Progress Software Corporation (PRGS) Q4 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Progress Software Corporation Q4 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Mike Micciche, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Sherri. It's always great to be in your capable hands. Thank you. Before we get started here, we're going to go over our safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our acquisition of ShareFile which closed on October 31, 2024 and other information that might be considered forward-looking. Such 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 risk factors in our filings with the Securities and Exchange Commission. Progress Software assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced in this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our financial results press release, which was issued after the market closed today. This document contains additional information related to our financial results for the fourth quarter and full fiscal year 2024, and I recommend that you reference it for specific details. We've also provided a presentation that contains supplemental data for our fourth quarter and full fiscal year 2024 results, provides highlights and additional financial -- and provides highlights and additional financial metrics. Both the earnings release and the supplemental presentation are all available on the Investor Relations section of our website at investors.progress.com. Today's call will be recorded in its entirety and should be available for replay on the Investor Relations section of our website shortly after we finish. With that, I'll turn it over to Yogesh.

Thank you, Mike. Good afternoon, everyone, and thank you for joining our Q4 2024 financial results conference call. Fiscal '24 was another outstanding year for profits, as you can see from our published results. We registered another strong performance in Q4, marked by continued demand across our product portfolio, especially for our data platform products MarkLogic, OpenEdge and DataDirect and our AIOps network management products. Our data platform products are the foundation for mission-critical applications at over 100,000 businesses, and we are living in a world where business data is increasingly important for responsible AI applications. We exceeded the high end of guidance on earnings and free cash flow, and ARR grew by 46% in constant currency. Our net retention rates came in above 100%, which holds true even when you completely exclude ShareFile from our results. We generated $238 million in unlevered free cash flow on revenues of $753 million, close to the high end guidance of $755 million. As a reminder, ShareFile contributed only one month of revenues in Q4. Our strong top line performance, coupled with excellence expense management led to the significant outperformance in earnings and free cash flow. I'm extremely proud of our team for their dedication and their relentless commitment to excellence. Anthony will go through our excellent results in more detail and provide FY '25 guidance shortly. But in the meantime, I'd like to share some highlights of FY '24. As you might recall, we received good news in August from the SEC, which concluded its investigation into the MOVEit vulnerability with no actions recommended. Earlier in the year, several international data privacy regulators also closed their investigations without action. We are heartened by these conformations that Progress did the right thing in addressing the attack on MOVEit and are happy to focus on the business of our [ business ]. The biggest highlight of the year, of course, was that we closed the acquisition of ShareFile on October 31, and we've had an excellent start to our integration process. Because ShareFile was a carve-out and not a standalone in the company, you will recall that we are operating under a transition services agreement with Cloud Software Group or CSG. We're working diligently towards ending our reliance on the transition services from CSG in a rapid and timely manner. We've already completed or are well into some of the more immediate synergies such as eliminating duplicate infrastructure, transitioning ShareFile employees to our collaboration and HR systems, working with customers and partners to ensure a smooth transition and all the other activities we customarily initiate upon closing. While it's still very early, the integration is on track, and we expect to complete the full integration of ShareFile within the 12-month time frame we provided when we announced our Q3 results. And as we indicated when we announced the deal, we believe our 40% threshold for operating margins for the acquired business is attainable by the end of FY '25. We expect ShareFile to add about $250 million to the top line in FY '25, which will be 100% SaaS recurring revenue. This meaningfully increases the percentage of Progress's total SaaS revenue, getting it close to 30%. It also adds excellent stability and visibility to our top line by significantly raising the share of recurring revenue to well over 85% of our overall revenue. Anthony will have more on this. Perhaps more importantly, ShareFile is a native SaaS platform with gross margins in excess of 80% and will benefit our own SaaS journey. ShareFile's proven at-scale SaaS platform, combined with the expertise of the technologists that joined us with this acquisition, provides us the foundation to accelerate our own SaaS product deliveries. It will also make it easier for us to integrate any additional SaaS companies that we may acquire in the future. What's more, with this demonstrable proof point of evaluating, buying and integrating a large SaaS business into our company, the universe of potential acquisition now expands to include other SaaS businesses as well. Our approach to M&A, which is one of the three pillars of our total growth strategy, continues to be disciplined. Our M&A discipline is simple: acquire great businesses at the right price, integrate rapidly and have a laser-like focus on improving customer retention. Let me define what we mean by great businesses. A great business to us is one with exceptional products that have future relevance, an impressive customer base that loves those products and relies heavily on them to run their business and has excellent talented employees and a culture that fit well with our own. Acquiring such businesses strengthens Progress today and will keep us relevant well into the future. For example, chef has made us a meaningful provider in the DevSecOps market as the shift left trend continues to gain momentum. Ipswitch and Kemp brought us observability and AIOps capabilities while MarkLogic has enabled us to enter the GenAI application market with a business-centric reliable and secure offering. And our latest acquisition, ShareFile is an at-scale SaaS AI-powered platform for content center collaboration. All these modern offerings enable us to address a broader set of our customers' needs. And the skills and expertise brought to progress by the employees of