The conference will begin shortly.
Good day, and welcome to the Progress Software Corporation Q4 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Micciche, Vice President of Investor Relations. Please go ahead.
Okay, great. Thank you, Sherry. Good afternoon, everyone, and thanks for joining us for Progress Software's fourth fiscal quarter 2022 financial results conference call. With us today is Yogesh Gupta, president and chief executive officer, and Anthony Folger, our chief financial officer. Before we get started, I'd like to remind you that during this call, we will discuss our outlook for future financial operating performance, corporate strategies, product plans, cost initiatives, our proposed acquisition of MarkLogic, and other information that might be considered forward-looking. This forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties. For a description of the factors that may affect our results, please refer to the sections captioned Risk Factors in our most recent Form 10-K and subsequent 10-Qs.
Progress Software assumes no obligation to update the forward-looking statements included in this call, whether a result of new developments or otherwise. Additionally, on this call, all the financial figures we discuss are Non-GAAP measures unless otherwise indicated. You can find a reconciliation of these Non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after the market closed today. This document contains the full details of our financial results for the fiscal fourth quarter of 2022, and I recommend you reference it for specific details. We have also prepared a presentation that contains supplemental data for our fourth quarter 2022 results, providing highlights and additional financial metrics. Both the earnings release and the supplemental presentation are available in the investor relations section of our website at investors.progress.com.
As Sherry said, today's call will be recorded in its entirety. It will also be available via replay on the investor relations section of our website. With that out of the way, let me turn it over to Yogesh.
Thank you, Mike. Good evening, everyone, and thank you for joining us on our call today. We're happy to be back with you to talk about the results of our fourth quarter and full year fiscal 2022 and to look ahead to fiscal year 2023. We're excited that we can provide you with much more detail about our pending acquisition of MarkLogic. Anthony will discuss the financial results from FY 2022, provide guidance for FY 2023, and he'll also walk us through the financial benefits, impact, and timing of the MarkLogic deal. It's a lot to cover, so let's jump right in. Fiscal 2022 was another outstanding and eventful year for Progress, during which we saw steady demand for virtually every product in every geography and exceptional execution from all of our teams in the field throughout the year.
Our ongoing efforts to invest in our products and in customer success continued to bear fruit and led to exceptionally high Net Retention rates of over 101%. We saw customers expand their use and recommit to our products across the board. In FY 2022, many of our large Chef, OpenEdge, and DataDirect customers significantly increased their annual spend with us. Our DevTools products continued to see best-in-class retention rates, and products such as Sitefinity Cloud and MOVEit Cloud saw many new wins around the globe. Operationally, we fully integrated Kemp and folded the business into our existing sales, support, engineering, and customer success platforms as planned. Our workhorse products, OpenEdge and DataDirect, continued to perform solidly above plan, along with Sitefinity, DevTools, Chef, LoadMaster, and Flowmon, as customers continued to rely on our portfolio to run their mission-critical applications and manage their digital transformation efforts.
All of this resulted in our finishing the fourth quarter on a very positive note, most notably with ARR coming in at $497 million, up 3.5% year-over-year. As you know, we consistently beat estimates and raised guidance this year with strong revenues, world-class operating margins, and increasing earnings while maintaining a solid balance sheet. We navigated the tough and rapidly changing economic environment following the outbreak of war in Ukraine, a brief but dramatic resurgence of Covid, the onset of rapid inflation, we overcame significant FX headwinds. We managed our cost structure very effectively in FY 2022. We sold our headquarters and were able to shed the associated burdens of owning real estate.
Our employees love our flexible work from anywhere model, and our leased space in Burlington, which we inherited from Ipswitch, is working perfectly as our new headquarters. We also continued to manage our variable expenses well throughout the year, even as we reunited more employees and customers in person, in some cases for the first time since March of 2020. Even more importantly, we maintained high employee engagement and retention rates throughout the year, well above the industry averages. We consider employee retention to be critical to our success because retaining employees builds institutional knowledge and is much more cost effective. We have continued to create and nurture a culture geared towards teamwork, respect for all, accountability, trust, and innovation. Progress continues to win awards year after year in the U.S. and abroad as one of the best companies to work for.
We're very proud of the success we've had in hiring and retaining a great team, I believe it shows directly on both the top and the bottom lines of our business. All in all, we're very pleased with the fourth quarter and full year 2022. I couldn't be more proud of our team or more grateful to our customers and partners. We culminated calendar 2022 by finalizing the terms to acquire MarkLogic, allowing us to kick off 2023 by announcing the signing of a definitive agreement for our largest acquisition yet on January 3rd. When we announced our total growth strategy in 2019, we made a pledge to shareholders that we would be disciplined, patient, and extremely selective in how we deployed our capital.
