June 28, 2017

Progress Reports 2017 Fiscal Second Quarter Results

Raises Annual Guidance for Earnings per Share, Operating Margin and Adjusted Free Cash Flow

BEDFORD, Mass.--(BUSINESS WIRE)-- Progress (NASDAQ: PRGS) today announced results for its fiscal second quarter ended May 31, 2017.

Revenue was $93.2 million during the quarter compared to $96.1 million in the same quarter last year, a year-over-year decrease of 3% on an actual currency basis and 2% on a constant currency basis. On a non-GAAP basis, revenue was $93.4 million during the quarter compared to $96.7 million in the same quarter last year, a decrease of 3% on an actual currency basis and 2% on a constant currency basis.

Additional financial highlights included:

On a GAAP basis in the fiscal second quarter of 2017:

  • Revenue was $93.2 million compared to $96.1 million in the same quarter in fiscal year 2016;
  • Income from operations was $20.3 million compared to $12.3 million in the same quarter last year;
  • Net income was $10.3 million compared to $7.3 million in the same quarter last year;
  • Diluted earnings per share was $0.21 compared to $0.14 in the same quarter last year; and
  • Cash from operations was $22.4 million compared to $26.8 million in the same quarter last year.

On a non-GAAP basis in the fiscal second quarter of 2017:

  • Revenue was $93.4 million compared to $96.7 million in the same quarter last year;
  • Income from operations was $32.6 million compared to $27.0 million in the same quarter last year;
  • Operating margin was 35% compared to 28% in the same quarter last year;
  • Net income was $20.5 million compared to $16.4 million in the same quarter last year;
  • Diluted earnings per share was $0.42 compared to $0.33 in the same quarter last year; and
  • Adjusted free cash flow was $27.9 million compared to $26.4 million in the same quarter last year.

"I'm pleased that our Q2 revenue and earnings per share were above our expectations, and we continued to strengthen our core businesses with several key product releases during the quarter," said Yogesh Gupta, CEO at Progress. "And I'm excited about our future prospects as we focus on the very large and growing market opportunity for development platforms. Our recent acquisition of Kinvey, the top-ranked leader in 'The Forrester Wave' for Mobile Development Platforms, combined with our unique mobile and web development tools, machine learning capabilities, and unmatched data connectivity products, offer the best-of-breed product portfolio for building and running modern mission-critical business applications."

Paul Jalbert, CFO at Progress, said: "The financial performance of our core business in the first-half, coupled with our continued strong cash flow generation, has enabled us to meaningfully raise our annual guidance for earnings per share, operating margin and free cash flow. We remain confident in our strategy and financial strength, and look forward to a solid second-half of the year."

Other fiscal second quarter 2017 metrics and recent results included:

  • Cash, cash equivalents and short-term investments were $245.1 million at the end of the quarter;
  • DSO was 42 days, compared to 45 days in the fiscal second quarter of 2016;
  • Under the previously announced authorization by the Board of Directors to repurchase up to $200 million of shares of common stock, Progress repurchased 0.2 million shares for $6.9 million during the fiscal second quarter of 2017. As of May 31, 2017, there was $110.4 million remaining under this authorization; and
  • On June 21, 2017, our Board of Directors declared a quarterly dividend of $0.125 per share of common stock that will be paid on September 15, 2017 to shareholders of record as of the close of business on September 1, 2017.

Business Outlook

Progress provides the following updated guidance for the fiscal year ending November 30, 2017 and the third fiscal quarter ending August 31, 2017:

               
(In millions, except percentages and per share amounts)

FY 2017
GAAP

FY 2017
Non-GAAP

Q3 2017
GAAP

Q3 2017
Non-GAAP

Revenue $390 - $395 $391 - $396 $93 - $96 $93 - $96
Diluted earnings per share $0.66 - $0.73 $1.73 - $1.78 $0.17 - $0.19 $0.41 - $0.43
Operating margin 16% - 17% 33% - 34% * *
Adjusted free cash flow $86 - $91 $100 - $105 * *
Effective tax rate 43% 33% * *

*We do not provide guidance for this financial measure.

Progress' fiscal 2017 financial guidance is based on current exchange rates. The negative currency translation impact on Progress' fiscal year 2017 business outlook compared to 2016 exchange rates is approximately $2.0 million on non-GAAP revenue and $0.02 on non-GAAP earnings per share. The negative currency translation impact on Progress' fiscal Q3 2017 business outlook compared to 2016 exchange rates on both non-GAAP revenue and non-GAAP earnings per share is not meaningful. To the extent that there are further changes in exchange rates versus the current environment, this may have an additional impact on Progress' business outlook.

Conference Call

The Progress quarterly investor conference call to review its fiscal second quarter of 2017 will be broadcast live at 5:00 p.m. ET on Wednesday, June 28, 2017 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 1-877-340-7912, pass code 2708560. The conference call will include brief 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, 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 and capitalized software development costs, 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 by Telerik AD ("Telerik") that would otherwise have been recognized but for the purchase accounting treatment of the acquisition of Telerik. We acquired Telerik on December 2, 2014. 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 (and Telerik) 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.
  • 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. In addition, during the fiscal second quarter of 2016, we adjusted our income tax provision to remove from non-GAAP income the positive impact of an out-of-period adjustment recorded to the income tax provision.

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 weaken, our consolidated results stated in U.S. dollars are negatively 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, including the uncertain economic environment in Europe as a result of the Brexit vote, and the continued difficult economic environment in Brazil and other parts of the world, 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, 2016. 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 mission-critical business applications. Progress empowers enterprises and ISVs to build and deliver cognitive-first applications, that harness big data to derive business insights and competitive advantage. Progress offers leading technologies for easily building powerful user interfaces across any type of device, a reliable, scalable and secure backend platform to deploy modern applications, leading data connectivity to all sources, and award-winning predictive analytics that brings the power of machine learning to any organization. Over 1,700 independent software vendors, 80,000 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

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

May 31,
2017

   

May 31,
2016

    % Change

May 31,
2017

   

May 31,
2016

    % Change
Revenue:
Software licenses $ 25,592 $ 28,787 (11 )% $ 49,914 $ 52,742 (5 )%
Maintenance and services 67,621   67,331   % 134,269   132,857   1 %
Total revenue 93,213   96,118   (3 )% 184,183   185,599   (1 )%
Costs of revenue:
Cost of software licenses 1,422 1,233 15 % 3,010 2,715 11 %
Cost of maintenance and services 11,262 11,063 2 % 21,754 21,392 2 %
Amortization of acquired intangibles 4,683   3,939   19 % 8,361   7,878   6 %
Total costs of revenue 17,367   16,235   7 % 33,125   31,985   4 %
Gross profit 75,846   79,883   (5 )% 151,058   153,614   (2 )%
Operating expenses:
Sales and marketing 21,236 29,138 (27 )% 46,957 58,796 (20 )%
Product development 18,791 22,297 (16 )% 36,125 44,094 (18 )%
General and administrative 11,606 12,264 (5 )% 22,174 24,644 (10 )%
Amortization of acquired intangibles 3,223 3,185 1 % 6,402 6,370 1 %
Restructuring expenses 662 331 100 % 17,801 265 6,617 %
Acquisition-related expenses 44   324   (86 )% 93   396   (77 )%
Total operating expenses 55,562   67,539   (18 )% 129,552   134,565   (4 )%
Income from operations 20,284   12,344   64 % 21,506   19,049   13 %
Other (expense) income, net (1,552 ) (1,361 ) (14 )% (2,899 ) (3,186 ) 9 %
Income before income taxes 18,732   10,983   71 % 18,607   15,863   17 %
Provision for income taxes 8,391   3,708   126 % 8,791   5,372   64 %
Net income $ 10,341   $ 7,275   42 % $ 9,816   $ 10,491   (6 )%
 
