Brian Flanagan - Vice President, Investor Relations Yogesh Gupta - President and Chief Executive Officer Paul Jalbert - Chief Financial Officer.

Steve Koenig - Wedbush Securities Mark Schappel - Benchmark Glenn Mattson - Ladenburg Thalmann Matthew Galinko - Sidoti.

Good day and welcome to the Progress Software Corporation Q3 Investor Relations Conference Call. At this time, I would like to turn the conference over to Brian Flanagan, Vice President, Investor Relations. Please go ahead..

Thank you, Shannon. Good afternoon, everyone and thanks for joining us for Progress Software’s fiscal third 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 would 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 and adjusted free cash flow 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 third 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 will now turn it over to Yogesh..

Thank you, Brian and good afternoon everyone. Welcome to our fiscal third quarter conference call. I am looking forward to walking you through our results for the quarter and providing you with an update on our strategy. I will also elaborate on the themes I covered on my September 12 shareholder letter.

But before I do so, let me begin by recapping several of the steps we have taken to drive shareholder value during my first 12 months as CEO. One, in January, we restructured our core operations to make them more efficient and reduced our headcount by 20%.

Two, over the past 9 months, we have built a new management team, including most recently, the addition of Gary Quinn as the new head of our field organization for our core products. I am delighted to have Gary on board. Three, we strengthened our relationships with our ISVs and customers.

A key indicator of this is that over 20 OpenEdge partners and enterprise customers have revised their relationships with us this year after a gap of at least 2 years. Four, we had several important product releases reflecting our continued commitment to our core products.

For example, we released OpenEdge 11.7 and had multiple releases within our Data Connectivity and DevTools portfolio. Five, with our January restructuring and prudent expense management throughout the year, we have expanded our margins from 28% to 34% year-over-year.

And six, we returned over $60 million to shareholders in the form of dividend and share buyback. These steps reflect our focus on and commitment to managing our business efficiently while at the same time bolstering our core products and our relationship with those ISVs and customers that have come to depend upon us.

Our strong Q3 financial performance can be traced directly to this laser focus. I am very pleased that we exceeded high-end of our revenue guidance, which was highlighted by the continuing strong license performance of our OpenEdge ISVs. We also exceeded our earnings per share guidance by $0.05.

We are pleased with the momentum we have established as we approach the end of FY ‘17 which has enabled us to again increase our guidance for revenue, operating margin, earnings per share and free cash flow as we reported in our press release earlier today. It has also enabled us to raise our quarterly dividend as we reported on September 12.

Paul will provide additional detail on our financial results and guidance in a few moments. We believe that maximizing our profitability and cash flow are essential to enhancing shareholder value. To that end, while we are still in the planning stages of FY ‘18 we are targeting operating margins of 35% in FY ‘18 and beyond.

I am also pleased with the progress we have made to-date in integrating DataRPM and Kinvey, the two acquisitions we completed this year. Going forward, M&A will continue to support our strategy in line with specific strategic and financial criteria that I will discuss shortly.

We are fortunate to have a strong balance sheet that enables us to make future acquisitions. However, we will be extremely disciplined in doing so. We have also enhanced our capital allocation strategy as we continue to manage our business prudently and return cash flow to shareholders. More on this shortly as well.

With that, I would like to go into greater detail on the themes I covered in my September 12 letter. Let’s start with our core strategy, which we updated in January 2017. At the beginning of the year, we articulated our strategy to position profit for success, not only today, but well into the future.

At the center of our strategy is an unwavering commitment to serving the needs of our large installed base of OpenEdge, DataDirect and Telerik customers. To be successful, we must maintain and expand our customer retention, which requires a certain level of investment.

We also recognized that although our ISVs and customers remain fiercely loyal to our products, products from which they have built their very businesses. We needed to provide a path to the future for them to grow and stay competitive in their markets.

Without providing such a path, our historically strong retention would eventually begin to suffer if these ISVs built new applications using non-Progress technology.