We have kept that promise, and our criteria and commitment have not changed, even as the market and the environment around us has. We believe the M&A market will continue to evolve, and that our ability to compete will increase as we keep adding infrastructure software acquisitions that create meaningful shareholder returns and generate durable cash flows, making Progress the acquirer of choice for target company employees, customers, and sellers. As we said on the call announcing the MarkLogic deal two weeks ago, we think that this acquisition hits the target on every metric, from the ability to create synergies that provide strong recurring revenues, margins, cash flows, and earnings, to a great cultural and technology fit. We look forward to serving MarkLogic's impressive customer list of over 300 companies once the deal closes.
From a technology perspective, MarkLogic's multi-model data platform and its capabilities for data integration and semantic analysis of structured and unstructured data will allow Progress to deepen our data offerings and enable customers to consume data grounded in superior analytics, informed search, and fact-based intelligence. MarkLogic products will also extend data capabilities for our DataDirect customers from structured data integration to natively manipulating, storing, and managing non-relational data such as graph data, triples, and other unstructured data, as well as gleaning insights by performing semantic metadata analysis and applying AI capabilities to all types of data. Now let's talk a little bit about our FY 2023 expectations, including the expected impact of MarkLogic. We expect demand for our products to remain steady in FY 2023 and our ARR to continue to grow modestly. Once MarkLogic is fully integrated, Progress will scale to over $700 million in revenue.
Speaking of MarkLogic's financial impact, which Anthony will explain in more detail in a minute, we expect MarkLogic to add approximately $75 million in annual recurring revenue with high retention rates, over $100 million to the top line on a full year basis, and expect operating margins to improve as we integrate its sales, go-to-market, engineering, and support functions into the Progress platform. It is important to note a few things regarding the timing of the deal and the seasonality of the MarkLogic business. We currently anticipate closing the acquisition in early February and expect MarkLogic to be accretive starting with the first full quarter of our ownership. More importantly, MarkLogic has a January fiscal year-end, and about one-third of its revenue is recorded in December and January.
MarkLogic's two biggest revenue months would have occurred just before the acquisition closes and our fiscal year ends in November, we will only be able to benefit from about 2/3 of their annual revenue in our fiscal year 2023, and we'll only see the full year's impact on revenue in FY 2024. The deal closing in February also gives us only a few weeks of contribution in our Q1 2023. As you will see in our guidance from Anthony, we expect the integration and synergies from this acquisition to take place through FY 2023, with the first full year of revenue and margin impact coming next year. Speaking of M&A more broadly, our total growth strategy is playing out as planned. We're sticking to our disciplined approach, finding great companies and adding great customers, employees, and products to our portfolio.
Our capital structure and ability to finance new transactions is in excellent shape. We're selective, we're patient, and we're ready to find the next good deal. We're also in executing our integration playbook well once we make acquisitions. We learn from each acquisition and continually incorporate better strategies and tactics. We use our significant corporate development experience, as well as our ability to walk away from transactions that don't fit our model, to seek out good deals in a challenging M&A landscape. Most of all, we remain committed to our goal of providing strong returns to shareholders and allocating our capital in the most efficient and productive manner. As you can see, as good as fiscal 2022 was, we're even more excited for fiscal 2023. With that, I'll turn it over to Anthony to go over the numbers. Anthony?
Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call. As I'm sure you heard in Yogesh's remarks, we're very pleased with our performance in the fourth quarter and the full fiscal year of 2022. We're also delighted to have signed a definitive agreement to acquire MarkLogic, which met all our M&A criteria and provides a larger scale opportunity for significant value creation. Turning to the numbers, we'll start on the top line with ARR, which we believe provides the best view into our underlying performance. As a reminder, our calculation of ARR is presented on a pro forma basis to include the results of acquired businesses in all periods presented, and in constant currency with all periods presented at our current year budgeted exchange rates.
