Progress Software Corp /Ma Q1 FY2026 Earnings Call

Hello, and thank you for joining us. Welcome to Progress Software Corp.'s First Quarter 2026 Earnings Conference Call. I will now turn the call over to Michael Micciche, Senior Vice President of Investor Relations. You may proceed.

Okay. Thank you, Twanda. Good afternoon, everyone, and thanks for joining us for Progress Software's First Fiscal Quarter 2026 Financial Results Conference Call. Joining me on the call are Yogesh Gupta, President and CEO; and Anthony Folger, our Chief Financial Officer. Before we get started, please consider our safe harbor statement as follows. 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 vary 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-Q and the latest 10-Q being filed in conjunction with this announcement. Progress assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced on this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the first quarter of fiscal '26, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our first 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. Today's call is being recorded in its entirety and will be available for replay on the Investor Relations section of our website shortly after we finish. Yogesh, let me turn it over to you.

Thanks, Mike. Good afternoon, everyone, and thank you for being here. We are excited to present our first quarter results today, so let’s get started. We had another solid quarter, with revenue of $248 million, which is a 4% increase compared to last year’s Q1. ARR grew by 2% in constant currency during the same timeframe, and NRR remained robust at 99%. The EPS for the quarter was $1.60, marking a 22% increase year-over-year, and our operating margins exceeded 41%. We achieved record cash flows due to a strong emphasis on collections. Our adjusted free cash flow amounted to $99 million, with unlevered free cash flow at $111 million. Our balance sheet is in excellent condition as we aggressively pay down debt and buy back shares. This strong performance is driven by AI and other innovations in our portfolio that our customers appreciate. Now, more than ever, our products are essential, our customers are loyal, and our team is executing exceptionally well. These factors support our positive outlook. The foundation of our success continues to be our total growth strategy. We maintain discipline as we innovate across our product lineup and deliver increasing value to both our shareholders and customers. This approach has proven effective during various technology shifts and industry changes, and it remains effective today. Regarding M&A, our corporate development team is actively pursuing deals, and we have refined ShareFile operations, which continues to perform strongly as one of our top acquisitions. Lastly, customer success is our primary focus. Now, let’s address the three key topics that are top of mind. First, our business is doing well. We are seeing strong retention and good performance across our products. Our broad product portfolio continues to support our customers’ businesses, leading to solid year-over-year growth in both ARR and revenue. As we have mentioned before, our NRR goal is 100%, and over recent years, it has consistently been between 99% and 101%. This quarter, NRR stayed at 99%, and ARR growth was strong, fueled by robust new customer acquisition and expansions from existing customers, both positively impacted by our AI investments and innovations. This brings me to the second topic, AI. We view AI as a significant opportunity for our business. For several quarters, we have discussed our internal use of AI to enhance our operational efficiency, which is reflected in improved productivity across all departments. The savings from these initiatives allow us to further invest in AI-related products while achieving excellent operating margins. AI has accelerated our innovation cycles and transformed our product capabilities to be more relevant for the future. We are incorporating AI into our products, yielding substantial business value for our customers today. We believe that trusted software companies like us, with strong customer relationships, will capitalize on this AI opportunity. Our customers are eager to learn how to leverage AI while ensuring their businesses remain secure and trustworthy. They look to us for AI capabilities that enhance their competitiveness and efficiency in this new landscape. For instance, a global beverage company improved its HR operations using our Progress agentic RAG product, enhancing employee satisfaction at a lower cost. Similarly, a foreign government's tax authority and finance ministry are employing the same product to provide reliable information to their employees and citizens. Additionally, a U.S. state government is utilizing the Progress data platform to consolidate large volumes of data from various sources to identify and eliminate waste and fraud, having become a Progress customer less than 18 months ago, and is now a seven-figure ARR client. The Progress data platform and Progress agentic RAG convert business data, unstructured files, archives, and other resources into an information system that quickly delivers secure and trusted answers. Our AI-powered infrastructure management products are also managing and securing modern tech infrastructure. A leading financial payment company processing over $100 billion annually uses Progress WhatsUp Gold, Loadmaster, and Flowmon to enhance infrastructure security and availability while reducing the time needed to detect and prevent security threats. ShareFile customers are completing tasks in minutes that used to take hours, thanks to its AI document summarization and Q&A features. ShareFile’s AI security capabilities proactively identify sensitive information and suggest actions to significantly lower security risks. Our customers rely on Progress for support during their journeys because they trust us to prioritize tangible business results. Across all our products, AI is generating measurable customer value, from workflow automation to productivity improvements. Every Progress product now plays an active role in our customers’ AI initiatives, with a focus on governance, observability, cost, and flexibility of large language models. The third topic is capital allocation and M&A. In Q1, we paid down $60 million in debt and repurchased $20 million worth of stock. Our balance sheet is solid, and our cash generation provides us with significant flexibility. Our capital allocation priorities are clear: we will invest in our business and innovate, reduce debt aggressively while being opportunistic about buybacks, and commit to generating excess returns through disciplined M&A and rapid integrations. We will continue to look for strong companies with solid infrastructure technology products, loyal customers, high recurring revenue, and a compatible culture. Additionally, ShareFile has continued to create value. Although it was our most significant and complex acquisition, ShareFile has strengthened our recurring revenue mix, expanded our SaaS capabilities, and contributed positively to both our bottom line and cash flow. It has also improved our ability to assess and integrate future SaaS opportunities while maintaining our discipline regarding returns and fit. I'm excited to announce that Progress has opened a new innovation hub in Bangalore, consolidating office space for our former offices while reflecting our long-term commitment to the region and our goals to grow our engineering, product development, sales, and customer success teams. Our team in India is crucial to our global growth and innovation strategy, and this move will enable us to deliver more value to our customers worldwide efficiently. We remain optimistic as we look ahead, and Anthony will provide further details shortly. From my perspective, our business performance supports our confidence for the rest of the year. We are closely monitoring the macroeconomic landscape and geopolitical developments. In summary, our business is performing well. Our model is resilient. AI is enhancing our products and operations. ShareFile is delivering results, and our revenue, margins, and cash flow indicate strong execution across the company. I want to extend my gratitude to our employees for their hard work and dedication, and to our customers and partners for their continued trust. I'll now turn it over to Anthony.

