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Jun 27, 2018

Progress 2018 Second Quarter Results Exceed Guidance

Raises 2018 Guidance for Earnings Per Share, Operating Margin and Adjusted Free Cash Flow

BEDFORD, Mass.--(BUSINESS WIRE)--Jun. 27, 2018-- Progress (NASDAQ: PRGS), the leading provider of application development and digital experience technologies, today announced results for its fiscal second quarter ended May 31, 2018.

Revenue was $96.1 million during the quarter compared to $93.2 million in the same quarter last year, a year-over-year increase of 3% on an actual currency basis, and 1% on a constant currency basis. On a non-GAAP basis, revenue was $96.2 million during the quarter compared to $93.4 million in the same quarter last year, an increase of 3% on an actual currency basis, and flat on a constant currency basis.

On a GAAP basis, diluted earnings per share was $0.33 compared to $0.21 in the same quarter last year, an increase of 57%. On a non-GAAP basis, diluted earnings per share was $0.60 compared to $0.42 in the same quarter last year, an increase of 43%.

“We are very pleased with our Q2 performance, and our strong first half,” said Yogesh Gupta, CEO at Progress. “We exceeded our earnings per share expectations for the quarter, and our consistent execution provides us the confidence to once again raise our full year guidance for operating margin and earnings per share, as well as increase our expectations for free cash flow. We continue to focus on keeping our business strong, and driving new opportunities through our Cognitive Apps initiatives.”

Additional financial highlights included:

   
Three Months Ended
GAAP   Non-GAAP
(In thousands, except percentages and per share amounts)

May 31,
2018

 

May 31,
2017

  % Change

May 31,
2018

 

May 31,
2017

  % Change
Revenue $ 96,102 $ 93,213 3 % $ 96,212 $ 93,427 3 %
Income from operations 21,788 20,284 7 % 37,378 32,579 15 %
Operating margin 23 % 22 % 5 % 39 % 35 % 11 %
Net income 15,403 10,341 49 % 27,763 20,530 35 %
Diluted earnings per share 0.33 0.21 57 % 0.60 0.42 43 %
Cash from operations (GAAP) /Adjusted free cash flow (Non-GAAP) $ 42,129 $ 22,429 88 % $ 42,761 $ 27,855 54 %
 

Paul Jalbert, CFO, said: “We had another strong financial performance in Q2, and returned over $50 million of capital to shareholders through share repurchases and dividends. We remain focused on running our operations efficiently while also making the investments needed to strengthen our business, in order to drive sustainable, long-term value for all of our shareholders.”

Other fiscal second quarter 2018 metrics and recent results included:

  • Cash, cash equivalents and short-term investments were $144.2 million at the end of the quarter;
  • DSO was 40 days compared to 42 days in the fiscal second quarter of 2017, and 51 days in the fiscal first quarter of 2018;
  • Pursuant to the $250 million share authorization by the Board of Directors, Progress repurchased 1.1 million shares for $45.0 million during the fiscal second quarter of 2018. As of May 31, 2018, there was $130.0 million remaining under this authorization; and
  • On June 20, 2018, our Board of Directors declared a quarterly dividend of $0.14 per share of common stock that will be paid on September 17, 2018 to shareholders of record as of the close of business on September 3, 2018.

2018 Business Outlook

Progress provides the following guidance for the fiscal year ending November 30, 2018 and the third fiscal quarter ending August 31, 2018:

         
(In millions, except percentages and per share amounts)

FY 2018
GAAP

FY 2018
Non-GAAP

Q3 2018
GAAP

Q3 2018
Non-GAAP

Revenue $398 - $404 $399 - $404 $95 - $97 $95 - $97
Diluted earnings per share $1.33 - $1.39 $2.45 - $2.50 $0.30 - $0.33 $0.56 - $0.58
Operating margin 22% - 23% 38% * *
Cash from operations (GAAP) /

Adjusted free cash flow (Non-GAAP)

$120 - $126 $120 - $125 * *
Effective tax rate 26 % 22 % * *

* We do not provide guidance for this financial measure.

