Brian Flanagan - IR Yogesh Gupta - CEO Paul Jalbert - CFO.

Steve Koenig - Wedbush Securities Mark Schappel - Benchmark Matthew Galinko - Sidoti.

Good day, and welcome to the Progress Software Corporation Q1 Investor Relations Conference Call. At this time, I’d like to turn it over to Brian Flanagan, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Stephanie. Good afternoon, everyone, and thanks for joining us for Progress Software’s fiscal first quarter 2017 earnings call. With me today is Yogesh Gupta, President and Chief Executive Officer; and Paul Jalbert, 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, 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 today. Today, we published our financial press release on our website.

This document contains the full details of our financial results for the fiscal first quarter 2017, 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. With that, I’ll now turn it over to Yogesh..

Thank you, Brian, and good afternoon, everyone. Welcome to our first quarter earnings call and thank you all for attending. I’m pleased with our Q1 performance. Revenue was $91.2 million was well above the high-end of our guidance range due to the timing of revenue and from our OpenEdge segment.

Our earnings per share of $0.34, also exceeds our guidance range, largely due to the higher revenue I just mentioned and partially due to the delays in some of our growth investments and other discretionary spending.

And our adjusted free cash flow was $43 million, an excellent start to the year, attributable in large part to a very strong collection performance and to a lower cost profile as a result of our recent restructuring effort. While we are not changing our expectations for the full year, this is an encouraging start.

Before continuing, I do want to mention that I am really pleased that Paul Jalbert has become a new CFO. Paul and I have worked very well together getting my first five months of CEO and his broad financial experience and knowledge of our business make him the ideal candidate to lead our finance function going forward. Welcome Paul.

Paul will provide more detail on our financial results and guidance, but I would like to focus my remaining remarks on the efforts we have made to execute on our strategy since our last call. As I have mentioned previously, we have a two-pronged strategy.

The first is to strengthen the core of our business which consists primarily of our OpenEdge, DCI and Dev Tools products. The second is to provide the platform of the future for developers to build cognitive business application. I’ll talk about our cognitive apps platform in a few minutes but first let me address our core business.

Our core segments all grew by low to mid single-digits year-over-year in Q1. As we discussed during the last conference call, while our quarterly performance may fluctuate up or down due to the timing of certain customer and partner deals, our expectation is still for flattish revenue from these businesses overtime.

Our OpenEdge partner business had a very solid license growth in Q1. And our maintenance renewal rate for both partners and enterprises was again well above 90%. I want to reiterate that OpenEdge is the great platform, a platform that tens of thousands of organizations depend upon for their machine critical application.

Our ISVs continues to attract new customers for their applications built on OpenEdge and their efforts are critical to Progress's long term success.

As part of our strategy to strengthen the core, we will continue to invest in the OpenEdge technology and support the current and future needs of our ISVs, in fact, in the next few days we will release OpenEdge version 11.7 which delivers several enhancements in the areas of security, high performance replication, and always-on capabilities.

Our customers and partners are truly excited about this new release that’s coming up. As at OpenEdge, we are also committed to ongoing investments in our other core products, and we announced several important product releases during Q1. Let me highlight two of them.

One, we delivered the industry's first suite of pre-built data connectors for all the major SaaS CRM systems including Salesforce, Microsoft dynamics, SugarCRM and Oracle sales cloud.

Using these powerful new connectors, software vendors can now instantly deliver tools and application that leverage unified data access to cloud CRM systems as well as other cloud and on-prem data sources. Two, we also released an update to our Telerik DevCraft suite, the most complete UI toolbox for web, mobile and desktop development.

This new release includes support for Angular, Visual Studio 2017, JQuery 3, ASP.NET core and Xamarin as well as new tooling for faster desktop development. This focus on strengthening our core was one of the key themes at our Progress Next Partner Conference in early February when we hosted over 200 of our ISVs from around the globe.

These partners are excited about our future together. They're very pleased with our commitment to our core product and what's more they're enthusiastic about our cognitive app strategy. Our partners expect us to be forward looking.

They realize that there is a lag between when we deliver new platform capabilities to them and when they can deliver their application on top of that platform. And they've recognized that cognitive-first is the future of applications and they want us to enable that future.

Our strategy positions us to drive growth going forward by providing an open and standard based platform that makes it easy for the broader market to build these cognitive applications. I'd like to review the reasoning behind our cognitive app strategy and why we're confident we will succeed.

Providing the platforms on which mission critical applications are built and deployed is core to Progress' DNA and we will leverage that DNA to do the same for business applications of tomorrow. Cognitive applications is a very broad category.

