June 29, 2016

Progress Reports 2016 Fiscal Second Quarter Results

BEDFORD, Mass.--(BUSINESS WIRE)-- Progress (NASDAQ: PRGS) today announced results for its fiscal second quarter ended May 31, 2016.

Revenue was $96.1 million during the quarter compared to $88.8 million in the same quarter last year, a year over year increase of 8% on an actual currency basis and 9% on a constant currency basis. On a non-GAAP basis, revenue was $96.7 million during the quarter compared to $100.9 million in the same quarter last year, a decrease of 4% on an actual currency basis and 3% on a constant currency basis.

Additional financial highlights included:

On a GAAP basis in the fiscal second quarter of 2016:

  • Revenue was $96.1 million compared to $88.8 million in the same quarter in fiscal year 2015;
  • Income from operations was $12.3 million compared to a loss from operations of $2.7 million in the same quarter last year;
  • Net income was $7.3 million compared to $5.8 million in the same quarter last year;
  • Diluted earnings per share was $0.14 compared to $0.11 in the same quarter last year; and
  • Cash from operations was $26.8 million compared to $20.8 million in the same quarter last year.

On a non-GAAP basis in the fiscal second quarter of 2016:

  • Revenue was $96.7 million compared to $100.9 million in the same quarter last year;
  • Income from operations was $27.0 million compared to $27.8 million in the same quarter last year;
  • Operating margin was 28% compared to 28% in the same quarter last year;
  • Net income was $16.4 million compared to $18.1 million in the same quarter last year;
  • Diluted earnings per share was $0.33 compared to $0.35 in the same quarter last year; and
  • Adjusted free cash flow was $26.4 million compared to $18.8 million in the same quarter last year.

Phil Pead, CEO at Progress, said, "We are pleased with our second quarter performance. We had another solid quarter from our OpenEdge partners, strong growth from our data products and increased momentum in our Telerik bookings. We also announced our Digital Factory solutions during the quarter, which will enable us to take advantage of the longer-term growth opportunities available in the digital transformation market."

Other fiscal second quarter 2016 metrics and recent results included:

  • Cash, cash equivalents and short-term investments were $229.1 million at the end of the quarter;
  • DSO was 45 days, compared to 50 days in the fiscal second quarter of 2015; and
  • Under the previously announced authorization by the Board of Directors to repurchase up to $200 million of shares of common stock, Progress repurchased 1.9 million shares for $48.3 million during the fiscal second quarter of 2016.

Business Outlook

Progress provides the following guidance for the fiscal year ending November 30, 2016 and the third fiscal quarter ending August 31, 2016:

                         
(In millions, except percentages and per share amounts)

FY 2016
GAAP

FY 2016
Non-GAAP

 

Q3 2016
GAAP

Q3 2016
Non-GAAP

Revenue $410 - $416 $412 - $418 $103 - $106 $103 - $106
Earnings per share $0.63 - $0.68 $1.57 - $1.63 $0.17 - $0.20 $0.43 - $0.46
Operating margin 15% - 16% 29% - 30% * *
Adjusted free cash flow * $80 - $85 * *
Effective tax rate 45% 32% - 33% * *

*We do not provide guidance for this financial measure.

Progress' fiscal 2016 financial guidance is based on current exchange rates. The negative currency translation impact on Progress' fiscal year 2016 business outlook compared to 2015 exchange rates is approximately $6.0 million to $7.0 million on non-GAAP revenue and $0.03 to $0.04 on non-GAAP earnings per share. The negative currency translation impact on Progress' fiscal Q3 2016 business outlook compared to 2015 exchange rates is approximately $1.5 million on non-GAAP revenue and $0.01 on non-GAAP earnings per share. 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 2016 will be broadcast live at 5:00 p.m. ET on Wednesday, June 29, 2016 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 1-877-440-5788, pass code 1530142. 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, in the current period, 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 during the fiscal second quarter of 2016.

Constant Currency

Revenue from our international operations has historically represented approximately half 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 recent 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 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, 2015. 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) is a global leader in application development, empowering the digital transformation organizations need to create and sustain engaging user experiences in today's evolving marketplace. With offerings spanning web, mobile and data for on-premise and cloud environments, Progress powers startups and industry titans worldwide, promoting success one customer at a time. Learn about Progress at www.progress.com or 1-781-280-4000.