these acquired companies accelerate the technological evolutions of all our products. Importantly, our acquisitions have also broadened our go-to-market channels, Ipswitch and Kemp with their respective 2-tier channels, Chef with open source and MarkLogic with U.S. federal government contractors. And ShareFile at scale and ShareFile's at-scale high-velocity sales model significantly complements our role. These channels, combined with our existing enterprise and ISV and OEM go-to-market strength, enable us to efficiently serve large and small businesses around the world. Acquiring such excellent businesses for the right price, requires us to be patient and disciplined, which we have demonstrated in each of the five acquisitions we've completed to date, as well as in all the deals we have walked away from. We will continue our track record of such discipline and patience when it comes to doing deals. The other two equally important pillars in our Total Growth strategy are to innovate and to focus on customer success. We invest in innovation to ensure that our products, go-to-market efforts, people and systems continue to deliver increasing value to our customers. In FY '24, we delivered several innovative solutions within our product portfolio that enable our customers to develop, deploy and manage responsible AI-powered applications and digital experiences. For example, our data platform products, MarkLogic and Semaphore now use retrieval automated generational -- retrieval augmented generation and vector capabilities to enable our customers to securely leverage proprietary data and content to augment the GenAI capabilities of large language models. This leads to accurate and contextually relevant GenAI responses based on a business' own proprietary data, and these responses are supplemented with traceability and links to the original source material so that users can easily verify the results. Businesses need such accuracy, reliability and variability to use GenAI effectively and confidently, which is why a large U.S. government agency that serves tens of millions of citizens recently decided to extend their use of our data platform with its new capabilities to meet their GenAI needs. In another example, our Digital Experience products now leverage AI to simplify the job of marketers by automating content creation and personalization, enabling conversion rate optimizations. And our UI developer tools are AI-powered to make it easy for developers to embed GenAI in applications and deliver AI-powered experiences to end users. Our core infrastructure management products have always incorporated some level of AI in their architecture. But we are now leveraging advanced AI technology to make our products even more productive and easier to use, and to enhance their predictive analytics capabilities. For example, in '24, we launched Flowmon with advanced AI-powered threat detection that distills thousands of network events into specific actionable intelligence, drastically reducing the time and effort spent by cybersecurity experts to pinpoint threats. Our ShareFile acquisition also brings new AI capabilities to our portfolio, which include automated document summarization and automated guidance on user workflows. It also leverages AI to protect sensitive information. For example, if a user tries to share a document that contains sensitive information, ShareFile's AI-powered security detects the sensitive information, alert's the user and suggests more secure ways for the user to share their document within their workflow. In addition to innovation, we also have an unrelenting focus on customer success to ensure that they stay with us, which leads to a high net retention rates. It is this focus on customer success that resulted in a net retention rate in FY '24 of over 100% despite, as you might recall, a few large customers churning in late '23 and early FY '24. Keeping our customers happy and NRR high also enables us to be efficient with our sales and marketing efforts and allows us to continue to deliver high operating margins and generate cash. Speaking of cash, I'd like to briefly talk about our capital allocation strategy. As a reminder, we strengthened our balance sheet in Q2 of 2024 when we issued a new $450 million convertible bond and consolidated our prior credit facilities, ending up with a single $900 million revolving facility. We used $730 million of that credit facility to finance the ShareFile deal. With our strong recurring revenues and cash generation, we expect to pay down our outstanding debt quickly and prepare for our next acquisition. Our goal is to allocate capital in the most effective and efficient way to create greater shareholder value over time. And we want to consistently generate a return on invested capital that exceeds our cost of capital. I want to reiterate what we said in our Q3 earnings call. Our corporate development efforts are ongoing. We continue to look for great businesses. And if the right one comes along at the right price, we will not hesitate to act. We are confident that we can integrate more than one acquisition in parallel. Lastly, as a final highlight of the year, we continue to make progress an even better place to work for our employees. In addition to the numerous awards Progress earned for our exceptional work related to the environment and to employee culture, we were again selected a Best Place to Work by Boston Globe and the Boston Business Journal. These awards reflect the strength and engagement of our employees, which is a key to our success. Our low employee turnover and our outstanding employee Net Promoter Scores continue to show that we are one of the best technology companies to work for. We have good people who get better at what they do each year, and we benefit from their expertise, experience and institutional knowledge. Because of this low turnover, we have a significantly lower hiring and training expenses. We strongly believe that having highly talented and engaged employees is one of our strategic differentiators and a competitive advantage in an industry, where high turnover is the norm. I can't thank the progress deep enough for their commitment to our success and for their hard work. So to wrap up, we are thrilled with our execution in FY '24 and excited about FY '25. Just a few weeks ago, we got our field organization off to a quick start to FY '25. We held our global kickoff in early December, where more than 500 people gathered in person to learn about our new offerings, sales place and their targets. The team has returned energized and ready to hit the ground [ running ]. In FY '25, we expect continued solid demand for our products to drive meaningful ARR growth. We also expect continued improvement in the ShareFile operating margin throughout the year, resulting in significant growth in the unlevered free cash flow, which we will use to aggressively pay down debt while we look for the next business to acquire. Let me now turn it over to Anthony to provide additional details around our results and guidance. Anthony?

