Progress Software Corp (PRGS) 2019 Q2 法說會逐字稿

Good day, and welcome to the Progress Software Corporation Q2 2019 Investor Relations Call.

At this time, I'd like to turn the conference over to Mr. Brian Flanagan, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Cody.

Good afternoon, everyone, and thanks for joining us for Progress Software's Fiscal Second Quarter 2019 Earnings Call.

With me today is Yogesh Gupta, President and Chief Executive Officer; and Paul Jalbert, our Chief Financial Officer.

Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, initiatives 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 the 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 second quarter 2019, and I recommend you reference it for specific details.

Today's conference call will be recorded in its entirety and will be available via replay on our website in the Investor Relations section.

And with that, I'll now turn it over to Yogesh.

Thanks, Brian.

Good afternoon, everyone, and thank you for attending our second quarter earnings call.

As you've seen in this afternoon's press release, we had a really strong Q2 performance.

Both revenue and EPS were well above the high end of our guidance range and cash flows were very solid.

Although much of the revenue overachievement is due to timing within our DCI segment, OpenEdge also achieved better-than-expected revenue, and I'm encouraged by the overall momentum we've seen in our business.

During the quarter, we completed our acquisition of Ipswitch, and I'm very pleased with the strides we've made over the past 2 months in integrating their people, products and processes.

I'll get into more details on Ipswitch later but we are well on our way to realizing the synergies we've projected while keeping this business healthy and strong.

Based on our performance in the first 2 quarters as well as our optimism of continued strong execution in the remainder of the year, we are increasing our annual guidance for both operating margin and EPS.

Paul will provide more details during his remarks, but we raised our EPS projection by $0.05 to $0.06, and now expect margins of 36% to 37% for the full year, an increase of 100 basis points on the high end.

This is a great way to start the second half, and I'm pleased to see our hard work reflected in our financial performance.

Let's turn now to a few highlights for each of our segments, starting with OpenEdge.

This is the third consecutive quarter that OpenEdge has overperformed versus our expectations, this time driven primarily by increased revenue from direct enterprises.

While much of this is due to deal timing, I'm certainly encouraged by the overall trend we are seeing with our flagship product.

Our OpenEdge partners also performed well in Q2, fueled by an increase in the SaaS-related revenue we received from partners who sell their applications in the cloud.

The OpenEdge SaaS-related business represents an important revenue stream for us, and we continue to expect double-digit growth from these partners on an annual basis.

Maintenance renewals, a key indicator of customer satisfaction as well as the health and strength of OpenEdge, were again well over 90% in Q2 for both ISV and direct enterprises.

As I stated many times, our ongoing investments in OpenEdge, like our release of OpenEdge 12 last quarter, are what enable us to generate these high retention rates within our existing customer base.

In addition, these customer- and partner-driven product enhancements position us to win back customers who have discontinued maintenance at some point in the past.

We had several of these win-backs during Q2, including one I'd like to highlight that contributed in a meaningful way to our revenue during the quarter.

Based in EMEA, this customer is one of the largest optical retailers in the world and runs both their central offices as well as their retail locations on OpenEdge.

They had discontinued maintenance several years ago, but are now back on maintenance, and as a next step, we're discussing how we can help them move forward and modernize their current apps.

This was only possible because our OpenEdge products are regularly updated with modern, cutting-edge capabilities and features.

We also had a very good quarter from our DCI segment, with growth that was even stronger than the significant year-over-year increase we had expected.

This was due to the timing of several large OEM renewals that we had expected to close later in the year.

What's even more exciting is that we signed a significant new DCI OEM during the quarter, a U.S.-based multibillion-dollar global provider of Internet-related services and products.

This is a marquee win for us, and as a 6-figure multiyear deal, it will contribute meaningfully to our DCI revenue and ACV going forward.

Our AD&D segment also performed well in Q2, bouncing back from a disappointing first quarter.

Q2 bookings grew sequentially by 20% and by 4% versus last year and are trending consistent with the expectations we outlined last quarter.

Turning to Ipswitch.