ARR at the end of Q4 was $497 million, representing approximately 3.5% organic growth on a year-over-year constant currency basis. The growth in ARR was driven by multiple products, including OpenEdge, DataDirect, Sitefinity, Chef, DevTools, and FileTransfer. A consistent trend that continues to fuel our ARR growth is strong Net Retention, with rates remaining at a record high in Q4, again exceeding 101%. Revenue for the quarter was $159.2 million and represents 11% growth over the prior year, reflecting an incremental contribution from Kemp, which we acquired in Q4 of 2021, coupled with strong sales of our OpenEdge, DataDirect, Sitefinity, DevTools, and FileTransfer products. It's also worth highlighting that on a constant currency basis, our year-over-year revenue growth for the fourth quarter increased from 11%-15%.
For the full year, revenue of $610.6 million represents 10% growth compared to 2021. This year-over-year growth is comprised of a full year revenue contribution from Kemp and growth across multiple other product lines, most notably OpenEdge, DataDirect, and DevTools. Worth highlighting is the impact of exchange rates, because revenue growth for the full year at constant currency would have increased from 10% to 12.5%, an approximately $17 million headwind from foreign exchange for the year. With customer retention rates remaining consistently strong throughout 2022, and with a strong demand environment fueling growth across our portfolio, we're thrilled with our top line results for the year. Turning to expenses.
Total costs and operating expenses were $97 million for the quarter, up 6% over the year ago quarter, and $369 million for the full year, up 12% compared to the full year 2021. For the quarter and the full year, the increase in costs and operating expenses was driven by an increase in our cost base resulting from the acquisition of Kemp. Operating income for the quarter was $62 million, for an operating margin of 39%, compared to $52 million or 36% in the year ago quarter. For the full year, operating income was $242 million for an operating margin of 40%, compared to $229 million or 41% in 2021.
Earnings per share were $1.12 for the quarter, an improvement of $0.20 compared to the year-ago quarter. For the full year, earnings per share was $4.13, an increase of $0.26 compared to 2021. Moving on now to a few balance sheet and cash flow items. We ended the year with $252 million in cash equivalents, and short-term investments, and approximately $300 million in untapped capacity under our revolving line of credit for total liquidity of $552 million. In addition, we had a debt balance of $628 million, which is comprised of our term loan in the amount of $268 million and $360 million in convertible notes.
DSO for the quarter was 62 days compared to 60 days in the fourth quarter of 2021. The increase in DSO was driven by the timing of billings, with much of our billings overperformance coming very late in the quarter. Deferred revenue was $282 million at the end of the fourth quarter, up $30 million from a year ago, a reflection of our strong year-over-year top-line performance. Adjusted free cash flow was $37 million for the quarter and $189 million for the full year. We repurchased $1.5 million worth of stock during the fourth quarter, bringing our total for the year to $77 million. As a result, at the end of Q4, we had $78 million remaining under our current share repurchase authorization.
As you've no doubt seen in today's press release, we've increased the amount available by $150 million for a total of $228 million now available under our plan. I'd like to turn to our outlook for Q1 and the full year 2023. When considering our outlook, it's important to keep in mind the following. First, 2022 was a year of top line growth in constant currency across many of our product lines. In 2023, we expect stability in the demand environment for our products, and as a result, our top line guidance range reflects a relatively flat top line for our non MarkLogic product lines.
Our expectations for MarkLogic and MarkLogic's contribution to 2023 are driven off an assumption that the deal will close during February of 2023, thereby contributing less than 10 months of MarkLogic activity. Once integrated, we expect MarkLogic to contribute more than $100 million to our top line annually. It's important to understand that MarkLogic has a revenue model driven by term-based license agreements, which can result in uneven recognition of revenue. It's also very important to understand that MarkLogic has a January 31st fiscal year end, and seasonality in the business results in roughly one-third of all MarkLogic activity being booked in December and January of any given year. Because of the seasonality, we expect MarkLogic to contribute approximately $70 million of revenue to our fiscal 2023, and to deliver an operating margin of approximately 25%.
As previously mentioned, we expect the integration of MarkLogic to continue throughout 2023. Therefore, we expect to recognize cost synergies gradually during the year and to exit the year with operating margin from MarkLogic of more than 40%. While our pro forma leverage levels are expected to remain modest, increased interest rates will impact our borrowing costs, resulting in interest expense of roughly $0.20 per share associated with the MarkLogic revolver drawdown, and another increase in interest expense of $0.11 per share on our existing Term Loan A. The final point I'd like to highlight relates to Section 174 of the U.S. Tax Code and its anticipated impact on our 2023 cash flows.