So to select which cognitive application domain we would target first we analyzed our open edge ISV partner base. Almost half of our open edge partners have this manufacturing ERP application, providing us with tremendous presence in the manufacturing and industrial sectors.

This led us to select predictive maintenance as the first domain that our platform's cognitive capabilities would address. The market for cognitive predictive maintenance alone is nearly a $1 billion in size and growing at over 30% annually.

Competition is fragmented with no dominant player and the target audience is developers of business applications, a group we know well and have credibility with. As we discussed during our Q1 call, we already have many of the foundational elements we need for this strategy.

From our experience with mission critical application to technologies such as native script for building native iOS and android mobile application, responsive web UI development tool, data connectivity as well as our mobile platform, business logic and growth engine.

A key component that we did not have was machine learning, which is why I'm so excited that we're able to acquire DataRPM. DataRPM is a leading provider of machine learning technology that is focused on cognitive predictive maintenance for industrial IoT.

Their unique and patented technology automates machine learning, dramatically reducing the need for armies of data scientists to build cognitive applications.

It is also a tremendously scalable platform that can be deployed in both public and private cloud environment providing a powerful and differentiated offering within the predictive maintenance market.

It is this differentiated offering that has enabled DataRPM and entrepreneurial startup with approximately 40 employees to win a growing list of loyal customers such as Samsung, Jaguar, Mitsubishi, Heavy Industries, et cetera. Their proven technology is already being used by these and other customers to achieve significant business benefits.

This is the reason why this acquisition makes tremendous sense for Progress. Additionally, their technology will strengthen our core by addressing our partner's future needs.

We have begun integrating DataRPM technology with OpenEdge and our other products, which enable our partners their powerful predictive analytics capabilities into their application. We expect to deliver that integrating by the end of the year.

DataRPM will remain an agile independent unit and the integration efforts I just mentioned will not disrupt their ability to innovate on their platform or their singular focus on acquiring new logos. We do not expect a meaningful revenue contribution from DataRPM in FY ’17. That’s why we invest in the platform, we will run lean operationally.

For now their go-to-market efforts will remain focus on cognitive preventive -- sorry cognitive predictive maintenance for industrial and manufacturing companies. In the future however, DataRPM solution can be applied the use cases across many industries, greatly expanding our growth opportunities.

In closing, I’m pleased with our Q1 performance, but you must continue to execute to ensure a successful FY ’17. As we work towards growth, we will also optimize our operations by simplifying and streamlining our processes, systems and go-to-market efforts.

We remain confident in the strength of our core product portfolio as well as in the growth opportunities for cognitive applications. The data -- the acquisition of DataRPM with its market reading capabilities and predictive analytics is an important milestone for us.

I've had the pleasure of speaking with many of our investors since our last call and I look forward to meeting many more of you in the coming months. We appreciate your input and your view on our strategy and operations and we will remain focused on creating shareholder value.

I’ll now turn the call over to Paul to review our Q1 performance in more detail and our expectations for Q2 and for the full year.

Paul?.

Thank you, Yogesh and good afternoon everyone. This is my first quarterly conference call as Progress’ CFO. So I look forward to meeting with many of you in person over the next few months. As Brian mentioned all the revenue, operating income, earnings per share amounts that I will be referring to in my remarks are on the non-GAAP basis.

For our GAAP results, please refer to the earnings results. For the first quarter, total revenue was $91 million an increase of 1% at actual exchange rates and 2% on a constant currency basis. This was well above our guidance range primarily due to the timing of revenue from our OpenEdge segment.

First quarter EPS was $0.34 an increase of 26% versus Q1 of 2016. This was also well above the high end of our guidance range due to some delays and some of the growth investments and the timing of our discretionary expenses.

Also reflected in our Q1 results is the negative year-over-year impact from currency translation due to the strengthening of the U.S. dollar, which was about $800,000 on revenue and $0.01 on EPS. Licensed revenue was $24 million for the quarter, an increase of 1% at actual exchange rates and 2% on a constant currency basis.

The increase in license revenue for Q1 was primarily due to strong performance from our OpenEdge ISDs [ph] in North America and Latin America. Maintenance revenue was $59 million for the quarter an increase of 1% at actual rates and 2% on a constant currency basis.

The increase was primarily due to higher OpenEdge maintenance revenue in both Latin America and EMEA, as well as higher maintenance revenue from our Dev Tools and Sitefinity products. For our revenue by geography, North America was $51 million for the first quarter, up 2% from the same quarter a year ago.

On a constant currency basis, EMEA first quarter revenue was 31 million, flat to last year. Latin America revenue was 4 million, up 20% and APJ revenue was 6 million, up 3%. The year-over-year increase in North America was primarily due to license revenue increases in OpenEdge and DCI.