Progress is a trademark or registered trademarks of Progress Software Corporation or one of its subsidiaries or affiliates in the U.S. and other countries. Any other trademarks contained herein are the property of their respective owners.

                         

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

Three Months Ended

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

May 31,
2016

May 31,
2015

% Change

May 31,
2016

May 31,
2015

% Change

Revenue:
Software licenses $ 28,787 $ 28,722 % $ 52,742 $ 53,953 (2 )%
Maintenance and services 67,331   60,095   12 % 132,857   116,245   14 %
Total revenue 96,118   88,817   8 % 185,599   170,198   9 %
Costs of revenue:
Cost of software licenses 1,233 1,365 (10 )% 2,715 3,085 (12 )%
Cost of maintenance and services 11,063 10,288 8 % 21,392 21,563 (1 )%
Amortization of acquired intangibles 3,939   4,093   (4 )% 7,878   8,726   (10 )%
Total costs of revenue 16,235   15,746   3 % 31,985   33,374   (4 )%
Gross profit 79,883   73,071   9 % 153,614   136,824   12 %
Operating expenses:
Sales and marketing 29,138 31,852 (9 )% 58,796 62,602 (6 )%
Product development 22,297 22,290 % 44,094 45,111 (2 )%
General and administrative 12,264 13,673 (10 )% 24,644 27,988 (12 )%
Amortization of acquired intangibles 3,185 3,171 % 6,370 6,373 %
Restructuring expenses 331 3,810 (91 )% 265 6,153 (96 )%
Acquisition-related expenses 324   1,010   (68 )% 396   2,518   (84 )%
Total operating expenses 67,539   75,806   (11 )% 134,565   150,745   (11 )%
Income (loss) from operations 12,344   (2,735 ) 551 % 19,049   (13,921 ) 237 %
Other expense, net (1,361 ) (1,025 ) 33 % (3,186 ) (93 ) 3,326 %
Income (loss) before income taxes 10,983   (3,760 ) 392 % 15,863   (14,014 ) 213 %
Provision (benefit) for income taxes 3,708   (9,529 ) (139 )% 5,372   (18,812 ) (129 )%
Net income $ 7,275   $ 5,769   26 % $ 10,491   $ 4,798   119 %
 
Earnings per share:
Basic $ 0.15 $ 0.11 36 % $ 0.21 $ 0.10 110 %
Diluted $ 0.14 $ 0.11 27 % $ 0.21 $ 0.09 133 %
Weighted average shares outstanding:
Basic 49,873 50,342 (1 )% 50,341 50,505 %
Diluted 50,354 51,085 (1 )% 50,897 51,224 (1 )%

 

CONDENSED CONSOLIDATED BALANCE SHEETS

           
(In thousands)

May 31,
2016

November 30,
2015

Assets
Current assets:
Cash, cash equivalents and short-term investments $ 229,109 $ 241,279
Accounts receivable, net 48,294 66,459
Other current assets 21,970   15,671
Total current assets 299,373   323,409
Property and equipment, net 51,760 54,226
Goodwill and intangible assets, net 469,888 484,098
Other assets 13,209   15,390
Total assets $ 834,230   $ 877,123
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and other current liabilities $ 51,168 $ 65,314
Current portion of long-term debt 11,250 9,375
Short-term deferred revenue 133,006   125,227
Total current liabilities 195,424   199,916
Long-term deferred revenue 9,229 8,844
Long-term debt 127,500 135,000
Other long-term liabilities 10,674 10,899
Shareholders' equity:
Common stock and additional paid-in capital 231,043 227,930
Retained earnings 260,360   294,534
Total shareholders' equity 491,403   522,464
Total liabilities and shareholders' equity $ 834,230   $ 877,123
             

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended Six Months Ended
(In thousands)

May 31,
2016

     

May 31,
2015

May 31,
2016

     

May 31,
2015

Cash flows from operating activities:
Net income $ 7,275 $ 5,769 $ 10,491 $ 4,798
Depreciation and amortization 9,969 10,360 19,909 21,495
Stock-based compensation 6,293 6,439 13,231 12,275
Other non-cash adjustments 1,691 (7,509 ) 977 (25,408 )
Changes in operating assets and liabilities 1,532   5,732   4,654   44,771  
Net cash flows from operating activities 26,760   20,791   49,262   57,931  
Capital expenditures (1,204 ) (3,147 ) (2,617 ) (5,788 )
Issuances of common stock, net of repurchases (47,137 ) (22,023 ) (52,509 ) (26,512 )
Payments for acquisitions (246,275 )
Proceeds from the issuance of debt, net of payments of principle and debt issuance costs (1,875 ) (1,875 ) (5,625 ) 144,543
Proceeds from divestitures, net 4,500
Other 1,074   (5,789 ) (681 ) (12,546 )
Net change in cash, cash equivalents and short-term investments (22,382 ) (12,043 ) (12,170 ) (84,147 )
Cash, cash equivalents and short-term investments, beginning of period 251,491   211,164   241,279   283,268  
Cash, cash equivalents and short-term investments, end of period $ 229,109   $ 199,121   $ 229,109   $ 199,121  
             

RESULTS OF OPERATIONS BY SEGMENT

 
Three Months Ended Six Months Ended
(In thousands)

May 31,
2016

     

May 31,
2015

      % Change

May 31,
2016

     

May 31,
2015

    % Change
Segment revenue:
OpenEdge $ 66,928 $ 71,906 (7 )% $ 131,061 $ 141,377 (7 )%
Data Connectivity and Integration 10,005 7,275 38 % 16,601 14,388 15 %
Application Development and Deployment 19,185   9,636   99 % 37,937   14,433   163 %
Total revenue 96,118   88,817   8 % 185,599   170,198   9 %
Segment costs of revenue and operating expenses:
OpenEdge 17,296 18,446 (6 )% 35,360 37,980 (7 )%
Data Connectivity and Integration 3,134 3,133 % 6,035 6,383 (5 )%
Application Development and Deployment 9,724   10,851   (10 )% 18,535   20,235   (8 )%
Total costs of revenue and operating expenses 30,154   32,430   (7 )% 59,930   64,598   (7 )%
Segment contribution:
OpenEdge 49,632 53,460 (7 )% 95,701 103,397 (7 )%
Data Connectivity and Integration 6,871 4,142 66 % 10,566 8,005 32 %
Application Development and Deployment 9,461   (1,215 ) 879 % 19,402   (5,802 ) 434 %
Total contribution 65,964   56,387   17 % 125,669   105,600   19 %
Other unallocated expenses (1) 53,620   59,122   (9 )% 106,620   119,521   (11 )%
Income (loss) from operations 12,344   (2,735 ) 551 % 19,049   (13,921 ) 237 %
Other expense, net (1,361 ) (1,025 ) 33 % (3,186 ) (93 ) 3,326 %
Income (loss) before provision for income taxes $ 10,983   $ (3,760 ) 392 % $ 15,863   $ (14,014 ) 213 %
 

 

(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 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
License $ 28,722 $ 31,840 $ 44,457 $ 23,955 $ 28,787
Maintenance 52,656 55,365 60,458 58,336 59,485
Services 7,439   7,432   7,803   7,190   7,846
Total revenue $ 88,817   $ 94,637   $ 112,718   $ 89,481   $ 96,118
 
Revenue by Region
 
(In thousands) Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
North America $ 47,520 $ 49,810 $ 68,112 $ 49,065 $ 53,392
EMEA 31,146 30,656 34,504 31,221 31,577
Latin America 4,388 4,621 3,617 3,693 4,389
Asia Pacific 5,763   9,550   6,485   5,502   6,760
Total revenue $ 88,817   $ 94,637   $ 112,718   $ 89,481   $ 96,118
 
Revenue by Segment
 
(In thousands) Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
OpenEdge $ 71,906 $ 73,398 $ 81,159 $ 64,133 $ 66,928
Data Connectivity and Integration 7,275 8,281 15,257 6,596 10,005
Application Development and Deployment 9,636   12,958   16,302   18,752   19,185
Total revenue $ 88,817   $ 94,637   $ 112,718   $ 89,481   $ 96,118

 

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

       
Three Months Ended May 31,

%
Change

 
2016     2015  
(In thousands, except per share data) GAAP   Adj.  

Non-
GAAP

GAAP   Adj.  