I briefly mentioned that the integration is going well, and I wanted to provide a little more color on the progress we've made so far.

The transaction closed on April 30, as expected, so our Q2 operating results include the impact of 1 month of Ipswitch revenue and expenses.

Let's start with a reminder of what made this such an ideal acquisition for us.

Ipswitch meets all of the strict criteria we have in place for potential acquisition.

It is immediately accretive to both non-GAAP EPS and cash flows, with products and customers that are complementary to our business.

The business also has high levels of recurring revenue and solid maintenance renewal rate similar to Progress.

And finally, by leveraging our operating model in infrastructure, we expect Ipswitch to contribute operating margins of over 40% after cost synergy.

The bulk of the $15 million of cost synergies we had identified are already completed, which is slightly ahead of plan and part of the reason we feel comfortable increasing our EPS guidance for the full year.

In addition, I am pleased so far with Ipswitch's bookings and revenue performance.

It's only been 1 month, of course, but we're off to an encouraging start.

We've seen very positive customer and channel partner reaction to the deal.

In the month of May alone, we had a number of new customer wins and existing customer expansions that were in the 6-figure range which constitute large deals for Ipswitch.

Overall, this positive response bolsters my confidence that we will achieve the $42 million revenue contribution from this business that we've projected for this year.

I'm particularly proud of the performance of the Ipswitch team, both before and after the acquisition, in remaining focused on the business objectives.

We've also seen high levels of enthusiasm and collaboration from the Progress employees as we begin to fold Ipswitch's operations into our OpenEdge segment.

We are confident in our ability to execute on acquisitions like Ipswitch going forward, which provides scale and increased cash flow and generates strong returns for our shareholders.

Successfully integrating Ipswitch remains our top priority.

However, we are also actively building a pipeline of opportunities that meet our strict criteria, and we will remain deliberate in our approach.

Before I close, I'd like to spend a few minutes recapping ProgressNEXT, our annual customer and partner conference that we held in May.

The conference was a huge success and was even bigger than last year, with over 800 attendees from 36 countries taking part in sessions covering all of our offerings, including our newly acquired Ipswitch products.

Over half of the attending companies were new this year, evidence of our appeal to a broader audience.

There was a particular focus on some of our newer products such as OpenEdge 12, our DCI Autonomous REST Connector, Sitefinity Cloud, Kinvey and DataRPM.

Customer and partner reaction to our new initiatives at NEXT was validation that delivering modern, high-productivity access capability is important for their future success.

We also had strong industry and media representation, along with more than 3,300 additional viewers for the livestream of the event.

Sessions were packed from the preconference workshops right up through the keynote speech by Megan Smith, former Chief Technology Officer for the United States.

Overall, there was a tremendous level of enthusiasm and engagement from the customers, partners, sponsors and employees who attended our premier annual showcase.

So in summary, we have now closed out a very solid first half to 2019.

Our businesses are performing well, and I'm particularly pleased with the performance of OpenEdge which continues to be the cornerstone of our success.

Our focus in the second half will be on continuing to run our business well, with an emphasis on the ongoing integration of Ipswitch.

We are committed to delivering the revenue contribution we're projecting for Ipswitch this year while maintaining their long-standing customer relationships and healthy renewal rates.

We will also work to achieve the planned synergies even more quickly, enabling us to potentially advance the timeline of the returns to our investors.

Our business is trending in the right direction, and coupled with our ongoing emphasis on operating efficiently, I'm confident that we will achieve our financial goals for 2019.

I'm now going to turn things over to Paul to review our Q2 performance in more detail and to outline our financial expectations for Q3 and FY 2019.

Paul?

Thank you, Yogesh, and good afternoon, everyone.

As a reminder, all financial results that I'll be referring to in my remarks are on a non-GAAP basis.

Also please note that all 2018 amounts have been adjusted to reflect ASC 606, which we adopted effective December 1, 2018, using a full retrospective method.

For our second quarter, total revenue was $103.5 million, $4.5 million above the high end of our guidance range.

Our overachievement was primarily driven by the timing of several large OEM renewals within our DCI segment and by better-than-expected license sales to direct enterprises within our OpenEdge segment.