The increased in Latin America was primarily due to higher OpenEdge maintenance renewals and the growth and APJ was related to the increased revenue from our Telerik products.

Turning to our revenue by segment, which is all at constant currency, OpenEdge revenue was $65 million for the first quarter, an increase of 2%, driven primarily by strong performance from our ISDs.

OpenEdge maintenance renewals were again well over 90% for the first quarter and revenue from OpenEdge partners, who deploy their applications in a SaaS model continued to grow. SaaS revenue was 5 million for the quarter, up 11% versus Q1 of 2016. DCI revenue was 7 million an increase of 4% for the quarter.

Our multi-year license backlog at the end of the first quarter was $22.3 million, which was down from the $25.2 million at the end of Q4 of 2016, but an increase of 33% on a year-over-year basis. Turning to our AD&D segment, total bookings were $18 million for the quarter, a decrease of 4% versus the Q1 of last year.

The decrease was due to slightly lower bookings from certain Telerik products. However, renewals of our Dev Tools products were strong and in line with our expectations. Revenue for our AD&D segment was $20 million for the quarter an increase of 2% versus Q1 of last year. Operating expenses were $64 million, down almost 5 million from a year ago.

A year-over-year decrease in operating expenses was due to lower compensation and benefit expenses, as well as decreased facilities costs both as a result of the recent restructuring efforts. Q1 expenses were also lower due to some delays in our growth investments and the timing of other discretionary expenses.

Operating margin for Q1 2017 was 30%, compared to 24% in Q1 of last year. The improvement in operating income and margin was in large part the result of cost reductions from our restructuring actions. In line with the guidance that we provided during our Q4 call. We recorded a restructuring charge of $17.1 million during the quarter.

This charge is primarily for severance costs and facility closures. We expect additional charges of $1 million to $3 million from our Q1 restructuring for the remainder of 2017.

Moving on to a few balance sheet and cash flow metrics, the company ended the quarter with a strong balance sheet cash, cash equivalents, short term investments of 264 million. Our debt balance at the end of Q1 was $130 million. Net DSO for Q1 2017 was 48 days, down two days sequentially and down 11 days from Q1 2016.

We had strong collections across all our geographies and businesses with particularly strong results in North America. Deferred revenue was 147 million at the end of the first quarter compared to 145 million in Q1 2016, an increase of 2 million.

The increase was driven by both OpenEdge maintenance and Telerik bookings, which was partially offset by a negative impact from exchange rates. Adjusted free cash flow was approximately $43 million for the quarter, compared to 23 million in Q1 2016.

The cash flow performance for the quarter was driven by strong collections and lower operating expenses results from our recent restructuring efforts as well as a timing of some estimated tax payments. During the quarter we repurchased 631,000 shares and it cost of $18.1 million.

As of the end of the first quarter, we had approximately $117 million remaining under the 200 million shares of repurchase authorization. We will continue to provide quarterly updates on our actual share repurchases during the year. I would now like to turn to our business outlook and guidance for fiscal year 2017.

But first I want to provide an update on the impact of currency translation and 2017 outlook. As a remainder, approximately one-third of our revenue is invoiced in currencies other than the U.S. dollar. The strengthening of the U.S. dollar throughout 2016 continues to create some headwinds this year related to currency translation on our non-U.S.

revenue. However, the U.S. dollar weakened slightly during the first quarter which has reduced the expected negative currency impact on our full year 2017 outlook. Based on current exchange rates, we now expect a negative currency translation impact of about 5 million on our 2017 revenue. Our previous estimate was $7 million.

Consistent with our previous guidance for 2017, we will continue to include Telerik pre-acquisition deferred revenue in our non-GAAP quarterly reporting. Our full year fiscal 2017 guidance includes approximately 700,000 of non-GAAP revenue.

Now although we have changed our current estimates, as to the negative impact of the exchange rate, we still expect 2017 revenue to be between 388 million and 396 million unchanged from our prior guidance. This 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.

As we have mentioned and as Yogesh has spoken earlier, our quarterly performance may fluctuate up and down due to the timing of customer and partner deals, but we remain confident in our annual revenue guidance. Now moving to our earnings per share volumes. Our EPS outlook for 2017 is also impacted by currency translation of our non-U.S.

based revenue and expenses, because a meaningful proportion of our cost base is also denominated in foreign currencies, we do that from translation benefits on our operating expenses from the strengthening of the U.S. dollar.

This a natural currency translation hedge in our business based on the global diversity of our cost structure, based on current exchange rates which includes a recent weakening of U.S. dollar, the net negative currency translation impact on our 2017 operating income outlook is expected to be about $2 million and about $0.03 on EPS.