Non-
GAAP

Non-
GAAP

TOTAL REVENUE $ 96,118 $ 564 $ 96,682 $ 88,817 $ 12,034 $ 100,851 (4 )%
Software licenses (1) 28,787 93 28,880 28,722 3,018 31,740 (9 )%
Maintenance and services (1) 67,331 471 67,802 60,095 9,016 69,111 (2 )%
 
TOTAL COSTS OF REVENUE $ 16,235 $ (4,119 ) $ 12,116 $ 15,746 $ (4,247 ) $ 11,499 5 %
Amortization of acquired intangibles 3,939 (3,939 ) 4,093 (4,093 )
Stock-based compensation (2) 180 (180 ) 154 (154 )
 
GROSS MARGIN % 83 % 87 % 82 % 89 % (2 )%
 
TOTAL OPERATING EXPENSES $ 67,539 $ (9,953 ) $ 57,586 $ 75,806 $ (14,276 ) $ 61,530 (6 )%
Amortization of acquired intangibles 3,185 (3,185 ) 3,171 (3,171 )
Restructuring expenses 331 (331 ) 3,810 (3,810 )
Acquisition-related expenses 324 (324 ) 1,010 (1,010 )
Stock-based compensation (2) 6,113 (6,113 ) 6,285 (6,285 )
 
INCOME (LOSS) FROM OPERATIONS $ 12,344 $ 14,636 $ 26,980 $ (2,735 ) $ 30,557 $ 27,822 (3 )%
 
OPERATING MARGIN 13 % 28 % (3 )% 28 % %
 
TOTAL OTHER EXPENSE, NET $ (1,361 ) $ $ (1,361 ) $ (1,025 ) $ $ (1,025 ) 33 %
 
PROVISION (BENEFIT) FOR INCOME TAXES (3) $ 3,708 $ 5,478 $ 9,186 $ (9,529 ) $ 18,198 $ 8,669 6 %
 
NET INCOME $ 7,275 $ 9,158 $ 16,433 $ 5,769 $ 12,359 $ 18,128 (9 )%
 
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.19 $ 0.33 $ 0.11 $ 0.24 $ 0.35 (6 )%
 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 50,354 50,354 51,085 51,085 (1 )%
 
(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 180 154
Sales and marketing 962 1,488
Product development 2,397 1,062
General and administrative 2,754   3,735  
Total $ 6,293   $ 6,439  
(3) In the current period, the Company identified an error in its prior year income tax provision whereby income tax expense was overstated for the year ended November 30, 2015 related to the Company's tax treatment of an intercompany gain. We corrected this error by recording an out of period $2.7 million tax benefit in its quarter ended May 31, 2016 financial statements. We adjusted our income tax provision to remove from non-GAAP income the positive impact of this out-of-period adjustment.
 

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

           
Six Months Ended May 31,

%
Change

 
2016         2015  
(In thousands, except per share data) GAAP       Adj.    

Non-
GAAP

GAAP       Adj.      

Non-
GAAP

Non-
GAAP

TOTAL REVENUE $ 185,599 $ 1,321 $ 186,920 $ 170,198 $ 26,107 $ 196,305 (5 )%
Software licenses (1) 52,742 208 52,950 53,953 6,764 60,717 (13 )%
Maintenance and services (1) 132,857 1,113 133,970 116,245 19,343 135,588 (1 )%
 
TOTAL COSTS OF REVENUE $ 31,985 $ (8,255 ) $ 23,730 $ 33,374 $ (9,045 ) $ 24,329 (2 )%
Amortization of acquired intangibles 7,878 (7,878 ) 8,726 (8,726 )
Stock-based compensation (2) 376 (376 ) 319 (319 )
 
GROSS MARGIN % 83 % 87 % 80 % 88 % (1 )%
 
TOTAL OPERATING EXPENSES $ 134,565 $ (19,888 ) $ 114,677 $ 150,745 $ (27,000 ) $ 123,745 (7 )%
Amortization of acquired intangibles 6,370 (6,370 ) 6,373 (6,373 )
Restructuring expenses 265 (265 ) 6,153 (6,153 )
Acquisition-related expenses 396 (396 ) 2,518 (2,518 )
Stock-based compensation (2) 12,855 (12,855 ) 11,956 (11,956 )
 
