Good day, ladies and gentlemen. And welcome to the Progress Software Corporation Q1 2020 Investor Relations Call. At this time, I'd like to turn the conference over to Brian Flanagan. Please go ahead, sir..

Thank you, Keith. Good afternoon, everyone, and thanks for joining us for Progress Software's fiscal first quarter 2020 earnings call.

With me today is Yogesh Gupta, President and Chief Executive Officer; and Anthony Folger, our Chief Financial Officer.Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, the impact of the COVID-19 crisis on our business and 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 in today's earnings 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, 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 first quarter 2020, 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..

one, high levels of recurring revenue; two, operating margins after synergies consistent with our margin structure; and most importantly, generate a return on our investment that is above our weighted average cost of capital.M&A in this space represents a huge market opportunity and one that Progress is uniquely suited to address.

As one data point, venture capital funds have invested more than $50 billion in over 10,000 infrastructure software companies over the last decade. Of course, many of these never become viable businesses.

Those that remain are often too small to scale, but many have stable, sticky customer bases and high levels of recurring revenue making them perfect candidates for our strategy.From a pipeline breadth perspective, we have been reviewing approximately 50 deals per quarter, and Q1 was no exception.

Many of these companies are in the $40 million to $80 million revenue range, the ideal size for us, but in many cases too small for other strategic or P/E buyers to pursue.The available pool of targets is large enough to support our acquisition strategy for many years, making this a viable path for delivering long-term value.

The opportunity exists, so let's now talk about how we are well positioned to take advantage of it.When we look at our revenue, more than 70% is recurring in nature. And as we've discussed previously, our retention rates are consistently well above 90%.

Coupled with our efficient operating model, this translates into very durable predictable top-line, best-in-class operating margin for enterprise software and very efficient free cash flow conversion.With net leverage of 0.6x and $225 million available within our current credit facility, we have the financial capacity to execute on our strategy.

We're also well positioned from an operational perspective. We have real expertise with recurring revenue model, where customer retention is key to long-term success. And we can leverage our own operational and back office infrastructure to achieve meaningful cost synergies.

Our success in sourcing, executing, and integrating Ipswitch is a testament to our ability to execute this strategy. And we’re further strengthening our capabilities in this area by adding resources for both identifying and integrating future M&A opportunities.Not surprisingly, macroeconomic conditions are impacting M&A globally.

And while they may create a headwind for deal timing, they could also create tailwind for valuations. And our strong liquidity and debt capacity positions us well in the coming months. As always, we remain disciplined in our approach.So in closing, our business is healthy and we had a very strong Q1, sustaining the momentum we achieved during 2019.

We will continue to monitor the external environment and remain very confident that our business is durable and diverse enough to provide a solid performance, even in this period of market uncertainty.

The guidance changes that Anthony will discuss are the direct result of that uncertainty, and do not reflect any wavering confidence in the health of our core business.Lastly, we are well positioned both financially and operationally to execute on our target and M&A strategy, driving real shareholder value through accretive acquisitions in the infrastructure software space.As you know, Anthony Folger joined us as CFO in January.

And I'd like to turn the call over to him now to review our Q1 performance and outlook for Q2, and full year of 2020.

Anthony?.

Thanks, Yogesh. Thanks, Brian. Good afternoon, everyone, and thanks for joining us. I'd like to start by saying that I'm thrilled to be joining the Progress team at such an important time for the company. Progress has embarked on an exciting evolution, shifting focus to improved M&A in order to drive growth and scale.

And I'm confident in this team's ability to successfully execute and capture the market opportunity that Yogesh described earlier. I look forward to speaking with Progress investor community personally in the coming quarters.

And I'm certain we’ll share more level of excitement about the opportunity in front of us.Turning now to our first quarter results. Total revenue was $113.8 million, well above the high end of the guidance range we provided back in January. This overperformance was driven by higher than anticipated revenue from our DCI, MOVEit and Sitefinity products.