Our previous estimated impact was approximately $3 million on operating income and $0.04 on EPS. Taking currency translation into account we still expect earnings per share of a $1.64 to a $1.69 unchanged versus our prior guidance. This represents a change versus 2017 of between negative 1% and positive 2%.

As we discussed during our last call our 2016 results included a one-time $0.05 income tax benefit related to the release of a dollar allowance that was no longer required. Excluding this one-time benefit 2017 EPS growth would be 3% to 6%.

We expect operating margins for 2017 to be approximately 32%, adjusted free cash flow to be between $95 million and $100 million. We're assuming an effective tax rate of approximately 33%, all unchanged versus our prior guidance.

Our 2017 guidance for operating margins, earnings per share, free cash flow reflects the cost savings from restructuring our operation and also includes investments that we will be required to drive our future growth from cognitive [ph] apps.

For our second quarter we expect revenues to be between 89 million and 92 million, a year over year decrease of 5% to 8%. Our guidance for the second quarter is based on current exchange rates which have a negative impact on revenue outlook of about $2 million.

Excluding the impact of currency translation the year-over-year revenue decrease would decrease would be 3% to 6%. In addition to the negative currency impact Q2 revenue is expected to be lower due to decreased revenue from our DCI segment related primarily to the timing of renewals and revenue recognitions for several of our OEM contracts.

We expect earnings per share of $0.35 to $0.37 for the second quarter compared to $0.33 in Q2 of 2016 an increase of 6% to 12%. The impact on exchange rates on our second quarter EPS is expected to be approximately $0.01.

We announced today that we have acquired DataRPM a leading provider of predictive analytics solution that is focused on addressing predictive maintenance for industrial IT. DataRPM has approximately 40 employees, most of whom are located in Bangalore, India.

The purchase price was $30 million with $28.3 million paid in cash and 1.7 million payable to the founders in the form of restricted stock. Today we also announced a quarterly cash dividend of $0.125 per share to be paid on June 15th 2017.

We began paying a regular dividend in Q4 of 2016 which we believe underscores the strength of our cash flow generation and offers an attractive yield to those investors seeking income.

In summary, we are pleased with our Q1 performance and look forward to continued execution as we work towards a successful 2017, of which our restructuring is now substantially complete.

This action will allow us to maintain healthy operating margins and free cash flow in 2017 while preserving the flexibility necessary to mix investments that will strengthen our core and drive our Cognitive Apps strategy. With that, I’d like to hand it back to Brian for Q&A..

Thank you, Paul. 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..

Thank you. [Operator Instructions] And we will take our first question Steve Koenig of Wedbush Securities..

I’ve got a few questions, I will leave it -- I'll restrict it to two. I think my first one would be, you’ve done some good work in terms of beating on the cross-side keeping moderate on your pace of investments. I think it’s been maybe two quarters now that you’ve been a little bit more moderate on the growth investments than you have guided.

Is that something we -- how should we think about continuing.

So part of the question is near term, but part of it as well is how should we think about Progress’ long term margin potential and your trajectory in getting there?.

At this point we in Q1 see we had -- we did not invest what we were planning to, we ended up some delays on our investments around both our core as well as Cognitive Apps. And so we expect that to change, we obviously don’t expect to sustain the same kind of deferment of investment that we’ve had historically.

I think that’s what your question right? I want to make sure, I understood the question correctly..

Yeah, that helps on the near-term part. I think part B of the question, I still would love to ask a follow-up if I may..

Sure..

But part B is how should we think about your long-term margin potential, and is their more and how would you get there, what will get you there and what kind of -- how does the timing feel like in terms of getting that launch on potential?.

Yeah, so Steve, this is Paul. So just looking at 2017 right, at this point we're not in any positioned to guide beyond 2017. I mean we are targeting for the full year operating margins to be approximately 32%..

Yeah, okay.

I'll leave that one there, if I may as well, the other question I wanted to ask you is, your full year guidance constant currency is effectively a very slight reduction it looks like is this really risk reduction or has your outlook becomes slightly more cautious maybe what’s your thinking there?.

I don’t think, our outlook has become any more cautious, I mean Steve, as you look in the back half of the year, there was a ramp there. But we feel, we’ve got some visibility.

If you look at the first half of the year and what we expected to do in the back half of the year, we are expecting our DCI business as you’ve seen in the past two ramp up in Q3 and Q4..

Okay. Well, great. Thanks very much for taking my questions..

And we will take our next question from Mark Schappel of Benchmark..

