Progress Software Corporation Stock

Thank you. Hello and welcome to Progress Software second quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I will now like to hand the conference over to Michael Michique.

Sir, you may begin.

Thank you, Tawanda. Good afternoon, everybody. Thanks for joining us for Progress Software's second fiscal quarter 2026 financial results conference call. With me tonight are Yogesh Gupta, our president and CEO, and Anthony Folger, our chief financial officer. Before we get started, let's go through the safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties, and our actual results may differ materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the risk factor section of our most recent Form 10-K and the latest 10-Q, which was filed in conjunction with this announcement this evening.

Progress assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced in this call tonight are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP years in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the second quarter of fiscal 2026, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our second quarter and provides additional highlights and information. and financial metrics. Both the earnings release and the supplemental presentation are available on the investor relations section of our website at investors.progress.com. And of course, today's call is being recorded in its entirety and it should be available for replay shortly after we finish tonight on the investor relations section of our website.

So with that,.

out of the way, Yogesh, I'll turn it over to you. Thank you, Mike, and good afternoon, everyone. Q2 was another strong quarter for progress as our results exceeded our expectations and we were able to raise our guidance again for the full year. Our Q2 26 results reflect the resilience of our product portfolio, strong execution by all our teams, and the continued loyalty of our customers. Revenue of $253 million was up 7% year-over-year, with ARR of $868 million, up 2% year-over-year in constant currency. Operating margin was 40% and earnings per share were $1.62, well ahead of the high end of our company. guidance. We also generated approximately $79 million of adjusted free cash flow and delivered a net retention rate of 100%.

These results exceeded our expectations and guidance across every metric and were driven by broad-based strength throughout the portfolio. We saw particularly strong performance in our data platform products, as our customers increasingly leverage their business data to provide context for AI. We also saw strength across the rest of our portfolio, including infrastructure management and content driven workflow automation. Demonstrating the benefits of our diversified product strategy and the mission-critical role our software continues to play for customers of all sizes around the world. When viewed against the backdrop of the last several quarters, I believe Q2 reinforces the strength and consistency of our business model. Over the past year, we have continued to demonstrate our ability to generate durable recurring revenue, strong margins, and significant cash flows, while integrating acquisitions, reducing debt, investing in innovation, and navigating a rapidly evolving technology environment. Over the past year, investors have tried to sort out whether AI ultimately will benefit or disrupt software.

Our view remains largely unchanged, that AI represents an opportunity for progress. The reason being, while certain aspects of the software business are dramatically changing, enterprises have begun to realize that context and control are key to AI efficacy, outcomes, and value. These realizations lead to the strengths of progress. Our data platform and workflow automation products provide the context needed for AI to deliver reliable, verifiable, and trustworthy outcomes. And these products, along with our infrastructure management offerings, the control that AI needs for security, risk mitigation, and cost control. Every modern enterprise runs on three foundational software layers. Business logic and workflows, data and content, and security and infrastructure management.

And progress has spent decades earning a place in that core. We are uniquely positioned in those three foundational layers, which continue to be critical in a world where AI is changing how businesses run. Over the past few years, we've been embedding AI capabilities across our portfolio, and have increasingly focused on helping customers build responsible AI-powered applications and digital experiences. We continue to see growing customer interest in leveraging our technologies to improve productivity, automate workflows, and accelerate innovation. Just today, we launched Chef Enterprise Management for NVIDIA's DGX Spark, the world's smallest AI supercomputer as NVIDIA calls it. India is bringing powerful AI computing out of the data center and into the hands of developers across the enterprise. As the adoption of systems grows across offices, research facilities, edge locations, and secure facilities, Organizations will need to manage them with the same rigor as the rest of their critical infrastructure.

Recognizing that, NVIDIA identified Progress and our Chef platform as a critical enterprise manageability partner to support DGX Spark deployments. This chef capability extends the reach of progress as infrastructure management control to a fast growing class of persistent AI infrastructure at the edge and underscores our broader strategy to help organization. deploy and manage AI securely and responsibly across their data, digital experiences, and the underlying infrastructure. Speaking of data, we're particularly encouraged about the Progress Data Platform. Last quarter, we highlighted a seven-figure deal amongst our wins, and we saw continued momentum through the second quarter. organizations move beyond AI experimentation and into production deployments, they are increasingly recognizing that successful AI outcomes depend on leveraging data for context. AI agents are only as effective as the enterprise knowledge that underlies them. The context. Much of that knowledge lives in systems of record and unstructured content, documents, emails, support records, and conversations. often disconnected from the systems where AI operates. Simply trying to provide all that context to AI is hard and extremely expensive. token expenses rise dramatically, and the accuracy of outcomes continually worsens as the context window grows for AI.

Progress agentic RAG and the data platforms transform fragmented business information into governed AI-ready intelligence, significantly improving tokenomics as well as the speed, accuracy, and reliability of the AI output. Those organizations that lead and succeed with AI will be the ones that securely contextualize and operationalize enterprise knowledge at scale. And our data platform helps customers address these challenges while improving accuracy, reducing complexity, and lowering the cost of AI deployments. So we remain optimistic about the broad technology landscape. AI continues to reshape the software world, and we will continue to anticipate and respond while monitoring those trends closely. We remain confident that our products will continue to be highly relevant and integral to our customer success, and in many cases, are becoming even more valuable as customers seek trusted platforms on which to build their AI strategies. You can see this across our business in many ways, and it is especially apparent on our balance sheet.

In Q2, elections improved again and day sales outstanding declined significantly compared to where we exited fiscal 2025. Our balance sheet continues to spend them and our leverage profile continues to improve as we paid down another $50 million of debt. Combined with our first quarter actions, we have now reduced debt by approximately $110 million during the first half of the fiscal year. And we will continue to reduce leverage significantly through the rest of the year. Our capital allocation strategy remains unchanged. First, we will reduce leverage and spend on our balance sheet. Second, we will repurchase shares when we believe that valuation presents an attractive opportunity.

Let me take a moment to reiterate our focus on our total growth strategy, which, as we have said before, has three components. First, we innovate and invest in our products and our people, delivering new products and new capabilities faster than ever before, while continuing to grow our people skills. Second, we look to grow our product portfolio and customer base through disciplined M&A with a specific focus on future AI relevance. Third, continue an unrelenting focus on our customers to drive the net retention rate to 100%. Speaking of M&A, our perspective is gradually becoming more optimistic as we see signs of sellers beginning to adjust their expectations. Our strong balance sheet enables us to rapidly execute on the right opportunity, and we remain very active in evaluating potential targets while staying disciplined. Go forward AI relevance continues to be one of the key criteria when evaluating acquisition targets.