INCOME (LOSS) FROM OPERATIONS $ 19,049 $ 29,464 $ 48,513 $ (13,921 ) $ 62,152 $ 48,231 1 %
 
OPERATING MARGIN 10 % 26 % (8 )% 25 % 1 %
 
TOTAL OTHER (EXPENSE) INCOME, NET (3) $ (3,186 ) $ $ (3,186 ) $ (93 ) $ 266 $ 173 (1,942 )%
 
PROVISION (BENEFIT) FOR INCOME TAXES (4) $ 5,372 $ 9,736 $ 15,108 $ (18,812 ) $ 33,950 $ 15,138 %
 
NET INCOME $ 10,491 $ 19,728 $ 30,219 $ 4,798 $ 28,468 $ 33,266 (9 )%
 
DILUTED EARNINGS PER SHARE $ 0.21 $ 0.38 $ 0.59 $ 0.09 $ 0.56 $ 0.65 (9 )%
 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 50,897 50,897 51,224 51,224 (1 )%
 
(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 376 319
Sales and marketing 2,041 2,725
Product development 5,077 2,564
General and administrative 5,737   6,667  
Total $ 13,231   $ 12,275  
(3) In the prior year period, the adjustment to other income (expense), net relates to the termination of Progress' prior revolving credit facility in connection with entering into the new credit facility. Upon termination, the outstanding debt issuance costs related to the prior revolving credit facility were written off to other income (expense) in the GAAP statements of income.
(4) In the current period, the Company identified an error in its prior year income tax provision whereby income tax expense was overstated for the year ended November 30, 2015 related to the Company's tax treatment of an intercompany gain. We corrected this error by recording an out of period $2.7 million tax benefit in its quarter ended May 31, 2016 financial statements. We adjusted our income tax provision to remove from non-GAAP income the positive impact of this out-of-period adjustment.
                 

 

OTHER NON-GAAP FINANCIAL MEASURES - QTD

 

Revenue by Type

 
(In thousands) Q2 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

License $ 28,787 $ 93 $ 28,880
Maintenance 59,485 471 59,956
Services 7,846     7,846  
Total revenue $ 96,118   $ 564   $ 96,682  
 
Revenue by Region
 
(In thousands) Q2 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 53,392 $ 490 $ 53,882
EMEA 31,577 60 31,637
Latin America 4,389 2 4,391
Asia Pacific 6,760   12   6,772  
Total revenue $ 96,118   $ 564   $ 96,682  
 
Revenue by Segment
 
(In thousands) Q2 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 66,928 $ $ 66,928
Data Connectivity and Integration 10,005 10,005
Application Development and Deployment 19,185   564   19,749  
Total revenue $ 96,118   $ 564   $ 96,682  
 
(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 2016 Q2 2015 % Change
Cash flows from operations $ 26,760 $ 20,791 29 %
Purchases of property and equipment $ (1,204 ) $ (2,070 ) (42 )%
Capitalized software development costs $   $ (1,077 ) (100 )%
Free cash flow $ 25,556   $ 17,644   45 %
Add back: restructuring payments $ 891   $ 1,189   (25 )%
Adjusted free cash flow $ 26,447   $ 18,833   40 %
                 

OTHER NON-GAAP FINANCIAL MEASURES - YTD

 
Revenue by Type
 
(In thousands) YTD 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

License $ 52,742 $ 208 $ 52,950
Maintenance 117,821 1,113 118,934
Services 15,036     15,036  
Total revenue $ 185,599   $ 1,321   $ 186,920  
 
Revenue by Region
 
(In thousands) YTD 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

North America $ 102,457 $ 1,150 $ 103,607
EMEA 62,798 140 62,938
Latin America 8,082 4 8,086
Asia Pacific 12,262   27   12,289  
Total revenue $ 185,599   $ 1,321   $ 186,920  
 
Revenue by Segment
 
(In thousands) YTD 2016

Non-GAAP
Adjustment (1)

Non-GAAP
Revenue

OpenEdge $ 131,061 $ $ 131,061
Data Connectivity and Integration 16,601 16,601
Application Development and Deployment 37,937   1,321   39,258  
Total revenue $ 185,599   $ 1,321   $ 186,920  
 
(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 2016 YTD Q2 2015 % Change
Cash flows from operations $ 49,262 $ 57,931 (15 )%
Purchases of property and equipment $ (2,617 ) $ (4,405 ) (41 )%
Capitalized software development costs $   $ (1,383 ) (100 )%
Free cash flow $ 46,645   $ 52,143   (11 )%
Add back: restructuring payments $ 2,483   $ 2,444   2 %
Adjusted free cash flow $ 49,128   $ 54,587   (10 )%
                                         

