including the nonrecurring impact with tax rate that occurred in the fourth quarter and approximately 32% in 2016 excluding that impact.

Our 2017 guidance for operating margin earnings per share and adjusted free cash flow reflects the cost savings from restructuring our operations and also includes investments that will be required to drive our future growth from Cognitive Apps.

Excluding the $0.05 benefit we received in the fourth quarter of 2016, we expect to increase EPS by $0.04 to $0.09 in 2017, while also making the necessary investments in our new strategic direction.

Turning to Q1, 2017 guidance, for our first fiscal quarter of 2017, we expect revenue to be between $86 million and $89 million, a year-over-year decrease of 1% to 5%. Our guidance for the first quarter is based on current exchange rates which negatively impact our revenue outlook by approximately $1 million compared to the first quarter of 2016.

Excluding the impact of currency translation, revenue growth would be flat to negative 3%. We expect earnings per share of between $0.25 and $0.27 for the first quarter, compared to $0.27 in the first quarter of 2016. The impact of exchange rates on our first quarter EPS is expected to be approximately $0.01.

Moving on to the last housekeeping item, yesterday we announced a quarterly cash dividend of $0.125 per share to be paid on March 15, 2017 to stockholders of record as of March 1.

This is the second quarterly dividend since we began paying a regular dividend last quarter, which we believe underscores the strength of our cash flow generation and offers an attractive yield to those investors seeking income. In summary, I’m optimistic of the future progress.

We’ve been busy in the three-plus months since I’ve joined the company to get us positioned in the best possible way for the future. I’m pleased that through prudent expense management we’re able to drive fourth quarter EPS toward the high-end of our guidance, and that we over achieved our free cash flow guidance for the quarter.

With our restructuring of operations, we’ll be able to increase operating margins, increase EPS growth and maintain free cash flow in 2017 despite more moderated revenue expectations, all while preserving the flexibility we need to make the very important investments that will drive our Cognitive Apps growth strategy.

And with that, I’d like to hand the call back to Brian for Q&A.

Brian?.

Thank you, Kurt. 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 session..

[Operator Instructions] We’ll take our first from Steve Koenig with Wedbush Securities..

Hi, gentlemen, and thanks for taking my question. Yes, so I’m curious - well, I want to actually just start by complementing you guys on the transparency you’re providing us on the existing businesses. It’s very, very helpful and we appreciate it. I do want to ask you on - yes, and I do want to ask you on the cognitive business applications.

You spilled out a little bit about where the IP is going to come from, that’s helpful. I’m curious to know how you anticipate building that outbound sales capability that will be necessary to sell that IP..

Really good question. Thank you. As you said, this is - would be new IP from the perspective of ability to build Cognitive Apps.

But when you think of it, the buyer is still application development teams, and enterprises and partners, who want to build new modern applications, so we initially actually see opportunity just to sell within our own installed-base, while we build out the team that sells beyond that to new logos.

And so, we do have a very strong customer relationship organization, and we will expand that as time goes on in a very entrepreneurial way to meet what we will see as the market opportunity and demand for our products.

This is really mostly a direct sale opportunity, in terms of how the go-to-market would be, as well as partnering with system integrators and those folks that sometimes do application development for large businesses.

So if we’re doing direct sales into larger enterprises, it is both within that organization that we have to sell, as well as to any system integrator that might be participating in that opportunity from a development perspective.

But again, I expect the sales organization and our partner organization to grow over time as we build out our portfolio, and as we gain traction in the market..

Okay. Great. That’s helpful.

I wonder - related to that question for my follow-up, I’m wondering as you build that sales organization and do the whatever internal development you need to supplement your acquisitions, your tuck-ins, how much of the - I calculated $30 million in net investment that you’re making this year that’s directed both to the core business and the new strategy.

Can you give us color on how much of that is being directed at cognitive applications and where that’s going to be spent?.

So, Steve, a part of that, as you might be aware, goes toward fully funding and [indiscernible] for variable comp plans, right. So that’s one part where the investments are going to go, that $30 million difference you mentioned.

The rest of it is going to be investment, as you said, both in our product capabilities and in our IP as well as in our go-to-market efforts as we build that out. As you know, and you yourself commented, we do have significant components already for our Cognitive App story.

We have everything from the UI tool building to data connectivity and many other pieces in between. We see the technical investments being made obviously in IP that we don’t have today such as machine learning and mobility as a backend platform and so on.

But from the perspective of how much investment to us, we see that as very entrepreneurial investment and running our business very lean to make sure that we do it in a cost effective way. I am also not a big believer in expanding sales and marketing before we get a product to market and begin to see traction.

I initially actually see significant opportunity with existing customer base to start gaining traction with this particular segment..

Great, very good. Well, thank you very much for your help..

Thanks, Steve..

Next is Mark Schappel, Benchmark..

