Morning, and thank you for attending the Southwest IDEAS Conference hosted by Three Part. Up next, we have Progress Software Corporation, traded on NASDAQ under symbol PRGS. On behalf of the company, we have Michael Micciche, Senior Vice President.
Thank you.
Morning, everybody. All right, I'm going to try and blaze through this so we have plenty of time left over for Q&A. Wouldn't be a conference presentation without that slide. That's our forward-looking statement. But I will say one thing: we're talking about Non-GAAP numbers here, just so you know. So currently, actually, we're a little over $2.9 billion market cap today. The company was founded in 1981, and it went public in 1991. That's our current FY 2024 projections for revenue and earnings that we end that quarter in 10 days, I guess, or nine days.
Really regarded the company as having lost its way. New CFO, or excuse me, the new CEO, Yogesh Gupta, came in, looked around, and said, "This company is never going to grow at the rates that it did when it was first started, high top-line growth." So he instituted what we call our Total Growth Strategy, and that's basically to find and acquire companies that look like us and grow our revenue that way because we don't grow organically very much anymore, and he put in this strategy with three pillars, which I'll go through here in succession, so the first one is invest in and innovate. We invest a lot in R&D. As you saw on that previous slide, it's about 18%, 19% of revenues get invested in R&D, and the whole focus behind that is to keep our customers using our products.
They're very sticky to begin with, but if you don't invest in the products, they lose their relevance. Customers churn off them. Your churn increases, and we firmly believe that old customers or existing customers are much cheaper and more profitable to keep than it is to go out and acquire new customers. So we invest in our products, and we try to keep our retention rates high. They're around 100% these days. We invest a lot in our people. Our turnover rate last quarter was 6% voluntary turnover. You can see our eN PS score there, which means everybody's happy, but it's a great culture.
The reason why we really want to hold on to our people, and we're really proud of those retention rates for voluntary turnover, is that if our strategy is going to be to go out and acquire companies, we want the same people doing the same jobs and getting better and better at them. Then also, I have friends who are IR guys at other software companies, and their turnover rates are 25%-35%. Imagine coming into work every day, and a third of your people are no longer there, and a third that come in are new, and they require a year or more to get used to their new job. Having a low turnover rate really works well for us.
And then in terms of systems and processes, we invest in our systems, and we try to optimize our processes in between acquisitions so that when we do our next one, we're geared up and ready to go, and we can hit our target of getting that company to our operating margin target within 12 months. So in order to do that, we have to standardize our systems and processes. We've invested a lot of money. We did a reorg where we realigned product groups, and we just basically optimized ourselves to be ready for the next acquisition. And that's this page. So when we go out, there are a lot of different kinds of companies that we could buy, but we stick to infrastructure software companies.
We look for a certain amount of revenues in terms of size because we know we can, first of all, we can kind of afford it. It's in the multiple and the size we want to pay. We know how many employees there are, and that number tends to be between 10% and 25% of our revenues. It makes it a lot easier to do the acquisition, makes it a lot easier to pay for it. The products also have to have a technological fit. There has to be an easy path to getting to those 40% operating margins. The retention, the recurring revenue has to be significant. We don't want to churn too many customers out of it. So the technology also has to match so that we can continue to invest in it. Our base hurdle is that this business school 101 equation.
If we look at a deal in the preliminary stages, even before an LOI goes out, and we don't think we can justify the ROIC to be greater than the weighted average cost of capital, we'll walk away from it. And keeping that discipline is really hard. The other thing is what I mentioned before about our people, where we have a really good acquisition and integration playbook. Our CEO ran M&A for Computer Associates for the older folks in the room who remember that company from a long time ago. They were the first billion-dollar software company, and they grew by M&A. We do a few things differently than they did, not the least of which is we probably hold on to a lot more people. We invest a lot more in the products to keep the maintenance streams alive rather than just letting them run out.
And I think the people who stay with us after we acquire the company really fall into the culture and tend to like the culture and like working in Progress. And then the last thing is drive customer success. This is our logo page. I guess you got to have it, but we don't grow our revenues organically. Again, we have products that are very well - what's the right word? - the infrastructure software that's very well embedded in people's business processes, and they ring the cash register with it every day. But we're not out there battling it out for new logos. So the reason we focus so intently on customer success is, again, to keep that churn low, keep the net retention rates high, and keep our customers happy. The second, I guess, the other part of our Total Growth Strategy would be how do we allocate our capital.
We believe that we can generate higher returns for shareholders by using it for M&A, so that's our primary use. We also repurchase shares to offset any dilution from the equity programs that we have in place. When we acquire a company and we want to keep the employees around, we give them a certain amount of equity. We all have some equity plans as executives, and our ESPP is actually really good. So a lot of employees participate in that, but we do repurchase at a minimum to offset any dilution from the equity programs. There's about 107 million remaining for this year, and so we also had a dividend. I don't know if anybody had done any research. You see, when we bought ShareFile and announced the deal back in September or October, we also suspended our dividend at that time. It wasn't much of a dividend.
It yielded less than 1.5%. It was about $30 million a year in total. We weren't attracting yield or income investors with it, and it had been put in place by that prior management team that was trying to return capital to shareholders because they couldn't do it with business execution, so they put in a dividend, and so we decided that we would just suspend it because it wasn't making a difference really to anybody. It certainly wasn't getting in our way of buying any companies, so again, this is our M&A framework. I mentioned this a little bit, but the end market has to line up. It has to be infrastructure software. You're not going to see us go out and buy a security company or a marketing company or a financial applications company. It will be infrastructure software.
We have to know that our existing infrastructure can accommodate when we buy the company and we take it on, that our go-to-market processes, our engineering, our sales processes all will work with that company as well. Again, I mentioned the size. We'll never do a merger of equals. You're not ever going to see us buy a company that's the same size or bigger than we are. Buying a company in that range makes it very easy to integrate it. Again, high recurring revenues and that's sort of a base equation that we map our success off of. If we don't get there, we won't even look at it. I mentioned our acquisition integration playbook before. I've seen it a couple of times. I've been in my career. I've been acquired four or five times. It really stinks when you don't know what's going on.
The core of our acquisition playbook is to let the employees know exactly what's going on, whether they're going to be with the company forever, whether they have a short-term contract or a medium-term contract, or whether they're going to be dismissed as the acquisition happens. But the acquisition playbook is good. It's always being refined. It's repeatable. And the two people on our corporate development team that we have that execute it do a really great job. So the synergies, we don't really acquire companies to ignite top-line growth or have cross-sell opportunities or penetrate new markets or take on fast-growing new products. We do it for synergies. The way we do that is we first. The first thing we do is senior management. We don't need two senior management teams. We don't need two G&A organizations, legal, HR, those kind of things.
We rationalize the real estate. We work really hard to keep the employees that we want to keep, whether that's quota-carrying salespeople or engineers or customer service people. And then we leverage lower-cost locations. We've got operations in Brno in the Czech Republic, Sofia in Bulgaria. We have a couple of different locations in India. And of the companies we've bought, we've moved some of those operations to the lower-cost environments, and we achieve our synergies that way. So these are the companies that we've acquired. Again, this is under the Total Growth Strategy with Yogesh Gupta, the current CEO, that he put in place about five, six years ago. Ipswitch was the first one. Chef, that was in 2019. Chef came in 2020. Kemp came late 2021, MarkLogic early 2023, and then ShareFile last week.
And our goal with these companies when we acquire them again is to get to 40% operating margins within 12 months. ShareFile's on the come, right? We just closed that deal. But the other four, we've definitely gotten to those targets. And I can go into more detail about that on the Q&A. But here's just a little table here that shows what we paid for each of the companies in terms of a multiple. The sellers like to use three-point, they like to use revenue multiples. So we never paid more than 3.6 times for any of the four companies we bought until ShareFile. It's the biggest one we've done, and we pushed it a little bit because we thought it was worth it to go to 3.6 times. You can see the margins pre-acquisition were down in here in the, well, Chef was barely break-even.
The others were mid-teens to mid-20s. So we put a little over $1 billion at work to get $330 million in recurring revenue and another $149 million in pro forma EBITDA. We did it in 12 months or less, and we got those target companies when we acquired them up to those 40% margins. So that ROIC greater than WACC equation has worked out somewhere in the neighborhood of 12%- 14% ROIC against. That's probably an aggressive WACC now because interest rates have come back down, and we borrow money to buy companies. We don't issue equity. But that's probably in the right neighborhood and a good way to look at it. Another key component of our M&A strategy is where do we find the targets and what does the M&A market look like?
So the really important thing on this slide is this green box right here shows you that between 2016 and 2020, there were 18,000 infrastructure software companies. Again, that's our target. And they were funded to the tune of $135 billion in VC money. So lots of those companies went away because they weren't great companies or good technology or well-managed. Some of them went public. A lot of them got acquired by other financial buyers or other software companies. And a lot of them are just, there's literally thousands of them that are just floating around out there. Their growth has plateaued. They have good technology. They have good customer bases. They have good management teams, but they're not going to get any more money from VCs to reignite their growth.
So they're floating around, spending a lot of money without getting a lot of, without the prospect of a lot of new funding on the way. That hit particularly hard in 2022. The picture's brightened a little bit, I think. But regardless, there's a lot of companies for us to choose from as long as we maintain our discipline and we walk from, we've walked from at least 20 deals just in the four years that I've been there. If we continue to maintain our discipline and buy the right targets, pay the right price, and integrate them the right way, we can continue the model. It's really just lather rinse and repeat. It's pretty boring. We like boring. We say all the time, "Be boring, make money." And boring is good. This is our ARR and our net retention rates.
One of the key things we've started asking or kind of pushing people toward looking at us on this basis because our revenues tend to be lumpy. We've bought a lot of companies. We bought several companies that had different financial year-ends than we did. Your average software company is sort of up and to the right. First quarter is the smallest. Second and third quarter are bigger, and the fourth quarter is their bonanza quarter. That doesn't really work out for us because of all those dynamics and because of revenue recognition policies. Like if we sign, for instance, if we have an OpenEdge contract that's been around for 20 years and we expect the customer to renew for, I don't know, say one year or three years, and then all of a sudden they come back and they renew for five years, it's an on-prem license.
It's software license revenue that has to be recognized upfront and then the maintenance ratably, so it tends to make the revenue very lumpy, so if you look at the ARR, you can see this is a quarterly basis, but you can see each year it's gone up a little bit. We guide to about 1%. We can do ARR and grow it at 1% or better, and then the net retention rate, our target is above 100%. It was running well above 100%, 102%, 101% until this quarter right in here. That was the fourth quarter and between the fourth quarter and the first quarter of last year, and that was churn. That's the most churn that I've ever seen, and that churn happened. Most of our customers churn off our products because they go away for one reason or another, and that's exactly what this was.
There were these two Swiss banks you guys might have heard about. One of them went out of business and was basically forced to be rescued by the other so when that happened, one of them was a customer of ours before the merger. After the merger settled out, that bank was no longer a customer. That was a decent-sized deal so it hit us right in the NRR. And because it's calculated on a trailing 12-month basis, that's why it's still showing up there. But otherwise, the churn remains relatively low. And again, that's the whole point of investing in R&D and putting a significant effort into making sure that our products are kept current and viable for customers so that they can continue to grow with them and pay us the license and maintenance fees so this is since the Total Growth Strategy.
This actually, we kept it to five years, so we chopped off the first year, but it's basically the same thing. Revenue's grown at about a compound annual growth rate of about 13%. This, again, this number up here, 750, is for the fiscal year that ends in 10 days. It doesn't incorporate the 240 we'll put on top of that from ShareFile next year. So I expect that this number will change somewhat. Again, these are ex-ShareFile. So this in terms of our operating profit, again, compound annual growth rate, they're at about 13%. We're looking for operating income of almost 300 this year, and then last, unlevered free cash flow has been growing at about 11%. This is how we did last quarter. This is from September, when we reported September 24th, but we had a great quarter. It was ahead of estimates.
Balance sheet was in great shape. We'd done $14 million in share repurchases in that quarter. We guided in here to revenues of about $200 million, call it at the midpoint, call it $210-$212 million, and EPS here. Then we upped the guidance to include a month of ShareFile. So we went to $750 million at the midpoint and $4.80. But for us, it was another good quarter. We've had four or three rather pretty good quarters so far this year. We'll report the fourth quarter when it closes in. We'll report that in January. This was the outlook that we provided. Again, I kind of went through this a little bit, but that's the outlook for fiscal 2024 so we can catch up to where we are today. Then ShareFile, that's kind of the big news. We announced that deal about three weeks ago.
We paid $875 in cash for it. We used $750 on a revolver, and the rest was cash off the balance sheet. We expect it to be about $240 million in revenues next year. It's currently at 20% operating margins. By the end of 12 months, we think that'll be 40% in line with our model. But it's kind of a cool little company. It'll go into our DX business that I mentioned and should fit in well there. For anybody wanting to project it out, this is our longer-term model that we provided at our investor day. Again, this might change in lieu of the acquisition that we made of ShareFile and announced a couple of weeks ago.
And then this is the model framework that pretty much recaps everything I was telling you before about our acquisition process and our assumptions that we make and the targets we hope to achieve. So again, if anybody wants that, I can send you the slide afterwards or we can talk about it more. This is the key takeaways. I'll just leave that up there. If there's any Q&A, I'll answer some questions. Yes, sir.
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Yeah. So okay. So I got there in March of 2021. The Chef acquisition had just been completed. So our corporate development team, we have four people. The head of our corporate development came out of Akamai, and then most recently out of LogMeIn. He's been around for 25 years. He knows tons of bankers. We have relationships with all the bulge bracket firms.
And he's very well known in the software market. So lots and lots of opportunities to look at companies. And then the question, if you guys didn't hear it in the back, was how many have you walked away from? Since I've been there, there have been, I don't know, I saw a slide. It was a couple of months ago now that I think there were at least 20 that we walked away from. And walking away from it means, in the case of the 20 that I'm mentioning, means we had a courtship, we got to the church, and we walked down the aisle. In some places, we were standing at the altar, and the priest was opening the book to the vow page. And a private equity firm came in and said, "You guys are willing to pay three times.
We'll give you eight times." And literally lost the deal a handful of times at the very last minute. But again, that key component, if we pay too much for a deal going in, if we pay too much of a multiple, sellers like to use revenue multiples. But if we go too high on our multiple, or if we lever up too much to buy a company, that ROIC greater than WACC equation doesn't work, and our strategy falls apart. So it's really math that governs us, but it's also just being good discipline. Yes, sir.
Can you talk about disruptive technologies, artificial intelligence, in terms of what they mean for developer productivity and disruption to the business model here?
Yeah.
We actually, the CEO of our company has a degree from the University of Wisconsin in artificial intelligence, which is what they called it in the late 1980s when he graduated and got his doctorate. We're kind of on top of the AI thing, but we never call ourselves an AI company. We use AI. We use the AI in three ways. One of which is, and probably the more effective way for us, is we use all kinds of AI products to make ourselves more efficient. Right? We also build AI into some of our development tool products. We have one product called Sitefinity that now you can, there's a little chat box in Sitefinity, and you could say, let's say you guys are all investors, you all have clients.
Let's say you wanted to redesign your web page so that your clients can look online anywhere on their phone, so you have to redesign that page. You could type into the Sitefinity chat box and say, "Show me a web page with our logo on the top right, a signature on the left, the balances down the right side of the page, the performance on the left side of the page." And it will spit out a mockup of that, and then as the developer, you can go and create that. The other thing I mentioned was MarkLogic. That's an unstructured database, and before we bought them, they bought a company called Semaphore, which I'm going to wow you guys with all of my technology know-how. It's called the semantic layer analytics product.
And what that does is it kind of gives you a way to look inside your data and do what AI tells you it can't do, right? Which is figure out patterns and recognize trends that you may or may not see. So we've applied that. I'm not going to say that we're an AI company, but we've applied that Semaphore as well as the current AI knowledge onto the top of our database products. And some of our customers have been using that AI capability or that product Semaphore to, we have one product, one company, for instance, that is a consultant, and they do tax consulting. It's a big household name.
But what they are using AI for is rather than sending an associate out and say, "Go find me every prior case like this in our file." So go into that big room with all the drawers and folders on the wall. Go into that room and find me a 10-year trend on this. And it might have taken that associate a week or a month to do. They can actually use Semaphore inside of their own database. So it's not external AI like ChatGPT, but it's focused on their own data. And they can return that within minutes or seconds. And they've told us that they've saved tens of millions of dollars on it, and they can charge their customers hundreds of millions of dollars more by making their associates and their partners more productive. So we don't really compete like the competition for our products.
Let's say if we use OpenEdge, JPMorgan is a big customer. They run their whole mortgage business on OpenEdge. We don't see Microsoft and Oracle coming in there saying, "Hey, you've got Datadog or Snowflake or any of the other type of vendors coming in and saying, 'Hey, you need to rip out OpenEdge because we have a better product.'" In truth, the time, the money, the effort, the risk that you would endure as a user of an infrastructure software product like that wouldn't yield you any better results, so the guy who runs JPMorgan's mortgage business is like, "No, we're not doing that." Where the competition, the real competition though, is they have 30,000 people in their IT organization, and a lot of them want to work with the coolest, latest technology, not 40-year-old OpenEdge.
And the answer to that, why don't we change it? Is because it works, it's low cost, it's extremely reliable. It's JPMorgan, right? Something goes wrong, we parachute in the A-Team to make sure that they solve their problem as quickly as possible. And we do that for all our customers, but JPMorgan in particular is a good example. Yes, sir.
Last survey I saw, I said 70% of acquisitions don't work out per the purchaser. So I'm trying to understand what you're doing to overcome that ratio, 70% not working out.
Yeah, I was meeting with an investor before, and he asked me of that other page here on these acquisitions, "Have any of these not worked out?" And they've actually, so let me go back in history before current management got there in that period when in between Progress being a really cool, highly sophisticated application database and development company, there was a lost period where they made a lot of acquisitions that didn't work out. They missed quarters, they never delivered on products, they didn't reignite growth. So learning from that and the CEO's prior experience as the head of M&A at Computer Associates, the one thing that I will say, especially among the finance team that I'm on and the executive team, is we have to be really disciplined when we buy a company, and we have to be really disciplined when we integrate the company.
So again, it goes back to that where I was saying before, in between acquisitions, we spend a lot of time on systems and processes. And I'll give you a great example. This is one that investors love, and I just talked about it before with somebody else who I'm not sure if is in the room. But so at our last extended leadership meeting for the finance team, I sat next to a guy whose job it is when we acquire a company to go and rationalize all the bank accounts. Right? So you buy MarkLogic, you got a $100 million, it's a $100 million revenue company. They've got dozens of bank accounts. They've got agreements with Hertz and American Express and some travel company.
Making sure we get all that money that now belongs to us, making sure we don't violate contracts, making sure that everything is reconciled properly. Those are the kinds of things that make acquirers good. And we focus on all of that stuff, not just the bank account stuff, but all of that stuff across the board. Our technology teams go in, and before the deal is even closed, maybe sometimes even before an LOI is sent, we kind of rip apart the technology and see, "Is this something we can manage? Do we have the engineering skill? And if not, will the engineers that are working on that product come with us?" We look at the customer relationships. Do the customers really value their relationship with XYZ guy? Then we're going to do everything we can to keep that guy when the deal closes.
So it's kind of things like that. It's really the blocking and tackling that we try to get right. It's not to say, by the way, that we don't make mistakes. We make mistakes all the time. And in our investor presentation from Investor Day last year, I have a slide in there that is called Institutionalizing the Learning Process. Right? So we're happy to make mistakes. We bought, for instance, when we bought MarkLogic, they have customers up and down the federal government, all the alphabet organizations. We never bought a company like that before, and we didn't know how to get people security clearances. The CEO of our company doesn't even have a security clearance. There are people in the company that know more about accounts than he does, and he can't ever know because they've got security clearances and he doesn't.
So things like that, we hadn't done it before. We try not to make the same mistakes over again, but we definitely try to learn from our mistakes. Yes, sir.
Thank you. Could you compare and contrast your strategy with, say, Constellation Software, which has also been a successful?
Yeah, boy, I wish I had half a Constellation's multiple. Constellation, the biggest thing that they do differently is they kind of let the companies run themselves, and they buy for growth, and they're willing to pay a lot more than we are. And it's like Roper too. I think Roper was a vacuum cleaner motor company at one point, or they made parts for railroad cars or something industrial. But now they're a really cool tech company.
They didn't even go as far as to switch from the New York Stock Exchange to the NASDAQ to get that tech company cachet, but they do it differently. They buy, and they're willing to pay up for growth. They'll buy things that are bigger than we're willing to buy, and then they just kind of make them, they integrate them into the organization by leaving them alone and just making them basically reporting divisions, so I think that's the biggest difference. Yeah, but boy, I'd love to have some of their multiple, so anything else? If anybody does any more research, let me just talk about it now. We had a product called MOVEit. You may have seen it. There was a big security breach. There were something like 25,000 articles written about MOVEit.
Any astute person in this room who does the research will say, "Wow, you had this big security breach. What's going on with that?" So what happened was it was some Russian hackers, state-sponsored Russian terrorists, basically had a zero-day vulnerability on one of our products. It's a file transfer product. And long story short, it was kind of a disaster when it happened, and there was a lot to deal with. Since then, we received subpoenas or notices from the SEC and the FTC and several data protection agencies around the world and some attorneys general from here in the States. And so last, actually, it was over the summer now, it was a couple of months ago. The SEC came back and said, "There's no wrongdoing on our part. They don't recommend any regulatory action." The data protection agencies of Spain, the U.K., and there's one more, Australia.
Yeah, Spain, the U.K., and Australia all cleared us and said, "There's no need for regulatory action. Progress didn't do anything wrong. These were state-sponsored Russian hackers, blah, blah, blah." Several attorneys general have dropped the cases, and then there are a couple of outstanding class action suits brought by, if you look at the firms, you'll see they do this all the time. They're basically ambulance chasers, and they're hoping that we'll pay them off and just go away. And so it costs us, I think we disclosed a little over $6 million in legal and crisis management and communications and stuff like that. But we kind of feel like the biggest liability and risks are pretty close to being in the rearview mirror if they're not there now.
The only real overhang are these shareholder, not shareholder, excuse me, class action lawsuits that have all been consolidated into a court in Massachusetts. So it's in our own backyard. And the SEC and the FTC and the others providing letters of clearance kind of gives us a pretty good feeling about those, but we're not ready to say they're all done because you never know. But if anybody does do more work on that, I always get the call, "Hey, I saw you at such and such a place. Tell me about this MOVEit thing." But that's it. If anybody's interested, happy to introduce you to my CEO and CFO. They love to meet with investors.
If anybody's interested in the model, I've got an FP&A guy who will give you information to 12 decimal points on either side, five years, either side of whatever period you're asking about. He's a great, great, really solid FP&A guy, and we're happy to work with companies who want to model. So if there's no more questions, thank you for coming.