Thank you, Yogesh. Good afternoon, everyone, and thank you for joining our call. As Yogesh mentioned, our fourth quarter results were strong across every metric, and we're thrilled to deliver such a solid close to the year. I'll start by mentioning close of our acquisition of ShareFile at the end of October, which means we've got a 1-month contribution from ShareFile included in our 2024 fiscal fourth quarter and full-year results. Please keep that in mind as we run through the numbers. And speaking of the numbers, let's start with ARR, which we believe provides the best view into our top line performance. We closed Q4 with ARR of $842 million, which represents approximately 46% growth on a year-over-year basis and almost 4% pro forma growth on a year-over-year basis. For clarity, the pro forma results include ShareFile's ARR in both periods. Our growth in ARR was driven by multiple products, including ShareFile, OpenEdge, our DevTools products, LoadMaster and Sitefinity. Also, as mentioned on previous calls, our net retention rate continued its upward move again in the fourth quarter, and we closed the year with a net retention rate of over 100%. And as Yogesh mentioned in his remarks, our net retention rate is over 100% if you completely exclude ShareFile's results, and it's also over 100% when ShareFile's results are included in all periods. In addition to growth in ARR and an increasing net retention rate, revenue for the quarter of $215 million was very close to the high end of the Q4 guidance range we provided back in September and represents approximately 21% growth on a year-over-year basis. Our strong revenue performance in the quarter includes a $21 million contribution from ShareFile, coupled with growth in other products, including OpenEdge, DataDirect MarkLogic, and our DevTools products, all of which performed better than our internal expectations. For the full year, our revenue of $753 million grew $55 million or 8% over the prior year. This growth was driven by the top line contributions of MarkLogic and ShareFile, combined with growth in other products, most notably, OpenEdge and our DevTools products. With customer retention rates improving throughout 2024 and a consistent demand environment fueling growth for our products, we're thrilled with our top line performance for the year. Turning now to expenses. Our total costs and operating expenses were $135 million for the quarter, up 17% over the year-ago quarter; and $455 million for the full year, up 6% compared to fiscal 2023. The year-over-year increase in expense for the quarter was driven by the acquisition of ShareFile, and the increase in our full-year expense was driven almost entirely by the inclusion of a full year of activity for MarkLogic and the aforementioned acquisition of ShareFile. Operating income for the quarter was $81 million for an operating margin of 37%, handily exceeding our internal expectations. This better-than-expected operating performance was the result of overperforming on the top line while managing our expenses to plan. On the bottom line, our earnings per share of $1.33 for the quarter were $0.08 above the high end of our guidance range. This overperformance relative to expectations was again driven by strong top line performance, coupled with solid cost management across the business. All right. Turning now to a few balance sheet and cash flow metrics. Let me start with a few details on the acquisition of ShareFile. The acquisition was an asset purchase, whereby certain assets and liabilities were acquired for a base purchase price of $875 million, and it was subject to a $25 million working capital credit. This working capital credit was negotiated to compensate for the fact that ShareFile accounts receivable were not acquired. While the credit results in a net purchase price of $850 million, Progress won't collect any of ShareFile's accounts receivable from before the acquisition close date. So said simply, we swapped some future cash inflows for an equivalent purchase price reduction. To fund the purchase, we used a combination of cash and debt, drawing $730 million from our existing