Progress Software Corp (PRGS) Q1 2021 Earnings Call Transcript

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Progress Software Corp (PRGS -0.79%)
Q1 2021 Earnings Call
Mar 25, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to the Progress Software Corporation First Quarter 2021 Investor Relations Call. At this time, I would like to turn the conference over to Mr. Michael Micciche, the Vice President of Investor Relations. Please go ahead, sir.

Michael Micciche -- Vice President, Investor Relations

Great. Thank you, David. Thank you, David. Good afternoon, everyone, and thanks for joining us for Progress Software's fiscal first quarter 2021 financial results conference call. My name is Mike Micciche. I recently joined Progress as Vice President of Investor Relations. Feel to be on board and I look forward to meeting all of you soon. With me today is Yogesh Gupta, President and Chief Executive Officer; and Anthony Folger, 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 operating performance, corporate strategies, product plans, cost initiatives, our integration of Chef, 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. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular the section captioned Risk Factors in our most recent Form 10-K. Progress Software assumes no obligation to update the forward-looking statements included in this call, whether a result of new developments or otherwise. Additionally on this call, all financial figures we use are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after the market closed today and is also published on our website.

This document contains the full details of our financial results for the fiscal first quarter of 2021 and I recommend you reference it for specific details. We also have published a presentation that contains supplemental data for our first quarter 2021 results providing highlights and additional financial metrics. Before our earnings release -- both our earnings release and this presentation are available in the Investor Relations section of our website at investors.progress.com. Today's conference call will be recorded in its entirety and will be available via replay from the Investor Relations section of our website.

With that, I'll now turn it over to you Yogesh.

Yogesh Gupta -- Chief Executive Officer

Hey, thank you, Mike and welcome. It's great to have you on board. And thank you all for joining our Q1 2021 financial results conference call. As I'm sure you've seen by now the first quarter was an excellent start to 2021 highlighted by better than expected performance across all metrics. Our over-performance was driven by a combination of strong execution and an improving demand environment from our customers and partners spanning virtually all of our product lines. We benefited from improved macroeconomic conditions as more businesses reopened from COVID-19 and became more active with their IT projects.

What's more, our performance [Technical Issues] of the mission-critical nature of our comprehensive product portfolio, which remains as strategic as ever to our customers and partners. As a result of our strong Q1 performance and increased confidence in our business, we have meaningfully raised our 2021 outlook for revenue, EPS and cash flow. And Anthony will cover this in more detail as part of his comment. As I reflect on the strength of our Q1 performance, it's worth stressing the investments we've made to modernize our portfolio and the industry's plan benefiting our business. As more customers and partners have taken a cloud-first approach for their applications, data and content our Chef OpenEdge, Sitefinity, and MOVEit products are available to support their efforts. Our heritage of delivering best-in-class application development options that are truly developer-centric, coupled with our strength in data and infrastructure management and our pioneering DevOps capabilities has produced a portfolio of products that fully addresses the modern continuous Application Development, Deployment and Management lifecycle.

What's more, it was our flagship OpenEdge product that was the single largest contributor to our top line outperformance in Q1. Its performance was fueled by the strong execution of our direct sales team and an increased strength from our OpenEdge ISVs, which is a tremendously positive data point because of the large number of global businesses that these independent software vendors touch. Our long-term expectations for OpenEdge haven't changed and the stability and resiliency of OpenEdge remains its true strength. In addition, the acquisition of Chef, which expanded our presence in the DevOps and DevSecOps market gives us further optimism about FY '21. The DevOps and DevSecOps space continues to see growth as the shiftless paradigm in Application Development and Deployment accelerate, and the role of developers becomes increasingly more important.

We continue to win new logos in our Chef business during the quarter. The world's top two social media companies and four of the five paying companies are now Chef customers. In addition to acquiring new Chef logos, our net retention rates at Chef continue to run higher than anticipated as a result of continued success renewing and expanding relationships with some of the world's largest and fastest growing SaaS company such as Salesforce, Slack, and Microsoft to name a few. The Chef team, product suite and customer base has been tremendous additions to Progress and I've been amazed by the dedication of the team to customer-centricity, which is similar to the dedication within our Progress DNA. We also saw strength within our DCI direct business, as well as with our network monitoring solution that came over with the Ipswitch acquisition.

