Prepared remarks
Hello, and welcome to Progress Software's second Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. To ask a question during the session, you will need to press *11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. I would now like to hand the conference over to Michael Micciche. Sir, you may begin.
Thank you, Towanda. Good afternoon, everybody. Thanks for joining us for Progress Software's second fiscal quarter 26 financial results conference call. With me tonight are Yogesh K. Gupta, our President and CEO, and Anthony Folger, our Chief Financial Officer. Before we get started, let's go through the safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, 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 and our actual results may differ materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the Risk Factors section of our most recent Form 10-K and the latest 10-Q, which was filed in conjunction with this announcement this evening. Progress assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced in this call tonight 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 earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the second quarter of fiscal 2026, and I recommend that you reference it for specific details. We have also provided a slide presentation that contains supplemental data for the second quarter, and provides additional highlights and financial metrics. Both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Of course, today's call is being recorded in its entirety, and it should be available for replay shortly after we finish tonight on the Investor Relations section of our website. So with that out of the way, Yogesh, I will turn it over to you.
Thank you, Mike, and good afternoon, everyone. Q2 was another strong quarter for Progress as our results exceeded our expectations and we were able to raise our guidance again for the full year. Our Q2 2026 results reflect the resilience of our product portfolio, strong execution by all our teams, and the continued loyalty of our customers. Revenue of $253 million was up 7% year over year with ARR of $868 million, up 2% year over year in constant currency. Operating margin was 40%, and earnings per share were $1.62, well ahead of the high end of our guidance. We also generated approximately $79 million of adjusted free cash flow and delivered a net retention rate of 100%. These results exceeded our expectations and guidance across every metric and were driven by broad-based strength throughout the portfolio. We saw particularly strong performance in our data platform products, as our customers increasingly leverage their business data to provide context for AI. We also saw strength across the rest of our portfolio including infrastructure management and content-driven workflow automation, demonstrating the benefits of our diversified product strategy and the mission-critical role our software continues to play for customers of all sizes around the world. When viewed against the backdrop of the last several quarters, I believe Q2 reinforces the strength and consistency of our business model. Over the past year, we have continued to demonstrate our ability to generate durable recurring revenue, strong margins, and significant cash flows while integrating acquisitions, reducing debt, investing in innovation, and navigating a rapidly evolving technology environment. Over the past year, investors have tried to sort out whether AI ultimately will benefit or disrupt software. Our view remains largely unchanged: AI represents an opportunity for Progress. The reason being, while certain aspects of the software business are dramatically changing, enterprises have begun to realize that context and control are key to AI efficacy, outcomes, and value. These realizations play to the strengths of Progress. Our data platform and workflow automation products provide the context needed for AI to deliver reliable, verifiable, and trustworthy outcomes. And these products, along with our infrastructure management offerings, deliver the control that AI needs for security, risk mitigation, and cost control. Every modern enterprise runs on three foundational software layers: business logic and workflows, data and content, and security and infrastructure management. Progress has spent decades earning a place in that core. We are uniquely positioned in those three foundational layers which continue to be critical in a world where AI is changing how businesses run. Over the past few years, we have been embedding AI capabilities across our portfolio and have increasingly focused on helping customers build responsible AI-powered applications and digital experiences. We continue to see growing customer interest in leveraging our technologies to improve productivity, automate workflows, and accelerate innovation. Just today, we launched Chef Enterprise Management for NVIDIA's DGX SuperPOD Spark, referred to by NVIDIA as the world's smallest AI compute supercomputer. NVIDIA is bringing powerful AI computing out of the data center and into the hands of developers across the enterprise. As the adoption of these systems grows across offices, research facilities, edge locations, and secure facilities, organizations will need to manage them with the same rigor as the rest of their critical infrastructure. Recognizing that, NVIDIA identified Progress and our Chef platform as a critical enterprise manageability