We continue to be pleased with the performance of Ipswitch with Q1 revenues from our Ipswitch products slightly ahead of our expectations.

We also saw stability in our OpenEdge partner channel with another solid quarter of SaaS related billings from our ISVs, who have deployed their applications in the cloud.In addition, maintenance renewal rates for both our ISV partners and direct customers continued to be strong coming in at well over 90% again this quarter.

On a year-over-year basis, total revenue increased 27%, driven by the acquisition of Ipswitch and the timing of DCI contract renewals with certain OEM partners.

The year-over-year impact of exchange rates on our first quarter revenue was negative $700,000 generally in line with our expectations.I'd like to take a moment now to discuss how the timing of DCI contract renewals with certain OEM partners impacts our top-line.

As we've mentioned on previous calls, ASC 606 generally requires immediate revenue recognition of our multi-year term license agreements with certain OEM partners who embed our DCI product into their solutions.As a result, our revenues can fluctuate materially depending on when these contracts renew.

This timing was a benefit for us in 2019, and again in the first quarter of 2020. For the full year 2020, however, we expect the DCI revenue will decrease when compared to 2019, driven by fewer scheduled renewals during 2020.

This obviously makes year-over-year comparisons for DCI more challenging, and it's the reason why we believe annual contract value remains the most effective way to evaluate our DCI business.We continue to expect ACV to be $32 million to $33 million for 2020 consistent with our actual performance in 2019.Turning now to expenses, our total costs and operating expenses for the quarter were $65.8 million, up 11% compared to the prior year quarter.

This year-over-year increase is driven by the acquisition of Ipswitch, partially offset by lower expenses in the rest of our business, where we continue to operate more efficiently.Operating income was $48 million, up $17.7 million or 59%, compared to Q1 2019.

And our operating margin was 42%, an increase of 800 basis points on a year-over-year basis.On the bottom line, earnings per share of $0.76 for the quarter represents growth of 52% year-over-year, and is $0.05 above the high end of our guidance range.

This overperformance on the bottom line compared to guidance is driven by our top-line performance, coupled with lower salary and benefit costs, resulting from slower than anticipated hiring.Moving on now to a few balance sheet and cash flow metrics.

We ended the quarter with cash, cash equivalents and short-term investments of $177 million and debt of $295 million.

DSO for the quarter was 49 days, an improvement of 7 days both sequentially and when compared to Q1 of last year.Deferred revenue was $181 million at the end of the first quarter, up $39 million compared to Q1 of 2019, due primarily to the addition of Ipswitch deferred revenue balances.Adjusted free cash flow was $33 million for the quarter, up almost $9 million or 37% from $24 million we achieved in Q1 of last year.

This growth in free cash flow was driven by the acquisition of Ipswitch, our lower DSO and the previously mentioned improvements to operating leverage in our business.During the first quarter, we repurchased 425,000 shares of Progress stock at a total cost of $20 million.

And at the end of the quarter, we had $230 million remaining under our current share repurchase authorization.I would now like to turn to our outlook for Q2 and the full year 2020. First, let me state that thus far, we are not experiencing any meaningful disruption across our sales channels, due to the COVID-19 crisis.

However, we recognize the reality of a much more challenging economic environment in the coming weeks and months, and felt it’s necessary to incorporate some of these potential challenges into our outlook despite the uncertainty.When we assess our business and how it could be impacted by the slowdown in activity that’s occurring globally, it's important to highlight some of the characteristics that have made Progress’ business so durable.

Specifically, our products, our mission critical applications, across a variety of industries and the cost, effort and time required to replace our solutions would be prohibitive in most cases. Over 70% of our revenue is recurring, and our retention rates are consistently been well over 90%.

And all of our technical and professional services can be delivered remotely without disruption.That's not to say our business is immune into a global economic slowdown.