Based on current exchange rates, the expected positive currency translation impact on Progress' fiscal year 2018 business outlook compared to 2017 exchange rates is approximately $4.5 million on GAAP and non-GAAP revenue, and $0.02 on GAAP and non-GAAP diluted earnings per share. The expected currency translation impact on Progress' fiscal Q3 2018 business outlook compared to 2017 exchange rates on GAAP and non-GAAP revenue, and on GAAP and non-GAAP diluted earnings per share is not meaningful. To the extent that there are changes in exchange rates versus the current environment, this may have an impact on Progress' business outlook.

Conference Call

The Progress quarterly investor conference call to review its fiscal second quarter of 2018 will be broadcast live at 5:00 p.m. ET on Wednesday, June 27, 2018 and can be accessed on the investor relations section of the company’s website, located at www.progress.com. Additionally, you can listen to the call by telephone by dialing 1-877-874-1563, pass code 8020190. The conference call will include comments followed by questions and answers. An archived version of the conference call and supporting materials will be available on the Progress website within the investor relations section after the live conference call.

Non-GAAP Financial Information

Progress provides non-GAAP supplemental information to its financial results.

We use this non-GAAP information to evaluate our period-over-period operating performance because our management believes the information helps illustrate underlying trends in our business and provides us with a more comparable measure of our continuing business, as well as a greater understanding of the results from the primary operations of our business, by excluding the effects of certain items that do not reflect the ordinary earnings of our operations. Management also uses this non-GAAP financial information to establish budgets and operational goals, which are communicated internally and externally, evaluate performance, and allocate resources. In addition, compensation of our executives and non-executive employees is based in part on the performance of our business evaluated using this same non-GAAP information.

However, this non-GAAP information is not in accordance with, or an alternative to, generally accepted accounting principles in the United States (GAAP) and should be considered in conjunction with our GAAP results as the items excluded from the non-GAAP information often have a material impact on Progress’ financial results. A reconciliation of non-GAAP adjustments to Progress' GAAP financial results is included in the tables below and is available on the Progress website at www.progress.com within the investor relations section.

As described in more detail below, non-GAAP revenue, non-GAAP costs of sales and operating expenses, non-GAAP income from operations and operating margin, non-GAAP net income, and non-GAAP diluted earnings per share exclude the effect of purchase accounting on the fair value of acquired deferred revenue, amortization of acquired intangible assets, stock-based compensation expense, fees related to shareholder activist, restructuring charges, acquisition-related expenses, certain identified non-operating gains and losses, and the related tax effects of the preceding items. We also provide guidance on adjusted free cash flow, which is equal to cash flows from operating activities less purchases of property and equipment, plus restructuring payments.

In the noted fiscal periods, we adjusted for the following items from our GAAP financial results to arrive at our non-GAAP financial measures:

  • Acquisition-related revenue - In all periods presented, we include acquisition-related revenue, which constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. The acquisition-related revenue relates to Telerik, which we acquired on December 2, 2014, and Kinvey, which we acquired on June 1, 2017. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. We believe these adjustments are useful to management and investors as a measure of the ongoing performance of the business because, although we cannot be certain that customers will renew their contracts, we have historically experienced high renewal rates on maintenance and support agreements and other customer contracts. Additionally, although acquisition-related revenue adjustments are non-recurring with respect to past acquisitions, we expect to incur these adjustments in connection with any future acquisitions.
  • Amortization of acquired intangibles - In all periods presented, we exclude amortization of acquired intangibles because those expenses are unrelated to our core operating performance and the intangible assets acquired vary significantly based on the timing and magnitude of our acquisition transactions and the maturities of the businesses acquired.
  • Stock-based compensation - In all periods presented, we exclude stock-based compensation to be consistent with the way management and the financial community evaluates our performance and the methods used by analysts to calculate consensus estimates. The expense related to stock-based awards is generally not controllable in the short-term and can vary significantly based on the timing, size and nature of awards granted. As such, we do not include these charges in operating plans. Stock-based compensation will continue in future periods.
  • Fees related to shareholder activist - In September 2017, Praesidium Investment Management publicly announced in a Schedule 13D filed with the Securities and Exchange Commission its disagreement with our strategy and stated that it was seeking changes in the composition of our Board of Directors. We incurred professional and other fees relating to Praesidium’s actions. We exclude these fees because they distort trends and are not part of our core operating results. We do not expect to incur additional professional and other fees related to this matter.
  • Restructuring expenses - In all periods presented, we exclude restructuring expenses incurred because those expenses distort trends and are not part of our core operating results.
  • Acquisition-related and transition expenses - In all periods presented, we exclude acquisition-related expenses because those expenses distort trends and are not part of our core operating results. In recent years, we have completed a number of acquisitions, which result in our incurring operating expenses which would not otherwise have been incurred. By excluding certain transition, integration and other acquisition-related expense items in connection with acquisitions, this provides more meaningful comparisons of the financial results to our historical operations and forward-looking guidance and the financial results of less acquisitive peer companies. We consider these types of costs and adjustments, to a great extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, we do not consider these acquisition-related costs and adjustments to be related to the organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition-related costs, may not be indicative of the size, complexity and/or volume of future acquisitions.
  • Income tax adjustment -In all periods presented, we adjust our income tax provision by excluding the tax impact of the non-GAAP adjustments discussed above.

Constant Currency

Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S. dollars are positively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we present revenue growth rates on a constant currency basis, which helps improve the understanding of our revenue results and our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Note Regarding Forward-Looking Statements

This press release contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Progress has identified some of these forward-looking statements with words like “believe,” “may,” “could,” “would,” “might,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate” and “continue,” the negative of these words, other terms of similar meaning or the use of future dates.

Forward-looking statements in this press release include, but are not limited to, statements regarding Progress' business outlook and financial guidance. There are a number of factors that could cause actual results or future events to differ materially from those anticipated by the forward-looking statements, including, without limitation:

(1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price. (2) We may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts. (3) Our ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy, may not be successful. (4) If we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts. (5) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners. (6) Our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses. (7) If the security measures for our software, services or other offerings are compromised or subject to a successful cyber-attack, or if such offerings contain significant coding or configuration errors, we may experience reputational harm, legal claims and financial exposure. (8) We have made acquisitions, and may make acquisitions in the future, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations. For further information regarding risks and uncertainties associated with Progress' business, please refer to Progress' filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended November 30, 2017, as amended. Progress undertakes no obligation to update any forward-looking statements, which speak only as of the date of this press release.

About Progress

Progress (NASDAQ: PRGS) offers the leading platform for developing and deploying strategic business applications. We enable customers and partners to deliver modern, high-impact digital experiences with a fraction of the effort, time and cost. Progress offers powerful tools for easily building adaptive user experiences across any type of device or touchpoint, award-winning machine learning that enables cognitive capabilities to be a part of any application, the flexibility of a serverless cloud to deploy modern apps, business rules, web content management, plus leading data connectivity technology. Over 1,700 independent software vendors, 100,000 enterprise customers, and 2 million developers rely on Progress to power their applications. Learn about Progress at www.progress.com or +1-800-477-6473.

Progress and Progress Software are trademarks or registered trademarks of Progress Software Corporation and/or its subsidiaries or affiliates in the U.S. and other countries. Any other names contained herein may be trademarks of their respective owners.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

     
Three Months Ended Six Months Ended
(In thousands, except per share data)

May 31,
2018

 

May 31,
2017

  % Change

May 31,
2018

 

May 31,
2017

  % Change
Revenue:
Software licenses $ 26,439 $ 25,592 3 % $ 51,782 $ 49,914 4 %
Maintenance and services 69,663   67,621   3 % 138,367   134,269   3 %
Total revenue 96,102   93,213   3 % 190,149   184,183   3 %
Costs of revenue:
Cost of software licenses 1,233 1,422 (13 )% 2,494 3,010 (17 )%
Cost of maintenance and services 9,511 11,262 (16 )% 19,335 21,754 (11 )%
Amortization of acquired intangibles 5,899   4,683   26 % 11,717   8,361   40 %
Total costs of revenue 16,643   17,367   (4 )% 33,546   33,125   1 %
Gross profit 79,459   75,846   5 % 156,603   151,058   4 %
Operating expenses:
Sales and marketing 21,658 21,236 2 % 43,086 46,957 (8 )%
Product development 19,822 18,791 5 % 40,067 36,125 11 %
General and administrative 12,190 11,606 5 % 23,452 22,174 6 %
Amortization of acquired intangibles 3,318 3,223 3 % 6,637 6,402 4 %
Fees related to shareholder activist 214 * 1,472 *
Restructuring expense 426 662 (36 )% 2,247 17,801 (87 )%
Acquisition-related expenses 43   44   (2 )% 86   93   (8 )%
Total operating expenses 57,671   55,562   4 % 117,047   129,552   (10 )%
Income from operations 21,788   20,284   7 % 39,556   21,506   84 %
Other (expense) income, net (1,284 ) (1,552 ) 17 % (2,869 ) (2,899 ) 1 %
Income before income taxes 20,504   18,732   9 % 36,687   18,607   97 %
Provision for income taxes 5,101   8,391   (39 )% 8,372   8,791   (5 )%
Net income $ 15,403   $ 10,341   49 % $ 28,315   $ 9,816   188 %
 
Earnings per share:
Basic $ 0.34 $ 0.21 62 % $ 0.62 $ 0.20 210 %
Diluted $ 0.33 $ 0.21 57 % $ 0.61 $ 0.20 205 %
Weighted average shares outstanding:
Basic 45,531 48,221 (6 )% 46,030 48,477 (5 )%
Diluted 46,087 48,490 (5 )% 46,781 48,762 (4 )%
 
Cash dividends declared per common share $ 0.140 $ 0.125 12 % $ 0.280 $ 0.250 12 %
 
Stock-based compensation is included in the condensed consolidated statements of operations, as follows:
                     
Cost of revenue $ 269 $ 294 (9 )% $ 515 $ 551 (7 )%
Sales and marketing 995 200 398 % 1,365 563 142 %
Product development 1,984 1,158 71 % 4,030 1,054 282 %
General and administrative 2,332   1,981   18 % 4,240   3,095   37 %
Total $ 5,580   $ 3,633   54 % $ 10,150   $ 5,263   93 %

*Not meaningful

     

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
(In thousands)

May 31,
2018

November 30,
2017

Assets
Current assets:
Cash, cash equivalents and short-term investments $ 144,200 $ 183,609
Accounts receivable, net 42,577 61,210
Other current assets 13,844   18,588
Total current assets 200,621   263,407
Property and equipment, net 42,208 42,261
Goodwill and intangible assets, net 391,552 409,935
Other assets 2,592   3,115
Total assets $ 636,973   $ 718,718
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and other current liabilities $ 53,842 $ 69,661
Current portion of long-term debt, net 5,819 5,819
Short-term deferred revenue 135,202   132,538
Total current liabilities 194,863   208,018
Long-term deferred revenue 12,586 9,750
Long-term debt, net 113,180 116,090
Other long-term liabilities 7,207 8,776
Shareholders’ equity:
Common stock and additional paid-in capital 258,696 249,836
Retained earnings 50,441   126,248
Total shareholders’ equity 309,137   376,084
Total liabilities and shareholders’ equity $ 636,973   $ 718,718
 
     

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Three Months Ended Six Months Ended
(In thousands) May 31,
2018
  May 31,
2017
May 31,
2018
  May 31,
2017
Cash flows from operating activities:
Net income $ 15,403 $ 10,341 $ 28,315 $ 9,816
Depreciation and amortization 11,331 10,490 22,633 19,848
Stock-based compensation 5,580 3,633 10,150 5,263
Other non-cash adjustments (1,117 ) 444 (1,251 ) 4,571
Changes in operating assets and liabilities 10,932   (2,479 ) 13,877   20,231  

Net cash flows from operating activities

42,129   22,429   73,724   59,729  
Capital expenditures (1,810 ) (140 ) (3,196 ) (523 )
Repurchases of common stock, net of issuances (42,798 ) (7,503 ) (85,329 ) (19,923 )
Dividend payments to shareholders (6,482 ) (6,044 ) (13,101 ) (12,116 )
Payments for acquisitions, net of cash acquired (28,270 ) (28,270 )
Payments of principal on long-term debt (1,547 ) (3,750 ) (3,094 ) (7,500 )
Other (12,789 ) 4,168   (8,413 ) 3,931  
Net change in cash, cash equivalents and short-term investments (23,297 ) (19,110 ) (39,409 ) (4,672 )
Cash, cash equivalents and short-term investments, beginning of period 167,497   264,192   183,609   249,754  
Cash, cash equivalents and short-term investments, end of period $ 144,200   $ 245,082   $ 144,200   $ 245,082  
 
     

RESULTS OF OPERATIONS BY SEGMENT
(Unaudited)

 
Three Months Ended Six Months Ended
(In thousands)

May 31,
2018

 

May 31,
2017

 

%
Change

May 31,
2018

 

May 31,
2017

 

%
Change

Segment revenue:
OpenEdge $ 69,967 $ 65,890 6 % $ 136,375 $ 130,398 5 %
Data Connectivity and Integration 5,788 7,096 (18 )% 13,392 13,924 (4 )%

Application Development and Deployment

20,347   20,227   1 % 40,382   39,861   1 %
Total revenue 96,102   93,213   3 % 190,149   184,183   3 %
Segment costs of revenue and operating expenses:
OpenEdge 15,013 16,287 (8 )% 30,775 34,164 (10 )%
Data Connectivity and Integration 1,674 2,069 (19 )% 3,303 4,331 (24 )%
Application Development and Deployment 6,199   5,991   3 % 12,997   13,527   (4 )%
Total costs of revenue and operating expenses 22,886   24,347   (6 )% 47,075   52,022   (10 )%
Segment contribution margin:
OpenEdge 54,954 49,603 11 % 105,600 96,234 10 %
Data Connectivity and Integration 4,114 5,027 (18 )% 10,089 9,593 5 %
Application Development and Deployment 14,148   14,236   (1 )% 27,385   26,334   4 %
Total contribution margin 73,216   68,866   6 % 143,074   132,161   8 %
Other unallocated expenses (1) 51,428   48,582   6 % 103,518   110,655   (6 )%
Income from operations 21,788   20,284   7 % 39,556   21,506   84 %

Other (expense) income, net

(1,284 ) (1,552 ) 17 % (2,869 ) (2,899 ) 1 %
Income before income taxes $ 20,504   $ 18,732   9 % $ 36,687   $ 18,607   97 %
 

(1) The following expenses are not allocated to our segments as we manage and report our business in these functional areas on a consolidated basis only: certain product development and corporate sales and marketing expenses, customer support, administration, amortization of acquired intangibles, stock-based compensation, fees related to shareholder activist, restructuring, and acquisition-related expenses.

           

SUPPLEMENTAL INFORMATION
(Unaudited)

 
Revenue by Type
 
(In thousands) Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
Software licenses $ 25,592 $ 28,529 $ 45,963 $ 25,343 $ 26,439
Maintenance 59,898 60,536 61,826 61,479 62,323
Services 7,723   8,245   8,290   7,225   7,340
Total revenue $ 93,213   $ 97,310   $ 116,079   $ 94,047   $ 96,102
 
Revenue by Region
 
(In thousands) Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
North America $ 51,430 $ 55,703 $ 66,504 $ 51,641 $ 50,823
EMEA 30,646 31,830 38,039 33,014 35,333
Latin America 5,637 5,009 5,489 4,461 4,256
Asia Pacific 5,500   4,768   6,047   4,931   5,690
Total revenue $ 93,213   $ 97,310   $ 116,079   $ 94,047   $ 96,102
 
Revenue by Segment
 
(In thousands) Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018
OpenEdge $ 65,890 $ 68,135 $ 77,639 $ 66,408 $ 69,967
Data Connectivity and Integration 7,096 8,987 18,044 7,604 5,788
Application Development and Deployment 20,227   20,188   20,396   20,035   20,347
Total revenue $ 93,213   $ 97,310   $ 116,079   $ 94,047   $ 96,102
 
 

RECONCILIATIONS OF GAAP TO NON-GAAP SELECTED FINANCIAL MEASURES
(Unaudited)

     
Three Months Ended % Change
(In thousands, except per share data) May 31, 2018   May 31, 2017 Non-GAAP
Adjusted revenue:    
GAAP revenue $ 96,102 $ 93,213
Acquisition-related revenue (1) 110     214    
Non-GAAP revenue $ 96,212   100 % $ 93,427   100 % 3 %
 
Adjusted gross margin:
GAAP gross margin $ 79,459 83 % $ 75,846 81 %
Amortization of acquired intangibles 5,899 6 % 4,683 6 %
Stock-based compensation 269 % 294 %
Acquisition-related revenue (1) 110   % 214   %
Non-GAAP gross margin $ 85,737   89 % $ 81,037   87 % 6 %
 
Adjusted operating expenses:
GAAP operating expenses $ 57,671 60 % $ 55,562 60 %
Amortization of acquired intangibles (3,318 ) (3 )% (3,223 ) (3 )%
Fees related to shareholder activist (214 ) % %
Restructuring expenses and other (426 ) (1 )% (498 ) (1 )%
Acquisition-related expenses (43 ) % (44 ) %
Stock-based compensation (5,311 ) (6 )% (3,339 ) (4 )%
Non-GAAP operating expenses $ 48,359   50 % $ 48,458   52 % %
 
Adjusted income from operations:
GAAP income from operations $ 21,788 23 % $ 20,284 22 %
Amortization of acquired intangibles 9,217 10 % 7,906 8 %
Fees related to shareholder activist 214 % %
Restructuring expenses and other 426 % 498 1 %
Stock-based compensation 5,580 6 % 3,633 4 %
Acquisition-related 153   % 258   %
Non-GAAP income from operations $ 37,378   39 % $ 32,579   35 % 15 %
 
Adjusted diluted earnings per share:
GAAP diluted earnings per share $ 0.33 $ 0.21
Amortization of acquired intangibles 0.20 0.16
Fees related to shareholder activist
Restructuring expenses and other 0.01 0.01
Stock-based compensation 0.13 0.07
Acquisition-related 0.01
Provision for income taxes (0.07 ) (0.04 )
Non-GAAP diluted earnings per share $ 0.60   $ 0.42   43 %
 
Non-GAAP weighted avg shares outstanding - diluted 46,087 48,490 (5 )%
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

     

RECONCILIATIONS OF GAAP TO NON-GAAP SELECTED FINANCIAL MEASURES
(Unaudited)

 
Six Months Ended % Change
(In thousands, except per share data) May 31, 2018   May 31, 2017 Non-GAAP
Adjusted revenue:    
GAAP revenue $ 190,149 $ 184,183
Acquisition-related revenue (1) 257     446    
Non-GAAP revenue $ 190,406   100 % $ 184,629   100 % 3 %
 
Adjusted gross margin:
GAAP gross margin $ 156,603 82 % $ 151,058 82 %
Amortization of acquired intangibles 11,717 6 % 8,361 5 %
Stock-based compensation 515 1 % 551 %
Acquisition-related revenue (1) 257   % 446   %
Non-GAAP gross margin $ 169,092   89 % $ 160,416   87 % 5 %
 
Adjusted operating expenses:
GAAP operating expenses $ 117,047 62 % $ 129,552 70 %
Amortization of acquired intangibles (6,637 ) (3 )% (6,402 ) (3 )%
Fees related to shareholder activist (1,472 ) (1 )% %
Restructuring expenses and other (2,247 ) (2 )% (17,637 ) (10 )%
Acquisition-related expenses (86 ) % (93 ) %
Stock-based compensation (9,635 ) (5 )% (4,712 ) (2 )%
Non-GAAP operating expenses $ 96,970   51 % $ 100,708   55 % (4 )%
 
Adjusted income from operations:
GAAP income from operations $ 39,556 21 % $ 21,506 12 %
Amortization of acquired intangibles 18,354 10 % 14,763 8 %
Fees related to shareholder activist 1,472 1 % %
Restructuring expenses and other 2,247 1 % 17,637 9 %
Stock-based compensation 10,150 5 % 5,263 3 %
Acquisition-related 343   % 539   %
Non-GAAP income from operations $ 72,122   38 % $ 59,708   32 % 21 %
 
