Earnings Call Transcript - PRGS Q2 2025

Operator, Operator

Hello, everyone, and welcome to Progress Software's Second Quarter 2025 Earnings Call. Please note, this event is being recorded. Now it's my pleasure to turn the call over to Michael Micciche, SVP of Investor Relations. The floor is yours.

Michael Micciche, SVP of Investor Relations

Thank you, Carmen. Good afternoon, everyone, and thanks for joining us for Progress Software's Second Fiscal Quarter 2025 Financial Results Conference Call. On the line with me this afternoon are Yogesh Gupta, President and CEO; and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over the safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our integration of ShareFile, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties. For a description of the risk factors that may affect our results, please refer to the risk factors in our SEC filings. 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 are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our financial results press release, which was issued after the market closed today. This document contains additional information related to our financial results for the second quarter of fiscal year 2025, and I recommend that you reference it for specific details. We've also provided a presentation that contains supplemental data of our second quarter and provides highlights and additional 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 will be recorded in its entirety and should be available for replay on the Investor Relations section of our website shortly after we finish. So Yogesh, I'll turn it over to you now that we're done with that.

Yogesh K. Gupta, President and CEO

Thank you, Mike. Good afternoon, everyone, and thank you for joining our conference call to discuss the results of our second fiscal quarter of 2025. We're extremely pleased with our solid second quarter results and the success of our ongoing integration of ShareFile. Before we get into the details of the quarter, let me begin with the news we just announced regarding the acquisition of Nuclia for which we paid $20 million. Nuclia provides an easy-to-use self-service SaaS product that democratizes the use of trustworthy and verifiable generative AI. Small and midsized businesses as well as large global corporations can quickly and easily reap the benefits of sophisticated agentic RAG AI capabilities using Nuclia SaaS. While the deal does not have a material impact on our financials, we are very excited about Nuclia and the unique agentic RAG-as-a-Service AI capabilities it brings. As we have often discussed, the first pillar of our total growth strategy is to invest and innovate. We regularly update, modernize, and improve our products as an everyday part of our business, which is reflected in the R&D line of our income statement. For us, our R&D investment is an essential element of providing value to our customers, so they stay with us long into the future. With Nuclia, we have accelerated the R&D process by purchasing great technology that addresses an urgent market need, and we will rapidly integrate it with our products. This will allow us to incorporate additional agentic RAG AI features that help our existing customers speed up their own generative AI initiatives, thereby enabling us to continue to drive strong customer retention. You'll hear more about Nuclia in the coming quarters as we integrate this cutting-edge technology with our products. Turning to our second quarter results. Total revenue came in at $237 million, up 36% over last year and were solid across geographies and product lines. ARR grew 46% year-over-year or 2% on a pro forma basis to $838 million, and net retention was again 100%. Our operating margin was 40% and earnings exceeded the high end of our guidance, thanks to solid execution and expense control. Lastly, our balance sheet improved as well with another $40 million paid down on our revolving credit line. Anthony will provide the rest of the financial details in a minute, but as you saw, we have raised guidance for the remainder of the year, reflecting our confidence in the continued strength of our business and solid expense control. Overall, the second quarter showed strong renewals, expansions, and new customer additions across all geographies, and we saw consistent performance across our product areas, with significant strength coming from OpenEdge as well as solid performance from ShareFile. Our data platform products, including OpenEdge, continued to generate major renewals and expansions in the quarter, including a world-class biotech company, a global pharmaceutical firm, a major European DIY retailer, and several OpenEdge independent software vendors. The growing importance of data in an AI-driven world, combined with the ongoing investments in our products, is the driving force behind these wins. Let me share an example of how one customer is benefiting from using our products in their generative AI efforts. The research and scientist teams numbering in the thousands at a global pharmaceutical company were struggling to find the correct information needed, which was buried in mountains of unstructured and structured data such as research papers, emails, spreadsheets, files, etc. They tried using generative AI with vector support, which yielded rather poor results with only 44% accuracy of answers. This resulted in these highly skilled teams wasting their time and getting frustrated. So to reduce this incredible waste, the company partnered with Progress to strategically transform its information search capabilities using the Progress data platform. By implementing our advanced RAG search solution integrated with semantic knowledge graphs, the company dramatically improved the precision and relevance of the search results. The accuracy of answers improved to 84%, delivering significant time savings and dramatically improving user satisfaction. During the quarter, we released new versions of Progress Telerik and Kendo UI, which introduced a series of groundbreaking AI capabilities, including AI coding assistance that significantly accelerates development workflows. These AI enhancements were key to a major customer expansion with one of the largest ports in the U.S. In addition to the developer productivity boost from AI, the customer determined that the AI coding assistant also reduced business risk by producing higher quality code. Our infrastructure management products also continue to see success around the world. In Q2, one of the largest leading sustainability companies turned to our products to modernize the automation and deployment of their IT infrastructure, supporting their 6,500 locations around the world, and a European government selected our products to improve cybersecurity using AI ops. As organizations modernize their infrastructure, they continue to recommit to our products for their data, digital experience, and infrastructure management needs. Our ShareFile business also saw continued strong renewals and expansions, including a Fortune 500 global producer of oil and natural gas, who uses ShareFile's AI-powered document insights and collaboration tools to share large sensitive files with their customers and their global supply chain. Speaking of ShareFile, let me provide you with an update on the business. We reported at the end of Q1 that we were ahead of our integration plan. The same is true at the end of the second quarter. Most of the primary operational synergies are completed, and nearly all of the major milestones are now behind us. We've completed and terminated the transition services agreement with Cloud Software Group, again, earlier than planned, and I'm really pleased with the progress we have made so far. In addition to our integration efforts, the ShareFile engineering team has continued to deliver new capabilities without missing a beat. For example, we announced powerful new ShareFile AI features for faster document collection, automating repetitive tasks and simplifying workflows and generating AI-driven insights. With these new AI capabilities, businesses can gather documents 3.5 times faster and extract key insights they need up to 20 to 25 times faster. ShareFile is now also deeply integrated with Microsoft 365, allowing users to benefit from ShareFile's secure co-authoring and file collaboration seamlessly from within Microsoft 365. This helps organizations to streamline complex workflows and improve productivity as well. And we are delighted that ShareFile was named a Visionary in the latest Gartner Magic Quadrant for Document Management. I also want to briefly touch upon Progress' own use of AI to innovate and improve our operations. As you saw in our excellent bottom line results in Q2, we continue to maintain our expense discipline, which has always been central to our operating philosophy. And AI has begun to play an expanding role in helping us maintain our world-class operating margins. To that end, we are relentlessly pursuing ways to incorporate AI into any process that can be done more efficiently, which includes both off-the-shelf and our own AI products to drive productivity and produce strong results. Over the past year, we've embedded AI-driven automation and intelligence into a wide range of our business functions from engineering and IT to customer support, marketing, and sales. For example, our engineering teams are leveraging AI-assisted coding tools to accelerate development cycles and improve code quality while our IT operations teams have adopted predictive analytics to proactively manage our infrastructure and reduce downtime. In customer support, we have implemented AI-powered chat and case routing systems that significantly improve response times and customer satisfaction. We're also using generative AI to streamline certain content creation and campaign execution within our marketing teams, enabling faster go-to-market strategies and a more personalized customer engagement. And we are using AI in sales to help nurture prospects before sales teams begin to interact with them. By integrating AI technologies into our workflows, we're not only increasing efficiency and managing costs, but also freeing up our teams to focus on high-value strategic work. Lastly, I would like to briefly discuss the other key pillar of our strategy: Disciplined, accretive M&A to drive sustained top-line growth. As you recall, we often discuss the overall size of our opportunity for M&A, which remains quite large. But before we acquired ShareFile, we saw many SaaS companies that were unattractive to us as potential targets because we lacked in-house expertise to run a highly profitable SaaS business. Today, with ShareFile, we have a high-quality SaaS business that contributes over a quarter of our revenues. More importantly, we have an organization with the expertise and experience of running a highly efficient and profitable SaaS business at scale. So we are in a much better position today to evaluate almost any kind of business, SaaS or otherwise, as a possible acquisition target. Naturally, our success in executing our total growth strategy depends on maintaining our strict M&A discipline. We will continue to look for companies with excellent products, with great customer bases who love those products, significant recurring revenues, and high retention rates. And we will continue to be disciplined about what we pay for them. Our capital allocation priorities are unchanged. We believe M&A will produce the best returns on capital for shareholders. And between deals, we will focus on reducing our net leverage. Finally, and as always, I want to thank all of our Progress teams around the world for their dedication and hard work that led to our great results in Q2. In addition to consistently performing at a high level, our employees also make Progress a great place to work. Once again, Progress was named among the 2025 Best Places to Work recently by the Boston Business Journal. I am so proud of the amazing culture we have and the recognition we continually receive for us. With that, I will turn it over to Anthony.

Anthony Folger, CFO

All right. Thank you, Yogesh, and good afternoon, everyone. Thanks for joining our call. As Yogesh mentioned, we're thrilled with our Q2 financial results, the progress we've made integrating ShareFile, and we feel very well positioned for the second half of 2025. Before we dig into the numbers, I'd first like to congratulate Yogesh on recently being named an Ernst & Young Entrepreneur of the Year in New England. This prestigious award recognizes visionary leaders and transformational CEOs who are driving innovation, accelerating growth, and creating lasting impact. Having worked with Yogesh for several years now, I can attest this honor is well deserved. All right. Turning to the numbers. Let's start on the top line with ARR. We closed Q2 with ARR of $838 million, representing 46% growth year-over-year and 2% pro forma growth on a year-over-year basis. For clarity, the pro forma results include ShareFile's ARR in both periods. Although no single product drove material growth in our total ARR, the 2% pro forma growth that we delivered was the result of growth in multiple products across the portfolio, including ShareFile, OpenEdge, DevTools, Sitefinity, LoadMaster, and WhatsUp Gold. Also worth highlighting is our strong net retention rate, which again came in at 100%, reflecting resilience in our top line. As we've mentioned several times before, and as Yogesh just covered in his remarks, we believe that smart investments in our product portfolio and good customer relationship management both serve as the foundation of our consistently strong net retention rates. In addition to our solid ARR growth, revenue for the quarter of $237 million was solidly within the guidance range we provided back in March and was powered by strong performance from ShareFile and OpenEdge. Turning now to expenses. Our total costs and operating expenses for the quarter were $142 million, coming in better than our expectations. The year-over-year increase of 31% was driven entirely by the addition of ShareFile to our business. Operating income in Q2 was $95 million, up 42% over the prior year, and our operating margin in the quarter was strong at over 40%, compared to 38% in the second quarter of 2024. On the bottom line, our Q2 earnings per share of $1.40 was $0.06 above the high end of the guidance range we provided in March. This overperformance relative to our expectation was driven by strong cost management across the business, coupled with solid top line performance. Moving on to a few balance sheet and cash flow metrics. We ended the quarter with cash and cash equivalents of $102 million and total debt of $1.47 billion for a net debt position of $1.37 billion. On a post-synergy basis, we expect our net leverage ratio to be approximately 3.4 times. Our DSO for the quarter was 53 days compared to 48 days last quarter, and unlevered free cash flow of $52 million was driven by the strength of our operating performance, coupled with strong collections in our base business. The slight bump in our DSO in Q2 was the result of transitioning the ShareFile business onto Progress's billing system. This was a significant milestone on our integration roadmap. And within billing, fulfillment, credit, and collections now fully under Progress's control, we expect to significantly improve the ShareFile customer experience. Also, during Q2, we repaid $40 million against the revolving line of credit that was drawn down to partially finance the ShareFile acquisition. This brings our total first half debt repayment to $70 million and keeps us on schedule to pay down a total of $160 million during fiscal 2025. At the end of Q2, our revolving line of credit has a balance of $660 million. Finally, during Q2, we repurchased $20 million of Progress stock, bringing our first half total to $50 million and leaving $57 million remaining under our current share repurchase authorization. Okay. Now I'd like to turn to our outlook for Q3 and the full year 2025. Our outlook reflects continued strength in the demand environment for our solutions. It reflects recent changes in foreign exchange dynamics, and it reflects continued confidence in our team's ability to execute. I'd also like to mention that our acquisition of Nuclia is not expected to have a material impact on our financial results in the second half of 2025. In other words, our second half outlook is the same with or without the Nuclia acquisition. For the third quarter of 2025, we expect revenue between $237 million and $243 million and earnings per share of between $1.28 and $1.34. For the full year 2025, we are increasing our outlook across the board and expect revenue between $962 million and $974 million, an increase of $4 million from our prior guidance; and operating margin of 38% to 39%, an increase of roughly 50 basis points from our prior guidance; adjusted free cash flow between $228 million and $240 million; and unlevered free cash flow of between $285 million and $296 million, an increase of $2 million from prior guidance for both. Finally, we expect earnings per share between $5.28 and $5.40, an increase of $0.03 from prior guidance. Our guidance for full year EPS assumes a tax rate of 20%, the repurchase of $50 million in Progress shares that's been done to date, and total debt repayment of $160 million. In terms of the total share count in our EPS assumption, we're assuming approximately 45 million shares outstanding, and this includes approximately 500,000 shares associated with potential dilution on our 2026 convertible notes. I'm sure you'll recall that we purchased a call spread on our 2026 convertible notes to hedge the economic impact of dilution up to approximately $89 per share. Accounting regulations require that recognition of any benefit from that call spread be excluded when calculating shares outstanding. Because of this added nuance, we will continue to provide the number of shares that we've assumed for dilution each time we provide an outlook on earnings per share. For more details, I'd recommend you refer to the supplemental financial presentation filed with our press release, which includes detailed information on our outstanding debt. In closing, we're excited to deliver another strong quarter of financial results across the board, really a continuation of the trend we saw in the first quarter, and we believe we're very well positioned to deliver against our improved outlook for the remainder of 2025 and beyond. With that, I'd like to open the call for Q&A.

Operator, Operator

Our first question is from Ittai Kidron with Oppenheimer.

Nolan Bruce Jenevein, Analyst

This is Nolan Jenevein on for Ittai. I really just want to get a little bit more color about the Nuclia acquisition. And this is a little bit of a divergence from what we generally see as the profile of the company that you guys go after, being a more mature software company. So maybe just give us a little bit more color on Nuclia.

Yogesh K. Gupta, President and CEO

Sure, I'm happy to elaborate. You're correct in noting that this acquisition differs from some of our recent ones. This particular acquisition is primarily an investment in our product portfolio. As many are aware, Progress has a long-standing history of continually investing in our portfolio to keep it current and maintain high customer retention. Before the advent of the Internet, Progress was mainly a client service software company. With the emergence of the Internet and cloud computing, we made significant investments to adapt OpenEdge to be multi-tenant, which allowed that business to remain strong and stable. Similarly, when mobile computing surfaced, we invested heavily again and completed a small acquisition to enhance our mobile capabilities. Today, we are undertaking a similar approach with AI, which we believe represents the third major wave in enterprise software, significantly transforming the landscape even more than the previous two. From our viewpoint, this is part of our strong historical approach. We see a tremendous opportunity in providing ongoing value to our customers and ensuring their loyalty. The purchase price is relatively modest for advanced technology in generative AI with agentic RAG solutions. We are very optimistic about this acquisition, as it adds valuable technology and brings on a strong team that will help advance this tech, integrate it with our offerings, and facilitate our market efforts.

Operator, Operator

One moment for our next question. And it comes from the line of John DiFucci with Guggenheim Securities.

John Stephen DiFucci, Analyst

I have another question regarding Nuclia. Although it's a small acquisition, it is intriguing in a different way. Typically, you acquire products that function independently and operate them more efficiently. However, Nuclia seems like it could be utilized across your range of products, which is not your usual approach. There might be some confusion about this at times. Can this be an opportunity for cross-selling or even something that can be integrated into other products? It appears that it could be.

Yogesh K. Gupta, President and CEO

John, you're absolutely right. It is something that we expect to integrate across our product portfolio. I think it brings value not just to our data platform business, which includes OpenEdge, MarkLogic, and Semaphore, but also to products like Sitefinity and ShareFile. There are numerous interesting opportunities to create value for customers who are leveraging their information. ShareFile, for instance, has 86,000 customers with data stored in it, so we see significant opportunities here. We aim to integrate across the portfolio over time and deliver value to our customers and, consequently, to our business.

John Stephen DiFucci, Analyst

And that makes sense. It makes it a little different, too, for at least from ShareFile certainly, but a lot of your acquisitions.

Yogesh K. Gupta, President and CEO

It does, John. It does.

John Stephen DiFucci, Analyst

Okay. And if I could, a follow-up for Anthony. Anthony, free cash flow in the quarter was actually below what we had expected, a little bit below what we were looking for, but you brought up annual forecast meaningfully. So could you just give us a little color on that, like what happened this quarter and why are expectations so much higher for the second half? Was it just some timing things happening? Just want to just make sure we understand that.

Anthony Folger, CFO

Yes, I think there are two main factors, John. First, there was a bit of timing with collections. Second, we transitioned ShareFile's business, which we had previously managed under a service agreement with Cloud Software Group, to the Progress billing platform. This involved integrating a $250 million business into a new billing, fulfillment, and credit and collection system. Overall, we are very pleased with the outcome and the initial results. However, whenever you undertake a significant transition like this, things can move a bit slower as we ensure everything operates smoothly. This was evident in how we processed invoices and handled collections during the quarter. We were more cautious and focused on delivering a positive customer experience and the successful long-term implementation of the system, rather than concentrating on DSO for this quarter. I believe we will move past these challenges quickly, and we are excited about completing this important milestone in our integration plan.

John Stephen DiFucci, Analyst

Yes, that makes a lot of sense. By the way, that's reflected in your guidance for the year. That's such an important metric, especially for you guys. It's great to see ShareFile progressing so well, given its size.

Operator, Operator

As I see no further questions in the queue, I will pass it back to management for final remarks.

Yogesh K. Gupta, President and CEO

Thank you. Thank you again for joining our call today. I'm truly excited about our performance in Q2 and pleased to share our confidence in the outlook for the rest of fiscal 2025. I'm especially proud of the dedication of our entire organization and their continued hard work, which positions us well as we continue to execute our total growth strategy. We look forward to talking to you soon. Thanks again and bye-bye.

Operator, Operator

And this concludes our program for today. Thank you for participating, and you may now disconnect.