We have built significant shareholder value over many years to a thoughtful and deliberate acquisition strategy, and we will remain steadfast on our discipline and on our return thresholds. Turning to the outlook, a strong first half performance gives us confidence to raise our full year expectations, as Anthony will go through next. Our customer activity and deal size can vary from quarter to quarter. We're pleased with the momentum exiting Q2. And our updated guidance reflects both the strength of the first half execution and an optimistic and prudent view of the remainder of the year. In closing, we're very pleased with our Q2 results. We exceeded expectations on revenue, earnings, and cash flow. are improved, collections are splendid, and we are continuing to pay down debt aggressively.

Most importantly, we believe progress remains committed to helping our customers navigate a period of unprecedented technological change. We continue to see healthy customer engagement across the portfolio, growing interest in our AI-enabled data and infrastructure offerings, and strong demand for the mission-critical software. our customers rely on every day. These factors, combined with a disciplined approach to capital allocation and M&A, position us well to continue creating shareholder value over the long term. As ever, I want to acknowledge and thank Progress employees around the globe for their continued excellence and dedication to making and keeping our customers successful. And with that, I'll turn the call over to Anthony.

Alright, thanks Yogesh and good afternoon everyone. We're very pleased to report outstanding second quarter results. A couple of things. a quarter highlighted by terrific performance across all key metrics. With that, let's get right into the numbers. I'll start with ARR, which remains our key metric for assessing top-line performance. We close Q2 with ARR of approximately $868 million, representing 2% pro forma year-over-year growth. For clarity, our pro forma results include ARR from acquired businesses in all periods presented.

This growth was broad-based across our portfolio, including OpenEdge, LoadMaster, What's Up Gold, MoveIt, our DevTools products, and ShareFile. Consistent with prior quarters, our net retention rate was strong, coming in at 100%, up from 99% last quarter. In addition to solid ARR growth, Q2 revenue of $253 million exceeded the high end of our guidance range and grew approximately 7% on a year-over-year basis, again, driven by broad-based strength across the portfolio, most notably DataDirect, Chef, MarkLogic, and LoadMaster. As we've mentioned on previous calls, the renewal timing of subscription contracts can have a meaningful one-time impact on revenue in any given quarter. That dynamic contributed positively in Q2 and combined with strong demand resulted in very strong year-over-year growth. Beyond the product line contributions I've detailed, it's also worth echoing Yogesh's comments on our Q2 top line performance, especially increased demand for our progress data platform and the AI use cases that PDP solves for enterprises. Turning to expenses, total costs and operating expenses were approximately $151 million for the quarter, up 6% compared to the year-ago quarter.

The year-over-year increase included higher variable costs associated with our strong top-line performance and was otherwise very much in line with our expectations. Importantly, relative to the revenue outperformance, our incremental margins were strong, demonstrating continued cost discipline across the business. Operating income of $103 million was well above our expectations, resulting in an operating margin of 40% for the quarter. Earnings per share of $1.62 also came in well ahead of our expectations, driven largely by our strong revenue performance. On a year-over-year basis, EPS grew by approximately 16%. Turning now to a few balance sheet and cash flow metrics, we ended the quarter with cash and cash equivalents of $103 million and total debt of $1.3 billion for a net debt position of approximately $1.2 billion. Our net leverage ratio at the end of Q2 was approximately $2.92 times on a trailing 12-month basis, marking a significant improvement from 3.4 times at the beginning of the fiscal year.

As planned, our 2026 convertible notes matured in April and the $360 million in principal was paid using our revolving credit facility. With that maturity behind us, our total debt is now comprised of $850 million drawn on our revolving credit facility and $450 million as convertible notes due in 2030. At the end of Q2, we had $650 million in unused revolver capacity, providing ample liquidity and flexibility to continue executing our total growth strategy. DSO for the quarter was 49 days, an improvement of four days compared to 53 days in the year-ago quarter. Deferred revenue was approximately $423 million at the end of Q2, an increase of approximately $35 million compared to the year-ago quarter. Adjusted free cash flow was $79 million for the quarter, a significant increase compared to $37 million in the prior year quarter, and was driven by strong collections and excellent operating performance. On a first half basis, adjusted free cash flow was $178 million.

Again, a reflection of strong operating performance and improved collections spanning both Q1 and Q2. As for capital allocation, during the first half, we repaid net $110 million of debt and and repurchased approximately $55 million of Progress stock, leaving approximately $148 million remaining under our current share repurchase authorization. This capital allocation mix represents a slight shift from our initial plan, allowing for more share repurchases while maintaining meaningful leverage reduction. As previously noted, our net leverage ratio now stands at 2.9 times. Turning now to our outlook for Q3 and the full year. Before getting into the numbers, I'd like to provide some context on how we're thinking about the second half of the year. First, revenue in the first half was exceptionally strong. year over year growth of more than 5%, including 7% in Q2.

We're thrilled with this performance and the underlying demand it reflects. That said, our first half growth was partially influenced by deal timing And as we've noted many times on past calls, the clearest read on our underlying top line momentum is ARR, which grew 2% year over year. We'll keep that in mind as I turn to the outlook. Next on capital allocation, we've updated our full year plan to reflect approximately $220 million of net debt repayment and approximately $75 million of share repurchases. At current valuation levels, we believe our shares are an attractive value and have therefore allocated a little more towards repurchases while still maintaining aggressive deleveraging. As a result, we now expect to end the year with approximately $740 million drawn on our revolving credit facility and a net leverage ratio of approximately 2.8 times. With that context, for the third quarter of 2026, we expect revenue between $244 and $250 million and earnings per share of between $1.53 and $1.59.

For the full year 2026, we are raising our outlook and now expect revenue between $990 million and just over a billion, an increase of $2 million from our prior guidance, we reflecting approximately 1 to 2.5% growth over fiscal year 2005. We expect an operating margin for the year of approximately 39 percent, adjusted free cash flow of between $271 million and $283 million, and on the levered free cash flow of between 323 million and 334 million, both meaningful increases from our prior guidance. And finally, earnings per share of between $6.09 and $6.21, an increase of $0.18 from our prior guidance. Our guidance for full-year EPS assumes a tax rate of 20%, the repurchase of approximately $75 million in progress shares, total debt repayment of approximately $220 million, and approximately 42 million weighted shares outstanding. exceptional quarter that demonstrates the strength and resilience of our diversified product portfolio. delivered revenue and earnings above expectations, generated strong free cash flow, and continued to make excellent progress on deleveraging our balance sheet. We're entering the second half with confidence in our ability to execute, and we believe we remain well positioned to deliver on our raised outlook for fiscal 2026 and beyond. With that, I'd like to open the call for questions. Thank you.

Ladies and gentlemen, as a reminder to ask the question, please first start 11 on your telephone, then wait for your name to be announced. To withdraw your question, please first start 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John DeFuccio at Guggenheim. Your line is open.

