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Progress Software Corporation (PRGS)

Q3 2016 Earnings Call· Wed, Sep 28, 2016

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Transcript

Operator

Operator

Good day, and welcome to the Progress Software Corporation Third Quarter Investor Relations Conference Call. At this time, I'd like to turn the conference over to Brian Flanagan, Senior Director, Investor Relations. Please go ahead, sir.

Brian Flanagan

Management

Thank you, Don. Good afternoon, everyone and thanks for joining us for Progress Software's fiscal third quarter 2016 earnings call. With me today is Phil Pead, President and Chief Executive Officer; Kurt Abkemeier, Chief Financial Officer; Jerry Rulli, our Chief Operating Officer; and Paul Jalbert, our Chief Accounting Officer. Before we get started, I'd like to remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives or 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 both in today's press 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, all of the revenue, operating margin and diluted earnings per share amounts we refer to are on a non-GAAP basis. You can find a 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 and also furnished the information to the SEC in an 8-K filing. These documents contain the full details of our financial results for the fiscal third quarter 2016, and I recommend you reference these documents 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. With that, I'll now turn it over to Phil.

Phil Pead

Management

Thank you, Brian. Good afternoon, everyone, and thank you for attending our third quarter earnings call. First, I'm very pleased to introduce Kurt Abkemeier, who joins us on the call today, and is in his first day at Progress as our new Chief Financial Officer. Kurt has a proven track record of growing businesses and managing complex capital structures in global technology-driven companies, and his broad financial and operational experience will be invaluable in helping us achieve our strategic business objectives. So welcome, Kurt. Our third quarter had several highlights of note with our DCI segment leading the way with a terrific revenue performance. Maintenance renewals was strong for both OpenEdge and our Telerik solutions and we had another solid cash flow quarter. Jerry will address these highlights in greater detail when he discusses each segment's performance. I'll first review the status of our direct OpenEdge opportunities. If you recall from previous discussions we have had, I mentioned that it is difficult to predict the timing of closures of some of the larger OpenEdge direct enterprise opportunities. This is primarily due to us not being able to influence the internal timelines of OpenEdge customers who are expanding their applications or adding new licenses or other related opportunities. Some of the deals we expected to close during Q3 were not completed by quarter-end, which is why our overall revenue fell slightly below our guidance range. The good news however, is that some of those deals have already closed in September, enabling us to keep the low end of our fiscal year 2016 revenue guidance unchanged. Although third quarter bookings for our Telerik solutions were down slightly both sequentially and year-over-year, we have made significant progress in 2 of the 3 areas of improvement we have been focused on. You will recall…

Jerry Rulli

Management

Thank you, Phil. Good afternoon everyone. Our overall revenue grew by 3% at constant currency led by our data business, which had a strong growth in both revenue and license backlog. We also saw continued improvement in renewals for our Telerik products and a solid performance from our OpenEdge partners, highlighted by a maintenance renewal rate that continues to be well over 90%. Let's review each of our segments all on a constant currency basis. OpenEdge segment revenue was $69 million, down 7% for the quarter compared to last year. Our total revenue from our ISV partners again showed steady growth. Sales to our OpenEdge Direct enterprise customers were lower year-over-year. There were deals that we expected to close in Q3 that did not. But as Phil noted, some of those deals have already closed early in the fourth quarter. Coupled with our visibility into a strong pipeline of OpenEdge Direct opportunities, this gives us continued confidence in our Q4 revenue expectations for our OpenEdge Direct enterprises. Our revenue from OpenEdge partners who deploy their applications in a SaaS model continues to increase. Revenue for the quarter was approximately $5 million, representing growth of 8% year-over-year, and we expect this trend to continue during the fourth quarter, further increasing the percentage of our revenue that is recurring in nature. The license decline in the OpenEdge segment was partially offset by an increase in maintenance revenue, driven by a renewal rate that was once again well over 90% for the quarter. Our OpenEdge renewal rate continues on its improved year-over-year trend, evidence of our partners and customers overall continuing satisfaction with their relationship with Progress and confidence in our overall product direction and strategy. Q3 was a strong quarter for our EMEA region with solid license growth as a result of…