Hi, good morning. Thank you for taking my question. First off, Yogesh and Kurt, welcome, welcome aboard here..

Thanks, Mark..

Thank you..

So I guess, just kind of building on the earlier question, Yogesh, what is it about the current set of products that Progress has that give you the confidence you can have - or that you have increased the essential building blocks to make a meaningful impact in this market for cognitive business applications?.

I think, Mark, it starts with of course, first of all, our DNA. If you think of Progress as a company, we have always been the provider of mission-critical application platforms.

Today, over 50,000 enterprises, businesses run on our platform, and then that is by the way our direct customers as well as customers of our ISV partners who built their products on top of ours.

In addition to that, we have tremendously strong assets when you start from things like NativeScript, which is a front-end tool, which is really a unique technology out there that allows people to use JavaScript, which is a very popular frontend development language, and use JavaScript to build native apps for both iOS and Android.

We have other UI development tools like Kendo UI and others, which allow us to do web and other platforms as well. When you tie that back to data connectivity, where you have systems of record, both are our systems as well as third-party systems.

As you are aware, our data connectivity products have been expanded to support the cloud offerings as well, and other cloud products such as Salesforce and capture data from that.

We need to expand that to add IoT capabilities, but we have strong foundational capabilities there today, which are truly market leading in their sub-segment of that market.

We have business for logic and rules engines, that are used extensively to have company policies and business policies and business ways of doing things encoded in the application. And of course, we need to find some machine learning capabilities.

One of the very strong reasons as to why I believe this is right is my conversations with existing customers that I’ve had over the last 90 days. And I’ve gone and spoken to many of them face to face and dozens of them over the phone.

And these customers realize that we offer to them a very mission-critical business platform, and they want to work with us to move their technology forward and to move their business forward. So I think it’s a combination of what technology pieces we have.

It’s a combination of what our relationships are with our customers and partners, who are eager to work with us and grow their business with us. And, last but not least, it’s our internal DNA, that’s what my engineering team, my product teams, my sales teams and my entire organization knows how to do well.

So I think that’s what, Mark, makes me tremendously confident in this strategy..

Okay, great. Thank you.

And then, consistent with the my earlier question, product-wise what are some of the missing components that you think you can either need to build or buy with respect to the cognitive business apps?.

I think as I’ve said the machine learning is not something that we offer today and everybody knows that. I think that is one of the areas that we would need to do something to build that out. And that includes bringing onboard data scientists as well as folks that can build out machine learning algorithms.

And really the goal there is to make it so that it is easy for businesses to use this technology. In fact there is a lot of, by the way, open source componentry out there that does things like machine learning. The interesting challenge with all of that is it’s not easy to use it. You need hundreds and hundreds of data scientists.

When you talk to somebody like a GE, who says they’ve got thousands of data scientists that they have hired in Silicon Valley, that’s a way expensive proposition.

And if you want to democratize cognitive business apps and allow somebody who is relatively small to leverage this capability, you need some extremely easy-to-use technologies and capabilities. And so I think that’s where we see investment being made on our part..

Great. Thank you..

Thanks, Mark..

Next question is from Matthew Galinko with Sidoti..

Hey, good morning and welcome, guys..

Hey, Matt..

Hey, so I was hoping you could talk a little bit more about the lack of, I think you described as traction in Digital Factory, as you’ve evaluated progresses of asset. So it seemed like it would have been little bit early to expect much out of it.

So were they coming more from pushback in your conversations with existing or potential customers, or it’s just not really due to your point, was it more the competitive landscape in the market you were going after? And then second part of that question is, you talked about cognitive application having a relatively fragmented market with no significant concentrated player, but can you go over again your view of the competitive landscape there..

Sure, Matt. So talking about the Digital Factory strategy first in answering your first question, they were all of the factors actually that you yourself outlined went into figuring this out, right. In talking to customers and partners and prospects it became very clear that the technology that we’re offering was not mature enough.

I don’t know whether, Matt, you know this or not. But I actually ran a business in this market segment several years ago, which basically makes - that’s one of the areas that I’m fairly comfortable with and then know this market. So competitively the offering was not mature, and our customers and partners and prospects were reflecting that.

The second part is actually it was becoming clear to us that it’s very difficult to reach the marketing person who is the decision maker and a key constituent buyer, because we don’t really have credibility. So just even getting an opportunity to speak within marketing organizations was tough for us.

And we have tremendously strong competitors in this market, folks like Adobe and Acquia and Sitecore and others, whose core businesses is this, right. And then this is what they have been doing, living, breathing for the last several years and have created tremendous mindshare and market share in the marketplace as a whole.

And so, all of those things, the lack of maturity of our product, the dominant competitors in this marketplace, the lack of credibility and awareness with marketers who would potentially be the buyers for this. All of those things made it the wrong strategy for us to continue at this point and we decided to pivot and move away.