Yogesh, starting with the acquisition of DataRPM here, are you comfortable that you have all the necessary building blocks, if you will, to move forward with your cognitive apps strategy?.

So I think at this point Mark, we believe that we have a very, very strong machine learning capability that we’ve been able to pick-up with this. So, we will continue to feed the other things we need to bolster, but in general on the predictive analytic side DataRPM is a phenomenal company, it is a wonderful product.

We have marque logos who are using it. So we were planning to attack the predictive maintenance market. We have the right company for that and the right technology sets for that..

Okay, great. And there is a follow-up, with respect to your cognitive apps strategy, what can we expect from the product front this year, a chance to sit down and -- go ahead..

Yes. So on the products, a few things, of course we will continue to enhance and extend the lead that DataRPM itself has. The team in Bangalore is hard at work on it.

On the integration side, we have actually carved out a team from outside, from inside at OpenEdge team and other core products to work with the DataRPM team to do the integration so that we don’t slowdown the work that the DataRPM team needs to do to keep moving that technology forward.

As I said in the earlier remarks, we expect to have our integration work done by the end of the year. The plan is to, along the way involve a couple of our lead partners, who may want to start working with us to make sure that the integration work we are doing meets their needs.

So that they can also then, when we’re ready with our integrated offering, they can start building their capabilities around it.

So that they can offer for example, a predictive maintenance module for their ERP, their manufacturing ERP or in that integration to their systems of record with inventory management and maintenance management and anything else that they might have.

So to us, there is a two-part product approach on this whole cognitive apps; One is making sure that the DataRPM team continues to evolve and extent the technology lead that they have, while at the same time having a team that is partnering with them from inside our core organization that is doing all the integration work with our products.

And I’m really excited, we’ve actually as part of due-diligence, done extensive analysis has to how much work that will be, that's why we're confident that by end of the year we should have the integration work done.

To me that’s a really important thing to deliver, so that our partners can truly leverage this within their business application that they have built on top of OpenEdge and using our other technology..

[Operator Instruction] And we will take our next question from Matthew Galinko of Sidoti..

First one, just around the logos that DataRPM has under it's built already, are those actively contributing revenue or is there a point in time where you see converting those to revenue with DataRPM on its own?.

They are subscription agreement, they are contributing very, very tiny revenue in terms of actual impact compared to what we do so. For us, for Q2 we expect zero revenue contribution from them.

So -- but they are paying customers and I think that’s an important thing because to me unless the company has paying customers, it is not necessarily a good thing to just have logos, right. If you are delivering value, you ought to get paid for it. And so yes, these are paying customers.

But because it is writable revenue, because it is a subscription model, really there is not much expectation on revenue contribution this year from DataRPM..

Okay and maybe just digging a little bit deeper on those contracts, are they --..

Sure..

Would you consider it a foot in the door where you can see expanding the scope or the debts that you have with those logos becoming more material contributors?.

Yes Matt.

So really the DataRPM approach, so DataRPM started off as a horizontal predictive analytics platform focusing on sort of broad, we can do anything type of an approach to go-to-market which for a startup was, let's just say not very effective, and about a year ago they decided, we recognize that we are beginning to see some interest in the predictive maintenance side and they had actually started talking to a couple of these larger guys in -- around the middle of last year.

And so they basically pivoted to focus on predictive maintenance starting middle of last year and they signed up these customers over the last sort of three quarters. What they have done and what their approach is, is that what you said is exactly right.

They go in, they do a paid proof-of-concept to demonstrate to the customer that what they are offering is something that does deliver value, that’s usually a 90 day proof of concepts. And then they convert it an annual subscription for one use case.

And then the goal is overtime to expand the number of use cases and as they expand into additional use cases, they charge more for it. So that’s really sort of the -- it's a combination of used cases and scale of use that will drive growth. And so yes, we expect actually these individual logos to expand their contribution to us.

It's a land and expand strategy that DataRPM has embarked upon and that we expect to continue..

Great thank you..

And with no further questions in the queue I would like to turn the call back over to Mr. Flanagan..

Thank you all for joining the call today. As a remainder, we plan on releasing financial results for our fiscal second quarter of 2017 on Wednesday June 28, 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 would like to wrap up by reiterating that I am truly excited by the progress we have made in the last few months to transform ourselves into a much stronger and much more innovative company.

And our Q1 results were solid, we substantially completed the restructuring of our operation and coupled with the acquisition of DataRPM, we are executing well on our goal of operating our business efficiently while also positioning ourselves for future growth.

Thank you for your continued support and I look forward to continuing a dialog with each of you in the coming days and weeks. Thank you and have a great evening..

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect..