Good day, ladies and gentlemen. And welcome to the Progress Software Corporation Q2 2021 investor relations call. At this time, I would like to turn the conference over to Michael Micciche, Vice President of Investor Relations. Please go ahead..

Thank you Keith. Good afternoon everyone and thanks for joining us for Progress Software's second quarter 2021 financial results conference call. With me today is Yogesh Gupta, President and Chief Executive Officer and Anthony Folger, Chief Financial Officer.

Before we get started, I would like to remind you that during this call, we will discuss our outlook for future financial operating performance, corporate strategies, product plans, cost initiatives, our integration of the Chef, the impact of the COVID-19 pandemic on our business and other information that might be considered forward looking.

This forward-looking information represents Progress Software's outlook and guidance as of today only and is subject to risks and uncertainties..

Thank you Mike. Welcome everyone and thank you all for joining our Q2 2021 financial results conference call. We are very pleased with our second quarter performance which exceeded our guidance across the board. We again benefited from increased demand and investments in IT and infrastructure software projects.

The positive momentum we carried over from Q1 into Q2 is a validation of our strategy and confirmation of the strategic mission critical nature of our comprehensive product portfolio.

With growing confident in the strength of our business and two consecutive quarter of strong results under our belt in fiscal 2021, we are again raising full year guidance for revenue, operating margin, EPS and cash flow.

I will provide a summary of the second quarter and some comments on how we are executing on our strategy, followed by an in-depth discussion of our result and outlook by Anthony. Demand for our solutions was again strong in Q2.

We saw continuation of improving demands in all markets in which we do business and across nearly every product line, as our customers and partners continue to invest in systems built on Progress technology to run their businesses..

Thanks Yogesh. Thanks Mike. Good afternoon everyone and thanks for joining our call. Q2 was indeed another strong quarter for Progress. Our results reflect a continuation of the improving demand environment we mentioned in Q1. And again in Q2, we saw stronger than expected results across virtually all of our product lines.

Total revenue for the second quarter was $129.2 million reflecting 26% growth over the year ago quarter and was $6.2 million above the high-end of the guidance range we provided back in March. On a year-over-year basis, Chef is the biggest contributor to our growth.

However, many of our other product lines also contributed to growth, most notably our OpenEdge and Ipswitch products, MOVEit and WhatsUp Gold. In addition, we closed the second quarter with approximately $437 million in annualized recurring revenue, representing growth of 23% on a constant currency basis and 3.1% on a pro forma basis.

Pro forma results include Chef's ARR in all periods. Our Q2 growth in ARR, although not as significant as our Q2 revenue growth, was still better than expected and primarily driven by our Chef, OpenEdge, Sitefinity and DevTools products.

The mission critical nature of the applications we power and our consistent focus on improving the customer experience have resulted in a very stable and durable topline. At the end of Q2, our trailing 12-month net retention rate was slightly above 100% with improvement coming from multiple products including OpenEdge, DevTools and Chef..

. We will take our first question from Ken Wang with Guggenheim Securities. Please go ahead..

Great. Thanks for taking my question and a solid quarter, guys. I guess the first thing, I am not sure if Yogesh or Anthony, it this makes more sense for either of you guys, but you highlighted Chef tracking ahead of schedule on both growth and profitability.

Just wondering, anything you have seen in the last couple of quarters that would potentially steer you in the direction of maybe fueling a little more growth or potentially digging in and extracting more leverage? Any color there would be great..

So I will start. Ken. And thank you. And I will have Anthony follow-up. From our perspective, as we said, we have actually accomplished the expense synergies that we were targeting with the Chef acquisition. And of course, originally the target was that we would get to those synergies by end of this fiscal year. We have got into them sooner.

From our perspective going forward, Ken, as you know, our overall business continues to be flattish. Like, that's the way we characterize it, right. And we might have come times when we do a little bit better than flat and sometimes when we do a little bit worse than flat. But in general, it is a flattish business.

I don't think that over the long haul, at least at this point, we see any reason to change that. We are tremendously confident of the way the rest of the year is shaping up. But I think that's about all I would like to say on that topic.

And Anthony, I don't know whether you have something to add?.

No. I think that's right, Yogesh. I think we have kind of been on the positive side of flattish this year which we certainly prefer to be on that side. And Chef has certainly been a contributor to that but as have some of our other products like OpenEdge and some of the Ipswich products. So I think we are continuing to execute our plan with Chef.

It's a really good quality asset. It's got some growth characteristic. It's ahead of plan on profitability. I wouldn't say that we are necessarily deviating in any way with what we had originally set out to do there..

Got it. Okay Super helpful. And then perhaps just wanted to dive in a little bit on net revenue retention. Seeing that coming above 100%, that's quite positive, a nice step-up from last quarter.

Should we think that that particular metric has a lot of volatility? Just any color on what you think kind of the right range is for that number?.

Yes. It's a good question, Ken. We have been a pretty consistently, let's say, I would say 97% to 100%. There hasn't been a lot of volatility. Maybe it's been improving a bit over the past couple of years. So I think you are right. The way we calculate it, it is a trailing 12-month number. So there won't be a lot of quarter-to-quarter volatility.

But obviously as the trend changes, I think that will be apparent in the numbers. But on the flip side, I think from a business perspective, it's been a very deliberate effort, even since before I got here to invest in our technology, to invest in customer experience and those types of investments or things we are going to continue to do.

And I think we are seeing some results from that in terms of some slightly better retention rates. So I don't expect wild swings in the number and I think we feel pretty good about the investments we have made to get the number to where it is..

Got it. And then if I could just squeeze in one more and then I will pass the mic to my peers here.

Yogesh, just wondering as far as kind of the business or the product segment benefiting from just a return to normal on a macro basis, are there any particular areas that you would say are still lagging that we could potentially see some sort of a tailwind as we look to the back half of the year?.

So Ken, as we have said, right, actually the first two quarters of this year, the first half, we have seen really outperformance across the entire product portfolio, right.

It has been really sort of interesting to see that as businesses have got their head out of the challenges of trying to deal with COVID-19 and started looking forward as to how they want to invest in their longer term IT projects, we have seen the benefit across the board. We are confident that we will continue to see that.

I don't think there's any particular area that is more or less. Obviously, OpenEdge is our biggest product. So from an actual individual dollar perspective, it has been the biggest contributor. But overall, across the board, we are seeing interest. And then we are seeing interest whether it is in our network management product with WhatsUp Gold.

As you know, one of the competitors has had some security challenges there and that has opened up the market for other products like ours. And I think so just it has been a set of tailwinds around our products as people move to the cloud, as people go mobile first, they are modernizing their applications.

And I want to reiterate Anthony's point, right. Over the last five years, we have talked about the fact that we invest in R&D so that our products are ready so that when our customers want to move forward, our products are available and ready to help them move forward.

And that investment, whether it was in OpenEdge 12 or whether it is in the pre-releases that we do every year with DevTools or now pre-releases we do every year with Chef. And all those things are really, our investments in Ipswitch products such as MOVEit and WhatsUp Gold.

They are all sort of demonstrating that we have kept our product current and made it so that they truly benefit and address the challenges that our customers and users face. So I think it's been across the board good conditions and good demand for our products. I don't think there's any specific area that I would highlight for us..

Great. Thanks a lot guys..

Thank you Ken..

We will take our next question from Daniel Ives with Wedbush. Please go ahead..

Yes. Thanks. And great quarter, guys..

Thank you..

So can you just talk about with Chef, I mean what surprised you so far? Because obviously, it seems like things coming out of the gate is really working a lot better than maybe even you thought.

So as you are talking to customers, what you are hearing from the field? I mean, just give us some sort of anecdotal, what you are hearing?.

Sure. So I think a couple of really positive surprises. I shouldn't say surprises, but really sort of positive anecdotes that I want to highlight. When one acquires a company like Chef, Chef is an open source product. There's a large community out there of open source developers that do a phenomenal job of continuing to innovate in the Chef ecosystem.

And so one of the concerns we had was how would both the community of our customers and the community of that open source community, how will they react to Progress. And on both of those fronts, we have been very pleased that those communities have embraced Progress' taking over Chef.

Some of the larger customers who we have had the pleasure of speaking with, I mean, they are all really, really happy that Chef is now backed by a publicly traded software company, that we are a profitable business, that they know that we invest in R&D, that we will continue to invest in Chef and that we will continue to invest in the open source community as well.

And so, really phenomenally positive things. By the way, just I think one of the, SAP is a very large user of Chef. I think they publicly put out a blog that says that there are 11 million assets in the cloud. And when I say cloud, I really mean plural cloud for SAP. They are in every cloud you can imagine, including SAP's own.

And so there are, I think, like five or six different clouds. They are managing 11-plus million assets and they have really, really been excited about the fact that Progress acquired Chef. So I think to me, that part has been really positive. And I think we had an open source community event just about a month ago, phenomenal success.

The open source contributors are continuing to contribute aggressively. So I think, Dan, I am really happy both on the sort of customer-facing side as well as on the product side. The last part that I want to touch on is and I know that this quite often is ignored, in the end because it's our people that make this happen.

And the team that has come over from Chef and the team that we have at Progress that is working with them and the combined teams, the new joint Chef team at Progress has done an amazingly wonderful job across the board. So, I think to me, it's just been a very, very positive experience for us.

And that has allowed us to do things like we said, get to the synergies, continue to do well on both customer retention as well as winning new customers and so on..

Now let me ask a question, does this set a pretty high bar for Anthony and the M&A team to make sure they continue to match the success on the next one? Because that's what I am feeling. I mean for the next one, I feel like the bar is pretty high.

Is there a little more pressure on Anthony and the team?.

Yes. The good news is, Dan, I think that we have got Jeremy Segal leading the M&A group and Jeremy is fantastic. I think the entire team is disciplined around what the requirements are and sort of what financial criteria are for us to close on a deal. And so, I think the company is aligned around it. And I think we will be patient.

We will find the right asset. And the team has done a great job, really building out the pipeline. And so our ability to source the number of companies we are tracking, there's just been dramatic improvement in all of that over the past 12 months. So the bar is high, but I think we have certainly got the team to get over it..

Great. Thanks again..

Thank you Dan..

Thanks Dan..

We will take our next question from Anja Soderstrom with Sidoti & Company. Please go ahead..

Hi. Ad thank you for taking my questions. And congratulations on another great quarter. I have a follow-up on the Chef success.

How much of that do you think is attributed to Chef-specific drivers rather than your playbook being more refined, having done other acquisitions before Chef?.

I think, Anja, there are two aspects, right. On the expense synergy side and getting to them as quickly as we did, that is obviously our core competence. I mean, we have refined that. We did Ipswitch. We did a really good job with that. We have continued to refine it since and we were able to do it with Chef as well and get it done faster.

So, I think that's what we bring to the table, right. I think there's also a core competence at Progress around certain interesting areas like how we do marketing and demand so on and so forth. That said, I think the Chef team itself is really remarkably good and strong. And they have done a great job. And it's in a good market, right.

I mean, the DevOps and DevSecOps market is a market that is growing. It is a market where we see continued demand. It is a market where as people move to the cloud and try to deploy their mission-critical systems in the cloud, they need products like Chef. And we have an amazing product. So, I think it's a combination of things, Anja.

I think we, at Progress, can take some pride that you are bringing some things to it. And I think the folks that came over from Chef can take pride that they are bringing something to the table. And we happen to also have an asset in a really good market. So, I think it's an all-around -- been a really good asset for us..

Okay. Thank you. And also, in terms of the M&A environment, how has that changed over the past couple of months? Like with sort of a more warning about the inflationary environment and things like that.

Has that affected the M&A pipeline at all?.

I am not sure I understood the last part of your question, Anja.

What part of the environment?.

No.

So if there's going to be a more sustainable inflationary environment, is that affecting your M&A pipeline at all? And how has it evolved over the last couple of months?.

Yes. So, I think as we said earlier, right, the valuations continue to be high, right. And so what that means is that we continue to be disciplined, right. And it's kind of an interesting thing, right. This is one of the reasons why we feel confident about our strategy.

We have a strong pipeline and we have a team that is doing a great amount of deal flow and continuing to nurture and grow that pipeline.

And at the same time, as Anthony mentioned, we have a leadership team that is truly disciplined around making sure that we stick to our criteria and that we deliver the shareholder returns that our investors expect from us, right. And I think that's really the key. So, we will continue to be patient.

We will look for the right asset and we will make sure that when we find the right assets that we execute on it with the same level of rigor that we have with Chef lately and Ipswitch before that..

Okay. Thank you. And then just last one.

Is there anything you can call out in terms of the performance in terms of the different geographic regions you are serving?.

Yes. So again, we saw strong performance across geographies. I think if think about it, right, the U.S. is actually probably in the best shape when it comes to moving beyond COVID. I think Europe is coming along. I think parts of Asia-Pacific are still a little bit behind in terms of timing.

And I think Latin America is probably the slowest to recover because I mean, I am sure everyone has heard the challenges in Brazil, right. And Brazil is the single largest technology market in Latin America for Progress. But overall, I think if we look across the board, I think we see improvements happening everywhere..

Okay. Thank you. That was all for me..

Thank you Anja..

We will take our next question from Mark Schappel with Benchmark. Please go ahead..

Hi guys..

Hi Mark..

Thanks for taking my question and nice job again on the quarter. Yogesh, starting with you.

With respect to the OpenEdge strength in the quarter, was it principally driven on the ISV side of the business?.

Again, Mark, on both sides, of course, ISVs had continued strength as well but even the direct side of the business. It's an interesting thing, Mark, what is happening, right.

I think businesses are recognizing that they have their mission-critical applications sitting on a platform that is truly a lowest cost platform, the most efficient platform and a platform that we have continued to evolve and keep modern.

And so what we are seeing is, I think to some degree, I think actually COVID made people look at their sort of investments and say, where is it that you have investments that are truly delivering great results and maybe we should do a little bit more with that. So we are seeing both direct and ISVs. Of course, ISVs are doing well.

So that's always wonderful. But we are also seeing strength in direct..

Okay. Great. Thanks. And then shifting to Chef, if I recall correctly, when it was acquired, it was a mid single digit grower.

And based on the good 2Q results, is it fair to assume that Chef continues to grow at least that rate?.

As you know, Mark. Go ahead, Anthony..

No. I was just going to say, yes, we don't break it out separately. But I would say the trend line really hasn't changed. Chef continues to perform well. And so on a year-over-year basis, I don't think we have seen a change in the trend line there..

Okay. Super. And then shifting gears to DataDirect. Very little commentary about DataDirect, if at all, in the prepared remarks.

Any color on that business that maybe you could add? So for example, renewals coming in as planned?.

Absolutely. Yes. Business is performing very much as planned. As you know, Mark, with DataDirect, the quarters are lumpy because of the fact that there are multiyear contracts with large ISVs, right. And so in that sense, this was a relatively straightforward quiet quarter. It did well. But nothing to sort of highlight one way or the other.

By the way, in Q1, right, we had actually won a couple of new customers on the direct side, on the direct enterprise customers for DataDirect. So that was a positive surprise and we talked about it. This quarter was just a normal pretty straightforward quarter, down the middle..

Okay. Great. That's all from me. Thanks. Good job again..

Thank you again, Mark. Appreciate it..

We will take our next question from Ittai Kidron with Oppenheimer. Please go ahead..

Thanks guys. Great quarter. Very nice performance there. I just had one question for you, Anthony, on the free cash flow. Great quarter and great performance there, but your annual guidance suggests a big deceleration here in the second half of the year.

So help me think about the puts and takes of your annual free cash flow guide?.

Yes. Hi Ittai. That's a great question. The free cash flow in the quarter was really strong. And obviously, for the first half of the year, we have delivered about $102 million in free cash flow, which is a heck of a lot further along than we thought we would be. And a little bit of that is sort of better collection activity.

And I think when we look out to the back half of the year, we are probably a little bit more cautious assuming that we may get back to things like travel and get back into the office a little bit.

So we felt comfortable taking that guide up a little bit, but probably also holding a little bit back, just wanting to see how much of the travel comes back and how much of the in-office operating expenses come back. So if it's not sort of a linear move maybe with margin or something like that, I think that's really the reason why..

Got it. So it sounds like you are expecting, I guess, margins to, you actually raised your outlook on margin actually for the use up to 39%. So it doesn't sound like you are modeling much in your assumptions as a decline in operating margin in the second half of the year..

Yes. No, not from where we are now, perhaps a little bit relative to where the back half of 2020 margins shook out..

Got it. Very good. Thanks..

Thank you..

Ladies and gentlemen, this does conclude today's question-and-answer session. At this time, I would like to turn the conference back to Yogesh Gupta for any additional or closing remarks..

Thank you. Thank you for joining our call today. I am genuinely excited about our performance in Q2 and I am pleased to share our confidence in the outlook for the rest of 2021 with you.

I am especially proud of the dedication of our entire organization and their continued hard work, which really positions us well as we continue to execute our total growth strategy. I look forward to talking to you all soon. Thanks again and goodbye..

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