partner to support DGX Spark deployments. This Chef capability extends the reach of Progress' infrastructure management control to a fast-growing class of persistent AI infrastructure at the edge and underscores our broader strategy to help organizations develop, deploy, and manage AI securely and responsibly across their data, digital experiences, and the underlying infrastructure. Speaking of data, we are particularly encouraged about the Progress Data Platform. Last quarter, we highlighted a seven-figure deal among our wins, and we saw continued momentum through the second quarter. As organizations move beyond AI experiments and into production deployments, they are increasingly recognizing that successful AI outcomes depend on leveraging data for context. AI agents are only as effective as the enterprise knowledge that underlies them — the context. Much of that knowledge lives in systems of record and unstructured content: documents, emails, support records, and conversations, often disconnected from the systems where AI operates. Simply trying to provide all that context to AI is hard and extremely expensive. Inference expenses rise dramatically, and the accuracy of outcomes continually worsens as the context window grows for AI. Progress Agentic RAG and the data platform transform fragmented business information into governed, AI-ready intelligence, significantly improving token economics as well as the speed, accuracy, and reliability of AI output. Those organizations that lead and succeed with AI will be the ones that securely contextualize and operationalize enterprise knowledge at scale, and our data platform helps customers address these challenges while improving accuracy, reducing complexity, and lowering the cost of AI deployments. So we remain optimistic about the broad technology landscape. AI continues to reshape the software world, and we will continue to anticipate and respond while monitoring those trends closely. We remain confident that our products will continue to be highly relevant and integral to our customer success, and in many cases are becoming even more valuable as customers seek trusted platforms on which to build their AI strategies. You can see this across our business in many ways, and it is especially apparent on our balance sheet. In Q2, collections improved again, and days sales outstanding declined significantly compared to where we exited fiscal 25. Our balance sheet continues to strengthen and our leverage profile continues to improve as we pay down another $50 million of debt. Combined with our first quarter actions, we have now reduced debt by approximately $110 million during the first half of the fiscal year, and we will continue to reduce leverage significantly through the rest of the year. Our capital allocation strategy remains unchanged. First, we will reduce leverage and strengthen our balance sheet. Second, we will repurchase shares when we believe that valuation presents an attractive opportunity. Let me take a moment to reiterate our focus on our total growth strategy which, as I have said before, has three components. First, we innovate and invest in our products and our people, delivering new products and new capabilities faster than ever before while continuing to grow our people's skills. Second, we look to grow our product portfolio and customer base through disciplined M&A with a specific focus on future AI relevance. Third, we continue an unrelenting focus on our customers to drive the net retention rate to 100%. Speaking of M&A, our perspective is gradually becoming more optimistic as we see signs of sellers beginning to adjust their expectations. Our strong balance sheet enables us to rapidly execute on the right opportunity, and we remain very active in evaluating potential targets while staying disciplined. Going forward, AI relevance continues to be one of the key criteria when evaluating acquisition targets. We have built significant shareholder value over many years through a thoughtful and deliberate acquisition strategy, and we will remain steadfast on our discipline and on our return thresholds. Turning to the outlook, our strong first-half performance gives us confidence to raise our full-year expectations. While customer activity and deal size can vary from quarter to quarter, we are pleased with the momentum exiting Q2 and our updated guidance reflects both the strength of first-half execution and an optimistic and prudent view of the remainder of the year. In closing, we are very pleased with our Q2 results. We exceeded expectations on revenue, earnings, and cash flow. ARR improved, collections improved, and we are continuing to pay down debt aggressively. Most importantly, we believe Progress remains committed to helping our customers navigate a period of unprecedented technological change. We continue to see healthy customer engagement across the portfolio, growing interest in our AI-enabled data and infrastructure offerings, and strong demand for the mission-critical software our customers rely on every day. These factors, combined with our disciplined approach to capital allocation and M&A, position us well to continue creating shareholder value over the long term. As ever, I want to acknowledge and thank Progress employees around the globe for their continued excellence and dedication to making and keeping our customers successful. With that, I will turn the call over to Anthony.