Revenue from Ipswitch, which was included in our results for 1 month, was consistent with our expectations.

Our earnings per share was $0.65 for the quarter, $0.08 above the high end of our guidance range due to the higher revenue.

Looking at consolidated revenue for the quarter as compared to Q2 of last year, total revenue of $103.5 million was 11% higher than a year ago at actual exchange rates and 14% higher on a constant currency basis.

This includes a negative $2.5 million impact due to foreign exchange fluctuations which was consistent with our expectations.

License revenue of $29.8 million increased by 32% from a year ago at actual exchange rates and by 35% on a constant currency basis.

The increase was primarily due to the renewal of a higher number of multiyear-term OEM contracts in our DCI segment as compared to last year as well as a license revenue from Ipswitch for the month of May.

Maintenance and services revenue was $73.7 million, an increase of 5% year-over-year at actual exchange rates and 7% on a constant currency basis.

This increase was again primarily due to the addition of Ipswitch.

Turning now to our revenue by segment with all comparisons at constant currency.

OpenEdge revenue was $71.3 million for the second quarter, up 6% versus Q2 2018.

Now as a reminder, Ipswitch is being reported as part of our OpenEdge segment and was the primary driver behind the increased revenue.

For the OpenEdge product line, although license revenue from direct enterprises was higher than expected for the quarter, it was down year-over-year due to a difficult comparison versus Q2 of 2018.

License sales from our OpenEdge partner channel continue to be solid and stable, including a strong quarter for SaaS-related billings from our ISV partners who offer their applications in cloud.

We once again achieved maintenance renewal rates of well over 90% during the quarter for both OpenEdge ISV partners and direct enterprise customers.

Turning to our DCI segment.

Revenue was $12.9 million for the quarter, nearly 4x the revenue in Q2 of last year.

We had projected a significant increase both sequentially and year-over-year, but the actual growth was even stronger due to the completion of several large OEM renewals earlier in the year than anticipated.

However, while the timing of these renewals drove a significant revenue increase in Q2, our view for the full year has not changed.

Our results fluctuate quarterly and annually for this segment due to the timing of OEM renewals and the associated accounting treatment under ASC 606.

Now for these reasons, we believe renewal 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 2019, consistent with 2018.

Since the economic value of our DCI OEM contracts is very steady and predictable, we do not expect ACV to fluctuate in a meaningful way going forward.

Turning to our AD&D segment.

Revenue was $19.2 million for the quarter, down 3% compared to Q2 of 2018.

The decrease was due to lower license sales, partially offset by a slight increase in maintenance.

I'm pleased with the bookings performance for the quarter.

Total bookings were $20.2 million, up 4% versus last year and rebounding nicely from Q1, with 20% sequential growth.

The year-over-year bookings increase was primarily due to higher maintenance renewal bookings for both DevTools and Sitefinity.

The total revenue by geography, with our international regions at constant currency: North America revenue was $59.7 million, up 26% versus Q2 of 2018; EMEA revenue was $36.1 million, up 3%; Latin America revenue was $4.6 million, up 8%; and Asia Pacific revenue was $5.6 million, down 10%.

Total cost and operating expenses were $64.6 million for the quarter, up 10% from Q2 of 2018 primarily due to the addition of Ipswitch.

Operating income for Q2 was $39 million, an increase of $5 million or 14% versus Q2 2018.

In Q2 2019, operating margin was 38%, an increase of nearly 100 basis points from Q2 of last year and above our expectations due to the increased revenue for the quarter.

Q2 EPS of $0.65 was $0.10 or 18% higher than last year.

The increase was primarily due to the higher revenue for the quarter as well as a lower tax rate and the contribution from Ipswitch, partially offset by a negative $0.02 impact from foreign exchange.

Moving on to our Q balance sheet and cash flow metrics.

The company ended the quarter with a strong balance sheet, with cash, cash equivalents, short-term investments of $129 million.

Our debt principal balance at the end of Q2 was $301 million.

This includes the additional $185 million of debt that was used to partially finance the Ipswitch acquisition, part of a new $401 million term loan and revolving credit facility.