revolving line of credit, which has a variable interest rate currently running at approximately 6.6%. As we've previously mentioned, we intend to begin aggressively paying down debt in the first half of 2025. After closing the acquisition, we ended the year with cash and cash equivalents of $118 million and debt of $1.54 billion for a net debt position of $1.42 billion. We expect to complete the integration of ShareFile in 2025. And in doing so, we expect to realize meaningful synergies throughout the year. On a post-synergy basis, we expect our net leverage ratio to be approximately 3.5x. DSO for the quarter was 67 days, up five days compared to the year ago quarter. And deferred revenue was $404 million at the end of the fourth quarter, up approximately $119 million on a sequential basis, reflecting our strong top line performance in the fourth quarter, coupled with the addition of $96 million in deferred revenue from the ShareFile acquisition. Adjusted free cash flow was $18 million for the quarter, bringing our annual total to $212 million, an increase of 21% over prior year. During the fourth quarter, we did not repurchase any Progress stock. Our annual repurchase total for fiscal 2024 was $87 million at an average price of less than $53 per share. And we ended our fiscal year with $107 million remaining under our current share repurchase authorization. Okay. Now turning to our outlook. When considering our outlook, it is important to keep in mind the following. First, ShareFile's revenue model is entirely SaaS, and the acquisition will increase our recurring revenue mix to approximately 87%. So consistent with our message last year, we are going to continue to focus on ARR as a key metric, and we expect ARR will continue to grow in fiscal 2025 in the low single digits. Second, absent any acquisitions, we expect to aggressively repay the revolving line of credit that was used to partially finance the ShareFile acquisition. We've modeled $150 million in repayments during fiscal year 2025. As a result of this, our 2025 interest expense will increase meaningfully compared to 2024, and it will be further affected by the amount and timing of our 2025 repayments. These changes have the potential to distort the comparability of earnings per share and free cash flow in both prior and future periods. As a result, we will provide unlevered free cash flow as a key metric to assist with year-over-year comparisons. Finally, when calculating our fiscal 2025 earnings per share, we've considered dilution from our 2026 convertible notes because our share price is well above the conversion price. Though we did purchase a call spread that covers the economic impact of dilution up to approximately $89 per share, the accounting regulations do not allow us to recognize any benefit from the call spread when calculating our shares outstanding. Because of this added nuance, we will provide you with the number of shares that we've assumed for dilution each time we provide an outlook for EPS. All right. With all that said, for the first quarter of 2025, we expect revenue between $232 million and $238 million and earnings per share of between $1.02 and $1.08. And for the full year 2025, we expect revenue of between $958 million and $970 million, representing between 27% and 29% growth over 2024. We anticipate an operating margin for the year of 37% to 38%. We are projecting adjusted free cash flow of between $225 million and $237 million, and we're projecting unlevered free cash flow of between $282 million and $294 million. We expect earnings per share to be between $5 and $5.12. Our guidance for the full-year EPS assumes a tax rate of 20%, the repurchase of $80 million in progress shares and approximately 46 million shares outstanding, which includes 1.4 million shares associated with dilution on our 2026 convertible notes. In closing, we're excited to deliver a great result for fiscal 2024. We're thrilled with the ShareFile acquisition and our delivery against some early integration milestones, and we think we're well positioned for 2025 and beyond. With that, I'd like to open the call up for questions.