Brian Flanagan

Management

Thank you, Jerry. All of the revenue, operating income and earnings per share amounts I'll be referring to in my prepared remarks are on a non-GAAP basis. For our GAAP results, please refer to the earnings release. Revenue was $102 million for the quarter, compared to $101 million in Q3 2015, an increase of 2%. Revenue increased by 3% on a constant currency basis with a negative year-over-year impact from currency translation of $1 million due to the strengthening of the U.S. dollar. Our third quarter EPS was $0.44, an increase of $0.05 when compared to Q3 of 2015. In addition to higher year-over-year revenue, the increase was also due to a lower tax rate and a lower share count, partially offset by a $0.01 negative impact from currency translation. Revenue includes acquisition-related revenue adjustments for Telerik totaling $400,000. As discussed in our June earnings call and consistent with previous quarters, GAAP rules require us to eliminate certain preacquisition revenue classified by Telerik as deferred revenue. But we include this revenue in our non-GAAP quarterly reporting to better reflect our true business performance on a normalized basis. The year-over-year revenue increase was primarily due to maintenance and services revenue, which was $69 million for the quarter. This represents an increase of 2% at actual exchange rates and 3% on a constant currency basis. The increase in maintenance and services revenue is primarily due to improvements in our maintenance renewals for both OpenEdge and Telerik and increased SaaS revenue generated by our AD&D segment. License revenue was $34 million for the quarter, an increase of 1% versus Q3 of 2015 at an actual exchange rate and 2% on a constant currency basis. The license revenue increase was primarily due to our DCI segment as several of our larger OEMs renewed and…

Phil Pead

Management

Thank you, Brian. Turning to our updated guidance for fiscal year 2016, we expect revenue to be between $412 million and $415 million, which at actual exchange rates would be flat year-over-year at the low end of the guidance and 1% growth at the high end of the guidance. At constant currency rates, this guidance represents an increase of 1% to 3% as this includes an estimated year-over-year negative currency impact on our 2016 revenue of approximately $5 million. Our previous annual revenue guidance was between $412 million and $418 million. The decrease in the high end of our guidance is primarily due to continuing a more cautious view with respect to several of our large OpenEdge Direct end-user opportunities. With the deals we've already closed in September, coupled with our visibility into the timing of deals in our pipeline, we are confident in our Q4 revenue expectations for our OpenEdge Direct enterprises. This guidance assumes a low single-digit decline in revenue from our OpenEdge segment, a 20% plus growth in our DCI segment and low single-digit revenue growth from our AD&D segment. Additionally, while we are still confident in meeting our long-term growth objectives for Telerik bookings, we're lowering our outlook to a low single-digit decline for the full year. Although we are lowering our outlook for the full year, our guidance reflects double-digit sequential growth in Telerik bookings in the fourth quarter as we begin to see the benefits of our digital marketing investments to increase our top of funnel opportunities. Our 2016 operating margin guidance is approximately 30%, and our effective tax rate for the full year is expected to be approximately 32%. Our earnings per share guidance for the full year is $1.57 to $1.60, with the bottom end unchanged from our prior guidance and a…

Brian Flanagan

Management

Thank you, Phil. 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 questions and one follow-up. I will now hand over to the operator to conduct the Q&A session.

Operator

Operator

Thank you. [Operator Instructions] And we'll take our first question from Steve Koenig with Wedbush Securities.

Steve Koenig

Analyst

Thanks gentlemen for taking my question. Yes. So I wanted to ask you guys about the back-end loading of the year, just to parse that out a little bit. Is most of that due to the cadence of the DCI renewals, which were clearly pretty big this quarter? And are the expectations for OpenEdge closing a lot of those deals in Q4, a big part of that? Or simply, it's more pronounced seasonality, more of the lion's share. If you could maybe just parse that out and maybe help me understand which of those factors are most important.

Jerry Rulli

Management

Sure. Steve, this is Jerry. I'll talk about two issues. The DCI, I think DCI leaves us, I would call, the normal expectation for Q4. We're working the renewals as they come up, and so we're confident in their pipeline as we mentioned. As far as OpenEdge, we talked about this earlier in the last call and Phil mentioned in this call that we're pleased with the deals we're working and the large transaction we're working in the pipeline. They're hard sometimes to manage to get the timing right. I will say that ending Q3 going to Q4, we have a larger-than-normal amount of transactions in the pipeline today. Some of them from hundreds of thousands to multiple million of dollar transactions we're working. So a very, very strong pipeline that flow from Q3 to Q4. So, I think it's more or less what we've committed, what we've talked about in last quarter and this quarter from working the OpenEdge deals.

Phil Pead

Management

Yes, Steve. So it's less seasonality driven and more opportunities that we're working to close for the - as we mentioned in prior quarters, we said that the second half of the year is when we expect to see some of the larger opportunities close.

Steve Koenig

Analyst

Yes, got it. Okay. And then the follow-up is kind of related to that, which is, so closing the OpenEdge deals that you did in September. Does that effectively help you to make up for the Q3 lightness? Or does it actually go further and de-risk the bottom end of your guide, would you say?

Phil Pead

Management

It does a little of both, I would say, Steve. It would've definitely produced a positive result for us in Q3, and it somewhat adds to our revenue expectations for Q4.

Steve Koenig

Analyst

Got it. Great, very helpful. Thank you gentlemen, appreciate it.

Phil Pead

Management

Thanks Steve.

Operator

Operator

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

Mark Schappel

Analyst · Benchmark.