Thank you. Thanks for taking my question. I have a question for Yogesh and another for Anthony. So, Yogesh, you said you're starting to see potential sellers beginning to adjust their expectations. We're more than a year and a half now after the successful share file acquisition, which was a different animal for you beyond just the size. It was very different and it was successful. But I guess, given this experience, what's your appetite for similar acquisitions of size or pure SaaS like that was or is? And on the other side of the coin, can you also just talk a little bit more, give a little more context color on your comments, your prepared comments, where you said that sellers are beginning to adjust their expectations?.

Absolutely, John, definitely. So I think first, you know, the first part of the question, yes, you know, I think we are comfortable with doing a transaction that is the same scale in terms of the size of the business that we acquire. As you know, John, that the Our criteria historically has been that we want to pick up companies that are about 10 to 25 percent of our scale and size on revenue. Given that we are now about a billion dollars in revenue, Sharefile is just about a 25 percent contributor to that. So you're looking at another share file size acquisition as being very well within that. When we acquired it, actually, it was significantly more because our denominator was smaller. So we're very comfortable doing that. We're also comfortable buying businesses that are cloud-based.

However, just like you said, we did with ShareFile, just like we did with other acquisitions, including MarkLogic, we're very cognizant of the fact that AI relevance and what the future lies for the business has to also be something that we get very comfortable with. That is such a critical thing. And we want to make sure that just like our platform, our portfolio is strong. anything we pick up continues to have a great future ahead in the world of AI. In terms of my comment about we're beginning to see sellers adjusting their expectations, John, I think over the last few quarters, I have mentioned that when we talk to sellers, their expectations are still sort of not yet reset. I won't say that they have been completely reset, but I think we're beginning to see some change in tone. We're beginning to see folks going, yes, we understand that the software industry is being reset in terms of valuations. And so that's where that commentary comes from.

And that comes from several conversations, not just one or two, that we're having with potential targets. As you know, we speak to 50 to 60 targets every quarter. That continues. unabated right now and has been. And it really was something that I thought was worthwhile sharing because I've said consistently over the prior few quarters that people's expectations are still unfortunately out of line with reality. I wouldn't say that they are completely in line with reality, but I do believe that there is movement and there's meaningful movement towards being in line with reality.

Got it. That all makes sense, Yogesh, and we expect you to keep doing what you're doing, what you've done so far. So thank you. And Anthony, if I could follow up here. So fiscal 3Q, I mean, the results look really good and the guidance looks good, but fiscal 3Q revenue guidance was a touch below the street. You saw this quarter a sequential acceleration in your SaaS business. But was that more seasonal? Because we saw something similar to that last year, and then the SAS growth sequentially wasn't the same into 3Q. Is that how we should be thinking about the guidance, or am I off somehow? Yes.

No, you know, John, I think we certainly saw some strength in SAS revenue this quarter. You know, sequentially, there was a nice step up. But in prior quarters, we've had just some cleanup that we've had to do on share file. And, you know, we talked about that a little bit last quarter. the further away we get from close date, the smaller that cleanup becomes. And so I think we're just, you know, we're not completely normalized yet in terms of that business, but certainly getting to much smaller numbers and their impact on the business. So, yes, I think we're just starting to see maybe a more normalized shift. share file number in that that SAS line. I wouldn't expect it to bounce around materially right? I mean sequentially quarter to quarter.

Things should should be moving like you would expect with a typical SAS business. I think it's more of the cleanup in the past that we've been we've been dealing with in prior quarters, but this one felt a bit cleaner.

and a bit stronger. So that sequential revenue guidance, which is just a little bit below the street at the midpoint, I'm just, I don't know, is there anything to think about that then? Yes.

Yes, it was just the timing. So I I mentioned you know we had. Uh, let's say five little over 5% growth in the first half of the year and 7% growth in Q2. And I mentioned some of that was timing. So we did have some deals that we had expected in Q3, came in in Q2. You know, probably a little more than half the beat maybe for Q2 was timing. And so that pulls from Q3 into Q2.

So, you know, it doesn't, I don't think it diminishes the strength we saw in Q2, but certainly causes us to just slide some numbers around from quarter to quarter. And like I mentioned, I think what we're seeing is, you know, for the full year, maybe 1% to 2.5% revenues. revenue growth, which starts to map a little more closely to the ARR growth we've been seeing for the past few years.

Got it. Okay, thanks. It's all really helpful. Thanks, guys. Yep. Thank you.

Please stand by for our next question. Our next question comes from the line of ETAC Kidroom with Oppenheimer & Company. Your line is open.

Thanks. Hey, guys. Solid numbers. Yogesh, I wanted to start with you. You talked about in your prepared remarks about the data platform. workflow and infrastructure management as kind of important vehicles for AI. Can you quantify roughly perhaps what percent of your revenue is positioned within those portfolios and in With AI now in place, I mean, is there a case to be made that over the next two, three years, you could actually drive, I don't know, two, three, four points of organic growth off?.

of this portfolio that's associated with AI? So, as you know, we don't do guidance for two, three years out, but joking aside, right? The The business, when you think about our data plus content business, it's actually more than two thirds of our total business. And I think so people forget how much we are in the data and content and the workflows around that and the business. The whole thing around sort of keeping information under control, connecting to information, integrating information sources together, leveraging that for AI, it is truly, truly important. you know, the bigger part of our business. And so, and I think that you're right. I think over time, we expect that to be a healthy part of our business. You know, to me, the fact that we are growing ARR 2% organic, that has been sort of our We've sort of shared that over and over again over the last couple of years, that that's where we see us landing. I think we feel good about that going forward.

And I think part of the reason is that the data business, the data and content business is going to be more and more important. I think the question in terms of first, out, it'll be interesting to see how adoption grows. You know, we would love nothing more than to have great organic growth, but you know, at this stage, where we feel confident is the 2% range that we've talked about.

Is the 2% volume driven or you think with AI you can drive better price increases?.

I think it's a combination, right? So when you think about it, A lot of the data platform business is somehow or the other related to consumption of data. I mean, I think people don't think of it that way. But when you think about it, right, if you're a data platform, the more data you store in it, the more data you access from it, the more you need a greater capacity. And so it is an indirect connection to consumption. It is not a direct connection to consumption. And so it is that. And so in that sense, you know, if I may say so for now, it is purely a capacity slash consumption driven growth among the existing customer base. We have one new customer, as I've talked about with our data platform. platform business.

So that's an interesting early early set of indicators and let's see how that goes. But I think that you For us, pricing is a secondary lever, a tie that we have not pulled on yet. We think that if we get to a stage where we start seeing that there is an opportunity for us to do something there, we absolutely will. But right now, what we're talking about is not really pricing-based, but more consumption, volume of information, pricing. and really that's primary, the amount of work that they get out of the platform.