Thank you. [Operator Instructions] And our first question will come from the line of Fatima Boolani with Citi. Your line is open.

Good afternoon. Thank you for taking my questions and a belated Happy New Year to you. Yogesh. I wanted to focus my first question and channel it to you with regards to the performance in the entirely organic side of the business. You saw a ton of momentum in your flagship solutions like OpenEdge, DataDirect and now MarkLogic. And so, I wanted to really unearth, what is driving some of that almost revitalization in organic demand and performance. And if you can maybe help us bifurcate that by end markets, if you're seeing any differences by way of geography and/or end market, and even from a distribution perspective. And then I have a quick follow-up as well, please? Thank you.

Thank you, Fatima. Happy New Year to you as well. So the three businesses, as you know, they are to be honest, relatively lumpy businesses just to be upfront. We all know that these are, these are businesses with large enterprises and large OEM deals in the case of DataDirect, large ISV customers in the case of OpenEdge and MarkLogic is a large enterprise solution as well. So what drove these? So the business first of all, from a global perspective, we saw strength across the globe. There wasn't really whether North America did better than Europe, but most of these products are primarily North America and Europe, where their footprint is. Even though we do have customers in Latin America and APJ, for these products. I think the whole importance of data, is becoming critical to businesses. These products are the, they tax - this is where mission critical data either sits, in the case of OpenEdge and MarkLogic, or it is connected to using DataDirect. So I think that the whole, I think the data movement is a important part of this. It's kind of interesting to see but as I said, this is a lumpy business. And Anthony, if you'd like to add something to this.

Yes, no, I agree with all of that Yogesh. I think there continue to be more and more opportunities, to leverage the AI aspects of our platform in our install base. And I think that's another element that, I think is at least bolstering a lot of our upsell, and giving us a lot more opportunity. So it just felt like a strong quarter across geographies, across channels and across a good number of products.

I appreciate that. And Anthony, just as a direct consequence of - the increased criticality of your core solutions, how are you thinking about the investment envelope specifically around your core product? And especially because historically you have done a pretty good job, of maybe siloing some of your products. So very surgically focusing on retention rate, but just wondering how you're thinking about incremental investment on the organic solutions to help power more upsell, potentially more cross sell, to really have the net retention rate break out into new territory. And that's it from me? Thank you.

Yes, thank you, Fatima. I would say we're not, there's not going to be a material change in our investment envelope. A lot of, as Yogesh mentioned, we've got a lot of AI capabilities in some of our products and have historically, and a lot of that has been enhanced with the budget envelope that we have. And then through acquisition, I think we have done a lot, to really add to the portfolio in terms of AI capabilities, especially on the data platform side. And so, I think it's less about the investment envelope, and just more about continuing to focus and enhance those solutions, for our customers. I think we're well positioned to continue to get some traction in that area.

Thank you.

Thank you. One moment for our next question. And that will come from the line of John DiFucci with Guggenheim Securities. Your line is open.

Thank you. First question is for Yogesh. Yogesh, you spoke about your acquisition strategy, and you guys have done a commendable job, at least in our observation. How does the new administration, and perhaps even more importantly higher interest rates for longer affect that strategy? In other words, if rates stay where they are, should we assume sort of, I don't know, a pause in your strategy?