And in developing our current outlook, we assumed that a meaningful slowdown in the demand environment will negatively impact our ability to acquire new customers and expand existing customer installations and the timing of certain maintenance contract renewals and customer collections.Despite the potential negative impacts, we have maintained our prior outlook for operating margin, largely due to the operating efficiencies we realized in the first quarter and the changes in how we are conducting business during the COVID-19 crisis, which Yogesh previously mentioned.

It's also important to note that we transact in multiple currencies.

So in addition to the slowdown in economic activity resulting from the COVID-19 crisis, we also expect our business to be negatively impacted by the recent significant moves in exchange rates.With that, for the second quarter of 2020, we expect revenue between $95 million and $101 million.

This contemplates a $3 million reduction for the COVID-19 crisis, a $2.5 million reduction for the anticipated negative impact of foreign exchange and a widening of our typical quarterly guidance range to account for greater uncertainty; earnings per share of between $0.60 and $0.64, which includes an anticipated negative impact from foreign exchange of approximately $0.02.For the full year 2020, we expect revenue between $428 million and $438 million.

This contemplates a $10 million to $13 million reduction for the COVID-19 crisis, a $7 million reduction for the anticipated negative impact of foreign exchange and a widening of our guidance range to account for greater uncertainty.

As I mentioned, we also expect our operating margin to be approximately 39% consistent with prior guidance; adjusted free cash flow between $125 million and $135 million; the reduction in our outlook being driven by the COVID-19 crisis and recent movements in exchange rates; earnings per share of between $2.73 and $2.80, which includes an anticipated negative impact of foreign exchange of approximately $0.06.

Our annual EPS estimate contemplates a tax rate of 21%, approximately 45 million shares outstanding and the impact of 60 million of share repurchases we’re targeting to complete by the end of 2020.To summarize, we're very pleased with our Q1 results and the positive momentum in our business during the quarter.

However, we recognize the reality of the COVID-19 crisis, its potential impact on economic activity and we adjusted our outlook accordingly. In closing, we believe a high level of recurring revenue, coupled with consistently strong retention rates positions us well to weather the economic challenges brought on by the COVID-19 crisis.

In addition, the strength of our balance sheet and consistency of our cash flows give us confidence to continue to execute against our strategy of scaling our business through accretive M&A.With that, I'd like to open the call for Q&A. And I ask that you keep your remarks to your primary question and one follow up..

Thank you. [Operator Instructions]. We'll take our first question from Steve Koenig, Wedbush. Please go ahead..

Welcome, Anthony. One to you and then a follow up for Yogesh. So -- and then also a housekeeping -- the 60 million share purchases, does that include the Q1? And then I want to ask you, Anthony, in terms of your guidance here on COVID-19 impact, how -- the environment is pretty uncertain.

So, it’s clearly difficult to make adjustments and now with uncertainty what they're going to do.

How did you go about adjusting the timing of deals, as well as kind of the seasonality in the year? How does how that get impacted year-over-year and kind of what assumptions you can make to arrive at the new guidance?.

To answer your first question, the share repurchase of $60 million includes the repurchase activity from Q1, so all in that would be 50 million for the year. And then on the guidance question, yes, you're right. I mean it's a really uncertain environment right now.

We went through all the leading indicators that we had in the business and we’re really not seeing much impact. And so we basically went product-by-product.

And we looked at the different revenue streams in terms of where the likely impact would show up from a meaningful slowdown in activity and we looked at new customer acquisition, we looked at expansion and we looked at maintenance renewal, with each of them down, but I would say that the priority order and the magnitude of the impact, because of the size of the maintenance base, there’s probably maintenance number one, and then expansion and new customer acquisition.

And it was going product-by-product transaction types we have to consider and we have to look at each of our products quarterly, and adjust the existing forecast that we have.Now, there's more art and science unfortunately to how we're putting the outlook together right now just due to evolving uncertainty, but one thing is for sure that the economic activity is slowing down.

It's a global issue. We expect our business to be impacted. I think this is our best view into that right now..

I will leave that question there and then move on to Yogesh.

Any commentary on, how does the current environment impact your ability to get deals done, whether it's availability of deals, whether it's their willingness to sell to you, whether it's valuations and/or ability to execute on the transaction? How do those factors roll in when you're thinking about getting the M&A, speaking of M&A on track with the plan?.

So, from a Progress operational perspective, we are actually in good shape, right. We do -- most of our marketing activity is electronic and it's virtual.

Most of our conversations are virtual, most of our new sales -- new license sales in the business happens with products like Sitefinity and Ipswitch products, which as you're aware are lower end prices and therefore significant amounts of those happen through a lot of online engagement.

So, our ability on our side to execute transaction I don't believe is being hampered. What we do believe is this happening and what we expect to happen is, is that customers basically not being able to transact because their businesses are impacted.

Their decision making is delayed, their ability to collect and pay, get deferred, those kinds of things, right.

So, Steve, really from our perspective, we really see more direct impact from our internal execution perspective, it really is the demand side.And on the demand side again, as I said, it is more about delays with people, if they may decide to not do something for two months, three months, six months.

One of the challenges, Steve, in terms of this uncertainty also is the level of timing and we're all hoping that this will be short in terms of the disruption, but at the same time we also know that it can be quite long. So that is also a challenge in trying to figure out what.

But on an execution side, we are very comfortable with the fact that we can do the deals, we can execute, we can connect with our customers, we can basically make this happen..

And Yogesh, how do you prepare a deal? By the way that’s very helpful color on your execution.

I'm also wondering about your ability to conduct M&A in this environment and the availability of targets that sell themselves to you, any color on that?.

Yes, so on the M&A side, again, we don't really see challenges for us to be able to do deals from again our perspective, our deal execution side, we have a strong team. We have the financial wherewithal and the ability to execute those deals from a financial perspective.

We have a -- both an unpacked revolver as well as an expansion facility, so $100 million of unpacked revolver; revolver plus a $125 million expansion in our current debt itself. Plus as you know, we have a strong balance sheet to begin with today. So, from a financial perspective, we don't see real challenges.

It will make some of the due diligence work, might be a little more difficult since we can't travel and then they can't travel as much. But I think in today's day and age there’s a lot of data that’s shared electronically anyway. And really from a plus positive side perspective, the valuations today are different than they were four weeks ago, right.

It's kind of interesting. And by the way, they’re evaluating right. So I don't think -- I think, however, no matter where they end up, I do believe that there's opportunity for valuations to be less than what they were before. And that creates opportunities as well.

I also think Steve that there will be companies out there who otherwise were getting funded well or thought they could survive a bit longer than they will basically look at this and they'll see challenges in their business and maybe they were thinking they could grow 10% and do well but instead of that they're going to come in flat this year or approximately flat and making them again more likely to be open to conversations with us.

So I see this as really an opportunity on the deal making side..

We'll take our next question for Mark Schappel with Benchmark..

Yogesh, starting with you, given the uncertainty in the marketplace here, why not suspend your guidance as few of the other software vendors have done?.

Hey Mark. Good to speak with you as well. And appreciate the question. So, we wanted to make sure that we provided the level of visibility we have today, right. I mean I've been always a transparent -- I've always taken a transparent approach, right, and you know that.And so we want to share some level of knowledge we have.

We know the significant FX impact already because of the way the dollar has moved against both the euro and the pound. And at the same time, we see that there are early signs that, that some of the new business would get delayed or extended beyond the timeframes that we're talking about.

So that's on that side.On the other side, we have a very strong recurring revenue business, and we have really strong customer retention.

And so when you think of it that way, right, we felt that it was important to highlight the fact that we feel confident that the range of impact even though there's uncertainty, even though there's unknowns related to this, that the range is in our view, right, rather limited.

And again from a impact of this crisis perspective, in terms of it impacting our revenues, that impact for the year is between $10 million and $13 million, which is whatever right between 2% to 3% of our top-line expectation.So, that to us is actually one of our strengths that we have a business that is quite stable.

And because of how efficiently we run, we're still able to reiterate that we will make 39% operating margin, which is 100% basis points greater than last year and 400 basis points greater than two years ago.

So, I think all those things were part of the rationale to share information with folks like yourselves and our shareholders as to what we see in our business..

Great, thank you.

And then, there is a question here, could you just give us an idea of how your -- how you see the professional services business holding up and how the company just plans to manage the business [often]?.

Yes Mark. So it's actually interesting. Even before the coronavirus impacted the way people do business, the vast majority of Progress professional services are being delivered remotely. We have rather limited set of people that use to go to on-prem anyway. Of course this -- 100% of it is being delivered remotely.

We have seen no disruption in the project. And as far as we are seeing, we're not seeing delays in ongoing projects either. So at least from -- I know that some other companies that have seen different things in their business. But from our perspective and from our professional services business, we are not seeing a project impact at least today..

And then finally here on the M&A front with respect to the 50 or so companies that you see each quarter, what percentage of those would you say are marginally profitable or might have some cash issues?.

Well, I think, it may be, right? I think probably I would have to sort of go back and look, but -- so I believe that probably in the 20% to 30% maybe even a bit more, maybe even up to a half.

But what really we see across the board, I mean we actually see companies that are extremely profitable that are being run really well to companies that are actually quite significantly burning cash. It's a fascinating world out there Mark.

And I don't know whether this change in the economic environment will change, sort of where -- how that shakes out, but -- whether companies will focus differently, but we see across the board. And I think there's a significant number of them that are actually maybe breakeven or negative..

We'll take our next question from Anja Soderstrom with Sidoti & Company..

And welcome aboard Anthony. Looking forward to working with you. So just on the M&A, you said you do look at 50 companies each quarter.

So what you’d be looking at, maybe -- so you walked away for something that you guys weren’t looking, just passing down that might be more interesting now that would be easier for you to execute on without maybe doing a whole lot more …?.

Sorry. Anja, I'm having a very hard time hearing your question. I know it was about M&A. And I know it was about some companies we are seeing. But I -- really I am sorry.

Could you please repeat?.

Sorry, so there are other companies that you may have been walking away from those companies because that’s too expensive, that might have come down but you already made a lot of due diligence on, so it was easier for you to execute on that in this kind of environment?.

I think you -- let me make sure that I heard your question. I think you've asked whether there were companies that we walked away from, because they were so expensive, that now the valuations might have come down and we could potentially participate in it. And they become more attractive now.

So, to answer that question, a lot -- all along right in these processes that are companies that we walk away from.I do believe that the timing is still too early to see whether there is a meaningful change in valuation. So I don't think that this is something that in the last three weeks, we can suddenly say, now valuations are less.

Public company valuations are well known. Private company valuations, as you can imagine, right folks -- the fellows have to come to realize that they need to reset their expectations.

We are expecting that, anecdotally we are seeing that, but I wouldn't say that there are opportunities that we walk away from that now we can suddenly be engaged on that..

And then also you mentioned hiring in the first quarter was slower than anticipated.

Talk a little bit about that and are you still trying to hire in this environment or how is that going to impact?.

Yes. So regarding hiring, in Q1, we had an aggressive plan to hire and it has been difficult to hire before this. And so, we're in competitive location as you know, such as Boston and India and so on. So we were not able to get through our hiring targets. We are continuing to hire where needed.

But obviously we're also looking at things very carefully as to where those real needs are. So we are being prudent but we're not really changing in any meaningful way, how we operate, right? There is -- there are cost savings from things like no travel, and then there are cost savings from less events and those kinds of things.

But overall, we are continuing to run our business, we are delivering products on time, we're supporting our customers, just as well as we were doing before, around the globe, 24x7. We are servicing our customers in terms of professional services engagements.

We are communicating with them from a sales and marketing perspective as much as we were doing before. So I actually, -- the work hasn't changed, we are focused on running the company well, and we will continue to do so..

We'll take our next question from Matthew Galinko with National Securities..

So we are seeing some positive comments from companies that are able to lead other -- that have products that enable secure remote work, given this environment.

And so I'm curious if there's anything particular with Ipswitch’s portfolio that are -- maybe seeing a little bit more sell through or interest, that might be a counterbalance a little bit to the headwinds that you expect to see in this environment?.

So Matt, as we've looked at each product, as Anthony mentioned, right, where we -- and analyze these products and we looked at and said, are there some products that might get a little bit of a benefit? Clearly, IT infrastructure availability and performance management becomes even more critical in today's day and age and then in this environment than it was even a month ago.

So, obviously the Whatsup Gold product addresses that need. And -- but overall -- and secure data transfer is potentially another area that can benefit. But clearly, there a couple of challenges that I want to point out, right.

Those products also have along with the Dev Tools products, right, new business acquisition and the new business acquisition is where we expect to see a significant impact from what we are trying to do right.

That we’re expecting have a slow down and extension of timeframes.We also have, Matt to be honest, right $7 million of FX headwind on the top line. It is dramatically different than it was four weeks ago, right.

And so when you look at it from that perspective, we actually have a rather muted impact on our revenue numbers that we are contemplating and that we are envisioning at this point given the uncertainty in the market..

And then maybe follow up with respect to capital allocation. I know you talked about your target buyback allocation for fiscal '20.

But just in light of the market volatility we've seen and some of the declines in your share price, fairly steep, do you think about -- just walk us back through how you think about leading a little bit more heavily into the buyback versus M&A and sort of how you feel that opportunistically compared to opportunistic M&A?.

Yes. So, a great question Matt. Obviously, we had our strong cash flow, the opportunity to really allocate our capital in the most shareholder friendly way is what we focus on all the time. So our first priority of course is our dividend, right.

We pay approximately 25% of our annual free cash flow to shareholders in the form of dividends, which as you know, in September, we increased by $0.04.

And so -- and the Board reviews that every quarter and so the dividend is of course number one.The second thing from our perspective really is now should we apply the capital towards buybacks versus M&A.

And reality is even though share purchases provide a solid low risk return, accretive M&A that meets our discipline criteria provides a much better return.

And so we look at it from the perspective of what is best for our shareholders, what is the best place to apply capital.And so, we of course have the flexibility to increase or change or suspend our buybacks based on whether or not we're able to do M&A and what we're doing from an M&A perspective. So our Board reviews that every quarter.

We make sure that, that we look at the trade-off between possible M&A and buybacks. And again, if we can find the right M&A deals, we believe that, that is even at the current valuations that, that Progress is at, it really does offer a much better return for our shareholders..

Ladies and gentlemen, this will conclude today's question-and-answer session. At this time, I would like to turn the conference back to Brian Flanagan for additional remarks..

Great. Thank you all for joining the call today. As a reminder we plan on releasing financial results for our fiscal second quarter of 2020 on Thursday, June 25, 2020, after the financial markets close and holding the conference call the same day at 5:00 PM Eastern time. And I'll now turn the call over to Yogesh for his closing remarks..

Hey, thanks, again, Brian. Given this time of uncertainty, we, as a business will always do what we've always done before, which is to continue to provide great products and high levels of support to our longstanding customers and partner base. The company is financially really strong and healthy.

And while our 2020 results may be impacted by this crisis, we will continue to be focused on the long term opportunity we have to create value through accretive M&A.I want to thank all of you for joining us today. And I look forward to speaking with you again during the next quarter's conference call. Stay safe, everyone..

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect..