Welcome to the Progress Software Corporation Q3 2021 Earnings Call. My name is Darryl and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. I'll now turn the call over to Mike Micciche. Mike, you may begin.

Great. Thank you, Darryl. Good afternoon, everyone, and thanks for joining for Progress Software's third quarter of fiscal 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'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 acquisition of Kemp, 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 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 the 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 as a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss 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 close today and is also available on our website. This document contains the full details of our financial results for the fiscal third quarter of 2021, and I recommend you reference it for specific details. We also have prepared a presentation that contains supplemental data for our third quarter 2021 results providing highlights and additional financial metrics. Both the 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 on the Investor Relations section of our website. So with that, I will now turn it over to Yogesh.

Thank you, Mike. Hello, everyone, and welcome. I am delighted to announce two very positive news items today. First, we delivered yet another outstanding quarter driven by strong demand across the board for our products, combined with excellent execution by our teams, which resulted in significant outperformance on both the top and the bottom line. We see the kind of demand environment for our products continuing, which is why, for the third time this year, we're again raising guidance for the full year; more on this later. The second bit of exciting news is our acquisition of Kemp Technologies, which extends our total growth strategy. With this acquisition, which is our third in as many years, we will be that much closer to meeting our goal of doubling our size in five years. Most importantly, this deal checks all the boxes of our disciplined acquisition criteria, as Anthony will detail later, and we will accomplish it in the most competitive environment seen in many years among software executives. As you are aware, our mission is to be the provider of the best products to develop, deploy, and manage high-impact business applications. The key aspect of managing these applications is to ensure high performance and always-on availability for an amazing end-user experience. Kemp is a leading provider of products that address this need. Kemp products monitor application performance and optimize workloads across servers in the cloud and on-prem to ensure high performance and availability. These products leverage machine learning to look for anomalies and detect them before end users are impacted. These capabilities complement Progress offerings, such as WhatsUp Gold, a market leader in easy-to-use metric management, which we acquired with Ipswitch. Together we will offer the best application experience solutions to our customers. Kemp has a strong two-tier go-to-market channel that provides global reach, with tens of thousands of SMBs, and Progress will nurture and leverage this channel for some of our other products as well. This focus on two-tier go-to-market channels has enabled Kemp to win a large and growing set of customers ranging from midsize to some of the largest enterprises in the world who rely on its products to deliver great application experiences. Our broader product portfolio and financial strength will enable us to serve these channel partners better. The cultures of Progress and Kemp are also very aligned. Both organizations have a strong focus on the success of our customers, and we dare to innovate and solve the pressing needs of the market. I look forward to bringing the Kemp team on board once the acquisition is complete and together driving toward even greater success. Financially, this acquisition meets all our disciplined criteria and will again result in meaningful value creation for our shareholders. Despite the hyper-competitive M&A landscape, we have demonstrated that we can execute our corporate growth strategy without compromising our disciplined approach. For the third year in a row, we will have completed an acquisition that adds significant revenue, earnings, and cash flow. When this $70-plus million revenue deal closes, Progress' revenue run rate will be over $600 million with excellent operating margins well over our baseline of 35%, and it will continue to generate cash flow margins over 30%. This places us well on our five-year goal to double the size of our business, with an even greater increase in EPS and cash flow. We expect this transaction to close around the end of October, once the necessary closing conditions are satisfied. We also see other M&A opportunities in our pipeline that can further advance our total growth strategy. While our focus for the immediate future will be on the closing and integration of Kemp, our ongoing efforts to enhance our sourcing capabilities and to strengthen the depth of our M&A readiness have positioned us well to tackle the next opportunity. We will remain disciplined in our approach as Kemp is further evidence that our total growth strategy is succeeding in building sustainable long-term shareholder value. As you may recall, disciplined accretive M&A is the first of three pillars of our total growth strategy. The second pillar is to keep our core business strong and increase customer retention. We achieve this by continuing to innovate, keeping our product portfolio current by investing in R&D, and by focusing on customer relationship management. The third pillar is operational excellence. We’re proud that we’ve also continued to execute on these two pillars as evidenced by the ongoing strength of our business. So let's talk a bit about our Q3 results in the market for products and our expectations. We have had an outstanding third quarter where our business outperformed on every metric, including revenue, operating income, earnings per share, and cash flow. Our recurring revenue continues to steadily grow and is organically 4% higher than last year and our overall net retention rate again exceeded 100%. This outperformance has been driven by two important factors. First, with the continuing emergence of the global economy from COVID, the demand for our products across the board continues to be strong. As a leader in the overall DevOps cycle with the best products to develop, deploy, and manage high-impact business applications, we are winning new customers and seeing existing customers expand their usage of our offerings. Based on performance in the first three quarters and the continuing strong appetite for our solutions across our product portfolio, we are very confident in raising our full-year guidance yet again. The second factor driving our results is the performance of our teams. Our investments in R&D, our sales, marketing, and relationship management efforts, our ability to address customer needs, and our efficient operational execution, make for a potent combination. We greatly exceeded our revenue expectations and we did so while operating more efficiently than expected as well, leading to a very impressive outperformance of our bottom line. We now expect our full-year EPS to be over $0.20 higher. Our significant increases in the top line and bottom line expectations reflect our confidence in the ongoing market demand and our team. We continue to demonstrate that we can execute well on our business, source and execute acquisitions in a tough and extremely competitive acquisition market, and integrate efficiently to create great value for our shareholders through our total growth strategy. When I joined Progress nearly five years ago, I could not have imagined that it would be as strong as we are today and I'm excited about our prospects ahead. Now I'd like to turn this over to Anthony to take you through the details of our performance, our guidance, as well as details on our Kemp acquisition.