So John, thank you for those kind words, but the short answer is no, no pause. But I'll give you a slightly longer answer. I think interest rate, if you notice right, they've been relatively high for a couple of years now. It actually creates a competitive advantage for us. There are a lot of buyers who look to buy, the kind of businesses we look to buy, and their sort of approach is to lever them to an extremely high degree, which doesn't work in a high interest environment. And so therefore, I think in terms of competitive situation. I think we will find that, we have an edge. I mean, look at ShareFile itself, right? I mean, here was a business that potentially, right. If you had lower interest rates, somebody else could have potentially said ah, I can level it up much more and therefore pay much more. So I think that's one competitive advantage for us. We still have a little bit of firepower left in our capital even today. So we could do a relatively modest size transaction. But as we pay-off our debt, which we intend to as rapidly as we can, I mean, Anthony mentioned high interest the $150 million down this year. That creates additional capital that frees up for us to go do additional acquisitions. So I think, the combination of getting ShareFile synergies going, the combination of paying down debt, the combination of the fact that the competitive landscape for buyers like us, is going to be favorable. I think last but not least, higher for longer also probably John means, let's just say more reasonable valuations, right. And so all those things are, think, are they going to play in our favor. I mean - historically I've seen that the periods that follow this kind of increased interest rate for the next few years, three to five years, there is tremendous opportunity to buy great enterprise infrastructure software companies, at reasonable multiples. And so, we're excited about doing more deals.

You know, you guess. Thank you. All of that makes a lot of sense. It does. So thanks on that. And I guess a follow-up for Anthony and Anthony, I'm going to come back afterwards ask you, because actually I think like the street, including us, like your forecast for the year, we got the revenue right, we even got the operating margin right, like within your range. But our interest expense has got to be off, because it ended, but we'll talk about that after. I guess I want to ask a question, because helping us model as you know, you have a lot of different models within Progress. So it makes it, it's hard to model you if you really try to do it. And we tried several times, so it's hard. But at this point with ShareFile, would you break out the SaaS business going forward, since it's material? I think Yogesh said in his prepared remarks, it's going to be close to 30% of total revenue. Is that something you could do for us? I think you put it in services this quarter, but it just seems like - we can model? Go ahead, sorry.

Yes, no, John, it's a good question, and I think as we move through 2025, you're right because ShareFile is material, because we have other SaaS offerings that are going to push us up close to that 30% mark. I think it is likely that we'll have a services line in our P&L this year, which will effectively be all of our SaaS solutions, may include a little bit of professional services as well. But I think, you'll be able to, I think it'll lend itself to maybe some tighter modeling as we go. And maybe a better understanding of, for folks just sort of how the different elements within the revenue line are working. So yes, I think that is to come as we move through the, as we move through the quarters this year.

Thank you. I think that'll help, it'll help the understanding of the business a lot, and to your benefit. So, thank you. Thanks guys.

Thanks.

Thank you. One moment for our next question. And that will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Thanks. And guys, congrats on closing the deal. It's a big one, but I have full confidence you can do with it as you've done with others. I guess I have maybe two, three questions. Maybe start with you Anthony. Just on the financial and the EPA side, when I make sure I understand the guide for next year, is there a way for you to quantify the convert and the interest impact on a year-over-year basis? I'm just trying to think about what would have been the EPS guide if those two wouldn't have been a factor this year, as they have not been a factor last year. So just trying to get a little bit more of an apples-to-apples EPS. So if you could do the work on that that will be great?

Yes sure, Ittai. I think the, from an interest expense perspective, the incremental interest expense is about $0.74, $0.75 for the year, and the dilution from our converts is about $0.20. So both of those together, you're talking just under $1 per share on a year-over-year basis. That's the impact on EPS.

Okay. That's very helpful. And then, one thing on the annual guide, if I got this right, correct me if I'm wrong, you've got it to 37% to 38% operating margin. To be honest, I was a little bit surprised by that guide, because you've already delivered more than that, or within that range right this quarter, which included ShareFile and I understand you included only for a month. But if your baseline already here with ShareFile is within that range, why as you work to fully integrate and improve and bring that business back to the 40% level, why that number is not more closer to 40% rather than at 37%, 38%?

Yes. Keep in mind, the ShareFile contribution in 2024 in the fourth quarter was only one month. And I think we mentioned this before when we were sort of framing the acquisition that, that business came over with an operating margin below 20%, so sort of in the high teens. And I think that's right around where it landed for the fourth quarter. And so, there'll be a gradual improvement in that margin as the year goes on. I think with the - knowing that it's coming on at that level and the size of that acquisition, I think we feel pretty good about being able to deliver 37% to 38%.