As most of you are probably aware, Section 174 of the code was introduced in the Tax Cuts and Jobs Act of 2017, and it's effective for Progress beginning in fiscal 2023. Section 174 requires us to capitalize certain R&D expenses for tax purposes, which previously would have been expensed as incurred. Although we don't expect any meaningful change in our effective tax rate, we do expect to make $15.2 million of cash tax payments in 2023, specifically associated with the capitalization requirements of Section 174, unless it's again deferred, repealed or otherwise modified. With that, for the first quarter 2023, we expect revenue between $157 million and $161 million. This includes less than one month of a contribution from MarkLogic.
We also expect earnings per share of between $1.04 and $1.08. For the full year 2023, we expect revenue of between $675 million and $685 million, representing 11%-12% growth over 2022. We anticipate an operating margin for the year of approximately 38% with a headwind from the MarkLogic integration, which will improve through the course of the year, as I've previously mentioned. We're projecting adjusted free cash flow of between $175 million and $185 million, which includes the $15.2 million in incremental tax payments associated with Section 174 of the U.S. Tax Code. We expect earnings per share to be between $4.09 and $4.17.
This range reflects the previously mentioned negative impact from increasing interest rates of $0.11 per share on our existing credit facilities and $0.20 per share on the facilities we anticipate tapping into for the MarkLogic acquisition. Our guidance for the full year earnings per share assumes a tax rate of 20%-21%, the repurchase of $30 million in Progress shares, and approximately 44.4 million shares outstanding. Our share buyback activity in 2023 is meant to address dilution from our equity plans. While we believe that share buybacks and dividends can provide shareholders with a good return, our M&A track record over the past three years has delivered superior returns for our shareholders. For that reason, disciplined, accretive M&A continues to be the top capital allocation priority of our total growth strategy.
In closing, I'd like to reiterate that we're thrilled with our Q4 performance, the announced acquisition of MarkLogic, and our outlook for 2023. As Yogesh outlined, we believe we're well-positioned operationally and financially to continue executing our total growth strategy to create meaningful value for our shareholders. With that, I'd like to open the call for questions.
Hey, Sherry, it's Mike. Everybody I know Anthony's audio was breaking up while he was giving the MarkLogic guidance. Sherry, if it's okay with you, Anthony, do you mind reading the part again that I sent? It's in your chat, and also it's the paragraph that begins, "Next, our expectations for MarkLogic," and it ends with the paragraph where the last words are the comments about the Term Loan A.
Yeah, sure. Which one was that one, Mike?
Yeah. We're gonna start again and just go through the MarkLogic guidance with the paragraph that starts, "Next, our expectations for MarkLogic-
Yep.
MarkLogic's contributions," and then go right to the end where we talk about Term Loan A.
Yeah. Okay. All right. We'll go with take two. Next, our expectations for MarkLogic and MarkLogic's contribution to 2023 are driven off an assumption that the deal will close during February 2023, thereby contributing less than 10 months of MarkLogic activity. Once integrated, we expect MarkLogic to contribute more than $100 million to our top line annually. It's important to understand that MarkLogic has a revenue model driven by term-based license agreements, which can result in uneven recognition of revenue. It's also very important to understand that MarkLogic has a January 31st fiscal year-end, and seasonality in the business results in roughly one-third of all MarkLogic activity being booked in December and January of any given year.
Because of this seasonality, we expect MarkLogic to contribute approximately $70 million of revenue to our fiscal 2023 and to deliver an operating margin of approximately 25%. As previously mentioned, we expect the integration of MarkLogic to continue throughout 2023. Therefore, we expect to recognize cost synergies gradually during the year and to exit the year with an operating margin from MarkLogic of more than 40%. We anticipate drawing on our revolving line of credit to finance a portion of the MarkLogic purchase price. While our pro forma net leverage levels are expected to remain modest, increased interest rates will impact our borrowing costs, resulting in interest expense of roughly $0.20 per share associated with the MarkLogic revolver drawdown and another increase in interest expense of $0.11 per share on our existing Term Loan A.
Hopefully that one was a lot more clear.
It was. Thank you, Anthony. Sorry to throw that on you at the last second. Now, I think if you guys are good, Anthony and Yogesh, we can open up the Q&A.
Sounds good.
Thank you, gentlemen. As a reminder, to ask a question, you will need to press star one one on your telephone. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster. Today's first question will come from the line of Pinjalim Bora with J.P. Morgan. Your line is open.
Hey, thank you, guys, for taking the question. One question for Anthony first, on MarkLogic. The seasonality that you were talking about, with one-third bookings in, I think you said December and January, how does the rest of the year flow? Is it very minimal in Q1 and kind of goes through the year?
Yeah. Pinjalim, are you talking from a revenue perspective or just overall on the business?
Yeah, from a revenue perspective. I'm just trying to think how to model it next year, quarterly.
Yeah. I would say you're gonna pick up... You know, what we would see in the first quarter as a contribution is gonna be minimal. You know, and certainly because we close during February, you know, end of February is our Q1, and because so much activity gets booked in December and January. You know, I think spreading things relatively evenly over the remaining three quarters is pretty much a safe bet.
I see. Okay. Got it. One question for Yogesh. I checked that MarkLogic's website, they were talking about an OEM partnership as well. What portion of the business is OEM related? Seems like they have a general SI channel. Now with Kemp, I guess you have two companies with a broader SI channel. Would love to hear what we're You were talking about the plans of kind of developing that broadly across the business. Where do we stand today? Maybe, maybe help us give us an update on that. That's all for my sake.
Happy to do so, Pinjalim. Thank you. The OEM business is relatively small for MarkLogic. You know, as you know that in our DataDirect business, the OEM business is the lion's share. That's not the case in MarkLogic. MarkLogic does have an OEM business, but rather small. The SI part is really interesting because our relationships with SI started actually also increasing with Chef. Chef was sort of the first one where SIs have been playing a very important role in winning customers and helping customers be successful. That further expanded with Kemp, as you rightly recalled, now it further helps expand that channel for us with MarkLogic.
You know, it is, it is to me, a really important channel, as you know, you're aware, system integrators do enormous amount of work in terms of making customers successful. Having trusted partnerships with system integrators who are well-versed with products, who have certified folks on their teams, who know the products and, and can do, you know, wonderful things for the customers with them, who actually have a practice around products is truly beneficial. We are happy that we're able to expand that relationship, Pinjalim Bora. And again, the opportunity in my mind is really, the, the key opportunity is to be able to go to somebody who is an SI for a particular product and have them do some work for another product.
Just as an aside, by the way, we also have. We don't call them SIs because these guys do more than system integration work. We have a digital agency ecosystem around our Sitefinity and the whole online presence product portfolio around building and developing and targeting and doing the online analytics for online customers. Those digital agencies, you know, they play a big role in the success of Sitefinity as well, which includes a part of those digital agencies also have some system integration capabilities as well. We actually are building a really solid SI ecosystem in addition to our standard, you know, go-to-market with our own business, as well as the sort of the channel business, which is much more reseller distributor, you know, two-tier channel.
We're really excited about that as well.
Thank you. I'll get back in the queue.
Thank you.
Thanks.
One moment for our next question. That will come from the line of Ray McDonough with Guggenheim Partners. Please go ahead.
Great. Thanks for taking my questions. This is Ray McDonough on for John DiFucci. Yogesh, maybe to start, you mentioned that business was strong across all business lines, and I was hoping you could parse that out a bit. Was there anything in the portfolio that was a little softer than another? You know, I'm thinking OpenEdge is probably more stable in this environment, and maybe you're seeing more, you know, more softness or even cracks in something like Chef perhaps. I'm just trying to get a sense for how the portfolio performed relative to each other, if that makes sense.
Thanks for asking, Ray. Actually, you know, if you look at our business, you know, again, you know, FX makes the business looks different than really in constant currency it was. I mean, there was a significant amount of outperformance throughout the year. It did come across pretty much the entire portfolio. You know, when you think about, you know, whether it is Chef or whether it is OpenEdge or whether it is DataDirect or even, you know, Sitefinity and DevTools. If there's one product which I would say, you know, didn't show same level of outperformance, it's our network management product, WhatsUp Gold.
I think that's because in 2021, there was significant tailwind in the market because of what had happened to SolarWinds at the end of 2020. As everybody knows, 2021 was a really turbulent year for SolarWinds, and I think a lot of SolarWinds customers went looking for alternatives in 2021, which led to some additional outperformance on our part with WhatsUp Gold. I think it's back to sort of more of its regular cadence that it had before that happened. I think that would be the only area where I would say we did not see the level of performance, really outperformance and strength that we saw across everything else.
Great. Thanks for the color. Then maybe for Anthony, you know, as I think about you taking on more leverage for MarkLogic, how should we think about the use of capital going forward to either pay down debt and where? What levels are you comfortable at in terms of your net leverage if, you know, you see an attractive M&A opportunity in the next 6- 12 months where you really feel like you should be pulling the trigger? Where do you think you feel comfortable bringing that leverage in light of a rising interest rate environment here?
Yeah, Ray, it's a good question. And I've talked a little bit about the impact of increasing rates on the outlook for the year. You know, even having said that, I think with what we will draw down or what we anticipate drawing down from MarkLogic, I would expect the leverage level sort of on a pro forma basis to remain well under three. You know, I would expect that probably debt repayment will come into the calculus on capital allocation during the year. You know, we'll do a little bit of calculus on rates and other potential uses of capital. I suspect we're gonna wanna pay down. Like I said, the drawdown is not so much.
You know, if we were to go up to say 2.5x leverage on a pro forma basis, you'd probably see that under two as we go into 2024. You know, I would expect that we start to delever from this one pretty quickly. You know, I think we'd be comfortable up at, you know, to do a deal maybe up at 3x net. Again, that's at a point in time to get a deal done and, you know, similar to what we would do with a deal like MarkLogic, we'd probably look to delever in a rate environment like this pretty quickly.
Great. That's helpful. Thanks for taking the questions.
Yep.
Thank you. One moment for our next question. That will come from the line of Fatima Boolani with Citi. Please go ahead.
Hi, good afternoon. Thank you for taking my questions, and Happy New Year. Yogesh, I'll start with you. There was a cyber incident at the firm, and I understand you're taking a couple of charges just with respect to that incident. I'm curious if you could just expound upon that a little bit and to the extent that maybe on the margins maybe creating a little bit more, maybe a little less stability, if you will, in terms of growth expectations for the non-MarkLogic portfolio. Then I have a follow-up for Anthony, if I could please.
You know, as, as you are aware, and I think as we have mentioned before, you know, the investigation into the incident is still open and ongoing, we really can't comment on it any further other than basically we've said before and we can reiterate that we do not expect any material impact to our business, you know, operational, financial results, et cetera. You know, from a product specific perspective, I don't, I don't see, you know, the, you know, this causing a product specific impact, otherwise we would have talked about it, right? I don't think that the growth aspects of our projections for FY 2023, are related to that. As Anthony mentioned, right, we're expecting stable revenues, this year from the base products.
Obviously 2020 and 2020... Sorry, 2021 and 2022 saw, you know, some phenomenally wonderful demand for us. I think the overall macro is slightly different or maybe hugely different depending on what you think, right? We are being very straightforward about the fact that, yeah, we expect there to be stability in our business this year rather than significant growth. We do expect ARR to grow, by the way, Fatima, right? We said that we do. And, you know, we'll expect it to grow modestly. We think that our core business is truly solid across the board.
Fair enough. Anthony, just shifting gears to the cash flow. Appreciate some of the commentary you shared about, some of the tax and regulation changes on R&D expensing. I wanted to ask about, potentially other impacts to cash flow, inclusive of if there is a linearity or collections consideration for MarkLogic. And then, just generally, I think you called out, sort of back-end loaded performance. Just curious as to why, you did see linearity shift to the back end of the quarter and, you know, how that should, feather into our cash flow expectations, you know, considering the R&D expensing dynamic and, potentially, what we need to stay mindful of on MarkLogic's impact to the cash flow. That's it for me. Thank you.
All right. Yeah. There, there's a lot there, sort of packed into that question. I guess, you know, the largest item in terms of the 2023 cash flow to call out really is that $15 million in incremental cash payments that we'll make under Section 174. You know, like I said, that doesn't affect our rate in any meaningful way. It really just is an acceleration of cash out to the IRS. That has an impact in 2023. I think MarkLogic for sure, you know, when they're booking, you know, let's say a third of the business in December and January, that certainly will impact sort of the linearity or seasonality of cash flow.
you know, we won't realize the benefit of that, I think, until we roll into, to next year, into our fiscal 2024. Certainly along with the top line seasonality, and the amount of activity that's packed into December and January, you know, we should see something similar from a cash flow standpoint. Then the last comment I think that you were, you were sort of driving at.
The comment that I made about DSO and our DSO was up each day year-over-year for the fourth quarter. You know, we had a pretty good bill performance in the fourth quarter. I think from a timing perspective, there was a lot that came in at the tail end of the quarter. That really was what that comment was meant to illustrate. Hopefully that provides the context you were looking for.
Thank you.
Thank you. One moment for our next question. That will come from the line of Harshil Thakkar with Oppenheimer. Your line is open.
Hey, guys, this is Harshil. I'm pretty tired. Can you hear me?
Yep.