The facility includes $100 million revolving line of credit and $125 million expansion feature with substantially similar terms, interest rates and covenants as our prior facility.

Our leverage ratio is now 1.8x EBITDA, well within our capacity and very manageable given our strong, consistent cash [flows].

DSO for Q2 2019 was 42 days, down 14 days sequentially and up 2 days from Q2 of last year.

Deferred revenue was $150 million at the end of the second quarter, up $14 million compared to Q4 of 2018 due primarily to the addition of Ipswitch deferred revenue balances.

The deferred revenue balance does not include $30 million of Ipswitch pre-acquisition deferred revenue which is eliminated in purchase accounting under GAAP.

We will include this revenue in our non-GAAP guidance and quarterly reporting going forward to better reflect the true performance of that business.

Adjusted free cash flow was $40 million for the quarter compared to $43 million in Q2 of last year.

I'd like to turn to our business outlook and guidance for fiscal 2019 and Q3.

For -- our full year revenue guidance is $420 million to $428 million,(sic -- see press release "$422 million to $428 million") unchanged from our prior outlook.

Turning to operating margin and earnings per share.

While our overachievement in profitability for the first half was primarily related to timing of revenue, we are increasing our annual guidance for both of these metrics.

This is a reflection of our ongoing focus on running our operations efficiently as well as the acceleration of the Ipswitch cost synergies we had identified.

We have raised our guidance for our 2019 operating margin to a range of 36% to 37%, an increase of 100 basis points at the high end.

For EPS, our guidance is now $2.52 to $2.57, an increase of $0.06 on the low end and $0.05 on the high end compared to our prior guidance.

As a reminder, we are not planning on repurchasing additional shares during 2019 as the returns from Ipswitch acquisition are expected to be substantially higher than we would be on our share repurchases.

We expect to resume share repurchases in fiscal 2020 at a level consistent with our publicly stated capital allocation policy.

Our guidance for adjusted free cash flow is $125 million to $130 million, unchanged from our previous forecast.

And our expected tax rate is approximately 19%, also unchanged.

Based on current exchange rates, total expected negative currency translation impact on our 2019 revenue is now $6.2 million, an increase of $300,000 from the guidance we provided in March.

A negative impact of exchange rates on our full year EPS is now $0.05, an increase of $0.01 compared to prior guidance.

Turning to our guidance for Q3 2019.

We expect revenues to be between $109 million and $112 million, a year-over-year increase of 18% to 21%.

The increased revenue is primarily due to the inclusion of the full quarter's revenue from Ipswitch with offsets a step-down in our DCI revenue from Q2 to Q3.

DCI revenue is expected to represent approximately 7% of our total revenue in Q3.

The year-over-year currency translation impact on our Q3 revenue is expected to be a negative $1 million.

We expect earnings per share of $0.68 to $0.70 for the third quarter compared to $0.55 in Q3 of last year, an increase of 24% to 27%.

This is in part related to the Ipswitch contribution but also to our ongoing efforts to manage our business efficiently.

Based on current exchange rate, the expected currency translation impact on our Q3 EPS is expected to be a negative $0.01.

In closing, I'm very pleased with our financial performance in Q2 and the first half, with our ability to increase our full year guidance for both operating margin and EPS.

The expected revenue contribution from Ipswitch is on track, and we are actually slightly ahead of plan in realizing the $15 million of cost synergies we've identified.

Our cash flows are strong, overall business is healthy, and I look forward to sustaining our momentum in the second half and closing out a successful 2019.

With that, I'd like to turn it over to Brian for Q&A.

Thank you, Paul.

That concludes our formal remarks for today.

I'd now like to open up the call to your questions.

I ask that you keep your remarks to your primary question and one follow-up.

I will now hand over to the operator to conduct the Q&A session.

(Operator Instructions) We'll take our first question from Matthew Galinko with National Securities.

So was there -- can you highlight any key feature in OpenEdge that brought your highlighting EMEA customer back on to maintenance?

Or was there anything in particular that brought them back into the fold?