All right. Thanks, Yogesh, and good afternoon, everyone. We are very pleased to report outstanding second quarter results, a quarter highlighted by terrific performance across all key metrics. With that, let's get right into the numbers. I will start with ARR, which remains our key metric for assessing top-line performance. We closed Q2 with ARR of approximately $868 million representing 2% pro forma year-over-year growth. For clarity, our pro forma results include ARR from acquired businesses in all periods presented. This growth was broad-based across our portfolio, including OpenEdge, LoadMaster, WhatsUp Gold, MOVEit, our DevTools products, and ShareFile. Consistent with prior quarters, our net retention rate was strong, coming in at 100%, up from 99% last quarter. In addition to solid ARR growth, Q2 revenue of $253 million exceeded the high end of our guidance range and grew approximately 7% on a year-over-year basis, again driven by broad-based strength across the portfolio, most notably DataDirect, Chef, MarkLogic, and LoadMaster. As we have mentioned on previous calls, the renewal timing of subscription contracts can have a meaningful one-time impact on revenue in any given quarter. That dynamic contributed positively in Q2 and, combined with strong demand, resulted in very strong year-over-year growth. Beyond the product line contributions I have detailed, it is also worth echoing Yogesh's comments on our Q2 top-line performance, especially increased demand for our Progress Data Platform and the AI use cases that PDP solves for enterprises. Turning to expenses, total costs and operating expenses were approximately $151 million for the quarter, up 6% compared to the year-ago quarter. The year-over-year increase included higher variable costs associated with our strong top-line performance and was otherwise very much in line with our expectations. Importantly, relative to the revenue outperformance, our incremental margins were strong, demonstrating continued cost discipline across the business. Operating income of $103 million was well above our expectations, resulting in an operating margin of 40% for the quarter. Earnings per share of $1.62 also came in well ahead of our expectations, driven largely by our strong revenue performance. On a year-over-year basis, EPS grew by approximately 16%. Turning now to a few balance sheet and cash flow metrics: we ended the quarter with cash and cash equivalents of $103 million and total debt of $1.3 billion for a net debt position of approximately $1.2 billion. Our net leverage ratio at the end of Q2 was approximately 2.9x on a trailing 12-month basis, marking a significant improvement from 3.4x at the beginning of the fiscal year. As planned, our 2026 convertible notes matured in April and the $360 million in principal was paid using our revolving credit facility. With that maturity behind us, our total debt is now comprised of $850 million drawn on our revolving credit facility and $450 million as convertible notes due in 2030. At the end of Q2, we had $650 million in unused revolver capacity providing ample liquidity and flexibility to continue executing our total growth strategy. DSO for the quarter was 49 days, an improvement of 4 days compared to 53 days in the year-ago quarter. Deferred revenue was approximately $423 million at the end of Q2, an increase of approximately $35 million compared to the year-ago quarter. Adjusted free cash flow was $79 million for the quarter, a significant increase compared to $37 million in the prior year quarter and was driven by strong collections and excellent operating performance. On a first-half basis, adjusted free cash flow was $178 million, again a reflection of strong operating performance and improved collections spanning both Q1 and Q2. As for capital allocation, during the first half we repaid a net $110 million of debt and repurchased approximately $55 million of Progress stock, leaving approximately $148 million remaining under our current share repurchase authorization. This capital allocation mix represents a slight shift from our initial plan allowing for more share repurchases while maintaining meaningful leverage reduction. As previously noted, our net leverage ratio now stands at 2.9x. Turning now to our outlook for Q3 and the full year: before getting into the numbers, I would like to provide some context on how we are thinking about the second half of the year. First, revenue in the first half was exceptionally strong — year-over-year growth of more than 5%, including 7% in Q2. We are thrilled with this performance and the underlying demand it reflects. That said, our first-half growth was partially influenced by deal timing and, as we have noted many times on past calls, the clearest read on our underlying top-line momentum is ARR which grew 2% year over year. We will keep that in mind as I turn to the outlook. Next, on capital allocation, we have updated our full-year plan to reflect approximately $220 million of net debt repayment and approximately $75 million of share repurchases. At current valuation levels, we believe our shares are an attractive value and have therefore allocated a little more towards repurchases while still maintaining aggressive deleveraging. As a result, we now expect to end the year with approximately $740 million drawn on our revolving credit facility and a net leverage ratio of approximately 2.8x. With that context, for the third quarter of 2026, we expect revenue between $244 million and $250 million and earnings per share of between $1.53 and $1.59. For the full-year 2026, we are raising our outlook and now expect revenue between $990 million and just over $1 billion — an increase of $2 million from our prior guidance — reflecting approximately 1% to 2.5% growth over fiscal year 2025. We expect an operating margin for the year of approximately 39%, adjusted free cash flow of between $271 million and $283 million and unlevered free cash flow of between $323 million and $334 million, both meaningful increases from our prior guidance. Finally, earnings per share of between $6.09 and $6.21, an increase of $0.18 from our prior guidance. Our guidance for full-year EPS assumes a tax rate of 20%, the repurchase of approximately $75 million in Progress shares, total debt repayment of approximately $220 million, and approximately 42 million weighted shares outstanding. In closing, Q2 was an exceptional quarter that demonstrates the strength and resilience of our diversified product portfolio. We delivered revenue and earnings above expectations, generated strong free cash flow, and continued to make excellent progress on deleveraging our balance sheet. We are entering the second half with confidence in our ability to execute, and we believe we remain well positioned to deliver on our raised outlook for fiscal 2026 and beyond. With that, I would like to open the call for questions.
Questions and answers
Thank you. Ladies and gentlemen, as a reminder to ask a question, please press *11 and wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John DiFucci with Guggenheim. Your line is open.
Thank you. I have a question for you, Yogesh, and another for Anthony. So Yogesh, you said you are starting to see sellers beginning to adjust their expectations. We are more than a year and a half now after the successful ShareFile acquisition, which was a different animal for you beyond just the size. It was very different and it was successful. Given this experience, what is your appetite for similar acquisitions of size or pure SaaS like that was? And on the other side of the coin, can you give a little more color on your comments where you said sellers are beginning to adjust their expectations? Thanks.
Absolutely, John. On the first part of the question, yes — we are comfortable with doing a transaction at a similar scale to ShareFile. Historically, our criteria has been that we want to pick up companies that are about 10% to 25% of our scale and size on revenue. Given that we are now about $1 billion in revenue, ShareFile is just about a 25% contributor to that. So another ShareFile-size acquisition is well within that range. When we acquired it, it was a larger percentage because our denominator was smaller. We are also comfortable buying cloud-based businesses. However, as with ShareFile and other acquisitions including MarkLogic, we are very cognizant that AI relevance and the future prospects for the business must be something we get comfortable with. That is critical, and we want to make sure anything we acquire continues to have a great future ahead in the world of AI. In terms of sellers adjusting expectations: over the last few quarters, when we speak to sellers their expectations have not yet been fully reset. I will not say they are completely reset, but we are beginning to see a change in tone. We are seeing folks recognize that the software industry valuations are being reset. That commentary comes from several conversations, not just one or two. As you know, we speak to 50 to 60 targets every quarter. That continues unabated. I wanted to share that because in prior quarters I have said sellers' expectations were still out of line with reality. I do not think they are completely in line yet, but there is meaningful movement toward getting there.
Got it. That all makes sense, Yogesh, and we expect you to keep doing what you have done so far. Thanks. Anthony, if I could follow up here: fiscal Q3 results look really good and the guidance looks good, but fiscal Q3 revenue guidance was a touch below the street. You saw this quarter a sequential acceleration in your SaaS business. Was that more seasonal? We saw something similar last year, and then SaaS sequential growth wasn't the same into Q3. Is that how we should be thinking about the guidance, or am I off somehow?
John, we certainly saw some strength in SaaS revenue this quarter with a nice sequential step up. In prior quarters we had some cleanup to do on ShareFile, which we talked about last quarter; the further away we get from the close date, the smaller that cleanup becomes. We are not completely normalized yet for that business, but the impact is getting much smaller. I would not expect the SaaS line to bounce around materially quarter to quarter; we should see movement consistent with a typical SaaS business. Regarding the guidance being slightly below the street at the midpoint: some of Q2's beat was timing. We had some deals expected in Q3 come in Q2 — probably a little more than half of the beat for Q2 was timing. So that timing pulls from Q3 into Q2. It does not diminish the strength we saw in Q2, but it causes us to slide some numbers around from quarter to quarter. For the full year, we expect approximately 1% to 2.5% revenue growth, which maps more closely to the ARR growth we've been seeing.
Yep.
Thank you. Our next question comes from the line of Ittai Kidron with Oppenheimer and Company. Your line is open.
Thanks. Hey, guys. Solid numbers. Yogesh, I want to start with you. You talked about the data platform, workflow, and infrastructure management as important vehicles for AI. Can you quantify roughly what percent of your revenue is positioned within those portfolios? And with AI now in place, is there a case to be made that over the next two to three years you could actually drive two, three, or four points of organic growth off this portfolio associated with AI?
Ittai, we don't provide multi-year guidance, but I can give context about mix. When you think about our data plus content business, it is actually more than two-thirds of our total business. People often forget how much we are in data, content, and the workflows around that — keeping information under control, connecting information, integrating sources together, and leveraging that for AI. It's truly the bigger part of our business. We expect that to be a healthy part of our business going forward. The ARR growth of about 2% organic has been where we see us landing over recent years and is where we feel confident for now. Regarding drivers, it's a combination of volume and pricing, but currently it's primarily capacity or consumption-driven among the existing customer base. The more data you store and the more you pull, the greater capacity you need; it's an indirect connection to consumption. We have also won new customers for the data platform, which is encouraging. Pricing is a secondary lever we have not pulled much yet. If we see an opportunity, we will consider it, but today the primary driver is consumption volume and usage of the platform.
Anthony, a couple for you. Very good free cash flow in the first half of the year — $178 million, I think you mentioned. You talked about $110 million for the second half. I understand part of the $178 million was better collections, and there is a limit to how much you can improve collections. How comfortable are you with that $110 million? What are the opportunities for upside here? How should I think about that?
Ittai, the first half was an exceptional half for free cash flow. If you go back to last year after we acquired ShareFile, there was a lot of cleanup — moving billing systems and related items. In Q2 of last year we had a really low cash flow quarter because of that transition. Our DSOs got extended last year and some receivables built up. The team did a good job operationally addressing those issues in Q3 and Q4 last year and driving accelerated collections in the first half of this year to clean that up. We are very confident in the second-half outlook for free cash flow. I try to set numbers we think we can beat, so we are comfortable with the plan. The first half is somewhat of an outlier because of the cleanup benefits we realized this year compared to last year.
Maybe one last one, for both of you. Regarding M&A going forward, it's good to hear you are more optimistic. When I look at your capacity to do M&A, you have $650 million revolver capacity and about $100 million in cash, so roughly $750 million total. Do you envision an acquisition that would require increasing the revolver further, or are you thinking about targets within the capacity available in the revolver?
We intend to stay within the revolver. We believe we can pursue opportunities within existing capacity. Valuations are shifting and becoming more favorable, so we should be able to do what we want within the revolver. That's our intent. If a uniquely compelling opportunity came up that required a different approach, we would evaluate what's right for the business, but I do not expect transactions that would require going beyond the revolver at this time. Our existing capacity continues to improve each quarter as we pay down debt.
Thank you, guys. Good luck.
Ladies and gentlemen, our next question comes from the line of Lucky Schreiner with D.A. Davidson. Your line is open.
You had license outperformance and some deal timing. I'm curious if you've noticed any change in contract duration as customers evaluate their SaaS portfolios in the age of AI. Are you seeing any change, better or worse, in the contract durations you are signing with customers? Thanks.
Thanks, Lucky. We are not seeing a material change in contract durations. Deals that were coming in at three or five years in the last cycle are generally getting renewed for similar durations. We are not seeing a shortening of terms driven by AI dynamics. The primary factor remains timing of renewals rather than a change in typical term length. Overall, it feels like a really strong quarter and first half.
Yes.
Agreed, and retention rates obviously improving shows that out as well. One follow-up: regarding strong demand across your customer base, anything to call out from a vertical perspective? Previously you called out a semiconductor customer; but in general, any tailwinds within certain customer bases you'd want to call out?
Lucky, I would not call out any single vertical as a standout trend. We see good traction in industries with regulatory pressures and in parts of the government sector, but our business is very broad and more horizontal than most. There isn't a single vertical I would say will be a sustained driver next quarter that we would call out today. If there were, we would share it.
Appreciate you taking my questions.
Ladies and gentlemen, I am showing no further questions in the queue.
I would now like to turn the call back over to Yogesh K. Gupta for closing remarks. Thank you for joining us this evening and we look forward to speaking with you in the near future. Have a good night.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.