Yes. Yes, we can.
Great. Thanks for taking the question. Yogesh, you've talked about previously how there are parts of the portfolio that kind of operate in these price competitive markets where you're a bit careful on conducting price increases, and then there are other parts where you'll be a bit more proactive. Can you just describe where you think MarkLogic fits within that spectrum and how we should be thinking about price increases for that business going forward? As you look at the renewal pipeline for 2023, how are you thinking about price increases there?
Yeah, absolutely, Harshil. Happy to do that. Harshil, you know, again, MarkLogic has by and large, a business that, as Anthony mentioned, is multi-year term licenses that renew, you know, let's say three years at a time or somewhere in that range. You end up with, again, only about a third of the business coming up for renewal in any given year. That's point 1. Point 2, based on what we know and our due diligence, you know, not every one of their contracts has the ability to have meaningful price increases in it.
As you know, they have a significant government business, and there are limits to how much you can do in terms of price changes with the government, federal government contracts. you know, it is, again, it is, I would say, given the fact that it is only about three-quarters of the business, you know, in terms of three calendar or three fiscal quarters, given the fact it's only about 70% or even slightly less than 70% of their overall business, and the one-third of the business doesn't come in in FY 2023. given the fact that only about, you know, a third of the business will be up for renewal, I don't think it is a very large number.
You know, I would say maybe on an annualized basis, it would be about 20% of their revenue for MarkLogic, where I think there's an opportunity to do some price increases. The product is very strong and it's excellent. I think in those cases, we may be able to do some reasonable price increases. Again, the goal, Harshil, for us is customer retention matters more than the actual price increases. That's our philosophy, has always been, and we will continue to focus on that. Going back to the rest of our portfolio, again, gosh, about I keep going back to this, right?
That, you know, more than a third of the business or the core business, pre-MarkLogic business that Progress has, is such that it's, you know, OEM-ed or it is, you know, based on sort of royalties or, you know, revenue sharing, et cetera. Those things, there are really no price increases that are in our control. Where there is price increase opportunity, obviously, across two-thirds of the portfolio, as you yourself said, right? There are some products that are extremely competitive markets, where we don't see much either, so much opportunity either. That leaves probably about half our business. In about half our business, maybe somewhat less of our original business, again, we're looking at, you know, sort of three-year renewal cycles.
You know, you can do the math yourself, and you end up with, again, less than sort of 20% of our overall revenue can have some price increases. Overall, by the way, Harshal, you know, price increases are not a big, big component of our business stability. Our business stability is primarily driven by the fact that we have very, very high, and increasing by the way, right, growth retention rates. Every single acquisition we do or we have done so far, we have increased the growth retention rate and thereby increased the Net Dollar Retention rate as well. To me, that's sort of what drives the stability in the business.
Got it. Thank you.
You're welcome.
One moment for our next question. That will come from the line of Anja Soderstrom with Sidoti. Your line is open.
Hi, thank you for taking my questions. A lot of my questions have been addressed already. I'm just curious, after sort of beating your guidance throughout the year, you're coming in at the lower end. Was there anything in the fourth quarter that sort of surprised you?
Not really. You know, we had a solid fourth quarter. You know, we were within our guidance for revenue. We were above our guidance for EPS. You know, I think, Anja, we had a solid quarter. You know, I do think that, you know, we executed well. Again, Anthony, I don't know if you have something you wanna add.
Yeah. I would just say that coming into the fourth quarter, we probably left our range on the top line a little wider than we might otherwise. The reason for that was because, you know, we were just whipsawed on foreign exchange rates last year, like a lot of companies were. There was, you know, a bit of uncertainty going into the fourth quarter about how that would all land. The range might have been a little bit wider than would have ordinarily been the case, but to Yogesh's point, otherwise, it was, you know, from our perspective, just solid across the board.
Okay. Thank you. I'm just also curious for the MarkLogic with the term buy based licenses, how long are the duration of those? Are those one-year contracts or?
Yeah. A lot of multiyear. I'd say, yeah, a lot of three-year contracts, some longer than that. by and large, we end up with a lot of multiyear term-based license deals.
Okay. Thank you. That was all for me.
Thank you. One moment for our next question. That will come from the line of Brent Thill with Jefferies. Your line is open.
Hi, guys. It's Antonio on for Brent here. Thanks for taking the question. You know, about 20% of your revenue is invested back in R&D, and I was just wondering if you could talk a little bit about where those investment dollars are going, anything that you guys are working on now, and then maybe some key points you'd like to highlight for us.