So if I think about the linearity of this starting low, getting better and improving through the year, ending on a high note? Is that kind of the way to think about this?

I think so. Yes.

Okay. And lastly for you, Yogesh. It was an interesting review of the business from you in that, you've kind of highlighted or I guess, reminded all of us that your business is not just all legacy on-premise infrastructure software, but rather now evolving to be a cloud-based with also multiple go-to-market motions, right, whether it be through OEMs, open source on and so forth. I guess - my question is, one of the things you've always emphasized in our meetings in the past, is the importance of running your business focused and efficient. And I guess my question is, where is the risk in having multiple go-to-market motions, how do you maintain efficiency when you have multiple go-to-market motions? Is there I'm just kind of wondering what is the risk in executing here, and also on the ShareFile, shouldn't we think that, that business by the nature of it is, a higher churn than the other businesses you typically purchase? Thank you.

Thanks, multiple questions. I'll start with the first of. So Ittai - no, that's okay. So on the staying focused part, right. So it is one of the things that we have demonstrated that even with - before we acquired ShareFile right, all the channels basically were in place at Progress. We've had a high velocity go-to-market model. We've had a channel model with Kemp and Ipswitch. We've had an open source model with Chef. So we've demonstrated that we can - and of course, we've always had an enterprise and selling to ISV's model since - pretty much the early days of Progress. So I think, we have already demonstrated that we can run a lean operation, and deliver high margins. Because our go-to-market efforts, there's a lot of commonality in a lot of things that we do. We put in a lot of automation for a high-velocity model. We work with channel partners in a very efficient way. I think there are all kinds of benefits of having this wide range of go-to-market motions. It all allows us to actually address not just large enterprises, but midsized and smaller businesses. After all, we have now nearly 200,000 businesses who use our products around the world. And there are only 2000 - global 2000s, right? So really, we have a very large number of businesses who rely on us, and how do we reach them. And the impact channels actually are very efficient in doing so, as is the things like online sales and so on. So I don't see it impacting our margins. I actually see them as being very, very effective in helping us manage our costs. A lot of the channels - a lot of our channel, a lot of the lower-sized deals, a lot of the high velocity stuff, that's all - it's either inside sales or completely automated or folks that do channel partner management, who then basically do meaningful revenue at their end. So it's actually - it is tremendously efficient.

Very good. And then on the churn on ShareFile?

So I think that actually, the net retention of ShareFile was practically the same as that of Progress in FY '24. And as we have always looked to improve net retention when we acquire a business. That is one of our core competencies. And so our goal is to get that to 100% plus as well. And it's extremely close to that.

Yes. And I would just add, Ittai, that you're right, the sort of the raw churn, or raw gross retention might be slightly lower in a business like ShareFile. But it's not different than some of the other products we have in our portfolio. So we have a group of DX products. We've got DevTools, we have Sitefinity, products like that, I would say, share common attributes with ShareFile in terms of the velocity. And sort of the churn, and how those products play out. And I think we're pretty comfortable with where ShareFile has been, and where it can be relative to the rest of those products in our portfolio.

Appreciate it. Thanks for patience. Thank you.

Thank you. One moment for our next question. And that will come from the line of Brent Thill with Jefferies. Your line is open.

This is Bo Yin on for Brent Thill. Yogesh, I wanted to ask a high level one on the demand environment. So we're three weeks into the New Year now. And I guess my question is, more around how demand looks, the customer appetite spending trends heading into 2025 versus this time last year? And - what are the assumptions that you're sort of embedding in the full year guide?

So we see - we need - continue similar demand as we've had in '24. So again, demand in '24 has been solid. I mean, actually, we expected not such great demand. I mean that's one of the reasons why we have continued to do well throughout '24, as the year has progressed. We are expecting sustained demand across our product portfolio. So right now - and we're not seeing anything to make us feel otherwise. Of course, there are lots of uncertainties out there, as we all know. And who knows what will happen. But at least at this stage, we see solid demand going forward.

Got it. Is there anything you could share on just maybe like the state of your pipeline, or top of funnel metrics that you're seeing today?