Based on this determination, we defined how we would leverage our inherent application development D&A to build on the capabilities of our products and address the future needs of our strong customer base. We have always delivered the platform into that organization’s need to develop and deploy mission-critical business applications.

We also articulated our vision that tomorrow’s mission-critical business applications would learn business characteristics from data and leverage it for their competitive advantage. Our competitive advantage would be in providing the solutions necessary to build and deploy those applications quickly and efficiently.

I am thrilled to report that through our efforts in 2017, my vision is being realized as we now offer the best platform for building and deploying tomorrow’s applications quickly and cost effectively. We could not have made this much progress without seizing the opportunities that presented themselves to DataRPM and Kinvey.

Let me take a few minutes to explain what I mean. As we began fiscal year ‘17, we recognized that we could not fulfill our vision of providing the best platform of building and deploying tomorrow’s application in a timely and market responsive manner through internal development efforts.

While we had many of the foundational elements we needed to build on next generation platform such as best-in-class UI tools, world class data connectivity and strong business logic and rules capabilities through additional critical requirements emerged.

We needed to expand from the back end of our platform and we needed to offer machine learning capabilities. Machine learning is critical for the applications of tomorrow. Automated machine learning enables organizations to harness previously unused volumes of data to make better, faster decision and operate much more efficiently.

We also needed to ensure that this platform responded to the future needs of our ISVs and customers. We met this challenge by focusing our initial efforts on predictive maintenance.

We chose this domain, because almost half of our OpenEdge partner base has built manufacturing and industrial ERP applications and predictive maintenance is a key requirement of their customers.

With DataRPM, we acquired the leading provider of a predictive analytic solution that is focused on addressing predictive maintenance for industrial IoT, a strong back end is equally critical. All 11 mobile applications require a similar set of back-end capabilities, which must also be cloud-native, secure, performant and highly scalable.

Critically, a strong back-end combines these features with front end development tooling and robust data connectivity into a consistent and cohesive platform. The process for building these capabilities on an app-by-app basis is time-consuming, complicated, expensive and error prone for developers.

A strong cloud back-end platform provides a consistent way for developers to use and manage these features without timing to build them dramatically reducing both cost and time-to-market. With Kinvey, we added the leading provider of a cloud-based server less back end platform for mobile, web and IoT applications.

Having completed these acquisitions, we made significant strides in integrating Kinvey and DataRPM with our existing core technologies. We now offer the best platform to quickly and easily develop modern, intelligent cloud applications, what we have come to call, cognitive applications.

We do not need further acquisitions related to cognitive applications and we will continue to run our new businesses in a lean fashion. To emphasize this last point, the total expense associated with our new businesses in FY ‘17 is less than $10 million and we will not ramp up sales and marketing expense in advance of demand.

The reception from our partners has validated our strategy. Two of our largest OpenEdge ERP partners have become early adopters of DataRPM even before the integration with OpenEdge is complete. And they have taken the platform to their customers. As a result, we have several projects with these prospects in the pipeline.

We are now well positioned to serve the future critical software needs of our ISV and enterprise customers as well as to attract new customers. This last point bears repeating. What makes these acquisitions so compelling is that they enabled Progress to meet the future needs of our ISVs and customers. Of course, we have done this in the past as well.

Only a decade ago, we saw future need as major trends in application development shifted and we were the first company in the industry to offer a multi-tenant database, which allowed our OpenEdge partners to deploy their applications in the cloud.

Today, revenue from our partners deploying their applications in a SaaS model in the cloud is a $20 million plus revenue stream for us with low double-digit growth rate. Let me now spend a few minutes talking about how we view M&A within the context of our overall strategy. There are two principle reasons for us to pursue acquisitions.

The first is to add an important technology or product capability that is critical to our core business strategy, which is not conducive to organic development. We recognized that we must continuously take steps to meet the evolving needs of our large installed base of customers.

If we don’t, they will look elsewhere to meet those needs and our retention, revenue and profitability will likely suffer. DataRPM and Kinvey are examples of filling critical gaps to serving evolving customer requirements.