Earnings per share:
Basic $ 0.21 $ 0.15 40 % $ 0.20 $ 0.21 (5 )%
Diluted $ 0.21 $ 0.14 50 % $ 0.20 $ 0.21 (5 )%
Weighted average shares outstanding:
Basic 48,221 49,873 (3 )% 48,477 50,341 (4 )%
Diluted 48,490 50,354 (4 )% 48,762 50,897 (4 )%
 
Cash dividends declared per common share $ 0.125 $ 100 % $ 0.250 $ 100 %
 

CONDENSED CONSOLIDATED BALANCE SHEETS

       
(In thousands)

May 31,
2017

November 30,
2016

Assets
Current assets:
Cash, cash equivalents and short-term investments $ 245,082 $ 249,754
Accounts receivable, net 43,894 65,678
Other current assets 22,332   20,621
Total current assets 311,308   336,053
Property and equipment, net 44,863 50,105
Goodwill and intangible assets, net 377,562 358,894
Other assets 3,331   9,775
Total assets $ 737,064   $ 754,827
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and other current liabilities $ 62,345 $ 59,778
Current portion of long-term debt 14,643 15,000
Short-term deferred revenue 133,254   128,960
Total current liabilities 210,242   203,738
Long-term deferred revenue 8,820 8,801
Long-term debt 111,964 120,000
Other long-term liabilities 13,202 15,659
Shareholders' equity:
Common stock and additional paid-in capital 242,331 239,496
Retained earnings 150,505   167,133
Total shareholders' equity 392,836   406,629
Total liabilities and shareholders' equity $ 737,064   $ 754,827
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

       
Three Months Ended Six Months Ended
(In thousands)

May 31,
2017

    May 31,
2016
May 31,
2017
    May 31,
2016
Cash flows from operating activities:
Net income $ 10,341 $ 7,275 $ 9,816 $ 10,491
Depreciation and amortization 10,490 9,969 19,848 19,909
Stock-based compensation 3,633 6,293 5,263 13,231
Other non-cash adjustments 444 1,691 4,571 977
Changes in operating assets and liabilities (2,479 ) 1,532   20,231   4,654  
Net cash flows from operating activities 22,429   26,760   59,729   49,262  
Capital expenditures (140 ) (1,204 ) (523 ) (2,617 )
Repurchases of common stock, net of issuances (7,503 ) (47,137 ) (19,923 ) (52,509 )
Dividend payments to shareholders (6,044 ) (12,116 )
Payments for acquisitions (28,270 ) (28,270 )
Payment of long-term debt (3,750 ) (1,875 ) (7,500 ) (5,625 )
Other 4,168   1,074   3,931   (681 )
Net change in cash, cash equivalents and short-term investments (19,110 ) (22,382 ) (4,672 ) (12,170 )
Cash, cash equivalents and short-term investments, beginning of period 264,192   251,491   249,754   241,279  
Cash, cash equivalents and short-term investments, end of period $ 245,082   $ 229,109   $ 245,082   $ 229,109  
 

RESULTS OF OPERATIONS BY SEGMENT

       
Three Months Ended Six Months Ended
(In thousands)

May 31,
2017

   

May 31,
2016

   

%
Change

May 31,
2017

   

May 31,
2016

   