Great. Thanks, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh noted, the third quarter was exceptionally strong, and based on that strength and our continued confidence in the business, we're raising our full-year outlook for revenue and earnings per share for the third time this year. In addition to outstanding financial results, we're also very excited about the acquisition of Kemp, which we also just announced. Kemp is one more step in our total growth strategy. It meets all our disciplined financial criteria and brings with it an outstanding team, an established enterprise-grade set of products, and a phenomenal customer base. I'll speak more about Kemp in a bit, but starting with our Q3 financials, revenue for the quarter was $152.6 million, which represents 38% year-over-year growth, and it's approximately $22 million above the midpoint of the Q3 guidance range we provided in June. Let me take a minute to discuss the two primary elements driving the upside in our Q3 revenue performance. I would encourage you all to have a look at the presentation that Mike referenced earlier, which includes supplemental data and does a good job of illustrating some of the following points. First, approximately $12 million of the overperformance relative to our Q3 guidance was driven by better-than-expected customer and partner demand for our solutions. This improved environment resulted in better-than-expected customer retention, larger-than-expected upsell opportunities with existing customers, and in some cases, longer-than-expected contract durations, as customers seem more willing to commit to our solutions for the long run. This $12 million of overperformance relative to our guidance is reflected across virtually all product lines, most notably DataDirect, OpenEdge, DevTools, and our Ipswitch products. The second element of our revenue overperformance was the timing of two large contract renewals. In our June outlook, we had forecast these renewals to occur in the fourth quarter with an expected revenue contribution of approximately $10 million. Both of these renewals closed earlier than forecasted, and in doing so, accelerated the recognition of $10 million of revenue from the fourth quarter into the third. This timing element has no impact on our full-year revenue outlook, which is being raised for the third consecutive quarter. I'll speak more about the outlook in a bit, but for another level of detail on our Q3 top-line performance, we believe ARR provides an informative view. ARR at the end of Q3 was $444 million, representing approximately 4% organic growth on a year-over-year basis. The growth in ARR is a reasonable reflection of our underlying performance in Q3 and was bolstered by net retention rates that exceeded 100% for the second consecutive quarter. In the past, we've talked about the investments we've made in our products aimed at improving customer experience, and our net retention rates in Q3 illustrate the continuing benefit of those investments. Turning now to expenses, our total costs and operating expenses were $81.4 million for the quarter, an increase of $17.7 million compared to Q3 of 2020. The year-over-year increase is the result of two primary factors; first, the addition of Chef to our business, which makes up more than half of the year-over-year increase, and second, variable incentive costs associated with our top-line overperformance. Operating income was $71.2 million for the quarter, up approximately 51% compared to Q3 of 2020. Our operating margin was approximately 47% compared to 42% in the year-ago quarter. Our revenue overperformance and the timing of revenue mentioned previously were the primary contributors to this unusually strong performance in the quarter. Turning to the bottom line, our earnings per share of $1.18 for the quarter was $0.35 above the high end of our guidance range and approximately 51% above our earnings per share of $0.78 cents in the year-ago quarter. Moving on to a few balance sheet and cash flow metrics, we ended the quarter with cash and short-term investments of $384 million and approximately $100 million in untapped capacity under our revolving line of credit for total liquidity of $484 million. We intend to utilize a portion of this liquidity to fund the acquisition of Kemp during Q4. DSO for the quarter was 54 days, which is elevated somewhat due to large deals booked toward the end of the quarter; however, it's still very much in line with our historical averages. Deferred revenue was $203 million at the end of the third quarter, up slightly from the second quarter, reflecting our strong Q3 top-line performance. Adjusted free cash flow was $35 million for the quarter, up $5 million or 16% from the year-ago quarter. We did not repurchase any stock during the third quarter. As a result, at the end of Q3, we have $155 million remaining under our current share repurchase authorization, and we're not anticipating any additional share repurchases in the fourth quarter. Turning now to our proposed acquisition of Kemp, we expect to complete the acquisition during Q4 and will fund the $258 million purchase price with cash on hand. In terms of financial profile, Kemp is approximately $70 million in revenue with operating margins in the low 20% range. We expect the integration of Kemp to be completed in nine to 12 months from closing, with cost synergies from our integration driving Kemp's operating margins above 40%. Turning to our outlook, starting with the full year 2021, we are increasing our revenue guidance to be between $548 million and $552 million. This includes a contribution of $4 million to $5 million from Kemp in the fourth quarter. Excluding the Kemp contribution, our revenue guidance of $544 million to $547 million represents an increase of $12 million to $15 million over the outlook we provided in June. We are increasing our outlook for operating margin for the year to approximately 40%. We are increasing our outlook for adjusted free cash flow to be between $168 million and $172 million and we are increasing our outlook for earnings per share to be between $3.68 and $3.70. Our guidance for full-year EPS assumes a tax rate of approximately 20% and approximately 45 million shares outstanding. For the fourth quarter of 2021, we expect revenue between $134 million and $138 million, and as noted earlier, this includes a contribution of approximately $4 million to $5 million from Kemp. Earnings per share are expected to be between $0.73 and $0.75 per share, including the impact of Kemp during the quarter, which we anticipate will be slightly positive. In closing, we're thrilled with our financial performance and our outlook for the balance of 2021. We’re also very pleased to be reaching another milestone in the execution of our total growth strategy with the pending acquisition of Kemp. With that, I'd like to open the call for Q&A.