Got it. Anthony, a couple for you. A very good free cash flow in the first half of the year. 178 I think you mentioned was the number. You talked about 110 for the second half. And I understand that part of the 178 was just better collections, which probably there's a limit to how much you can squeeze there. But I guess I'm wondering how comfortable are you with that 110? What are the opportunities for upside here?.

How do I think about that? Yes, you know, the first half was definitely, I would say, an exceptional half for free cash flow. And really, Ty, if you go back to last year, after we acquired ShareFile, there was a lot of talk about, you know, a lot of cleanup we had to do. We had to move billing systems. And if you go back. to Q2 of last year, we had a really low cash flow order because we were going through that transition. So I would maybe characterize it by saying our DSOs got extended last year and some of those receivables built up. And I think the team did a good job of just operationally breaking through a lot of those issues, you know, Q3, Q4 last year, and then really driving accelerated collections this year in the first half to clean that up. So I think we're very confident in the second half outlook around free cash flow.

You know, I certainly, we like to put numbers out that we think we can beat, but, So I think we're very comfortable with it. You know, the first half is definitely a bit of an outlier because there was, you know, last year there was a lot of cleanup that needed to be done, and we sort of saw the benefits of it in the first half of this year.

Very good. And maybe last one, and maybe it's for both of you, as I think about M&A going forward, I guess it's good to hear that you're a little bit more optimistic here. But when I look at your capacity to do M&A, You've got 650, I think, on the revolver. You've got 100 on the balance sheet, so 750 you put together. I'm just trying to think, do you envision an acquisition that will require to even increase your revolver even more? Or you're thinking about it more in the context of the capacity that's available to you within the revolver? I would love to kind of get a perspective on this.

Yes, so we believe that we want to stay within the revolver. And again, one never says never, but in general, we feel good about what we can do with that. Again, as I said, I think valuations are coming our way a little bit. So we should be able to do whatever we are looking to do within that revolver. That is our intent at this point, at least, Itay. Again, if some unique, phenomenally wonderful opportunity comes up and it makes sense, we will obviously do what's right for the business. But I right now don't expect us to do anything where going beyond the revolver is required.

So I think existing capacity is very good and it continues to get better every quarter, every month, right, as we pay down debt.

Got it. Thank you guys. Good luck. Thank you. Thank you.

Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from the line of Lucky Schreiner with DA Davidson. Your line is open.

Great. Thanks for taking my questions. Obviously, the license, outperformance, some of that deal timing. I'm curious if you've noticed any change in duration of contracts, especially as customers evaluate their SaaS portfolios in the age of AI. Are you seeing any change, better or worse, in terms of the contract durations that you're signing with customers? Thanks. Great.

Yes, thanks, Lucky. I would say we're not seeing a change. You know, I think for the most part, deals that were coming in at three years or five years on the last cycle are getting better. getting renewed for similar duration. So I wouldn't say there's necessarily a change that's driving things. It's just the timing of when those renewals come through. But, you know, to be honest, your comment, I think, is spot on. There are a lot of, you know, I think the narrative out there is that there's a lot of companies that are, you know, reevaluating everything based on time. you know, the AI dynamics and opportunities out there. And you would think maybe we'd see a shortening in term or duration, and we're not.

I mean, we continue to see good strength across the portfolio in that regard. And so it's been a you know, I think again, it just feels like it's been a really strong quarter and a really strong first.

first half. Yes, agreed. And retention rates, obviously, improving shows that out as well. But maybe a follow-up in terms of the strong demand across your customer base, anything to call out from a vertical perspective? You know, previously, you've called out a nice one with a semiconductor company, but in general, any tailwinds within certain customer bases that you'd want to.

call out? You know, Lucky, I don't think there's any specific one. You know, there is a fair bit of, I think, business in those industries that have some regulatory pressures and regulatory needs. We see good traction there. We see good with government sector in some aspects of it, obviously not all. So I think it just depends on sort of how the sort of things land within each quarter. You know, ours is a very broad business, as you know, more horizontal than most businesses are lucky. So it is, we don't see a strong trend in any vertical that I would say, you know what, that's a great vertical for us and will be, let's say for the next quarter or two. If it were, we would share that, but there isn't.

Awesome. Appreciate you taking my questions. Thank you.

Ladies and gentlemen, I'm sure no further questions in the queue. I would now like to turn the call back over to your guest, Gupta, for closing remarks.

Thank you for joining us this evening, and we look forward to speaking with you in the near future.

Have a good night. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

[Call has ended.]

Hello, and thank you for standing by. Welcome to Progress Software Corp. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Michael Micciche, Senior Vice President of Investor Relations. You may begin.

Okay. Thank you, Twanda. Good afternoon, everyone, and thanks for joining us for Progress Software's First Fiscal Quarter 2020 Financial Results Conference Call. Joining me on the call are Yogesh Gupta, President and CEO; and Anthony Folger, our Chief Financial Officer.

Before we get started, please consider our safe harbor statement as follows. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties, and our actual results may vary materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the Risk Factors section of our most recent Form 10-Q and the latest 10-Q being filed in conjunction with this announcement. Progress assumes no obligation to update forward-looking statements included in this call.

Additionally, please note that all the financial figures referenced on this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the first quarter of fiscal '26, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our first quarter and provides additional highlights and financial metrics.

Both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Today's call is being recorded in its entirety and will be available for replay on the Investor Relations section of our website shortly after we finish. Yogesh, let me turn it over to you.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. We're very pleased to share our first quarter results with EBITDA, so let's get right to it. We had another very good quarter. Revenue was $248 million, up 4% from last year's Q1. We ARR grew 2% in constant currency over the same period and NRR remained strong at 99%. EPS for the quarter was $1.60, up 22% year-over-year as operating margins finished above 41%. We saw record cash flows as a result of strong focus on collections. Adjusted free cash flow was $99 million and unlevered free cash flow was $111 million.

The balance sheet remains in great shape as we continue to aggressively pay down debt while also repurchasing shares. This strong performance is driven by AI and other innovations across our portfolio that are resonating with our customers. Now more than ever, our products remain mission-critical, our customers remain loyal, and our team continues to execute at a high level. These are also the reasons why we remain positive about our outlook.

As always, the foundation underpinning our success is our total growth strategy. We continue to run the business with discipline as we innovate across the product portfolio and provide increasing value to our shareholders -- to our customers. That formula has worked for us through multiple technology shifts and industry transformations, and it continues to work today. On M&A, our corporate development team is betting deals aggressively and we further fine-tuned ShareFile operations, which continues to perform very well as one of our best acquisitions.

Lastly, customer success remains our key focus. Now let me address the 3 topics that we know are top of mind. First, our business remains strong. We see solid retention and good performance across our products. Our product portfolio is broad and continues to power our customers' businesses, resulting in solid year-over-year growth and -- both in ARR and in revenue. As we previously said, our goal for NRR is 100%, and over the past few years, our NRR has consistently ranged between 99% and 101%. This quarter, NRR was 99% and ARR growth was solid, driven by the strength in our new customer acquisition as well as existing customer expansions, both of which were positively influenced by our AI investments and innovation.

And this leads to the second topic, AI. We continue to see AI as an exciting opportunity for our business. We've discussed for several quarters how we're using AI internally to be better, more efficient operators, which we can demonstrate through improve productivity in every department. Our savings from these efforts are enabling us to continue to invest in our AI-related product efforts while delivering exceptional operating margins.

Speaking of our product efforts, AI has enabled us to accelerate our innovation cycles as well as helped us transform our product capabilities to be more relevant for the future. We have been building AI into our products, and that is delivering meaningful business value to our customers today. It is our belief that trusted software companies like ourselves with excellent customer relationships, who leverage AI effectively will be the winners of this AI opportunity.

Our customers are eager to understand how they can benefit from AI, while ensuring that their businesses remain secure and trustworthy. They continue to look to us to deliver AI capabilities that increase their competitiveness and improve their efficiency, so that they can thrive in this new world. One such example is a global beverage company that wanted to dramatically improve the way they serve their more than 20,000 employees worldwide. By leveraging our progress agent Rag product, they streamlined their HR operations, resulting in improved employee satisfaction at a significantly lower cost.

Similarly, the tax authority and finance ministry of an overseas government is using the same product, so that all employees and citizens can get trusted verifiable answers from a host of data across that organization. And a state government in the U.S. is using the progress data platform to harmonize and synthesize large volumes of data from different sources to identify and eliminate waste, fraud and abuse. They first became a progress customer less than 18 months ago, and they continue to identify new use cases for the data platform, targeting efficiencies and elimination of fraud in the range of tens of millions of dollars annually. Today, they are a 7-figure ARR customer of ours.

Progress data platform and progress agentic RAG transform business data on structured files, archives, websites, knowledge bases and multimedia into an information system that instantly and securely delivers stack-based busted and verifiable answers. Our AI-powered infrastructure management products are also being used to manage and secure modern tech infrastructure. For example, a leading financial payment company that annually processes over $100 billion of transactions is using progress WhatsUp Gold, Loadmaster and Flowmon to improve the availability and security of their infrastructure. and to reduce the time to detect, analyze and prevent security threats. Our sharefile customers are doing work in minutes that used to take hours with its AI document summarization and Q&A capabilities.

Additionally, ShareFile powered-security capabilities will actively detect sensitive information and recommend actions to significantly reduce security risk. Our customers rely on progress to support their journeys because they trust us to focus on practical business outcomes. Across our product, AI is contributing to measurable customer value from workflow automation and productivity gains to monetization. Every product at Progress is now an active participant in our customers' AI efforts, and we have embedded AI into our products with attention to governance, observability, cost and LLM flexibility.

The third topic, capital allocation and M&A. It's worth noting that in Q1, we paid down $60 million in debt and repurchased $20 million of stock. Our balance sheet remains in good shape, and our cash generation gives us significant flexibility. Our capital allocation priorities remain very clear. We will continue to, number one, invest in our business and innovate. Number two, aggressively reduce debt and be opportunistic on buybacks. And number three, maintain our commitment to generate excess returns through disciplined M&A followed by rapid synergistic integrations. We will use the same M&A lens. We have always used to acquire good companies with strong infrastructure technology products, loyal customers, high recurring revenue and customer retention and a compatible culture.

It's also worth expanding on how ShareFile continues to create additional value. While it was our largest and most complex acquisition and integration to date, ShareFile has strengthened and scaled our recurring revenue mix, expanded our SaaS capabilities and contributed meaningfully to the bottom line and cash flow. Just as important, it has enhanced our ability to evaluate and integrate future SaaS opportunities while keeping the same discipline we've always had around returns and fit.

I'm also excited to share the Progress recently opened our new innovation hub in Bangalore. This consolidates the office space for our former Progress and ShareFile offices and also demonstrates our long-term commitment to the region as we continue to scale our engineering, product development, sales, and customer success teams. Our people in India are critical to our global growth and our innovation strategy, and this logical next step will enable us to efficiently deliver greater value to our customers worldwide.

Finally, we continue to be positive as we look ahead, and Anthony will give you all the details in a minute. From my perspective, what we're seeing in our own business supports our confidence for the rest of this year. We're also maintaining a close watch on the macro environment and geopolitical events.

So to summarize, the business is performing well. The model remains durable. AI is making our products and operations stronger. ShareFile is delivering, and our top line, margins and cash flow reflect solid execution across the company. As always, I want to thank our employees around the world for their hard work and commitment, and I want to thank our customers and partners for their continued trust.

With that, I'll turn it over to Anthony.

All right. Thanks, Yogesh, and good afternoon, everyone. As you heard in Yogesh's remarks, we're very pleased with our Q1 results, and we're excited to share a strong start to our fiscal year.

So let's get right into the numbers, starting with ARR, which, as we've discussed, provides the best view into our top line performance. We closed Q1 with ARR of approximately $863 million, representing 2% pro forma year-over-year growth. For clarity, our pro forma results include ARR from acquired businesses in all periods presented. This growth in ARR reflects a broad-based contribution from across our portfolio, including OpenEdge, ShareFile, Loadmaster, WhatsUp Gold, MoveIT and our DevTools products. Consistent with prior quarters, our net retention rate remains strong, coming in at 99%, underscoring the resilience of our customer base and the mission-critical nature of our products. We did see some isolated churn in the quarter, which we expect to work through quickly, and we still delivered solid growth, thanks to strength in new customer wins and expansion in the installed base. Two areas positively influenced by our investments in AI and innovation.

As a reminder, we calculate ARR in constant currency with all periods presented at current year budgeted exchange rates. Consistent with past practice, we've updated ARR using 2026 budgeted exchange rates. And as a result, ARR reported in prior periods has changed. The change is not material and doesn't alter the trend in ARR growth, although the previously reported ARR and NRR numbers changed slightly. The details of this update are included in the supplemental financial presentation filed with our press release.

In addition to solid ARR growth, Q1 revenue of $248 million came in ahead of our expectations and reflects 4% growth on a year-over-year basis, led by strong performance in OpenEdge. As we've mentioned on previous earnings calls, the renewal timing of subscription contracts, especially multiyear subscriptions and have a meaningful impact on our revenue in any given quarter. And for this reason, we continue to focus on ARR as the best barometer of top line performance.

Turning to expenses. Our total costs and operating expenses were approximately $146 million which was favorable to our internal forecast and largely flat compared to the year ago quarter as we continue to demonstrate disciplined cost management across the business. Operating income of $102 million was also better than our internal forecast, resulting in an operating margin of 41%, solid year-over-year margin expansion. Earnings per share of $1.60 for the quarter came in better than our internal expectations, the result of solid execution on the top line, coupled with strong cost management.

Turning now to a few balance sheet and cash flow metrics. We ended the quarter with cash and cash equivalents of $113 million and total debt of $1.35 billion for a net debt position of approximately $1.24 billion. As a reminder, our total debt includes our revolving credit facility with $540 million drawn a $360 million convertible note maturing this April and a $450 million convertible note maturing in 2030. At the end of the quarter, our net leverage ratio was 3.1x and down meaningfully from when we acquired ShareFile a little over a year ago. DSO for the quarter was 52 days, a significant improvement from 73 days reported in Q4. Deferred revenue was approximately $425 million at the end of the first quarter, up roughly $25 million year-over-year.

Adjusted free cash flow was $99 million for the quarter, a significant increase compared to the $73 million in the prior year quarter. The improvement primarily the result of increased collections. During the quarter, we paid down $60 million against our revolving line of credit and repurchased $20 million of progress stock. We ended the quarter with $540 million drawn on our revolving line of credit and $182 million remaining under our current share repurchase authorization.

Okay. Now I'd like to turn to our outlook for Q2 and the full year 2026. Before I get into the numbers, I'll highlight a few items. First, we continue to focus on ARR as a key metric and expect ARR growth to be generally in line with revenue growth for the full year. Second, we plan to roll our 2026 convertible notes into our revolving credit facility when they mature in April. At the end of Q1, we had approximately $960 million of unused revolver capacity, positioning us well to absorb the convert maturity and continue executing our strategy. Our updated EPS outlook reflects higher interest expense associated with the expected refinancing of the 2026 converts.

Finally, on capital allocation. We remain focused on deploying capital where we see the strongest returns. At current levels, that means repaying debt and remaining disciplined in pursuit of accretive acquisitions against a high return threshold. It also includes opportunistic share repurchases. We continue to forecast debt repayment of $250 million for the full year, bringing our net leverage ratio to approximately 2.7x by year-end. With that, for the second quarter of 2026, we expect revenue between $240 million and $246 million and earnings per share of between $1.47 and $1.53. For the full year 2026, we expect revenue of between $988 million and $1 billion, approximately 1% to 2% growth over 2025. And an operating margin for the year of approximately 39%, adjusted free cash flow of between $263 million and $275 million, and unlevered free cash flow of between $315 million and $326 million; and finally, earnings per share between $5.91 and $6.03. Our guidance for the full year EPS assumes a tax rate of 20%, the repurchase of approximately $30 million in progress shares, total debt repayment of $250 million and approximately 43 million weighted shares outstanding.

In closing, we are very pleased to deliver a strong Q1 to start fiscal '26. Our diversified product portfolio continues to demonstrate resilience. Our cost discipline remains strong, and we continue to focus our capital allocation strategy on generating the highest returns through a combination of aggressive debt repayment and opportunistic share repurchases. In short, we believe we're very well positioned to execute our total growth strategy throughout 2026 and beyond.

With that, I'd like to open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Ittai Kidron with Oppenheimer & Company.

Numbers. I have a couple of questions. Yogesh, maybe starting with you on the M&A front, I mean 1 would think that in this current environment, it'll be even easier for you to buy companies. I'm kind of wondering -- I know you've always been very disciplined, of course, on the metrics that you're looking for, but why is it still taking you this long to find the next one.

So a 2-part answer to that question. One is that, as Anthony just mentioned, right, there is a clearly a higher bar today given where our own company stock is and our valuation is compared to what it historically was, right? So we are trading now at an EBITDA multiple that we would be to pay less to generate additional incremental value for our shareholders. So I think that creates a constraint on what we can pay. So that's part A. And I'm not saying that, that's why we haven't bought companies, but that's an important consideration in terms of the filter we can apply to the companies we can look at.

The second one is we want to make sure that we find the right assets. And we are truly very active at this point looking at those. But again, as I said, that combination creates a challenge. And the flip side is that even though the public markets are where they are, the private markets Ittai, are still, let's to say, is connected from reality if what the public markets are is the reality, right? So at least they're disconnected from the public markets on the valuation side. So I think those 2 things are really it. We actually see tremendous activity in the market. We are seeing all kinds of companies come around. And obviously, everybody on this call will be the first to know when we do one.

Got it. And then Anthony, for you, can you talk about your SaaS revenue. It's kind of -- it's actually down quite substantially on a quarter-over-quarter basis. You guys talked about ShareFile actually doing well for you. But you did mention on the call some elevated churn isolated churn, I think you called it. So we'd love to get a little bit more color on what isolated churn means and why is the SaaS revenue declining quarter-over-quarter.

Yes, sure, Ittai. And maybe I'll take the isolated churn comment first because I do think they're a little bit different in terms of the isolated churn and the SaaS revenue. But in terms of isolated churn, yes, we had a couple of, I'd say, customer-specific events that weren't really related to product value or competitive dynamics or really a broader trend in the business. And to give you an example, we had a 7-figure government contract in Eastern Europe for data retention services and a European court rule, the government had to cease retaining the data. And so as a result, contract turns out, right?

So not because of any dissatisfaction with our product or competitive loss, but the underlying use case effect get eliminated by a court ruling. And so occasionally, we see issues like that. We've seen them in the past. We've talked about it. M&A sometimes can be something that may cause a little bit of churn in our business. So like in times past, not material overall and really specific to a particular situation. And I think something will probably work through pretty quickly. And despite that, having put up 2% ARR growth for the quarter, was a pretty good testament to new customer acquisition and some of the expansion that we got out of the base.

So that was the -- what I was referring to in terms of the any sort of isolated churn. In terms of the SaaS dynamics on revenue, if you'll recall, back in Q4, we were asked about a big sequential increase in our SaaS revenue. And I think I said at the time that it was a little bit of an upside surprise. And we expected things to normalize in 2026 and sort of come back in line with the maybe closer to the annual number for 2025.

So the Q4 number wasn't something we expected to sustain if you look at it sequentially. On a year-over-year basis, obviously, the SaaS revenue number is still growing. And the reason for it, what's underlying it is just a lot of the cleanup that we have been doing on the ShareFile business, right? We mentioned, I think, on the Q2 call last year that CSG was doing -- still doing the billings for us up until April of 2025. And then we have to stand up a billing system internally. And it probably took us until the back half of last year to get our arms around that completely. And so there's a lot of data that goes on.