Hi good evening. Thank you for taking my question here. Phil, starting with you. Given the challenges in the OpenEdge Direct business that you saw this year, I was wondering what gives you confidence that Q4 will be any different?

Phil Pead

Management

Yes. It's a good question, Mark. And I think that as we reviewed all the opportunities that we're working and where they are in the sales cycle, there is always that risk. Obviously, the timing doesn't exactly coincide with the quarter as we saw in Q3. But I think that with Jerry and I working these opportunities, I think that the maturity of the sales cycle as we look at the pipeline gives us confidence that we'll be able to close the required number of deals that will represent the - enough for us to meet the quarterly objectives. And bear in mind, Mark, that as I mentioned in my remarks, these are not - it's not a situation where we're going to lose the deal because the competitors come in and taking it from us. This is really internal timing that we're trying to work with our clients and customers to make sure that their natural close of their application, additional licenses that they're buying, coincides with our quarter.

Mark Schappel

Analyst · Benchmark.

So is it fair to assume that you haven't seen OE Direct deals or OpenEdge Direct deals go away?

Phil Pead

Management

No, we have not.

Mark Schappel

Analyst · Benchmark.

Okay. Great. And then just final question here on your share buyback program. What's changed that you're unable to execute that as you and Jerry planned?

Phil Pead

Management

Well, I think we've always said that our intention is to execute on the authorization by the Board, subject to market conditions. And clearly, we have expectations of intrinsic versus market value, Mark. So that affects how much stock you buy.

Mark Schappel

Analyst · Benchmark.

Okay, thank you. That’s helpful.

Phil Pead

Management

Welcome.

Operator

Operator

For next question we will go to Glenn Mattson with Ladenburg Thalmann.

Glenn Mattson

Analyst

Hi, on the Telerik business, I guess it’s good news also on the guidance for double-digit snapback and bookings next quarter. I guess, my question I wonder is what early signs are you’re seeing from the changes you've made to the sales force or to their go-to-market strategy that's given you confidence that you'll hit those targets?

Phil Pead

Management

Yes. Well, we've been working on this for some time, Glenn. And I will tell you that the disappointing thing for us is that we were expecting to see some effect of the efforts that we have been focused on with our - particularly in the dev tools area. But as our marketing folks will tell you, it is something that takes a little longer than people expect because we're encouraging people to come to our site. They definitely have needs. They will download trials. Those trials will take whatever time we give them and then there's a conversion, right? So that timing is sometimes very difficult for us to predict. But we were hoping that in Q3, we would see evidence of that, but we are seeing evidence of that now, which gives us confidence that as we exit Q4, we'll see that double-digit growth in bookings quarter-over-quarter.

Glenn Mattson

Analyst

Okay. It sounds good. And then on OE, we talk about snapback next quarter, some of these large deals come through. But what do you think - do you think anything's changed? Or how do you view that business as we head into the next fiscal year?

Jerry Rulli

Management

Yes, I was going to say, I think we feel very confident on the partner revenue stream, very confident on our maintenance renewals. We continue to build solid pipeline for OpenEdge Direct, and it's just managing the larger transaction. So, we feel good going into Q4 and continuing into next year for our OpenEdge today.

Glenn Mattson

Analyst

What do you think the natural growth rate is of that business currently? Same as kind of the, what you guys were talking about at the Analyst Day?

Phil Pead

Management

Yes. I think we said low single digits and we're kind of staying with that right now. But obviously, we haven't given guidance for 2017. As we go through that, we'll look at that a little bit just given that the dependence on larger deals are the ones that move the needle for us. We're still doing a large number of smaller deals. So I don't want anybody to misunderstand that direct business. But the larger deals are the ones that move the needle on our growth rate. And they are the ones that we've been challenged through this year. I think as we go into 2017, we're going to take a real hard look at what the opportunities are, the maturity of the sales cycles and I think we're going to make sure that we can align those sales cycles with our quarters, which has been the challenge for us in 2016.

Glenn Mattson

Analyst

Lastly, I guess, is it that there's fewer deals, but they're larger or is it there are fewer deals overall? Or is there any - can you characterize that at all, as far as - just when you're talking about those large deals?

Phil Pead

Management

Yes. There's actually a larger number of larger deals.

Glenn Mattson

Analyst

Okay. All right. So that should give you confidence then in the long-term growth. Okay. Thanks guys.

Phil Pead

Management

Thank you.

Operator

Operator

It appears there are no more questions at this time. So I'd like to turn the conference back to Brian Flanagan for any additional remarks.

Brian Flanagan

Management

Thank you all for joining the call today. As a reminder, we plan on releasing financial results for our fiscal fourth quarter of 2016 on Tuesday, January 17, 2017, after the financial markets close and holding the conference call the same day at 5:00 p.m. Eastern Time. We look forward to speaking with you again soon. Have a good day.

Operator

Operator

That does conclude today's conference. Thank you for your participation. You may now disconnect.