All right. Thanks, Yogesh, and good afternoon, everyone. As you heard Yogesh's remarks, we're very pleased with our Q1 results, and we're excited to share a strong start to our fiscal year. So let's get right into the numbers, starting with ARR, which, as we've discussed, provides the best view into our top line performance. We closed Q1 with ARR of approximately $863 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 in ARR reflects a broad-based contribution from across our portfolio, including OpenEdge, ShareFile, Loadmaster, WhatsUp Gold, MOVEit and our DevTools products. Consistent with prior quarters, our net retention rate remains strong, coming in at 99%, underscoring the resilience of our customer base and the mission-critical nature of our products. We did see some isolated churn in the quarter, which we expect to work through quickly, and we still delivered solid growth, thanks to strength in new customer wins and expansion in the installed base. Two areas positively influenced by our investments in AI and innovation. As a reminder, we calculate ARR in constant currency with all periods presented at current year budgeted exchange rates. Consistent with past practice, we've updated ARR using 2026 budgeted exchange rates. And as a result, ARR reported in prior periods has changed. The change is not material and doesn't alter the trend in ARR growth, although the previously reported ARR and NRR numbers changed slightly. The details of this update are included in the supplemental financial presentation filed with our press release. In addition to solid ARR growth, Q1 revenue of $248 million came in ahead of our expectations and reflects 4% growth on a year-over-year basis, led by strong performance in OpenEdge. As we've mentioned on previous earnings calls, the renewal timing of subscription contracts, especially multi-year subscriptions can have a meaningful impact on our revenue in any given quarter. And for this reason, we continue to focus on ARR as the best barometer of top line performance. Turning to expenses. Our total costs and operating expenses were approximately $146 million which was favorable to our internal forecast and largely flat compared to the year-ago quarter as we continue to demonstrate disciplined cost management across the business. Operating income of $102 million was also better than our internal forecast, resulting in an operating margin of 41%, solid year-over-year margin expansion. Earnings per share of $1.60 for the quarter came in better than our internal expectations, the result of solid execution on the top line, coupled with strong cost management. Turning now to a few balance sheet and cash flow metrics. We ended the quarter with cash and cash equivalents of $113 million and total debt of $1.35 billion for a net debt position of approximately $1.24 billion. As a reminder, our total debt includes our revolving credit facility with $540 million drawn, a $360 million convertible note maturing this April and a $450 million convertible note maturing in 2030. At the end of this quarter, our net leverage ratio was 3.1x and down meaningfully from when we acquired ShareFile a little over a year ago. DSO for the quarter was 52 days, a significant improvement from 73 days reported in Q4. Deferred revenue was approximately $425 million at the end of the first quarter, up roughly $25 million year-over-year. Adjusted free cash flow was $99 million for the quarter, a significant increase compared to the $73 million in the prior year quarter. The improvement is primarily the result of increased collections. During the quarter, we paid down $60 million against our revolving line of credit and repurchased $20 million of Progress stock. We ended the quarter with $540 million drawn on our revolving line of credit and $182 million remaining under our current share repurchase authorization. Okay. Now I'd like to turn to our outlook for Q2 and the full year 2026. Before I get into the numbers, I'll highlight a few items. First, we continue to focus on ARR as a key metric and expect ARR growth to be generally in line with revenue growth for the full year. Second, we plan to roll our 2026 convertible notes into our revolving credit facility when they mature in April. At the end of Q1, we had approximately $960 million of unused revolver capacity, positioning us well to absorb the convert maturity and continue executing our strategy. Our updated EPS outlook reflects higher interest expense associated with the expected refinancing of the 2026 converts. Finally, on capital allocation, we remain focused on deploying capital where we see the strongest returns. At current levels, that means repaying debt and remaining disciplined in pursuit of accretive acquisitions against a high return threshold. It also includes opportunistic share repurchases. We continue to forecast debt repayment of $250 million for the full year, bringing our net leverage ratio to approximately 2.7x by year-end. With that, for the second quarter of 2026, we expect revenue between $240 million and $246 million and earnings per share of between $1.47 and $1.53. For the full year 2026, we expect revenue of between $988 million and $1 billion, approximately 1% to 2% growth over 2025. And an operating margin for the year of approximately 39%, adjusted free cash flow of between $263 million and $275 million, and unlevered free cash flow of between $315 million and $326 million; and finally, earnings per share between $5.91 and $6.03. Our guidance for the full-year EPS assumes a tax rate of 20%, the repurchase of approximately $30 million in Progress shares, total debt repayment of $250 million and approximately 43 million weighted shares outstanding. In closing, we are very pleased to deliver a strong Q1 to start fiscal '26. Our diversified product portfolio continues to demonstrate resilience. Our cost discipline remains strong, and we continue to focus our capital allocation strategy on generating the highest returns through a combination of aggressive debt repayment and opportunistic share repurchases. In short, we believe we're very well positioned to execute our total growth strategy throughout 2026 and beyond. With that, I'd like to open the call for Q&A.

Our first question comes from Ittai Kidron with Oppenheimer & Company.

I have a couple of questions. Yogesh, starting with you on the M&A front, one would think that in this current environment, it would be easier for you to acquire companies. I'm curious why it is still taking you this long to find the next one, given your disciplined approach to the metrics you consider.

So Ittai, two-part answer to that question. One is that, as Anthony just mentioned, right, there is clearly a higher bar today given where our own company stock is and our valuation compared to what it historically was, right? So we are trading now at an EBITDA multiple that we would need to pay less to generate additional incremental value for our shareholders. So I think that creates a constraint on what we can pay. So that's part A. And I'm not saying that, that's why we haven't bought companies, but that's an important consideration in terms of the filter we can apply to the companies we can look at. The second one is we want to make sure that we find the right assets. And we are truly very active at this point looking at those. But again, as I said, that combination creates a challenge. And the flip side is that even though the public markets are where they are, the private markets, Ittai, are still, let's just say, disconnected from reality, if what the public markets are is the reality, right? So at least they're disconnected from the public markets on the valuation side. So I think those two things are really it. We actually see tremendous activity in the market. We are seeing all kinds of companies come around. And obviously, everybody on this call will be the first to know when we do one.

Got it. Anthony, can you discuss your SaaS revenue? It seems to have decreased significantly compared to the previous quarter. You mentioned that ShareFile is performing well, but you also talked about some elevated churn, which you referred to as isolated churn. We would appreciate more detail on what isolated churn means and the reasons behind the decline in SaaS revenue from quarter to quarter.

Of course, Ittai. I'll start with the comment regarding isolated churn. I believe there are some differences between isolated churn and our SaaS revenue. Regarding isolated churn, we experienced a few customer-specific events that were not linked to product value, competition, or broader business trends. For instance, we lost a significant government contract in Eastern Europe for data retention services because a European court mandated the government stop retaining the data. This led to the contract ceasing, not due to any dissatisfaction with our product or losing to a competitor, but because the core need was removed by a court ruling. We occasionally encounter situations like this, and we've discussed them previously. M&A activities can also lead to some churn, but historically, these instances are not material and are specific to certain situations, which we expect to resolve quickly. Despite these challenges, our 2% ARR growth for the quarter reflects solid new customer acquisition and expansion within our existing customer base. Now, regarding the SaaS revenue dynamics, back in Q4, we were asked about a significant sequential increase in our SaaS revenue. I mentioned that it was somewhat of an upside surprise and that we anticipated normalization in 2026, aligning closer with our expected annual figures for 2025. The Q4 revenue was not expected to sustain sequentially. However, on a year-over-year basis, our SaaS revenue continues to grow. The growth is primarily due to ongoing cleanup efforts in the ShareFile business. Last year during the Q2 call, we noted that CSG was handling billings for us until April 2025, after which we needed to implement an internal billing system. It took until the latter half of last year to fully address that aspect. As a result, there has been a significant amount of data processing occurring across Q4, Q1, and some continuing into 2026. While it isn't substantial overall, it may cause some fluctuations in figures occasionally. On a positive note, as we better manage the data and gain more control over the ShareFile business, we've seen enhanced collections and nearly $100 million in free cash flow for the quarter. The noticeable improvement is mainly due to better collections within ShareFile. So even with the data cleanup process, as we make progress in that area, we're effectively compensating for any prior delays in collections.

Our next question comes from the line of John DiFucci with Guggenheim Securities.

My first question is for Yogesh. It was interesting to hear you mention that ShareFile is performing well and is one of your best acquisitions. Regarding the developer seat count, I'm glad you brought it up because there are many concerns surrounding it. There's considerable debate on this topic. Are you observing any changes in developer numbers among your customers, excluding ShareFile? For instance, are customers not hiring as much as they used to, or is there a decline or stability in those numbers? Additionally, regardless of the answer, what do you think is driving ShareFile's strong performance?

I believe there has been a shift in trend regarding our customers, though I wouldn't say the overall developer numbers are declining. We have seen a slight drop in a small number of customers, but generally, the growth rate is less than what we've seen historically. The developer segment, specifically our DevTools business, is relatively small, making up a mid-single-digit percentage for us. This is an area where we could face challenges if we didn't take the right steps. That's why we've made significant AI investments to enhance our developer tools, which are mainly libraries for creating effective user interfaces. We're focused on making our offerings more relevant in this new age, providing developers with the appropriate tools for building modern applications. We feel confident about the ongoing performance of this business, which also has the highest potential risk, prompting us to accelerate our AI initiatives within it. We're seeing positive results here and believe that products like ShareFile are continuing to succeed because businesses need to manage, configure, and set up their infrastructure to ensure optimal performance. ShareFile is a reliable solution for many large organizations, including major credit card companies and many technology firms in Silicon Valley. Some of our long-standing customers have been with us for a long time. The demand for this product remains strong, and we've also acquired new customers. Additionally, the ShareFile product has been performing well from a customer perspective, bolstered by our AI efforts. I apologize for any confusion caused by my earlier comments.

No, Yogesh, it wasn't you. I'm sure it's me. I can't hear that well sometimes. But thank you for answering the second question, which I think was more important anyway. I want to follow up on Ittai's question regarding the SaaS business because it seems like ShareFile is performing really well. It's a significant acquisition and your first major SaaS acquisition. However, the SaaS revenue didn't just decline sequentially; it actually fell below the levels of the last three quarters. This isn't just about a stronger fourth quarter; those previous three quarters were stronger too. Can you help clarify what happened this quarter? It seems like the business is doing well, as you’ve mentioned multiple times. But what specifically occurred this quarter? It can't just be a matter of recognition. Sometimes it might be a lack of renewal leading to delayed recognition, but it's not just that the fourth quarter was stronger than this one. Sorry.

I understand, John. The range of SaaS revenue for the overall business, if I account for the cleanup issues I mentioned, has been between $72 million and $73 million, going back to the first quarter of last year. When normalizing each of these quarters, what we experienced, as we discussed last year, was that taking over the billing system from CSG was a significant milestone for integration. In the latter half of the year, as we began to manage the data, we identified a considerable amount of cleanup that was necessary. Some customers had not been billed and required invoicing; others needed adjustments in ARR or revenue reserves for various reasons. We faced numerous data challenges that we did not have access to before the acquisition, even with CSG managing a significant portion of the billing under the TSA. As we began resolving these issues in the latter half of last year, the overall impact was not material. However, fluctuations of a few million dollars from quarter to quarter could slightly alter that figure. Overall, you are correct that the ShareFile business, when normalized, shows total SaaS revenue on a quarterly basis in the range of $72 million to $73 million.

Okay. That's helpful. But is it cleaned up now, Anthony? Should we assume that this will behave like we didn't expect a lot of growth, but even if it's solid or steady, could we potentially see some declines going forward too?

No, I think it is largely cleaned up and any of these cleanup issues that we need to do will get smaller and smaller as we go forward. So I don't expect significant issues with it. I mean, as Yogesh said, the business fundamentally from an operational perspective has been incredibly solid.

Our next question comes from the line of Lucky Schreiner with D.A. Davidson.

Great. Maybe and apologies to follow up again on the line of questioning here. But on that isolated churn event. If I remember last quarter, I believe you guys talked to not seeing an impact of multi-year contracts for this year. And so it sounds like maybe visibility there changed. Is that related to the isolated churn event? Or is that something different?

When the EU court issued a statement requiring immediate action, an Eastern European government quickly announced it would stop payments. This directly affected local telephone customers, as it involved call records of phone calls made. Once these call records were deemed illegal, the government instructed all call record and telephone companies to delete the data and not to expect any further payments. This situation created what I would describe as a surprise churn. Essentially, they communicated that they could no longer afford to pay because they weren't receiving payments themselves. While we could argue that they have a contractual obligation that is still in effect, it's challenging to enforce compliance when governments take such actions. Thus, we chose to accept this churn situation.

Got you. So yes, it sounds like visibility hasn't changed then.

This situation was highly unusual. The decision was made, the government took action, and the service providers had to respond. It all happened within a matter of two weeks and came out of nowhere.

Got you. That's helpful. Maybe then on NRR. I know you guys are within your target framework. But what's going to take to get that above the 100% target? Is that a function of just working through the recent churn event? And you mentioned maintaining a close watch on the macro. Is that at all playing a factor here?

I don't believe that current macro conditions are affecting our business. I can't comment on the global situation, but for Progress, it's mainly due to the isolated churn we experienced. As you know, our net revenue retention is based on data from the past four quarters, which means it changes gradually, so it will take some time to recover. Our aim remains to achieve an NRR of 100%. We've generally fluctuated between 99% and 101% for the past few years, occasionally reaching 102%. Overall, we feel positive about our business. Additionally, we achieved a 2% year-over-year growth in ARR, indicating that new customers are joining us and our expansions are performing well. We remain confident and are not worried about our current business trajectory. However, the current macro and geopolitical uncertainties are important to monitor closely, as perceptions can change rapidly. So far, there is no evidence to suggest that macro conditions are impacting us.

I'm showing no further questions in the queue. I would now like to turn the call back over to Yogesh for closing remarks.

Well, thank you, everyone, for joining. It's a pleasure to speak with you all, and we look forward to speaking with you again next quarter. Bye-bye.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.