We have seen increased interest given the turmoil in that space. All-in-all, we could not be pleased with the performance of our products. We will continue to focus our growth efforts on this market by enhancing and expanding our portfolio. And we will also remain laser-focused on delivering superior value to our customers in order to maintain our solid net dollar retention rate, which have consistently been above 97% across our portfolio. Our stable customer base coupled with some of the market trends I described earlier, have allowed us to maintain a very stable top line, which is reflected in our high and increasing mix of recurring revenue. As we've mentioned previously, the mix of revenue from recurring sources has increased 600 basis points from 74% in 2018 to 80% in 2020 and we expect this trend to continue.

Additionally, to provide better investor's better visibility into this dynamic in our top line, and to provide more insight into our underlying performance, we've begun to disclose ARR, annualized recurring revenue, which also highlights the stability and durability of our business. Anthony will talk in more detail about our ARR and net dollar retention rates in his comments, but I'd like to reiterate that the strength and stability of our top line continues to come from a combination of; first, outstanding enterprise technology that powers mission-critical systems serving a growing and dynamic market; and second, a customer-centric approach across our entire organization including product management, engineering, technical support, sales and customer relationship management.

Now turning to our M&A efforts, which underpin our overall total growth strategy, we remain laser-focused on building out of opportunities in this hyper-competitive but plentiful environment. Our incubation of Chef is proceeding ahead of schedule, which contributed to our profitability upside in the quarter. Meanwhile our pipeline for deals have grown meaningfully and we've continued to expand and strengthen our sourcing channels as well as our internal capabilities to simultaneously operate, integrate, and support acquired companies.

We have been and are actively pursuing deals across the entire DevOps lifecycle, Application Development, Deployment, and Operation. Our financial criteria, which includes a mix of recurring revenue and strong retention rates continues to be paramount. And we will of course, remain disciplined to ensure we realize meaningful value from each acquisition. In summary, Q1 marked an excellent start to the year for Progress. Our performance was stronger than expected across virtually all product lines and all of our metrics. And I'm thrilled with how well we are positioned at back of opportunities ahead of us.

I would like to now turn the call over to Anthony to discuss our financial results and our guidance for Q2 as well as for the full year. Anthony?

Anthony Folger -- Chief Financial Officer

Great. Thanks, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh mentioned we're very pleased with our Q1 results and feel we're positioned well for the year ahead. Our revenue for the quarter came in at $131.8 million, well above the high end of the guidance range we provided back in January and represents 16% growth on a year-over-year basis. Our top line results in the quarter were driven by better than expected performance across all of our product lines but much of the outperformance came from OpenEdge, our Ipswitch products, WhatsUp Gold, and MOVEit and finally Chef. I'd also like to point out that our strong Q1 performance was more than enough to offset the expected year-over-year decline of more than $8 million in our DataDirect products, which we mentioned as part of our outlook back in January.

We've previously discussed how ASC 606 has affected revenue recognition for subscription products such as DataDirect. With the addition of Chef to our portfolio, an increasing proportion of our revenue now comes from recurring sources whether they be on-prem subscriptions, term license agreements or SaaS deployment models. In order to provide better insight into the underlying performance of our business, to address the potential variability in revenue recognition resulting from these different revenue models and to highlight the durability of our recurring revenue base beginning in the first quarter, we are disclosing annualized recurring revenue and net dollar retention rate. We've provided clear definitions of these metrics in the supplemental presentation accompanying our press release and I'd like to comment briefly on both.

First, our Q1 ending ARR was $432 million, an increase of 22% on a year-over-year basis with the increase largely driven by the acquisition of Chef. It's also worth highlighting however that on a pro forma basis, which would include Chef's pre-acquisition ARR, our ARR would still reflect low-single-digit growth in the first quarter of 2021 when compared to the first quarter of 2020. That stability coupled with a net dollar retention rate that's consistently ranged between 97% and 100% provides us with confidence in the durability of our top line. We will continue to provide these ARR and NRR metrics quarterly and we look forward to discussing them further on future calls.

Turning now to expenses, our total costs and operating expenses for the quarter were $75.1 million, up 14% compared to the prior year quarter. This year-over-year increase is driven by the acquisition of Chef, partially offset by lower expenses in the rest of our business where we continue to operate more efficiently. Operating income was $56.7 million, up $8.7 million or 18% compared to the first quarter of 2020. And our operating margin was 43% compared to 42% in the prior year quarter. On the bottom line earnings per share of $0.95 for the quarter represents growth of 25% year-over-year and is $0.19 above the high end of our guidance range. This over performance on the bottom line was driven by our outstanding top line performance, coupled with good cost management across the business including Chef where our integration is now running slightly ahead of plan.

And I'd like to point out that we still anticipate recognizing all synergies from the Chef integration by the end of fiscal 2021. 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 $114 million and debt of $366 million. DSO for the quarter was 53 days, an improvement of 1 day when compared to the fourth quarter of 2020 and an increase of 4 days from 49 days in the year-ago quarter. Adjusted free cash flow was $47 million for the quarter, up almost $14 million or 40% from the $33 million we achieved in Q1 of last year. This growth in free cash flow was driven by our strong top line performance and the previously mentioned improvements to operating leverage in our business.

During the first quarter, we repurchased 353,000 shares of Progress stock at a total cost of $15 million. And at the end of the quarter, we added $175 million remaining under our current share repurchase authorization. In addition, during the first quarter, we made a $15 million payment against our revolving line of credit, which we had drawn down to consummate the Chef acquisition in the fourth quarter of 2020. Before I turn to our outlook for Q2 and for the full year of 2021, I'd like to point out that with recent changes to our business, including the acquisition of Chef and other product level realignments, we have changed how we assess performance and allocate resources across the business. As a result of these changes, we expect to begin operating as one distinct segment instead of the three segments that we've previously reported.

We plan to implement a new segment structure starting with the results for the second quarter of 2021, which will be reported in June. Okay, I'd now like to turn to our outlook for Q2 and the full year 2021. For the second quarter of 2021, we expect revenue between $119 million and a $123 million, and earnings per share of between $0.72 and $0.74. And for the full year 2021, we are increasing our outlook on each metric and expect revenue between $519 million and $527 million, an increase of $6 million from our prior guidance; operating margin of approximately 38%, an increase of 100 basis points from our prior guidance; adjusted free cash flow between $155 million and $160 million, an increase of $5 million from our prior guidance; and earnings per share of between $3.38 and $3.42, an increase of $0.15 from the midpoint of our prior guidance.

Our annual EPS estimate contemplates a tax rate of 20%, approximately 44.6 million shares outstanding and the impact of $40 million of share repurchases we are targeting to complete at the end of 2021. In closing, we're truly excited to deliver results that reflect a strong and durable top line, expanding operating margins and meaningful growth in earnings per share. As we begin to realize synergies from the acquisition of Chef, our total growth strategy continues to be validated and we're very well-positioned to deliver strong results for the remainder of 2021.

With that David, I'd like to open the call for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first questioner is Anja Soderstrom with Sidoti.

Anja Soderstrom -- Sidoti & Co. LLC -- Analyst

Hi, everyone. Thank you for taking my question and congratulations on a great quarter. I just had a first question on the guidance. Since like for the full year increase you might be a little bit conservative considering the beat on the first quarter. Can you just talk a little bit about that?

Yogesh Gupta -- Chief Executive Officer

So, hey, Anja. Thank you first of all. Yeah, it was a wonderful quarter. In terms of our ways, as you know historically, when we've beaten the top line in the first quarter by a couple of million dollars, we have usually not done any changes to our top line for the year. And that's because that's still three quarters ahead. Because of the really strong performance and our confidence in the way the business is shaping up for the whole year, we thought that we could raise it in a meaningful way with the ways that we have now.