As I mentioned earlier, without these additions, we would not be in a position to offer our ISVs and customers the platform they need to remain competitive and to grow their business. In light of the advances we have made in strengthening our platform in FY ‘17, we do not expect to make other acquisitions of this type in the foreseeable future.

The second type of acquisition is the kind in which we add offerings that are complementary to our core business in terms of product, audience and growth profile. These acquisitions would bolster recurring revenue and be highly synergistic.

At a minimum, there must be significant opportunities to optimize the operating and expense structure off the target. Bearing that in mind, we would target operating margin after synergies that are equal to or better than our current margin.

These acquisitions must generate a return on invested capital within 1 year of completion that is above our weighted average cost of capital. The exact hurdle rate would depend in large part upon the risk profile of the target company.

We currently estimate that our WAC, weighted average cost of capital is approximately 9% to 10%, although this will likely fluctuate over time as interest rates and market benchmarks evolve.

Given the financial profile of the kind of businesses we intend to pursue and our return criteria, we anticipate that any such acquisition would be immediately accretive to our non-GAAP earnings. We are going to follow these financial criteria and we are going to be extremely disciplined in our approach to these acquisitions.

We believe we can be successful in pursuing these acquisitions, because we can leverage our operating model to run these businesses more efficiently. Our core strength is selling solutions to other software vendors and application development teams and enterprises enabling them to build mission-critical applications that achieve their business goals.

This is an audience we are intimately familiar with and the primary one we will look for when pursuing acquisitions. Conversely, we will not pursue acquisitions that put us in direct competition with our ISVs or require us to enter markets in which we have limited expertise.

Also, our new management team and I have proven that by aggressively managing our core business expenses while making focused and targeted investments, we can run a lean organization and expand our operating margins to world class levels. I am confident that we can do the same with businesses we acquire.

Importantly, while we believe we have a strong balance sheet that can support using leverage to finance acquisitions, we want you to know that we are going to be extremely disciplined in our acquisitions.

For leverage, we will target a gross debt to EBITDA ratio of 1x to 2x although we would evaluate going above that level on a temporary basis to support a transaction that will maximize value for our shareholders. Turning to capital allocation, I am pleased that in FY ‘17 we have built upon Progress’ long history of returning capital to shareholders.

Our continuing goal is to allocate our capital in the most efficient manner to create long-term shareholder value. We carefully allocate our capital to dividends, share buybacks and M&A. As you will recall, we began paying quarterly dividends in FY ‘17.

On September 12, reflecting our confidence in the continued strength and stability of our operating cash flows, we announced a 12% increase on quarterly dividend and established a target payout ratio of 25% to 30% of our annual cash flow from operation. As of the end of Q3, we have paid out $18 million in dividends during FY ‘17.

Turning to share buybacks, Progress has repurchased almost $600 million of it shares since 2012, including $44 million in FY ‘17. Our Board remains committed to ongoing share repurchases as part of our overall capital allocation framework. And today, we have announced an increase in our total authorization to $250 million.

We are targeting to repurchase $150 million of our shares by the end of FY ‘18 with the remaining balance to be completed by the end of FY ‘19. Going forward, we intend to target 50% of our annual cash flow from operations in future share repurchases.

As I discussed earlier, to execute on our M&A framework, we intend to utilize a strong balance sheet and existing credit facility where appropriate to fund acquisitions that fit our targeted profile. Before closing, I wanted to say a few words about Praesidium Investment Management’s recent communication.

As we have previously said, our Board has carefully considered Praesidium’s observations and believes many of the ideas have merit, which should be apparent from my remarks today.

Our Board also recognizes Praesidium’s perspectives regarding the company’s past acquisitions, but we believe that we have articulated a go-forward business, M&A and capital allocation strategy, which will create meaningful value of all of our shareholders.

We look forward to continuing our dialogue with Praesidium as we always welcome the views of our shareholders. I am looking forward to meeting with many of you during the coming days. We have made excellent strides in the past year and are completely focused on executing our business strategy.