In terms of your second question regarding Cognitive Apps, yes - oh, I’m sorry, yes, the fragmented market state of the Cognitive Apps and the state there. So it’s interesting by the way.

Cognitive Apps and machine learning technologies are currently being applied to any problem you can imagine, right, whether it is recognizing your voice as folks like Google and others are doing, to translating languages to machine vision, to all kinds of stuff, right? And a lot of that is very consumer centric.

From our perspective, when we look at how we can help businesses, we realized that really one of the key things we could do is leverage the backend big data information that is coming in from new sources, as well as leveraging the core business data that these businesses have collected over the last decade or two.

I was speaking to a very large European manufacturer just last week, who said that they have collected more industrial data over the past 20 years, which is interesting, right. We think of IoT as the new phenomena. But when you think of large machinery and large equipment, people have been gathering data for a long time.

And what they need to do is make heads or tails of it to figure out some business competitive advantages. And so, when you look at this whole machine learning market opportunity it is very, very broad and applicability is across many, many different functions.

We see for example just one function like predictive maintenance, right, being $1 billion market today, right, so think of it, right. That’s just one, and predictive maintenance of industrial technology is a big opportunity, because any company that has equipment of some kind that is worth something needs to be maintained.

And today most of that equipment, when it fails nobody knows that the failure is coming. And then the consequential business impact is much greater than just the impact of fixing what breaks. And so, from our perspective again, we are very focused on identifying a market like that, which is completely fragmented.

I mean, if you went today and said, hey, who are the players in predictive maintenance, you’ll find dozens of small companies and some very large companies who are doing in-house work, like GE is doing in-house work. I mentioned them earlier. There are others, who are doing in-house work.

But really if you look at sort of commercial products, those markets are very fragmented. And so, Matt, we see tremendous opportunity in picking one of those segments, going after that segment through our partners as well. We have very strong ERP vendors who have built their applications on top of ours. And so that’s how we see going to market there.

I see actually the competitive landscape quite fragmented when it comes to applying this to the business side..

Got it. Thank you..

Our final question is from Glenn Mattson with Ladenburg Thalmann..

Good morning. I wonder about OpenEdge just a little bit. I realize it’s a fresh set of eyes and taking a fresh look at it.

But if you compare what seems like a quite or soft quarter for OE versus Phil’s comments last quarter for a market that’s picking up, and then use your outlook for it longer term, being more superior; I wonder a little bit more about what drove the outlook decision and also about if there was anything that happened during the quarter that reflected the change versus what Phil was talking about in Q3? Thanks..

Hey, you are welcome, Glenn. Thank you for asking. Glenn, the - if you look at the longer-term trend of the market, and I think OpenEdge is actually a business that fluctuates. I mean, occasionally we see some large deals come in and that makes the revenue look good for that quarter. And then for a while they don’t come in.

And our business is difficult to predict, because the timing and size of these deals are completely dependent on either our partners who go off and win some new customer and therefore they need licenses. Or our existing customers who decide, oh, you know what, the application I’m currently using, I need more capacity for that.

That’s where any new licenses that come in. Those are the only two sources of those licenses. So they are not really first of all in our control, right. We don’t really have the ability to push in a true sales, what would be sales and go-to-market efforts, right, to change that.

So overall, we continue to expect a flattish business, maintenance revenues continue to be very strong, Glenn, with our OpenEdge product line, as well as our core products as a whole.

And because of the fact that these things are unpredictable and occasionally we do get large deals, we want to make sure that we have a realistic view of what is happening in this business. I think if you actually look at the last three years or so in constant currency, I think the business has been flattish, right.

And occasionally we do some good stuff, and occasionally it doesn’t look that good, but quarter-to-quarter fluctuations will happen in our business..

I think it’s also worth pointing out that we had a difficult comp year-over-year too, because the fourth quarter of 2015 was, for lack of a better characterization, a little bit of inflated compared to what they normally would have been. So it’s a tough comp year-over-year..

Okay, great. Good luck going forward, guys..

Thank you, Glenn..

At this time, I’d like to turn it back to our speakers for closing remarks..

Thank you all for joining the call today. As a reminder, we plan on releasing financial results for our fiscal first quarter of 2017 on Wednesday, March 29, 2017 after the financial market’s close and holding the conference call the same day at 5:00 PM Eastern Time. I’ll now turn the call back over to Yogesh for his closing remarks..

Thanks, Brian. I’d like to wrap up by reiterating that I truly am excited to be leading Progress as we transform ourselves into a much stronger innovative company. We’re putting into place a strategy that positions us well for future growth, while operating our business much more efficiently to continue to generate strong earnings and cash flow.

And we believe this will deliver the optimal results for our shareholders. I really appreciate and thank you for your continued support. And I look forward to beginning a dialogue with each of you in the coming days and weeks and months. Thank you very much..

That concludes today’s conference. We thank you for your participation. You may now disconnect..