Some of it in Q4, some of it in Q1, and there'll be a little bit of it that continues throughout 2026. Again, not material in total, but it may bump numbers around a little bit from time to time. And I guess, from the other side of it is as we get our arms around the data and as we sort of get more and more control around the ShareFile business, the positive aspects that we saw, especially this quarter were enhanced collections, right? And the free cash flow of almost $100 million for the quarter. I think the significant improvement we saw was largely the result of improved collections and share files. So on the one hand, there's a lot of data to clean up. But as we get that data cleaned and as we get our arms around the systems, we certainly make up for lost time on the collections front, which was nice.

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

My first question is for Yogesh. So your guess it was interesting that you mentioned Chef's doing really well and one of your best acquisitions performance-wise. As you know, the developer seat count, I'm glad you said that because there's a lot of concern out there with the developer seat count, and it's -- there's a huge debate out there. I guess you're doing well here, but are you seeing -- take Chef out of it. I mean -- when you talk to your customers, when you see what they're doing, are you seeing any change in developer numbers at your customer base? And whether that could be like they're not hiring as much as they used to be or they're actually declining or they're not declining. Whatever you're seeing? And then secondly, why is it regardless of what that answer is, why is it that Chef's doing so well?

So I think, by the way, just I think they might -- I don't know whether it was the audio or whether it would mean or which end but John, the product I mentioned that's doing really well with ShareFile, not Chef. A misunderstanding. But anyway, let me talk about the developer scenario, though, because our developer products are doing well, right? And so the reason I think -- so there are two parts. So I think first, talking about our customers, what we are seeing, I believe that there is a change in trend, but I wouldn't say that the absolute developer numbers overall appear to be dropping.

The absolute numbers have dropped in what I would call a small number of customers. But by and large, I think the trend is less growth than historic. And so I think that the developer seats and seat-based developer businesses which primarily is tools for us, which is a relatively small business. It's about -- it's a single digit -- mid-single-digit percentage business for us, right? That business is where if we didn't do the right things, we would see challenges.

So what we have done is we've actually done significant AI investments there to make our developer tools, which are primarily libraries for developing great UI and so on, be more relevant in the agentic age, help with developers who are building agentic apps and provide them with the right tooling for that. So we are effectively doing a significant amount of change in that, what I call, the value proposition for the developer. And so we feel good about how that business continues to perform.

But it is business that has the greatest potential risk, which is why it has also had the greatest acceleration on our part in terms of the AI work that we have done with it. And so we're seeing good business there, and we continue to see good business there. I think that the products like Chef continue to do well because infrastructure needs to be managed, infrastructure needs to be configured, infrastructure needs to be set up so that things run well. And so that product is a workhorse for many large enterprises, including the largest credit -- pretty much every credit card company pretty much many of the Silicon Valley tech companies, et cetera.

I mean, literally, 2 of the MAX 7 have been customers forever. So it is a very, very strong and solid product. And we continue to see basically the need for that product, and we win some new customers as well, which -- but I think the Shelf product, on the other hand, is doing well from a customer perspective as well because of the AI efforts there. So I'm sorry about the confusion about my voice. I'm sorry about that.

No. Yogesh, I am sure it wasn't you. I'm sure to me. I can't hear that well sometimes. But thank you for answering the second question, which was, I think, more important anyway. And I guess just a follow-up for Anthony. I want to follow up to Ittai's question on the SaaS business because it does sound like ShareFile is doing really well. And it's a big acquisition, and it's your first big SaaS acquisition, Big acquisition. But the SaaS revenue didn't just decline sequentially. It declined to less than it was the last 3 quarters. And so that like -- I mean it's not like just the fourth quarter was stronger. It's like the last 3 quarters were stronger.

So can you help us a little bit because something happened. And it sounds like the business is doing really well. You guys have said it several times, even if I heard it wrong. But what is it that what happened this quarter, like it wouldn't have been just like recognition. Sometimes I can imagine you don't get the renewal and you're not recognizing it and then you recognize it like , but it's not just the fourth quarter that was stronger than this quarter. Sorry.

I guess. And yes, I think -- the range of SaaS revenue for the business overall has been -- if I were to normalize for the cleanup issues that I sort of referred to, it's between $72 million and $73 million, going back to, I don't know, Q1 of last year. So that's if I sort of normalize each 1 of these quarters. And all that's happening is we talked about it a little bit last year that taking over the billing system from CSG was a pretty significant milestone in terms of integration. And in the back half of the year, as we started to get our arms around the data, there was a lot of cleanup that needed to be done.

In some cases, you had customers that haven't been billed and needed to get invoiced, they required some catch-up invoicing and there were some that needed to be written out of ARR or reserved against revenue for whatever reason. And there was just a lot of data that we really didn't have access to pre-acquisition and even with CSG doing a lot of the billings under the in the back half of last year as we started to clean that up. Again, not material overall. But if it's a few million dollars here and there as we go quarter-to-quarter, it may move that number around a little bit. And that's really all it was. I mean, otherwise, you're right. The ShareFile business, if I were to sort of normalize these things out, like I said, $72 million to $73 million for total SaaS revenue on a quarterly basis is where it's been.

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

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

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

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

Lucky, not really. When the EU court puts out a statement saying, "Gosh, I'll stop immediately." This was an Eastern European government. They basically instantly told that they were going to stop paying. And so this was actually -- the customers were local telephone customers, local -- and this was call records of phone calls that people make. And when that became -- that was deemed illegal, the country immediately, government immediately said to all those call record companies, all the telephone companies saying, "Hey, can't retain this anymore, delete it all, and we will not pay you anymore starting right now." So it was what I would call a surprise churn, right? It was one of those things where they just happened to say, sorry, we can't pay you anymore because we've got -- we're not getting paid anymore.

So it's a weird thing, right? I mean we could go and tell them, hey, you have a contract, it doesn't expire for a little bit. But at the same time, we really -- when governments do those kind of things, I think it's tough to get folks to supply. So we wanted to basically take the churn, and we'll take them the churn.

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

Maybe not at all. This was unusual. This was truly unusual. It was -- the decision came out the government acted and the service providers had to act. I mean it was within a matter of 2 weeks and completely from left field.

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

So I don't feel that today macro is playing a factor for our business. I can't speak for the rest of the world. But for Progress, I believe, this is purely because of the isolated churn that we saw. And as you know, Lucky, because our NRR is a trailing 4-quarter number, it moves rather slowly and so it will take us a little bit to get us back. Our target continues to be being at or above 100%. I mean our goal says 100% NRR is our goal. And -- but we've actually fluctuated between 99 and 101, by and large, for the last few years. I think occasionally, we've touched 102, but by and large, it's been between 99 and 101.

