Progress Software Corporation Focuses on Growth Strategy and AI Implementation | PRGS Q3 2023 Earnings Call Transcript

1. Progress had another strong quarter, with sustained demand for their products and solid execution from all teams. OpenEdge and digital experience products performed well, with the latter receiving Gartner's highest customer choice distinction in their latest report. The integration of MarkLogic is on the plan, and the company expects it to meet the timeline laid out when the deal closes. Progress continues to rely on its employees, who remain highly engaged and motivated, with retention rates improving further this quarter. Overall, Progress' culture enables market-leading employee retention and drives high customer retention rates.

2. Progress remains focused on executing its growth strategy while managing expenses in every part of the business. They continue to assess potential acquisitions, despite a trend of falling private equity deals and valuations. The integration of MarkLogic is nearing completion on schedule, and Progress continues to use AI in pragmatic ways where there are tangible benefits. Many Progress products have been using AI for years, but they are exploring new opportunities with generative AI (GenAI) and large language models (LLM) to make the company more efficient and to control costs. They are using GenAI to help employees do their jobs more efficiently in various functions such as finding new customers, providing support, talent management and recruiting, and legal and contract management.

3. Progress is leveraging AI in pragmatic ways to make the company more efficient and control costs, while also exploring market opportunities created by GenAI. They are developing tools to help businesses augment large language models with proprietary data in a secure manner, as well as helping application developers build applications more easily. The progress made with AI is driven by the creativity of their teams, but they will only invest where they believe there are tangible benefits for the business. Additionally, Progress responded quickly to a zero-day exploit in MOVEit, which affected less than 4% of their revenue, and incurred minimal impact on their business in Q3. They will continue to provide updates on any impact of litigation related to the exploit in their upcoming filings.

4. Progress had a strong Q3, with an ARR of $577 million representing an 18% YoY growth and 2% pro forma growth that included MarkLogic. The growth in ARR was driven by multiple products and bolstered by strong net retention rates of just under 101%. Revenue for the quarter was at the high end of their guidance range, at $176 million and representing approximately 15% YoY growth. OpenEdge performed ahead of expectations, and the addition of MarkLogic contributed to YoY revenue growth along with stability in the rest of the business.

5. Operating income was up $8 million, and the operating margin remained constant at 39%. Earnings per share of $1.08 were $0.06 above the high end of the guidance range. They expect to achieve all their synergy targets for MarkLogic integration by the end of this fiscal year. They ended the quarter with cash, cash equivalents, and short-term investments of $138 million, and a net debt position of $625 million. Deferred revenue was down slightly due to normal seasonality, while adjusted free cash flow increased by 21% from the previous quarter.

6. Despite a more challenging macro environment, Progress is seeing strength in demand for their solutions and increasing their revenue guidance by $1 million at the midpoint for full year 2023 to between $692 million and $698 million. They maintained their outlook for an operating margin of approximately 38% to 39%, adjusted free cash flow between $177 million and $183 million, and increased their outlook for earnings per share to be between $4.20 and $4.26. For Q4 2023, they expect revenue between $171 million and $177 million and EPS between $0.87 and $0.93. Progress is excited about its strong financial results and MarkLogic integration progress, positioning itself well for fiscal 2024.