Anja Soderstrom -- Sidoti & Co. LLC -- Analyst

Okay. That's sounds good. And then how about the momentum down through quarter and into the second quarter? It seems like -- it sounds like that's very strong.

Yogesh Gupta -- Chief Executive Officer

We've had a really good quarter. We have provided guidance for Q2 based on what we think we expect for the second quarter. We are confident about the way business is appearing at this point, of course, through uncertainty; the COVID is not behind us. There is still pockets where businesses have been locked -- that basically are in lockdown mode. But we feel confident about the trajectory of our business. We feel confident about our execution. We feel confident about the demand for our products. And so our guidance reflects that confidence.

Anja Soderstrom -- Sidoti & Co. LLC -- Analyst

Thank you. And one more from me in regards to M&A. You made a comments about your expansion of the sourcing channels. Can you elaborate on that?

Yogesh Gupta -- Chief Executive Officer

So, yes, of course, Anja. So, historically we have focused of course with working closely with investment bankers; that has gotten expanded. In fact we have many more investors -- investment banker relationships. Once Jeremy came on board, he has been able to expand that in a meaningful way. We have also spent a significant amount of effort and time connecting with a whole host of venture capitalists who have portfolios that are in the application development, deployment, and management market segments that have products what would fit in our product portfolio. And that basically could have opportunities that are getting to be of scale.

So that's another area where Jeremy and the team have done a really good job of expanding. We are also connecting with more founders as well for founder-led companies. If you'd recall, Ipswitch was the company that was still owned by Roger Greene, who was the Founder. And so, we were able to do that and so expanding that channel has been another effort. And last but not least, we are also expanding our relationships with some of the larger technology companies that might have some carve-out and that's a very small universe as you know. But still, we have begun to have conversations with them as well.

So again, to us, it is trying to find all venues and all avenues for us to be able to find more opportunities and to be able to find the right ones that fit us, not only from the perspective of the business criteria, right, high levels of recurring revenue, high retention rates but also where we believe we can generate meaningful value for our shareholders by being disciplined on the financial side. So, that's what we've been doing. And also Anja as an aside, we also have continued to improve and strengthen our internal capabilities so that we can do multiple deals that we can have -- the Chef deal was done. And as we said in January, we were ready to do another one. And so, that is why we feel really confident about our ability to continue to execute on our total growth strategy driven by M&A.

Anja Soderstrom -- Sidoti & Co. LLC -- Analyst

Okay. Thank you. That was all for me.

Yogesh Gupta -- Chief Executive Officer

Thank you, Anja.

Operator

Thank you. Our next question comes from Mark Schappel with Benchmark.

Mark W. Schappel -- The Benchmark Company -- Analyst

Hi, guys.

Yogesh Gupta -- Chief Executive Officer

Hey, Mark.

Mark W. Schappel -- The Benchmark Company -- Analyst

How are you doing? So just a couple of questions to start with you. First off, a very nice job in the quarter.

Yogesh Gupta -- Chief Executive Officer

Thank you.

Mark W. Schappel -- The Benchmark Company -- Analyst

With respect to the OpenEdge ISV business. It continues to perform well. I was wondering if you could just provide any additional color with respect to what maybe your ISV partners are telling you they're seeing in the business?

Yogesh Gupta -- Chief Executive Officer

Yeah. So absolutely, Mark. So we, interestingly enough in this quarter we had a strong OpenEdge ISV performance, as well as by the way OpenEdge Direct as well as some of our customers expanded their relationships with us in a meaningful way. I think what we hear from the ISVs of course is that their business -- they're becoming more confident in their own business. And since they are the ones that of course as you know Mark, they have a very, very large reach on a global basis. I think to us that reflects a strengthening of the market and the demand for the kind of products we offer. And the customer saying hey, how do we modernize, how do we expand, how do we take our application that is on OpenEdge and do more with it as far as business needs grow.

So that's really a very, very positive sign for us. And we feel really good about what is happening with our ISV base. And as I said, we are also actually seeing and we saw in Q1 actually a pick up on some of our direct customers who ended up expanding relationships with us as well. So we're seeing some interesting very positive signs. We also saw signs that were positive with respect to IP projects being started for new online engagement and new customer engagement projects and those professional services projects of course are only done when I think business is feeling a little bit better because we are not just -- just add some more licenses -- like they are doing something more and doing something new. So, we think that business is feeling more confident around the globe and that's reflected in the performance of ISVs who use OpenEdge.

Mark W. Schappel -- The Benchmark Company -- Analyst

Great. Thank you. And then shifting gears a little bit with respect to the integration of Chef. It sounds like it's proceeding ahead of plan, that's good. I was just wondering if maybe you just give us an idea of some of the integration work that still remains to be performed out there?

Yogesh Gupta -- Chief Executive Officer

Yes. I think -- the initial sort of the heavy lifting was all done, so which we feel really good about. Obviously Mark, for certain things like some back end systems that need to be integrated that are not related to finance but are related to let's say technical support or customer support. Those kind of things are being worked on and will continue to be worked on and which is why Anthony said some of the integration will take us toward the end of the year and -- but overall we've actually been able to accelerate a lot of the integration and that helped us of course on the profitability. Chef also of course outperformed on the top line as well compared to our plan. So we're really pleased with the way Chef is shaping up both on the top line and on the bottom line and the team that have come across is just absolutely phenomenal.

And they just fit so well with Progress. We have a very much customer-centric view of what they do. They are passionate about the product. They are passionate about the open source community. They are passionate about serving their customers and making sure that the customers are successful. We have been able to not only connect with a very large number of the large customers but we've also been able to connect with the open source community contributors and they are very engaged with us. So all of that stuff, and it's really meshes well with our DNA at Progress, which has always been customer-centric as you know, Mark. So it has been -- so far, it has been wonderful. It has been a really, really positive acquisition.

Mark W. Schappel -- The Benchmark Company -- Analyst

Okay, very good. And then bringing Anthony into the mix here, Anthony I was wondering if you could just review some of the reasons why the company has decided to move to a single reporting structure rather than the current three segment structure?

Anthony Folger -- Chief Financial Officer

Yeah. Yeah, sure, Mark. It's a good question. I think there was a point in time historically where I would say the company was probably very rigidly aligned around those three segments. And it made a lot of sense in terms of how we manage the business. And I think over time, things started to shift a little bit. And when we got Chef in -- Chef in our existing segment structure fit into Application, Development and Deployment and once we put that in there, it really became I would say its own unit. And we started to look at the business more on a product-by-product level. And I would say the less so on the traditional segments. So we were evaluating performance down at the product level, thinking about resource allocation down to the product level.

And ultimately it just no longer made sense to -- with all the realignments that had gone on, to carry the three segments forward. So, I think that change will roll through in the second quarter. I think we'll still continue to give color on some product level performance as it's relevant to the operations overall. But I don't think that the three segments are still going to be meaningful progress. And so I think ultimately what starts to probably become interesting I think is the annualized recurring revenue and really the stability there, the net dollar retention rates and the stability that those display as well. And then a lot of product level detail that we can share as quarters go by and as products may or may not have a material impact on the business.

Mark W. Schappel -- The Benchmark Company -- Analyst

Great. Thank you. Helpful. That's all for me.

Yogesh Gupta -- Chief Executive Officer

Thank you, Mark.

Operator

Thank you. At this time, we have no further questions. I'll turn it back to Mr. Yogesh Gupta for closing comments.

Yogesh Gupta -- Chief Executive Officer

Thank you, David. Thank you all for joining our call today. I'm genuinely excited about our performance in Q1. Our product portfolio addresses a large market opportunity and I'm especially proud of the continued hard work and dedication of our entire organization during the quarter, which positions us really well as we continue to execute our total growth strategy. I look forward to talking to you all soon. Thank you again. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Michael Micciche -- Vice President, Investor Relations

Yogesh Gupta -- Chief Executive Officer

Anthony Folger -- Chief Financial Officer

Anja Soderstrom -- Sidoti & Co. LLC -- Analyst

Mark W. Schappel -- The Benchmark Company -- Analyst

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