Yeah. You know, Antonio, as we've said before, right, you know, we have a tremendous emphasis on customer retention. The question becomes, you know, what can you do to drive net dollar retention of your customers and, you know, retain them and expand business with them and continue to grow with them, right? We actually basically spend and invest more in R&D to make sure that our products stay ahead of the curve, this is across the board, right? This is across our portfolio to make sure that our customers stay with us because it's much, much easier, much, much cheaper for us to retain customers that way than to win new ones.
Of course, we spend significantly less, again, relatively speaking, on sales and marketing, which is why if you look at our overall operating margins, they truly are world-class, right. A company our size and scale in the software industry just doesn't have the percentage operating margin that we do and the kind of cash flow generation that we do. I think that, you know, to me it becomes, and to us, it becomes very much a question of where do you put in your dollars to the best with shareholders. And we believe that investing in the product side is much better than trying to not invest on the product side and then try to clean up with all the other effort that would be needed.
That's where we invest, and we continue to look for, you know, the right level of investment, to continue to make sure that our products are leading edge. It really is across our entire portfolio.
Awesome. Thanks for that. Maybe one quick follow-up or more of a clarification. I know you mentioned Kemp in your opening remarks, but where are we on with that acquisition? I know you have to integrate Kemp and Flowmon together. Are we done with that or is just?
Oh.
... a little more work to be done?
No, no. Yeah. I mean, we are done integrating Kemp. I think I might have said that in the opening remarks as well. Our integration of the Kemp business, both the products, Kemp and Flowmon products and the business is complete. You know, they are a key part of our infrastructure management portfolio. They have been integrated on our platform and, you know, we're now looking forward to, you know, closing the MarkLogic deal and bringing that integration.
Awesome. Well, thank you, guys, and good luck on integrating...
Thank you so much.
Thank you. One moment for our next question. That will come from the line of Ittai Kidron with Oppenheimer. Your line is open.
Hey, guys. I just wanna follow up on a couple financial things, Anthony. First on the on MarkLogic, can you talk about how you're going to incorporate them in ARR since they're so lumpy? What is the financial exercise you'll do to normalize that into an ARR number?
Sure, Ittai. You know, I think we would expect that once the deal closes and we get to Q1, we would incorporate all of the ARR. We would effectively be able to provide platform as if we had owned the business, you know, from the beginning. You know, we will look to treat it exactly the way we do it with all of our other products. As Yogesh mentioned, you know, we would roughly or we are expecting roughly $75 million of ARR from the business. You know, we expect to continue to see that growth. You know, I think more to come in the Q1 earnings call once officially.
So Ittai
Okay.
Let me try to repeat what Anthony was saying just to see.
Yeah.
You can hear it this time around. Basically, as you know, when we complete a. You know, when we close the deal, then in the first reporting period, which will be at the end of Q1, we basically take the historic ARR of that business, and we do a pro forma across the history and current, and we gonna use that going forward. For of course, for multi-year term licenses, we analyze those. Obviously, the, you know, maintenance becomes or any other recurring revenue is annualized, of course. What we would expect to do is we would expect about $75 million increase to show in the ARR once the deal closes. You know, we expect ARR from MarkLogic to continue to grow.
Got it.
You know, they have seen a steady growth in their ARR over the last three years. We expect that trend to continue.
Okay. Then last one for me. On the revenue guide for the year, you know, when I take out MarkLogic from this exercise, and I assume that your guidance for 2023 includes already the $675 million-$685 million. Does that include or does not include MarkLogic, just to be clear?
It's included in that number.
Included. If you exclude your comments on MarkLogic from that number, you're basically guiding a shortfall of about $20 million roughly plus minus on the year. Can you break that down a little bit more as to the components of that? What is your underlying macro assumption that you've taken into account in your guide?
No, we're actually guiding, Ittai, if you were to take out 70, I think you'd be showing. Also if you factor in, say, I think $1.2 million in exchange rates that we mentioned, you know, you'd be showing a little bit of growth at the midpoint. I mean, it would be slight, but growing a little bit. I think from a macro perspective that's, you know, sort of leads to the consistency we talked about and in terms of what we're seeing in the demand environment.
Okay. Very good. Thank you.
Thank you. I'm showing no further questions in this queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for closing remarks.
Well, thank you again everyone for joining for this call, and we look forward to speaking to you again soon. Thank you and have a good night.
Thank you all for participating. This concludes today's conference call. You may now disconnect.