We have a new management team, a refreshed board and a focused strategy that has shown early signs of operational improvement. We also have a strong plan to return cash to our shareholders and a disciplined high bar to consider acquisitions.

I am excited about our prospects going forward and I will now turn the call over to Paul to review our Q3 performance in more detail and outline our expectations for Q4 and FY ‘17.

Paul?.

Thank you, Yogesh and good afternoon everyone. As Brian mentioned, all the revenue, operating income, earning per share and adjusted free cash flow amounts that I will be referring to in my remarks are on a non-GAAP basis. For our GAAP results please refer to the earnings release.

For our third quarter, total revenue was $97.6 million, which was $1.6 million above the high-end of our guidance range of $96 million. The overachievement resulted from a few 6-figure deals within our OpenEdge segment that closed earlier than expected as well as a favorable FX impact of approximately $700,000 from a weaker U.S.

dollar since we provided our revenue guidance in June. Our EPS of $0.48 was also well above the high-end of our guidance of $0.43. The $0.05 overachievement consisted of $0.01 from higher revenue and $0.05 cents from lower expenses partially offset by a negative $0.01 impact due to a higher than expected tax rate during the quarter.

Expenses were lower than expected due to lower hiring and lower more focused marketing program expenses. On a year-over-year basis, as expected, revenue for the quarter decreased by 5% at actual exchange rates. This decline was entirely related to our DCI segment and was factored into the guidance we provided in June.

Overall, our core business led by our OpenEdge partners continues to perform as expected. Despite the overall lower revenues, EPS increased by 9% versus Q3 of last year reflecting the positive impact from our restructuring efforts earlier this year and our continued focus on prudent expense management.

The year-over-year impact of exchange rate movements on both revenue and EPS for the quarter was immaterial. As expected, total license revenue was $29 million for the quarter, a year-over-year decrease of 50% at actual exchange rates and 60% on a constant currency basis.

The decrease was primarily due to the lower license revenue from our DCI segment, which I will catch on further in a moment. Maintenance and service revenue was $69 million for the quarter, an increase of 1% year-over-year at actual exchange rates and flat to last year on a constant currency basis.

For our total revenue by geography, North America was $56 million for the third quarter, down 4% from the same quarter a year ago. On a constant currency basis, EMEA third quarter revenue was $32 million, down 3% versus last year. Latin America revenue was $5 million, up 5% and APJ revenue was $5 million, down 26%.

The year-over-year decrease in North America was primarily due to the lower license revenue from our DCI segment that I mentioned earlier partially offset by increased license revenue from our OpenEdge segment.

The decrease in EMEA was primarily due to lower edge license revenue in the region, where we had several large OpenEdge direct enterprise deals in Q3 of last year. The increase in Latin America was primarily due to higher OpenEdge maintenance revenue.

And the decline in APJ was primarily related to a few large OpenEdge deals that occurred in Q3 of last year. Turning to our revenue by segment, which is all at constant currency. OpenEdge revenue was $68 million for the third quarter essentially flat with last year. Maintenance renewals were again well over 90%.

We had another solid license performance from our OpenEdge partners, but that was partially offset by decreased license revenue from direct enterprises. The license revenue increase from our partner channel was partially fueled by growth from partners who deployed their applications in a SaaS model.

Our SaaS related revenue from OpenEdge was $5.6 million for the quarter, up 13% versus Q3 of last year. Year-to-date, this revenue is $16.2 million, up 50% versus 26% and we continue to expect to be in the low double-digits going forward. DCI revenue was $9 million, a decline of 37% compared to Q3 of last year.

Q3 2016 included a scheduled billing of a multiyear multimillion dollar deal with one of our largest OEMs. As I mentioned earlier, this decline was factored into a quarterly guidance we provided in June and also into our annual guidance since the beginning of the year.

As we discussed in the past, revenue for this business is somewhat lumpy due to the timing of invoicing and renewals of our OEM partner agreements. Based on our current license backlog and our visibility into upcoming renewals, we expect Q4 2017 revenue to ramp up and be in line with our DCI revenue in Q4 of 2016.

Our multiyear license backlog at the end of third quarter was $18.1 million compared to $29.4 million at the end of Q3 of last year. Turning to our AD&D segment, total bookings were $20 million for the quarter flat to Q3 of last year, while bookings for the Telerik products were up 2% versus Q3 of last year.

Demand for both DevTools and Sitefinity renewals are strong and revenue for our AD&D segment was $20 million for the quarter, a decrease of 1% versus Q3 of last year. Operating expenses were $62 million, down more than $8 million from a year ago.

The year-over-year decrease in operating expenses was due to lower compensation and benefit costs and decreased facility costs both the result of our fiscal 2017 restructuring efforts as well as lower marketing program spend.

We continue to aggressively manage our core business expenses while also prudently investing in our primary growth initiatives. We have successfully achieved our cost saving initiatives that we announced in January and total costs and expenses on a year-to-date basis have decreased by approximately $22 million compared to last year.

We expect that our full year expenses will decrease by approximately $28 million compared to $26 million. Q3 2017 operating income grew 12% over Q3 of last year, while operating margin increased 600 basis points to 37% from 31% in Q3 of last year.

The lot improvement in both operating income and margin was the result of the cost reductions from our restructuring actions as well as additional savings from the ongoing aggressive management of our core business expenses that I just mentioned.

This focused expense management has allowed us to expand on margins this year beyond our original expectations and to target 35% operating income margins going forward as Yogesh mentioned in his remarks. Moving on to a few balance sheet and cash flow metrics.

The company ended the quarter with a strong balance sheet with cash, cash equivalents and short-term investments of $191 million. Our debt balance at the end of Q3 was $124 million.

DSO for Q3 2017 was 48 days, up 6 days sequentially and down 1 day from Q3 of last year with good collections across all geographies and businesses with particularly strong results in EMEA.

Deferred revenue was $141 million at the end of third quarter, up $3 million versus Q3 of 2016 with OpenEdge, DevTools, Sitefinity all showing year-over-year increases. Adjusted free cash flow was approximately $18 million for the quarter compared to $19 million in Q3 of last year.

The cash flow performance for the quarter was driven primarily by lower operating costs as well as lower capital spending offset by higher estimated tax payments and changes in working capital. Year-to-date, adjusted free cash flow is $89 million. In the quarter, we repurchased 601,000 shares at a cost of $19 million.

Of the previous $200 million authorization, we repurchased 4 million shares at an average price of $27.17 per share for a total of $109 million. At the end of the quarter, we had $91 million remaining under that authorization.

As Yogesh mentioned, we now have a new share authorization to repurchase up to $250 million, which we expect to spend by the end of 2019 with a $150 million targeted to be repurchased over the next five quarters. We do not expect any Q4 purchases made under this authorization to have a meaningful impact on our Q4 EPS.

We will continue to provide quarterly updates on actual share repurchases going forward. I’d now like to turn to our revised business outlook and guidance for fiscal year 2017. We expect 2017 revenue to be between $394 million and $397 million, an increase of $3 million on the low end and $1 million on the high end versus our prior guidance.

The increase is primarily due to the favorable impact of exchange rates on our year-to-date results relative to our original estimates. As a reminder, approximately one-third of our revenue is invoiced in currencies other than the U.S. dollar and the strengthening of U.S.

dollar throughout 2016 created headwinds during the first half of this year related to the currency translation of our non-U.S. revenue. However, the U.S. dollar weakened during this quarter and based on current exchange rates, we now expected positive currency translation impact of about $1 million on the 2017 revenue.

Our previous estimate was a negative impact of $2 million. Moving to our earnings per share guidance, for the full year, we expect earnings per share of $1.82 to $1.85, an increase of $0.07 to $0.09 versus our prior guidance. This represents both of 10% to 12% versus our 2016 EPS of $1.55.

As we discussed during our previous calls, our 2016 results included a one-time $0.05 income tax benefit related to the release of the valuation allowance that was no longer required. Excluding this one-time benefit, 2017 EPS growth would be 14% to 16%.

Our EPS outlook for 2017 has improved throughout the year, the result of our successful restructuring, ongoing prudent expense management, and further operational efficiencies and to a lesser extent, the weakening of the U.S. dollar during 2017 relative to our original estimates.

Based on current exchange rates, the net currency translation impact on the 2017 EPS outlook is immaterial, while our previous estimate was a negative impact of $0.02.

We now expect our operating margin for 2017 to be approximately 35%, an increase of 100 to 200 basis points versus our previous estimate of 33% to 34% and a 500 basis point improvement over 2016. We are confident in our ability to run the business efficiently. We feel comfortable targeting 35% operating margins going forward.

We are also increasing our adjusted free cash flow guidance for 2017 to be between $105 million and $110 million, an increase of $5 million at both ends of the range. We expect an effective tax rate of approximately 33% to 34% for the full year versus our prior guidance of approximately 33%.

Our 2017 guidance for operating margins, earnings per share and free cash flow reflects the cost savings from restructuring operations, ongoing expense management, investments that will be required to strengthen our core business in our newly acquired businesses, DataRPM and Kinvey.

For our fourth quarter, we expect revenue to be between $112 million and $150 million, a year-over-year decrease of 3% to 5%.

The year-over-year revenue decrease is primarily due to the lower revenue from our AD&D segment attributable to a one-time multimillion dollar perpetual license deal for our role-based product that was recognized in Q4 last year. We discussed on previous earnings calls that this deal would have a negative impact on our growth in 2017.

The ramp in revenue from Q3 to Q4 was primarily driven by OpenEdge and DCI segments. We have good visibility for the scheduled OEM renewals and backlog for DCI and a strong pipeline for OpenEdge direct enterprise and partner deals giving us confidence in the sequential step up in our revenue projections for Q4.

We expect earnings per share of $0.58 to $0.61 for the fourth quarter compared to $0.52 in Q4 of last year, a decrease of 2% to 6%. Excluding the $0.05 income tax benefit I mentioned earlier, Q4 EPS is expected to increase by 2% to 7%.

Our guidance for the fourth quarter is based on current exchange rates, which has a favorable year-over-year impact of $2 million to $3 million on revenue and $0.01 on EPS.

While we usually don’t issue quarterly guidance for operating income, our annual guidance of approximately 35% implies operating margins of approximately 40% for Q4, another indication of our strong cost controls and operational efficiencies.

Before closing, I would like to make a few comments regarding the M&A and capital allocation strategies that Yogesh outlined in his remarks. The acquisitions of DataRPM and Kinvey were critical to ensuring that our core businesses remain strong.

Going forward, we will be focused on acquisition that are complementary and accretive with post-acquisition margins at least as high as our current operating margins, which will ensure that our cash flows continue to grow.

In addition, we will take a disciplined focused approach in capital allocation utilizing dividends, share repurchases and focused M&As that meets our rigorous financial criteria will ensure that we create the strongest company possible and drive value for shareholders. In closing, we are pleased with our Q3 and the year-to-date financial performance.

These results enable us to again increase our full year estimates for revenue, EPS, operating margin and adjusted free cash flow. Our restructuring has allowed us to expand our operating margins, increase cash flows throughout the year.

We continue to strengthen and optimize our core business while also making focused measured measurements in newly acquired businesses. With that, I would like to hand it back to Brian for Q&A..

Thank you, Paul. That concludes our formal remarks for today. I would 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..

Yes, sir. Thank you, ladies and gentlemen. [Operator Instructions] We will take our first question from Steve Koenig with Wedbush Securities..

Hi, gentlemen. Thanks for taking my questions..

Hi, Steve..

Hi. Yes, so let me start with the cognitive application strategy since that’s the bone of contention right now. So, on the revenue line, it’s hard to see evidence yet, but that strategy is working.

So, what are the timeframes with which we should expect to see revenue impact in the strategy and are there other milestones we can use to gauge whether or not that strategy is working?.

Steve, as we had previously stated our initial lift back and our initial expectation for this year was the measure, the success of DataRPM by doubling or at least handful of customers that we have and we are well on our way of doing that. We actually expect to exceed that number. Our ISVs, OpenEdge ISVs have to-date validated our strategy.

They have actually already started to take us into their customers. And speaking to them personally which I have, they are very enthusiastic about how we are responding to the future need. One of the other things that I would like to share is that we are targeting the market that has been the center of our success for over 30 years.

Right, so we are focusing our initial efforts on predictive maintenance, because almost half of our OpenEdge partner base has been manufacturing an industrial ERP application. So by focusing on this segment rather than the broader market, we are helping these partners solve a very specific business problem just as we have done so before.

And as I said, our partners have already validated this strategy by already starting to take us to these partners, to their customers. As the next year evolves, we will share with you other metrics that will show what kind of financial progress the business is making..

Okay. And I will move on to my second question and then turn over to the next caller. So on the margin side, you guided on the call to 35%, I believe you said in fiscal ‘18 and beyond and Yogesh, you made a remark about expanding operating margin to world class levels.

So to clarify, I’d like to understand is by world class levels, do you mean that 35% or do you mean getting beyond 35%?.

We mean 35%, Steve, for a business our size. We are a $400 million revenue company. If you look at other companies that are in our market with a similar profile, we believe that those are truly best-in-class margins..

Okay, I will leave it at that. Thank you very much..

The next question comes from Mark Schappel with Benchmark..

Hi, good evening. Yogesh, question for you. I have a question regarding the operating margins and maintaining them at 35% next year and beyond.

I suspect that company is going to have to ramp their sales and marketing expenses pretty meaningfully next year as you start to build out the cognitive apps business, especially in the sales and marketing side.

And keeping operating margins flat at 35%, lot of initiatives taking place suggest that you are going to have to be cutting in other areas, with revenue being relatively flat.

So, what are your thoughts on some areas that you think there is just more opportunities next year for squeezing additional costs out of it?.

So, one of the things Mark that I am a very big believer in is growing businesses by running them lean and not really scaling up sales and marketing ahead of demand. I think the different ways that people do this I have always run lean organizations. And so we do not expect to ramp up sales and marketing in advance of demand for our solutions.

We also continually look for opportunities to run our business better, right. And that as you know and I have said this before as well, that’s an ongoing pretty much daily exercise what is it that we can improve and where we can find more efficiencies we will bring those to bear..

Okay, great. Thank you.

And then as a follow-up as your cognitive apps initiatives move forward, are you close to putting an official launch date on the calendar for those solutions?.

So, Mark as we have said that our predictive maintenance and Kinvey acquisition will get integrated into our products by end of the year. We are way well along that path. And I would expect to launch the product once it’s ready, right.

We have already however started going to market with them and we are seeing tremendously positive feedback from our partners. And they are already as I said taking us into their customers already.

So, we haven’t officially launched the products, but we are already working with our partners customers in doing projects for them and working with them to get them to use our products..

Okay, great. Thank you..

Thanks Mark..

The next question comes from Glenn Mattson with Ladenburg Thalmann..

Hi, Glenn..

Hi, Yogesh.

One quick one on the free cash flow, curious what the working capital assumption is for the full year on that?.

Yes, when we have had some higher tax payments that are in the fourth quarter to do to the higher profitability of the business..

So, can you give me just a general sense of what the full year working capital modest outflow I guess or?.

Yes, it should be fairly flat. I don’t have those numbers with me, Glenn..

Okay, that’s fine. So, Yogesh, the buyback kind of is interesting in that. I think you make a concerted effort for some period of time – the company has for some period of time for returning capital to shareholders, but never equated these, 21 times forward non-GAAP earnings to level that Progress haven’t traded at too often.

And so pardon me, wondered if this is a strategy that’s being put in place in order to defend against some of the attacks that are going on out there and perhaps if that’s the case, then maybe you are doing this return of capital for not necessarily all the right reasons.

So I guess, just I would be curious as to how you came about making that decision, I think it’s lofty – relatively lofty evaluations?.

So, Paul do you want to start with that and I will come back to that..

Sure. So, we have a fairly large cash balance at $181 million in January, hopefully $100 million of cash flow here. So, we say that share repurchase is a good vehicle to returning capital to shareholders certainly in the context of the overall capital allocation strategy that we just outlined right.

So share repurchases we feel are – they are always subject to market conditions as well..

Sorry, Glenn, what I would like to add is that it isn’t just that the Board has authorized the $250 million over between now and end of FY ‘19 but in addition to that, we would actually come up with a capital allocation strategy that says that we will use 50% of our cash flow to buyback stock, right going forward.

So, I think to us this is a very structured plan. This is not just a plan that basically we decided to do a one-time thing. So we believe that we have a very strong business. We have confidence in our business going forward and we believe this is the right thing to do for our shareholders..

Okay.

But the valuation was a factor in that discussion as well or is the buyback 13% allocation of free cash flow?.

Valuation, Glenn, as you know valuation is always a criteria and you know how much we buyback is always based on valuation..

Okay, thanks for that..

Thanks, Glenn..

The next question comes from Matthew Galinko with Sidoti..

Hi, good afternoon..

Hi Matt..

Hey.

So, you talked a fair amount about your capital strategy, I am curious what your outlook is for M&A that meets the new criteria you set out and sort of what your internal capacity there is for integrating and sort of managing that kind of transaction?.

So, Matt, we have a very strong management team that we have built over the past 12 months. We have put together an internal set of operations and processes in place that we feel very positively about. We believe we can execute on this M&A and we believe that we can deliver the kind of results we would want to from these type of M&A.

So obviously these kind of things are opportunistic, right, they don’t – opportunities like this will come along when they come along. We want to make sure that they meet our strict criteria, which is – which I outlined earlier.

And as long as they do, I am truly confident that we have a strong management team, we have strong processes and structures in place and we can and will deliver on the results..

Got it.

And maybe just as a follow-up to that given to my math right it sounds like your targeted dividend payout and your repurchase you are looking at pretty good majority of your annual cash flow being sort of returned to shareholders, just correct me if I am wrong, but does that math change if you can make a reasonably sizable acquisition that takes you above your sort of target leverage ratios.

And does it reach a point where you are sort of pulled the reigns on that so that you could maybe scale up to do bit of a larger transaction without levering up to too much?.

Yes. I mean, if we temporarily go over the 2x, those debts to EBITDA ratio then we would figure out what we ought to do to bring that leverage down to the target levels. But again as I said, these things are going to be very disciplined about identifying them.

We are going to be very disciplined about executing on them and these things are opportunistic. They don’t always come around. They have to be in our market segment. They have to meet all the criteria that we laid out.

Paul, do you want to add?.

So going forward right so I think if you look at our cash flow from operations 25% of that going to dividends and we said we have returned roughly 50% of our cash flow in the form of share repurchases.

While obviously if we are looking at an acquisition, then we would and depending on the leverage, we would just spend what could tell some of the share repurchases to get us back in line with what our targeted leverage ratio would be..

Got it. Alright, thank you..

And ladies and gentlemen, that concludes our question-and-answer session. I will turn it back to Mr. Flanagan for closing remarks..

Thank you, Shannon. Thank you all for joining us today. And I would like to remind you that we plan on releasing our Q4 financial results on Wednesday, January 10, 2018 after the financial markets close holding the conference call at the same day at 5 p.m. Eastern Time. I will now turn the call over to Yogesh for his closing remarks..

Thank you, Brian. We are very pleased with our progress to-date and excited about our future prospects as we continue to execute on our business strategy. Building on our solid financial performance and healthy cash flow over the past three quarters, we look forward to closing out FY ‘17 and beginning 2018 with good momentum.

We are looking forward to meeting you to discuss with our strategy objectives and accomplishments. Thank you all for joining and have a wonderful evening..

Thank you. Ladies and gentlemen that does conclude today’s conference. We thank you for your participation. You may now disconnect..