Great. Thanks a lot, guys, and really solid quarter here. Lots to dig into, maybe first on Kemp. You mentioned $70 million of revenue. When I looked on the slide deck, it looks like you also have $70 million for Kemp in '22. Is that just assuming all the write-downs are embedded in there? Or is this a matter of just the business was flat and you guys will somehow get it to reaccelerate?

We may just be referring to the non-GAAP numbers, Ken. So I think it's approximately $70 million this year. We would expect going into next year that the business will probably be a low single-digit grower and still in that $70 million low $70 million type range.

Got it. Okay, perfect. And then as I think about that ADC business and some of the names that come to mind would be like a Citrix and F5, just wondering how LoadMaster stacks up against the peers. Are there certain areas, verticals where you see competitive advantages? And then as you incorporated it into the broader Progress business, anything that would stand out in terms of benefits to that incorporation?

So Ken, we actually find that you're right; folks like F5 are some of the other players in this market. What we've found is that from a product perspective, it is a phenomenal product that can bring significant value to us. One of the interesting things that we see is that with our broader reach and being able to get the product out there, I think we can do a better job of competing with this product in the market. You mentioned, you pointed out a really good point about how it fits with the rest of the products. We have, WhatsUp Gold that we acquired with Ipswitch, which does network monitoring. The combination of load balancing and optimizing workloads, with network monitoring and monitoring application-level performance and application network flows create a wonderful solution to track, monitor, and optimize the performance and the experience that end users get in terms of availability and performance from their business application. Of course, there’s potential in the future to take the Kemp products and, based on what is needed to drive infrastructure change, optimize things even further by leveraging Chef to make changes to the infrastructure beyond just load balancing. So I think there are multiple parts and multiple touchpoints, Ken, that you can leverage. We are really excited about their product technology offerings. They are truly market-leading, and what we have discovered is that even in very large-scale competitive situations, they win remarkably well. In fact, a couple of years ago, Kemp created a strong partnership relationship with EMC, who recognized that this was a great product that could sit in front of EMC's object storage solution. They need something to balance the activity that goes on across storage systems as well. So it's actually a product that we believe has an incredible market opportunity.

Got it. Great. Thanks a lot. I'll jump back in the queue. I'm sure there's a ton of questions on a lot of topics today.

Thank you, Ken.

Thanks. Hey guys, congrats on the great quarter and a great acquisition. I've known Kemp for some time, and I think you've got a fantastic asset over there. Maybe I'll start with Kemp. Can you talk about the go-to-market overlap? I don't know if you've had a chance to map out channels and partners yours versus theirs to think about how much is incremental versus overlapping.