%
Change

Segment revenue:
OpenEdge $ 65,890 $ 66,928 (2 )% $ 130,398 $ 131,061 (1 )%
Data Connectivity and Integration 7,096 10,005 (29 )% 13,924 16,601 (16 )%
Application Development and Deployment 20,227   19,185   5 % 39,861   37,937   5 %
Total revenue 93,213   96,118   (3 )% 184,183   185,599   (1 )%
Segment costs of revenue and operating expenses:
OpenEdge 16,287 17,296 (6 )% 34,164 35,360 (3 )%
Data Connectivity and Integration 2,069 3,134 (34 )% 4,331 6,035 (28 )%
Application Development and Deployment 5,991   9,724   (38 )% 13,527   18,535   (27 )%
Total costs of revenue and operating expenses 24,347   30,154   (19 )% 52,022   59,930   (13 )%
Segment contribution:
OpenEdge 49,603 49,632 % 96,234 95,701 1 %
Data Connectivity and Integration 5,027 6,871 (27 )% 9,593 10,566 (9 )%
Application Development and Deployment 14,236   9,461   50 % 26,334   19,402   36 %
Total contribution 68,866   65,964   4 % 132,161   125,669   5 %
Other unallocated expenses (1) 48,582   53,620   (9 )% 110,655   106,620   4 %
Income from operations 20,284   12,344   64 % 21,506   19,049   13 %
Other (expense) income, net (1,552 ) (1,361 ) (14 )% (2,899 ) (3,186 ) 9 %
Income before provision for income taxes $ 18,732   $ 10,983   71 % $ 18,607   $ 15,863   17 %
 
(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: product development, corporate marketing, administration, amortization of acquired intangibles, stock-based compensation, restructuring, and acquisition related expenses.
 

SUPPLEMENTAL INFORMATION

                   
Revenue by Type
 
(In thousands) Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
License $ 28,787 $ 33,624 $ 48,497 $ 24,322 $ 25,592
Maintenance 59,485 60,368 60,188 59,138 59,898
Services 7,846   8,026   9,039   7,510   7,723
Total revenue $ 96,118   $ 102,018   $ 117,724   $ 90,970   $ 93,213
 
Revenue by Region
 
(In thousands) Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
North America $ 53,392 $ 58,275 $ 68,471 $ 50,305 $ 51,430
EMEA 31,577 32,719 35,301 29,844 30,646
Latin America 4,389 4,667 8,407 5,023 5,637
Asia Pacific 6,760   6,357   5,545   5,798   5,500
Total revenue $ 96,118   $ 102,018   $ 117,724   $ 90,970   $ 93,213
 
Revenue by Segment
 
(In thousands) Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
OpenEdge $ 66,928 $ 67,534 $ 77,672 $ 64,508 $ 65,890
Data Connectivity and Integration 10,005 14,251 17,157 6,828 7,096
Application Development and Deployment 19,185   20,233   22,895   19,634   20,227
Total revenue $ 96,118   $ 102,018   $ 117,724   $ 90,970   $ 93,213
 

RECONCILIATIONS OF GAAP TO NON-GAAP SELECTED FINANCIAL MEASURES - QTD

       
Three Months Ended % Change
(In thousands, except per share data) May 31, 2017     May 31, 2016 Non-GAAP
Adjusted revenue:        
GAAP revenue $ 93,213 $ 96,118
Acquisition-related revenue (1) 214     564    
Non-GAAP revenue $ 93,427   100 % $ 96,682   100 % (3 )%
 
Adjusted gross margin:
GAAP gross margin $ 75,846 81 % $ 79,883 83 %
Amortization of acquired intangibles 4,683 6 % 3,939 4 %
Stock-based compensation (2) 294 % 180 %
Acquisition-related revenue (1) 214   % 564   %
Non-GAAP gross margin $ 81,037   87 % $ 84,566   87 % (4 )%
 
Adjusted operating expenses:
GAAP operating expenses $ 55,562 60 % $ 67,539 70 %
Amortization of acquired intangibles (3,223 ) (3 )% (3,185 ) (3 )%
Restructuring expenses and other (498 ) (1 )% (331 ) %
Acquisition-related expenses (44 ) % (324 ) %
Stock-based compensation (2) (3,339 ) (4 )% (6,113 ) (7 )%
Non-GAAP operating expenses $ 48,458   52 % $ 57,586   60 % (16 )%
 
Adjusted income from operations:
GAAP operating income $ 20,284 22 % $ 12,344 13 %
Amortization of acquired intangibles 7,906 8 % 7,124 7 %
Restructuring expenses and other 498 1 % 331 %
Stock-based compensation (2) 3,633 4 % 6,293 7 %
Acquisition-related 258   % 888   1 %
Non-GAAP income from operations $ 32,579   35 % $ 26,980   28 % 21 %
 