So Matt, as you know, over the last few years, we have been making -- all of the enhancements within OpenEdge have been focused around what we are hearing back from our customers and partners as to what they want to see.

So a lot of the 12 is around both a combination of performance, availability as well as readiness for large scale 100% uptime or 99.999% uptime for cloud type of environments.

So the improved application server that we released last year, the release -- 12.0 that we released this year, the ongoing effort around continuous availability, all of those things added to this.

And these guys are all trying to -- they're a retailer.

They had not really thought of using us for their online presence and so on, and now, they basically, said, "Hey, this is really great, what you guys have done.

So we'd like to come back and move forward with you on how we modernize and go forward."

Got it.

I guess just as a follow-up for that one, did you -- were you engaged with that customer while they were off maintenance so you sort of had an exchange of understanding what they wanted?

And what does the pipeline look like for those sorts of potential customers?

So yes, we -- Matt, we have some amount of engagement with our -- with the customers that have left on a periodic basis.

I don't think it is -- clearly, it is not the same as we do for our customers who are on maintenance and who are currently engaged with us.

So we do, do that.

As you know, Gary has put an emphasis in his team on account management and follow-up, and so therefore, that has tremendously helped with our win-back efforts that have been going on.

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

Let me just say nice job on the quarter.

Thank you.

You're welcome.

Let me just start off, on your prepared remarks, you called out a new multiyear DCI deal, I think it was with a U.S. Internet provider.

Couldn't catch all of your remarks, I was wondering if you could just review your comments one more time.

Yes.

So this is a -- this is one of the well-known household names when it comes to an Internet company.

They are somebody who is considered one of the leaders in their field, and we signed a significant new DCI OEM deal with them during this quarter, which is a 6-figure multiyear deal and will have meaningful contribution to both revenue and ACV going forward.

This is somebody that could easily spend lots of money and try to build something like this themselves.

They clearly recognize that what we bring to the table is unique and differentiated.

So it was tremendously gratifying to us.

And it is really the first win of a meaningful OEM, I don't know, for a while.

So to us, it's a really exciting thing.

That's actually why I asked the question, because it was, to my attention, one of the first new meaningful OEM wins in a while as well.

That's great.

Congratulations on that.

Real quick on Ipswitch.

In your prepared remarks, I believe you stated that the $15 million in synergies that you planned for that acquisition have already been completed.

Did I catch that correctly?

No.

No, no, no.

What we specifically said was that the bulk of those $15 million of cost synergies already completed, and we are slightly ahead of plan.

So no, we're not all completed but the bulk of them are.

We are slightly ahead of plan, and which is why we were comfortable increasing our EPS guidance for the full year.

Great, thanks for the clarification.

And then very little kind of commentary on the Kinvey and DataRPM products in the prepared remarks.

Are these products still in the pipeline-building mode?

Yes, we continue to go-to-market with them.

As I said before, the reaction from our customers and partners to our new initiatives continues to be very positive.

And we see quite a bit of demand in the HIPAA-compliant version of Kinvey within the health care vertical, but we also see some applicability in other verticals as well.

So we do see traction but we're not at a point where we're ready to disclose metrics, and we continue to manage our go-to-market activities and spend to be aligned with the demand we're seeing, Mark.

That does conclude today's question-and-answer session.

I would now like to turn the conference back over to Mr. Flanagan for any additional or closing remarks.

Thank you, and thank you all for joining the call today.

As a reminder, we plan on releasing financial results for our fiscal third quarter of 2019 on Thursday, September 26, 2019, after the financial markets close and holding the conference call the same day at 5:00 p.m.

Eastern time.

I'll now turn the call over to Yogesh for his closing remarks.

Thank you, Brian.

We maintained our momentum in Q2 and are well positioned for a successful 2019 as we head into the second half of the year.

There are a lot of exciting things happening at Progress right now, and I'm enthusiastic about our future and our ability to create real value for our shareholders.

I thank you again for your continued support and for joining us on our call today.

Thank you.

Bye-bye.

Thank you.

That does conclude today's conference.

Thank you all for your participation.

You may now disconnect.