I think what we have discovered is that the vast majority of the channels don't overlap. Obviously, there will always be some overlap, but they are much more focused on the channel for all their go-to-market efforts. In fact, I believe 100% of their business is through the two-tier channel model. Even though we have a good chunk of our Ipswitch business through the two-tier channel, we haven't leveraged that beyond that. So I think there is opportunity to continue to help be successful in that channel, both from the strength of our portfolio and our ability to support our partners probably at a better level than a company the size and scale of Kemp can. So, we feel really good about that opportunity. In terms of direct go-to-market, even though Kemp does interact with prospects directly, they actually do all their business through channel partners. So, it is actually a very complementary go-to-market model.

Got it. Okay, cool. And then Anthony, a couple for you on the outlook for the fourth quarter. Are you really increasing the outlook only by $1.4 million? Come on. Surely you can do better than that following the performance in this third quarter, especially given that the fourth quarter is a year-end quarter.

Ittai, come on, you know my objective is to under-promise and over-deliver. So, yeah, I think we've got a good amount of confidence in the business right now. Obviously, Q3 was a great quarter. I think we've got enough confidence to take Q4 up a little bit; hopefully, we’re always looking to put numbers out that we can be very certain we can achieve and hopefully exceed. So we feel good about how we're positioned.

Okay. Very good. Maybe the last one for me, just to make sure I understand your comments regarding the synergies with Kemp. You talked about nine to 12 months to complete the integration, but is that also the timeline to get the margins from the low 20s to over 40?

Yeah, I think that's exactly the right way to think about it, Ittai. In the earlier quarters, the Kemp margins would be lower and in the later quarters, we would expect the margin profile to get up into the 40s. So, it'll be a gradual increase over that nine to 12 months as the integration activities occur. By Q4 of next year, as we exit the year, we'd expect it to be integrated into our operating model, running at an operating margin of better than 40%. And that's how the business is going to look for us going forward.

Hi, this is Bernie on Kim on for Tyler Radke. Thank you for taking my question. You pointed out earlier in the call about the M&A environment being the most competitive that you’ve seen among software executives. I was hoping to get a little more color on that and how you’re thinking about the M&A pipeline going forward and how you can balance being active without compromising that disciplined approach? Thanks.

Absolutely. Thank you. We all know that there are a lot of folks out there looking to buy companies. Private equity is very active; strategics are trying to be very active. I think what we have done is we have built a very strong team that is truly exceptional when it comes to identifying and sourcing opportunities. There’s also a strong focus on finding opportunities that meet our goals, right? So, I think that's key. We have also built within Progress a phenomenal team to execute on these deals and integrate them. So it’s important to have a strong deal sourcing team, as well as an integration team, and that combined with the fact that as business comes to market, we do a really good job of quickly narrowing them down to the ones that are truly interesting and that fit our size profile, having solid recurring revenue and good retention rates. We find assets and we're continuing to identify those opportunities. We can compete for them, and Kemp was a competitive situation. I believe we have done a deal that will return wonderful rewards to our shareholders, and the fact that we were able to check off all of our financial criteria and that it fits dramatically with our product portfolio demonstrates our ability to execute. The market is hyper-competitive, but we are seeing way more deals every quarter than we did even four quarters ago. We actually see a very large number of deals every quarter, with careful consideration toward the right ones.