Non-GAAP Bookings from Application Development and Deployment Segment

 
(In thousands) Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 Q1 2016 Q2 2016
GAAP revenue $ 4,797   $ 9,636   $ 12,958   $ 16,302   $ 43,693   $ 18,752   $ 19,185
Add: change in deferred revenue
Beginning balance 108 23,081 33,440 41,012 108 49,252 49,237
Ending balance 23,081   33,440   41,012   49,252   49,252   49,237   51,693
Change in deferred revenue 22,973 10,359 7,572 8,240 49,144 (15 ) 2,456
Less: acquired deferred revenue balance from Telerik (7,915 )       (7,915 )  
Non-GAAP bookings $ 19,855   $ 19,995   $ 20,530   $ 24,542   $ 84,922   $ 18,737   $ 21,641
                                         

 

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

 
(In thousands) Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 Q1 2016 Q2 2016
SaaS Revenue - Application Development and Deployment 567 713 765   975 3,020 1,071 1,079

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR FISCAL YEAR 2016 GUIDANCE

(Unaudited)

 
Fiscal Year 2016 Revenue Growth Guidance
      Fiscal Year Ended     Fiscal Year Ending
November 30, 2015 November 30, 2016
(In millions) Low     % Change     High     % Change
GAAP revenue $ 377.6 $ 410.0 9 % $ 416.0 10 %
Acquisition-related adjustments - revenue (1) $ 34.8   $ 2.0   (94 )% $ 2.0   (94 )%
Non-GAAP revenue $ 412.4   $ 412.0   % $ 418.0   1 %
 

 

(1) Acquisition-related revenue 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.

     
Fiscal Year 2016 Non-GAAP Operating Margin Guidance
Fiscal Year Ending November 30, 2016
(In millions) Low       High
GAAP income from operations $ 62.9 $ 66.6
GAAP operating margins 15 % 16 %
Acquisition-related revenue 2.0 2.0
Stock-based compensation 26.8 26.8
Amortization of intangibles 28.2 28.2
Acquisition-related expense 0.5 0.5
Restructuring expense 0.3   0.3  
Total adjustments 57.8   57.8  
Non-GAAP income from operations $ 120.7   $ 124.4  
Non-GAAP operating margin 29 % 30 %
Fiscal Year 2016 Non-GAAP Earnings per Share and Effective Tax Rate Guidance
      Fiscal Year Ending November 30, 2016
(In millions, except per share data) Low       High
GAAP net income $ 31.5 $ 33.5
Adjustments (from previous table) 57.8 57.8
Income tax adjustment (2) (11.1 ) (11.2 )
Non-GAAP net income $ 78.2   $ 80.1  
 
GAAP diluted earnings per share $ 0.63 $ 0.68
Non-GAAP diluted earnings per share $ 1.57 $ 1.63
 
Diluted weighted average shares outstanding 49.8 49.3
 
(2) Tax adjustment is based on a non-GAAP effective tax rate of 32% for Low and 33% for High, calculated as follows:
Non-GAAP income from operations $ 120.7 $ 124.4
Other income (expense) (5.7 ) (5.7 )
Non-GAAP income from continuing operations before income taxes 115.0   118.7  
Non-GAAP net income 78.2   80.1  
Tax provision $ 36.8   $ 38.6  
Non-GAAP tax rate 32 % 33 %

RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR Q3 2016 GUIDANCE

(Unaudited)

 
Q3 2016 Revenue Growth Guidance
      Three Months Ended       Three Months Ending
August 31, 2015 August 31, 2016
(In millions) Low     % Change     High     % Change
GAAP revenue $ 94.6 $ 102.6 8 % $ 105.6 12 %
Acquisition-related adjustments - revenue (1) $ 6.1   $ 0.4   (93 )% $ 0.4   (93 )%
Non-GAAP revenue $ 100.7   $ 103.0   2 % $ 106.0   5 %
 

(1) Acquisition-related revenue 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.

Q3 2016 Non-GAAP Earnings per Share Guidance
      Three Months Ending August 31, 2016
Low       High
GAAP diluted earnings per share $ 0.17 $ 0.20
Acquisition-related revenue 0.01 0.01
Stock-based compensation 0.14 0.14
Amortization of intangibles 0.15   0.15  
Total adjustments 0.30   0.30  
Income tax adjustment $ (0.04 ) $ (0.04 )
Non-GAAP diluted earnings per share $ 0.43   $ 0.46  

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

Source: Progress

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