Adjusted diluted earnings per share:
GAAP diluted earnings per share $ 0.61 $ 0.20
Amortization of acquired intangibles 0.39 0.30
Fees related to shareholder activist 0.03
Restructuring expenses and other 0.05 0.36
Stock-based compensation 0.21 0.11
Acquisition-related 0.01 0.01
Provision for income taxes (0.16 ) (0.21 )
Non-GAAP diluted earnings per share $ 1.14   $ 0.77   48 %
 
Non-GAAP weighted avg shares outstanding - diluted 46,781 48,762 (4 )%
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

       

OTHER NON-GAAP FINANCIAL MEASURES
(Unaudited)

 
Revenue by Type
 
(In thousands) Q2 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

Software licenses $ 26,439 $ 18 $ 26,457
Maintenance 62,323 43 62,366
Services 7,340   49   7,389
Total revenue $ 96,102   $ 110   $ 96,212
 
Revenue by Region
 
(In thousands) Q2 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 50,823 $ 110 $ 50,933
EMEA 35,333 35,333
Latin America 4,256 4,256
Asia Pacific 5,690     5,690
Total revenue $ 96,102   $ 110   $ 96,212
 
Revenue by Segment
 
(In thousands) Q2 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 69,967 $ 49 $ 70,016
Data Connectivity and Integration 5,788 5,788
Application Development and Deployment 20,347   61   20,408
Total revenue $ 96,102   $ 110   $ 96,212
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

       
Adjusted Free Cash Flow
 
(In thousands) Q2 2018 Q2 2017 % Change
Cash flows from operations $ 42,129 $ 22,429 88 %
Purchases of property and equipment (1,810 ) (140 ) 1,193 %
Free cash flow 40,319   22,289   81 %
Add back: restructuring payments 2,442   5,566   (56 )%
Adjusted free cash flow $ 42,761   $ 27,855   54 %
 
       

OTHER NON-GAAP FINANCIAL MEASURES
(Unaudited)

 
Revenue by Type
 
(In thousands) YTD 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

Software licenses $ 51,782 $ 37 $ 51,819
Maintenance 123,802 89 123,891
Services 14,565   131   14,696
Total revenue $ 190,149   $ 257   $ 190,406
 
Revenue by Region
 
(In thousands) YTD 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 102,464 $ 257 $ 102,721
EMEA 68,347 68,347
Latin America 8,717 8,717
Asia Pacific 10,621     10,621
Total revenue $ 190,149   $ 257   $ 190,406
 
Revenue by Segment
 
(In thousands) YTD 2018

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 136,375 $ 131 $ 136,506
Data Connectivity and Integration 13,392 13,392
Application Development and Deployment 40,382   126   40,508
Total revenue $ 190,149   $ 257   $ 190,406
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

       
Adjusted Free Cash Flow
 
(In thousands) YTD 2018 YTD Q2 2017 % Change
Cash flows from operations $ 73,724 $ 59,729 23 %
Purchases of property and equipment (3,196 ) (523 ) 511 %
Free cash flow 70,528   59,206   19 %
Add back: restructuring payments 5,181   11,630   (55 )%
Adjusted free cash flow $ 75,709   $ 70,836   7 %
 
               

Non-GAAP Bookings from Application Development and Deployment Segment
(Unaudited)

 
(In thousands) Q1 2017 Q2 2017 Q3 2017 Q4 2017 FY 2017 Q1 2018   Q2 2018
GAAP revenue $ 19,634   $ 20,227   $ 20,188   $ 20,396   $ 80,445   $ 20,035     $ 20,347  
Add: change in deferred revenue
Beginning balance 52,971 51,298 52,400 52,615 52,971 53,794 52,927
Ending balance 51,298   52,400   52,615   53,794   53,794   52,927     51,978  
Change in deferred revenue (1,673 ) 1,102   215   1,179   823   (867 )   (949 )
Non-GAAP bookings $ 17,961   $ 21,329   $ 20,403   $ 21,575   $ 81,268   $ 19,168     $ 19,398  
 
 

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR FISCAL YEAR 2018 GUIDANCE
(Unaudited)