Great. Thank you. In some of the other companies we cover that have this infrastructure-developer-oriented model, there has been tremendous tailwind, and in some cases, we have even seen inflecting demand trends. Is there any consideration to invest more in product or distribution to extract more of this industry tailwind?

So we do actually monitor that all the time. We have invested in a whole host of our products. Our revenue, which was declining four years ago, is today as you saw, we have organic growth in our ARR year-over-year. We are seeing change. We have a large portfolio of products. Some of our products are not as competitive in terms of winning new customers despite delivering value to the existing ones. We keep those products current and relevant. Given the characteristics of our products, we are investing in them appropriately. We are committed to high margins and high cash flow generation for our investors. So, we balance that and look for opportunities to invest more where we believe we can get good returns. We feel our total growth strategy is the right strategy for our shareholders given the current business landscape.

Great. Thank you for taking my question and congratulations on the great performance and the acquisition of Kemp. First, you mentioned you had new customers coming in, and how should we think about what kind of customers those are? What is the potential for further organic growth in your model?

So, thank you for the great question, Anja. We are winning new customers across a wide range of our product portfolio. For example, Chef continues to win new customers; it is a highly relevant product in today's world for DevOps and DevSecOps. We are winning new customers with our WhatsUp Gold and MoveIt products, which are secure file transfer and network performance monitoring solutions. We are attracting new customers with our Sitefinity, which is used by enterprises globally to provide excellent online experiences and our DevTools products that help create engaging user experiences. Across the board, we are winning new customers, and I expect this to continue. It’s gratifying to see strong demand for our products and exciting to be able to solve problems for new customers while strengthening our business as we move forward.

Okay. Thank you for that response. I'm also curious, you've touched a bit on the M&A pipeline, but how did the Kemp deal come about? When did you start looking at that and how long was the negotiation cycle with them?

The Kemp deal was a competitive process. At some point, the company decided that they wanted to find a home that would provide a better outcome for both them and us. I believe we first started looking at it about four months ago. Usually, these processes take three to four months, and I think, we’re really excited that we were able to recognize the opportunity and the value that it brings. We were able to competitively win the deal at a valuation that checks off all our boxes. We always do a thorough job of planning the go-forward strategy before we sign deals. We maintain rigorous analyses and I'm proud of the work that our team has done. From the first to the second deal took about a year and a half; this time it has been about a year. I think we’re getting better and faster at this and believe we can continue to find additional opportunities.

It sounds like exciting times ahead. One last question about talent acquisition. I'm sure you're struggling with the industry-wide shortage of talent. How are you being affected by that and how do you work around that?

Talent retention is so key in today's environment. We’ve worked closely with our organization throughout the last 18 to 24 months. Recently, we were selected by Forbes as one of the best mid-sized companies to work for in the U.S., ranking 170 out of 15,000 companies. We were also ranked number one in Bulgaria, where we have a significant workforce, and recognized as the best place to work by Boston Business Journal. These awards reflect employee engagement that is at least 10 points higher than the industry norm. Our focus on what we need to do for employees, along with recognition of our efforts, plays a large role in our recruitment success. While the need for us to look for employees isn’t as high as for other companies facing greater challenges, we recognize that it’s a competitive landscape. However, we are finding great talent globally, providing us with another advantage as we don’t have to limit ourselves to one geography. So, we continue to do well. Long answer to your question, but while it isn’t easy, we are managing well. Thank you, everyone, for joining our call today. I am extremely proud of our outstanding performance in the third quarter and am pleased to share our confidence in the outlook for the rest of fiscal 2021. I'm especially proud of the entire Progress team and their work on our acquisition of Kemp as well. We believe this transaction exemplifies our execution of our total growth strategy. It will add significant size and scale to our business and points us to a promising 2022. I look forward to talking to all of you soon. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.