Adjusted diluted earnings per share:
GAAP diluted earnings per share $ 0.21 $ 0.14
Amortization of acquired intangibles 0.16 0.14
Restructuring expenses and other 0.01 0.01
Stock-based compensation (2) 0.07 0.13
Acquisition-related 0.01 0.02
Provision for income taxes (0.04 ) (0.11 )
Non-GAAP diluted earnings per share $ 0.42   $ 0.33   27 %
 
Non-GAAP weighted avg shares outstanding - diluted 48,490 50,354 (4 )%
 
(1) Adjustments to revenue relate to acquisition-related revenue, which constitutes revenue reflected as pre-acquisition deferred revenue by Telerik that would otherwise have been recognized but for the purchase accounting treatment of the acquisition of Telerik. 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 entirely relate to Progress' Application Development and Deployment business unit.
(2) Stock-based compensation is included in the GAAP statements of income, as follows:
 
Cost of revenue $ 294   $ 180  
Sales and marketing 200 962
Product development 1,158 2,397
General and administrative 1,981   2,754  
Operating Expenses 3,339   6,113  
Total $ 3,633   $ 6,293  
 

RECONCILIATIONS OF GAAP TO NON-GAAP SELECTED FINANCIAL MEASURES - YTD

       
Six Months Ended % Change
(In thousands, except per share data) May 31, 2017     May 31, 2016 Non-GAAP
Adjusted revenue:        
GAAP revenue $ 184,183 $ 185,599
Acquisition-related revenue (1) 446     1,321    
Non-GAAP revenue $ 184,629   100 % $ 186,920   100 % (1 )%
 
Adjusted gross margin:
GAAP gross margin $ 151,058 82 % $ 153,614 83 %
Amortization of acquired intangibles 8,361 5 % 7,878 4 %
Stock-based compensation (2) 551 % 376 %
Acquisition-related revenue (1) 446   % 1,321   %
Non-GAAP gross margin $ 160,416   87 % $ 163,189   87 % (2 )%
 
Adjusted operating expenses:
GAAP operating expenses $ 129,552 70 % $ 134,565 72 %
Amortization of acquired intangibles (6,402 ) (3 )% (6,370 ) (4 )%
Restructuring expenses and other (17,637 ) (10 )% (265 ) %
Acquisition-related expenses (93 ) % (396 ) %
Stock-based compensation (2) (4,712 ) (2 )% (12,855 ) (7 )%
Non-GAAP operating expenses $ 100,708   55 % $ 114,679   61 % (12 )%
 
Adjusted income from operations:
GAAP operating income $ 21,506 12 % $ 19,049 10 %
Amortization of acquired intangibles 14,763 8 % 14,248 8 %
Restructuring expenses and other 17,637 9 % 265 %
Stock-based compensation (2) 5,263 3 % 13,231 7 %
Acquisition-related 539   % 1,717   1 %
Non-GAAP income from operations $ 59,708   32 % $ 48,510   26 % 23 %
 
Adjusted diluted earnings per share:
GAAP diluted earnings per share $ 0.20 $ 0.21
Amortization of acquired intangibles 0.30 0.28
Restructuring expenses and other 0.36
Stock-based compensation (2) 0.11 0.26
Acquisition-related 0.01 0.03
Provision for income taxes (0.21 ) (0.19 )
Non-GAAP diluted earnings per share $ 0.77   $ 0.59   31 %
 
Non-GAAP weighted avg shares outstanding - diluted 48,762 50,897 (4 )%
 
(1) Adjustments to revenue relate to acquisition-related revenue, which constitutes revenue reflected as pre-acquisition deferred revenue by Telerik that would otherwise have been recognized but for the purchase accounting treatment of the acquisition of Telerik. 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 entirely relate to Progress' Application Development and Deployment business unit.
(2) Stock-based compensation is included in the GAAP statements of income, as follows:
 
Cost of revenue $ 551   $ 376  
Sales and marketing 563 2,041
Product development 1,054 5,077
General and administrative 3,095   5,737  
Operating Expenses 4,712   12,855  
Total $ 5,263   $ 13,231  
 

OTHER NON-GAAP FINANCIAL MEASURES - QTD

           
Revenue by Type
 
(In thousands) Q2 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

License $ 25,592 $ 47 $ 25,639
Maintenance 59,898 167 60,065
Services 7,723     7,723  
Total revenue $ 93,213   $ 214   $ 93,427  
 
Revenue by Region
 
(In thousands) Q2 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 51,430 $ 214 $ 51,644
EMEA 30,646 30,646
Latin America 5,637 5,637
Asia Pacific 5,500     5,500  
Total revenue $ 93,213   $ 214   $ 93,427  
 
Revenue by Segment
 
(In thousands) Q2 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 65,890 $ $ 65,890
Data Connectivity and Integration 7,096 7,096
Application Development and Deployment 20,227   214   20,441  
Total revenue $ 93,213   $ 214   $ 93,427  
 
(1) Adjustments to revenue relate to acquisition-related revenue, which constitutes revenue reflected as pre-acquisition deferred revenue by Telerik that would otherwise have been recognized but for the purchase accounting treatment of the acquisition of Telerik. 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 entirely relate to Progress' Application Development and Deployment business unit.
 
Adjusted Free Cash Flow
 
(In thousands) Q2 2017 Q2 2016 % Change
Cash flows from operations $ 22,429 $ 26,760 (16 )%
Purchases of property and equipment (140 ) (1,204 ) (88 )%
Free cash flow 22,289   25,556   (13 )%
Add back: restructuring payments 5,566   891   525 %
Adjusted free cash flow $ 27,855   $ 26,447   5 %
 

OTHER NON-GAAP FINANCIAL MEASURES - YTD

           
Revenue by Type
 
(In thousands) YTD 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

License $ 49,914 $ 99 $ 50,013
Maintenance 119,036 347 119,383
Services 15,233     15,233  
Total revenue $ 184,183   $ 446   $ 184,629  
 
Revenue by Region
 
(In thousands) YTD 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 101,735 $ 446 $ 102,181
EMEA 60,490 60,490
Latin America 10,660 10,660
Asia Pacific 11,298     11,298  
Total revenue $ 184,183   $ 446   $ 184,629  
 
Revenue by Segment
 
(In thousands) YTD 2017

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 130,398 $ $ 130,398
Data Connectivity and Integration 13,924 13,924
Application Development and Deployment 39,861   446   40,307  
Total revenue $ 184,183   $ 446   $ 184,629  
 
(1) Adjustments to revenue relate to acquisition-related revenue, which constitutes revenue reflected as pre-acquisition deferred revenue by Telerik that would otherwise have been recognized but for the purchase accounting treatment of the acquisition of Telerik. 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 entirely relate to Progress' Application Development and Deployment business unit.
 
Adjusted Free Cash Flow
 
(In thousands) YTD 2017 YTD Q2 2016 % Change
Cash flows from operations $ 59,729 $ 49,262 21 %
Purchases of property and equipment (523 ) (2,617 ) (80 )%
Free cash flow 59,206   46,645   27 %
Add back: restructuring payments 11,630   2,483   368 %
Adjusted free cash flow $ 70,836   $ 49,128   44 %
 

Non-GAAP Bookings from Application Development and Deployment Segment

                           
(In thousands) Q1 2016 Q2 2016 Q3 2016 Q4 2016 FY 2016 Q1 2017 Q2 2017
GAAP revenue $ 18,752   $ 19,185   $ 20,233   $ 22,895   $ 81,065   $ 19,634   $ 20,226
Add: change in deferred revenue
Beginning balance 49,252 49,237 51,693 51,736 49,252 52,971 51,298
Ending balance 49,237   51,693   51,736   52,971   52,971   51,298   52,400
Change in deferred revenue (15 ) 2,456   43   1,235   3,719   (1,673 ) 1,102
Non-GAAP bookings $ 18,737   $ 21,641   $ 20,276   $ 24,130   $ 84,784   $ 17,961   $ 21,328
 

SaaS Revenue (Hosted Services) from Application Development and Deployment Segment

                           
(In thousands) Q1 2016 Q2 2016 Q3 2016 Q4 2016 FY 2016 Q1 2017 Q2 2017

SaaS Revenue - Application Development
and Deployment

$ 1,071   $ 1,079   $ 1,160   $ 1,163   $ 4,473   $ 963   $ 854
 

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR FISCAL YEAR 2017 GUIDANCE
(Unaudited)

 
Fiscal Year 2017 Revenue Growth Guidance
    Fiscal Year Ended     Fiscal Year Ending
November 30, 2016 November 30, 2017
(In millions) Low     % Change     High     % Change
GAAP revenue $ 405.3 $ 390.0 (4 )% $ 395.0 (3 )%
Acquisition-related adjustments - revenue (1) 2.1   1.0   (52 )% 1.0   (52 )%
Non-GAAP revenue $ 407.4   $ 391.0   (4 )% $ 396.0   (3 )%
 
(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.
 
Fiscal Year 2017 Non-GAAP Operating Margin Guidance
    Fiscal Year Ending November 30, 2017
(In millions) Low     High
GAAP income from operations $ 61.9 $ 68.4
GAAP operating margins 16 % 17 %
Acquisition-related revenue 1.0 1.0
Acquisition-related expense 0.1 0.1
Stock-based compensation 15.0 15.0
Restructuring expense and other 20.0 18.0
Amortization of intangibles 32.9   32.9  
Total adjustments 69.0   67.0  
Non-GAAP income from operations $ 130.9   $ 135.4  
Non-GAAP operating margin 33 % 34 %
 
Fiscal Year 2017 Non-GAAP Earnings per Share and Effective Tax Rate Guidance
    Fiscal Year Ending November 30, 2017
(In millions, except per share data) Low     High
GAAP net income $ 32.1 $ 35.8
Adjustments (from previous table) 69.0 67.0
Income tax adjustment (2) (17.1 ) (15.8 )
Non-GAAP net income $ 84.0   $ 87.0  
 
GAAP diluted earnings per share $ 0.66 $ 0.73
Non-GAAP diluted earnings per share $ 1.73 $ 1.78
 
Diluted weighted average shares outstanding 48.6 48.8
 
(2) Tax adjustment is based on a non-GAAP effective tax rate of 33% for Low and High, calculated as follows:
Non-GAAP income from operations $ 130.9 $ 135.4
Other (expense) income, net (5.6 ) (5.6 )
Non-GAAP income from continuing operations before income taxes 125.3   129.8  
Non-GAAP net income 84.0   87.0  
Tax provision $ 41.3   $ 42.8  
Non-GAAP tax rate 33 % 33 %
 

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR Q3 2017 GUIDANCE
(Unaudited)

Q3 2017 Revenue Growth Guidance
    Three Months Ended     Three Months Ending
August 31, 2016 August 31, 2017
(In millions) Low     % Change     High     % Change
GAAP revenue $ 102.0 $ 92.6 (9 )% $ 95.6 (6 )%
Acquisition-related adjustments - revenue (1) 0.4   0.4   % 0.4   %
Non-GAAP revenue $ 102.4   $ 93.0   (9 )% $ 96.0   (6 )%
 
(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.
 
Q3 2017 Non-GAAP Earnings per Share Guidance
    Three Months Ending August 31, 2017
Low     High
GAAP diluted earnings per share $ 0.17   $ 0.19  
Acquisition-related revenue 0.01 0.01
Stock-based compensation 0.10 0.10
Amortization of intangibles 0.19   0.19  
Total adjustments 0.30   0.30  
Income tax adjustment $ (0.06 ) $ (0.06 )
Non-GAAP diluted earnings per share $ 0.41   $ 0.43  

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

Source: Progress

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