I don't think there's anything specific that is different. Our top of funnel continues to be robust. Our pipeline continues to be robust. In general, as the vast majority of our business is existing customers - the vast, vast, vast majority of our business. So to us, that is a very, very predictable - and we know well in advance when renewals are coming up. We know well in advance when customers have their contracts that, we can maybe expand upon. So I think that as we - as our new business is very small, right? Our ARR growth, which is in the low single-digits last year. And but 100% was NRR, so over 100%. So you can see that new just a couple of points. And so that's a relatively small amount, so to speak, and we have good pipelines, robust pipeline for that. So really for us, pipeline, we think of a pipeline very differently. We don't - to us, it's really more of the - making sure that we understand our existing customer base and their cycles. That's where the vast majority of energy goes.

That's helpful. Thank you.

Thank you. One moment for our next question. And that will come from the line of Pinjalim Bora with JPMorgan. Your line is open.

Oh great. Thank you for taking the questions. Yogesh, I want to double down on one of the thing that you said about MarkLogic being sold to, I think, U.S. government agency on kind of the GenAI workload. What is it that the customer is using? Is that kind of a vector using MarkLogic, Semaphore as a vector database? What is the usage? I want to just understand that use case, and maybe help us understand if you're seeing more customer traction around that use case? And are you leaning in on from a marketing standpoint? Trying to think if that business line could start accelerating?

Yes, happy to. So Pinjalim, this is an existing MarkLogic Semaphore customers. So let me start there, right? And so they have been using MarkLogic for their - for their primary business database, right? So the business data is unstructured as well as structured. They store all of that in MarkLogic. And so what has happened is that as we have delivered back to capabilities. And the ability to do retrieval, augments with their generation RAC, against the corporate information to - augment the answers coming back from LLMs. These customers who are users of MarkLogic already, MarkLogic Semaphore already, they have an opportunity much rather than the near term rather than the longer term, to see how they can use that for a whole host of purposes. So initial LLM use is for the internal use or initial GenAI use with MarkLogic and Semaphore is for internal use and the internal users. And then we'll see how it goes from there. So they just started this project just - so this is a new go-to-market plan for us. We are looking at our entire - both MarkLogic and Semaphore customer base, as well as looking at broader than that and seeing how we can get some of the other customers to recognize what we can bring to them as well.

Yes. Understood. One follow-up for Anthony. Anthony, what is the assumption of revenue contribution for fiscal '25 from ShareFile? And can you remind us what that business is growing at?

Yes, we're expecting it to be around $250 million for the year, Pinjalim. And I would say it's going to be - we're going to say - it's consistent with the rest of our business sort of low single-digits.

Just to follow up, you said $250 million to $250 million in addition. I'm just looking at the guidance. I think the guidance versus last - or the last fiscal year came up - you'd be adding something like $211 million $214 million. So I'm trying to understand how - if you're adding $250 million from this acquisition is the organic business looks weak, a little bit weak. So I'm trying to understand the ratable piece. ARR $250 million, I understand, but to revenue, the ratable piece, is that lower?

Yes. Well, one thing to keep in mind is there's one month contribution from ShareFile in '24. So the - there's maybe a $230 million, $229 million incremental contribution. And yes, the base business on a pure revenue perspective, as we deal with - and we've talked about this before, the timing of contract renewals for things like DataDirect and even OpenEdge. To the extent we have multiyear term license renewals that either come in, or don't in a particular year, the revenue can get lumpy one way or another, which is why we continue to focus on ARR, which I would say we're expecting growth in ARR. And if you look at 24, even without ShareFile, ARR grew by probably around 2%, which was probably a little ahead of where we thought it would be. I think next year with ShareFile, we're expecting continued ARR growth. So yes, you can if you sort of unwrap let's say, $228 million, $229 million for the incremental ShareFile revenue in '25. You do have an FX impact of maybe $5 million, $6 million on the year. And then there's going to be a little variability from timing of contract renewals for things like DataDirect.

Understood. Very clear. Thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.

Thank you, Sherri. To close, we are delighted with our performance in FY '24, and we're looking forward to an exciting FY '25. Thanks again for joining us, everyone. Have a good time.

Thank you all for participating. This concludes today's program. You may now disconnect.