Good day, and welcome to the Progress Software Corporation Q3 2020 Investor Relations Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Anthony Folger. Please go ahead.

Thank you, Allen. Good afternoon, everyone, and thanks for joining us for Progress Software's fiscal third quarter 2020 financial results conference call. With me today is Yogesh Gupta, President and Chief Executive 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, cost initiatives, our acquisition and 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. Please review our Safe Harbor statement regarding this information, which is available in today's financial results press release, as well as in the Investor Relations section of our Web site 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 the financial figures we discuss are non-GAAP measures, unless it is stated that the measure of the GAAP number. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release issued today. Today, we published our financial results press release on our Web site. This document contains the full details of our financial results for the fiscal third quarter 2020 and I recommend you reference it for specific details. We have also published a presentation that contain supplemental data for our third quarter 2020 results, providing highlights and additional financial metrics. This presentation is available in the Investor Relations section of our Web site at investors.progress.com. Today's conference call will be recorded in its entirety, and will be available via replay on our Web site in the industrial relations section. With that, I'll now turn it over to Yogesh.

Thank you, Anthony and good afternoon, everyone. On today's call, I'd like to recap our strong third quarter results and provide some more color on why we are so excited about our pending acquisition of Chef. We reported strong Q3 financial results with revenue and EPS both meaningfully exceeding the high end of our guidance. Against the backdrop of a major global pandemic, our continued strong performance demonstrates the durability of our business, our relationships with our customers and partners and the discipline and commitment of our employees. I am very happy with our investors. The strength of our business enabled us to raise our 2020 outlook for revenue and EPS. The improved outlook reflects our increased confidence in the continued momentum in our business through the fourth quarter and the contribution from Chef. And consistent with our shareholder friendly capital allocation policy, for the third year in a row, we have increased our quarterly dividend, a reflection of our continued ability to generate strong cash flow. I'd like to spend the bulk of my time discussing our pending acquisition of Chef, which represents another important milestone in the execution of our total growth strategy. We recently received antitrust clearance for the deal, integration planning has been well underway, and we hope to close the transaction very shortly. Chef business has continued to perform very well throughout this period. During the roughly one month since we announced the transaction, the reaction from customers has bolstered our view that following on the heels of Ipswich, Chef will be another successful demonstration of our strategy to complement our stable businesses with accretive M&A in the infrastructure software space. As we discussed during our investor calls on September 8th, Chef is an amazing company and has been a true pioneer in the growing…

Thanks, Yogesh. Good afternoon, everyone and thanks for joining our call. As Yogesh noted, we're very pleased with our strong third quarter performance. And we're also very excited about our pending acquisition of Chef, which we think is a perfect fit with our longer term strategy. For the quarter, total revenue was $110.9 million or $1.9 million above the top end of the guidance range we provided in June, and was primarily driven by better than expected performance of our OpenEdge product. The durability and stability of our revenue, even in the backdrop of a major global pandemic, demonstrates just how mission critical our products are to the tens of thousands of businesses who have benefited from our technologies. The high and increasing mix of recurring revenue coupled with maintenance revenue retention rate well over 90% reflect the investments we've made in our products and our customer success and position us well for the future. On a year-over-year basis total revenues decreased by 4% in both actual and constant currency. The year-over-year decrease is driven by a decline in DCI revenue, resulting from the timing of multiyear term license renewals as we anticipated. As we previously discussed, the timing of DCI contract renewals with certain OEM partners can cause fluctuations in revenue recognition under ASC 606, which can significantly affect our top line in any given quarter. This timing benefited us in fiscal year 2019 and in Q1 of 2020 but caused our DCI revenue to decline year-over-year in both Q2 and Q3 of 2020. Because the timing of renewals can materially impact revenue recognition, we believe that annual contract value, or ACV, more closely reflects longer term trends in our DCI business than reported revenue. We continue to expect ACV to be $32 million to $33 million for 2020,…

Thank you [Operator Instructions]. And we'll take our first question from Anja Soderstrom from Sidoti. Please go ahead.

Hey, Yogesh and Anthony. Congratulations on a great quarter and the acquisition of Chef since we guys have speak to you. I want to ask you about the fluctuation in DCI. You have spoken about that before. And I remember you held last year about that pulling of the contracts there. What are you seeing in terms of content fluctuations there? Are there any larger contracts coming in in the near term, or was it a matter of push, or what are you seeing in terms of renewals for the DCI?

So I'll speak to sort of the -- first of all, to the fact that -- by the way, the renewals that are coming up are going really well, right? I mean, it is a very, very sticky product. The DataDirect business is a business that is largely an OEM business with over 200 different software vendors who embedded in their products. And those that come up they renew, right? In fact, I think we've talked about this before that we've not had ISVs, any ISV actually churn in a decade or more. So I think it's a really, really sticky business. In terms of what comes up when, our guidance includes in it, the expectation of bookings from the renewals that are coming in any given period. Anthony, would you like to add more?

No. I think that's right, Yogesh. I mean I think the reality is the renewals tend to move around and they tend to be lumpy and that will obviously drive a little bit of lumpiness in our revenue recognition. But ultimately when you look at the business on an annual basis, when you look at the amount of revenue that we're generating from an ACV basis, it's been in that $32 million to $33 million range for a couple of years now. So it's been very stable I think to Yogesh's point.