 
Fiscal Year 2018 Revenue Guidance
    Fiscal Year Ended   Fiscal Year Ending
November 30, 2017 November 30, 2018
(In millions) Low   % Change   High   % Change
GAAP revenue $ 397.6 $ 398.3 % $ 403.7 2 %
Acquisition-related adjustments - revenue (1) 1.0   0.3   (70 )% 0.3   (70 )%
Non-GAAP revenue $ 398.6   $ 398.6   % $ 404.0   1 %
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

 
Fiscal Year 2018 Non-GAAP Operating Margin Guidance
    Fiscal Year Ending November 30, 2018
(In millions) Low   High
GAAP income from operations $ 89.6 $ 93.1
GAAP operating margins 22 % 23 %
Acquisition-related revenue 0.3 0.3
Acquisition-related expense 0.2 0.2
Restructuring expense 3.0 2.2
Stock-based compensation 21.0 21.0
Amortization of intangibles 36.0 36.0
Fees related to shareholder activist 1.5   1.5  
Total adjustments 62.0   61.2  
Non-GAAP income from operations $ 151.6   $ 154.3  
Non-GAAP operating margin 38 % 38 %
 
 
Fiscal Year 2018 Non-GAAP Earnings per Share and Effective Tax Rate Guidance
    Fiscal Year Ending November 30, 2018
(In millions, except per share data) Low   High
GAAP net income $ 61.8 $ 64.4
Adjustments (from previous table) 62.0 61.2
Income tax adjustment (2) (10.3 ) (10.0 )
Non-GAAP net income $ 113.5   $ 115.6  
 
GAAP diluted earnings per share $ 1.33 $ 1.39
Non-GAAP diluted earnings per share $ 2.45 $ 2.50
 
Diluted weighted average shares outstanding 46.3 46.3
 
(2) Tax adjustment is based on a non-GAAP effective tax rate of approximately 22% for Low and High, calculated as follows:
Non-GAAP income from operations $ 151.6 $ 154.3
Other (expense) income (6.1 ) (6.1 )
Non-GAAP income from continuing operations before income taxes 145.5   148.2  
Non-GAAP net income 113.5   115.6  
Tax provision $ 32.0   $ 32.6  
Non-GAAP tax rate 22 % 22 %
 
 

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR FISCAL YEAR 2018 GUIDANCE
(Unaudited)

 
Fiscal Year 2018 Adjusted Free Cash Flow Guidance
    Fiscal Year Ending November 30, 2018
(In millions) Low   High
Cash flows from operations (GAAP) $ 120 $ 126
Purchases of property and equipment (7 ) (7 )
Add back: restructuring payments 7   6  
Adjusted free cash flow (non-GAAP) $ 120   $ 125  
 

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR Q3 2018 GUIDANCE
(Unaudited)

 
Q3 2018 Revenue Guidance
    Three Months Ended   Three Months Ending
August 31, 2017 August 31, 2018
(In millions) Low   % Change   High   % Change
GAAP revenue $ 97.3 $ 94.9 (2 )% $ 96.9 %
Acquisition-related adjustments - revenue (1) 0.3   0.1   (67 )% 0.1   (67 )%
Non-GAAP revenue $ 97.6   $ 95.0   (3 )% $ 97.0   (1 )%
 

(1) Acquisition-related revenue constitutes revenue reflected as pre-acquisition deferred revenue that would otherwise have been recognized but for the purchase accounting treatment of acquisitions. Since GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of our economic activities. Note that acquisition-related revenue adjustments relate to Progress' OpenEdge and Application Development and Deployment business segments for Kinvey and Telerik, respectively.

 
Q3 2018 Non-GAAP Earnings per Share Guidance
    Three Months Ending August 31, 2018
Low   High
GAAP diluted earnings per share $ 0.30 $ 0.33
Restructuring expense 0.01
Stock-based compensation 0.11 0.11
Amortization of intangibles 0.19   0.19  
Total adjustments 0.31   0.30  
Income tax adjustment (0.05 ) (0.05 )
Non-GAAP diluted earnings per share $ 0.56   $ 0.58  
 

Source: Progress

Progress Software
Investor Contact:
Brian Flanagan, +1 781-280-4817
flanagan@progress.com
or
Press Contact:
Erica Burns, +1 888-365-2779 (x3135)
erica.burns@progress.com