Thank you. And just in terms of renewal and you said you haven’t had any churn. But how should we think about pricing in terms of the DCI asset related renewals…

Anja, we expect things to continue to be very stable. They continue to be stable. We expect them to continue to be stable, which is why the annual contract value stayed stable at the $30 million to the $33 million range. So if somebody had a, previously had a three year contract that was $1 million a year, they will most likely renew it and we don't see any reason why they don't. In fact, we have not seen any difference this year that they renew at the same price.

Okay, thank you. That was all for me for now. I'll get back into queue.

We'll now take our next question from Mark Schappel from Benchmark. Please go ahead.

So starting off with a couple of questions on Chef. How much international business did they do?

Their international business is, Mark, significantly smaller as a percentage than Progress’ overall. So they are -- all [three] quarters of their revenues are U.S. Anthony, is that correct? I just want to make sure I didn't miss…

Yes, that is as you asked it, Mark, and even more so than the Progress business.

And then with respect to geographic business, where is that focused overseas, is it mostly in Europe?

Yeah, so I mean, pretty much EMEA is a place where they have customers, as well as some parts of the APAC. But as I said, it's way more focused on North America than any of the other geographies.

And Yogesh, I know it's only been a few weeks since the acquisition. But do you believe there are any potential price points or sales synergies between your Telerik business and Chef?

So, I mean, Mark, as you know there are some potentially interesting things there, not just on the Telerik side but other sides as well. But what we have done is that we have modeled the business going forward very much focused around no additional cross sell, no additional -- trying to find revenue synergies between businesses. Now the goal, to be honest, is to stay very focused and make sure that the customer base is stable, that the recurring revenue from those customers and the retention is very, very high and that we focus on making sure that the business continues to, as Anthony said, grow in the low single digits. And so we're not contemplating nor are we pushing for cross sell across product portfolios.

So is the integration plan to let Chef operate as a kind of standalone entity for the most part at least for the first year?

No. We are actually intending to rapidly integrate it as we did with Ipswitch. We are going to bring it under one of our GMs and then we are going to basically -- our integration plan get basically our G&A structure put in place very quickly and start putting our various other structures in place as well, including technical support and so on. Obviously, part of the consideration with any acquisitions as we did with Ipswitch as well, Mark, is just to make sure you don't do it so fast that you rock the boat but you do it fast as possible. So no, we do not intent to run it as a separate business. We do not intend to run it as a separate standalone entity. We are integrating it into our business.

And then turning to the core business, Yogesh. Could you just summarize real quick which parts of your business actually drove the upside in the quarter?

Really primarily the OpenEdge product, I mean, in a nutshell, Mark. The DCI, we knew what was going to happen from year-to-year. So we've had the decline year-over-year but that was as expected, but the OpenEdge business did well. And it is actually a testament to the strength of that product that even in times like these it continues to perform well.

Is it fair to say that it was the kind of core ISV channel on the OpenEdge side?

Yes, that is correct. And you know, Mark, when we had -- at the end of Q1 when we had provided guidance, we had talked about the fact that part of our contemplating the headwinds of COVID were around new business acquisition. And as you know, our primary new business acquisition is in the [dev tools] product, as well as in the Ipswich portfolio, the WhatsUp Gold and MOVEit. So whatever little we've seen that's where we've seen the primary sales, the OpenEdge business has been really strong and ISVs have been really strong.

We’ll now take our next question from Ittai Kidron from Oppenheimer. Please go ahead.

Yogesh and Anthony, congrats again on the Chef deal, looks very attractive. Yogesh can you talk about the asset itself, Chef? I mean, are there other things out there in the marketplace that you think you can kind of build around and add to Chef to kind of add a little bit more meat around the bone on that one?

I think, Ittai, lots of assets that exists in the market. As you know with M&A it is opportunistic. I mean both sides have to agree that now's a good time or whenever is a good time to do a deal. But yes, absolutely. I mean, if you think about the whole opportunity around deploying, managing, operating, doing even a extremely complex modern environment, there are tremendous challenges that face there and there's a whole portfolio of solutions that are needed by enterprises to do that successfully and do that well. And Chef is a market leader in one aspect of it but I think there's a whole DevOps cycle and a whole set of products and capabilities in the DevOps area that we do not participate in today. So yes, I think there's tremendous opportunity.

And then as a follow-up, Anthony, on the financial side of the deal. Correct me if wrong, I think you mentioned 35% -- to get to 35% margin on that business exiting '21. Did I get that right? And if so are we looking at about $5 million to $7 million increase on the operating profit side on a quarterly basis? Am I thinking about this right?

Ittai, you're correct in that we're certainly projecting to get 35% operating margin as we exit '21. It'll build gradually through the course of the year for the Chef business. So it'll be a little bit compressed as we work through Q1, Q2, Q3. But yeah, I think in terms of the quarterly operating margin that we might see from that. Yeah, I think you're right on that one.

And we have no further questions. That does conclude our question-and-answer session. I'd now like to turn the call back over to Yogesh for any closing remarks.

Thank you, Allie. Thank you all for joining us on this call today. I am very pleased with our Q3 performance and the continued strong momentum in our business going forward. We're also excited looking forward to closing the Chef deal and getting to work on our integration plan. Our company is financially strong and healthy and we will continue to execute aggressively on our total growth strategy to drive long-term value through accretive M&A in the infrastructure software space. Thank you again for joining us today and I look forward to speaking with you next during our FY 2020 full year conference call. Bye-bye.

And this does conclude today's call. Thank you for your participation. You may now disconnect.