So we actually feel good about our business. And we also feel good Lucky, that we were able to grow ARR by 2% year-over-year, which is another point because -- when you think about it, when NRR is somewhat light, it doesn't take much for first few tens of basis points of things to move. The fact that we were able to grow our ARR 2% year-over-year means that obviously, new customers are embracing us and our expansions continue to be good, et cetera.

So we continue to be confident we are not concerned about the way the business is going at this stage. And the reason why caveat at this stage is the macro and the geopolitical events going on, which I think -- I mean the uncertainty around those, I don't have to sort of share with anyone that we all know that basically, some days, people think in the morning, it's going to be okay and the evening is going to be not okay. So with that kind of uncertainty, unclear as to what will happen in the market. We will continue to monitor that very, very closely. But so far, we have not seen any instance or any example or any anecdotal evidence, anything at all to say that macro is having an impact on us.

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

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

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

Good day, and welcome to the Progress Software Q4 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Mike Micciche, Senior Vice President of Investor Relations. Please go ahead.

Okay. Thank you, Sheri. Nice to have you back. Good afternoon, everyone, and thanks for joining us for Progress Software's Fourth Fiscal Quarter and Fiscal Year 2025 Financial Results Conference Call. With me this afternoon are Yogesh Gupta, President and CEO; and Anthony Folger, our Chief Financial Officer. Before we get started, let me go over our safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our integration of ShareFile and Nuclia and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties, and our actual results may differ materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the Risk Factors section of our most recent Form 10-K and 10-Q. Progress assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced in this call are non-GAAP measures, unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the fourth quarter of fiscal year 2025 and the full year of fiscal 2025, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our fourth quarter and fiscal year and provides additional highlights and financial metrics. Both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Today's call is being recorded in its entirety and will be available for replay on the Investor Relations section of our website shortly after we finish. And with that, I'll turn it over to Yogesh for his prepared comments.

[Audio Gap]

our net leverage ratio at year-end was approximately 3.4x, which was slightly better than where we expected to be with the ShareFile integration now complete. DSO for the quarter was 73 days, up 6 days compared to the year ago quarter. Deferred revenue was $425 million at the end of the fourth quarter, up approximately $21 million year-over-year and $44 million sequentially, reflecting strong fourth quarter top line performance.

Adjusted free cash flow was $62 million for the quarter, and $247 million for the year, an increase of 16% over the prior year. And we also continued to return capital to shareholders, repurchasing $40 million in stock in Q4 and $105 million for the full fiscal year 2025. We ended our fiscal year with $202 million remaining under our current share repurchase authorization.

Okay. Now we'll turn to the outlook. And before getting into the numbers, I'd like to highlight the following items. First, we will continue to focus on ARR as a key metric and we expect ARR growth generally consistent with the 2% growth we saw in fiscal year 2025. Also, our 2026 outlook assumes minimal revenue impact from the timing of multiyear contract renewals.

And as a result, we expect annual revenue growth similar to our ARR growth. Second, we expect to aggressively repay the revolving line of credit that we used to partially finance the ShareFile acquisition. We've modeled $250 million of repayments for fiscal 2026, which would improve our net leverage ratio to approximately 2.7x by year-end. As a reminder, in July of 2025, we upsized the capacity of our revolving credit facility from $900 million to $1.5 billion.

Finally, we expect to roll our 2026 convertible notes into our revolving credit facility when those converts mature in April of 2026. With $900 million of unused revolver capacity today, together with our aggressive debt repayment plan, we'll have more than enough capacity to absorb $360 million in principle and continue executing our total growth strategy.

With all that said, for the first quarter of 2026, we expect revenue between $244 million and $250 million and earnings per share of between $1.56 and $1.62. For the full year 2026, we expect revenue between $986 million and $1 billion, representing between 1% and 2% growth over 2025, an operating margin of 39%, adjusted free cash flow between $260 million and $274 million and unlevered free cash flow between $313 million and $326 million.

Finally, earnings per share are expected to be between $5.82 and $5.96 per share. Our guidance for full year EPS assumes a tax rate of 20%, the repurchase of $20 million in progress shares and approximately 44 million shares outstanding.

In closing, we're excited to deliver a great fourth quarter results, capping off a strong 2025. With the product investments we've made and the ShareFile integration complete, we believe we're well positioned to execute our strategy and deliver solid results throughout 2026 and well beyond. With that, I'd like to open the call for Q&A.

[Operator Instructions] Our first question will come from the line of John DiFucci with Guggenheim Securities.

And nice job here guys on this quarter. And as usual, the execution is really -- is impressive and especially seeing ShareFile here. I guess I have a bunch in my mind. I'm going to go high level right now because you guys see the market. You see what's happening to all of software, especially applications. And Yogesh, you've been in this for a long time. And I knew you've got a business, and that's meant to be a compliment, I've been around a while, too. And you've been a business leader for a long time. But I first knew you as a technology leader.

And I'm just curious your perspective because right now, there's this fear out there on AI. You talked a lot about it in your prepared remarks and especially for application. So I want -- like broadly speaking, for software, how do you think this evolves? And I know there's no real like no 1 really knows right now. But how do you think what do you think it evolves for software and in that context for progress?

Yes. Absolutely, John. Thank you. And it is fascinating to see sort of the level of hype, if I may call it that, that has led to the level of fear around the disruption of software in the business world. You said specifically, let me start with applications, even though that's not our business. I have yet to speak to a CIO of any meaningful size business. who realistically is planning to write their own ERP, like their own financial systems, like their own HR system, right, their own whatever right?

So I think in the end, businesses are in the business of whatever business they are in and the tools they use is an applications they use to run their business basically are a means to an end. And so unless they are technology companies themselves, I really don't see a lot of that today. Now obviously, over time, things will get different. I think what can happen is that you can get new competitors come to market with offerings that are, let's say, similar to the applications that are available in the market today. But then the question is how hard it is to do 3 things: one, get your data out of, let's say, a Salesforce or a ServiceNow or whatever and move to the new offering, whoever that is, by the way, and they're not going to be free either.

So the question is how much effort will that be? So, even more importantly, what risk will that create for the business we have seen historically when people have tried to move from 1 ERP to another. I mean, I remember, John, a long time ago when SAP was pointed to by Fortune 50 companies, the reason why they were going to miss results for quarter and the year because their implementation of SAP was going like a disaster. Right?

And they were trying to move from some ERP to SAP and being a manufacturing company, that was the heart and soul of the business. So I think that there is a risk involved and the question is, can the risk be minimized. And then last but not least, what does it take to get the employees in the company and the organization retrain them a new system. So I think these are real hurdles. So I actually think that the yes, at least in the near term, in the near term, in my mind, is next 1 to 3 years, are, to be honest, way overblown.

And from a progress perspective, it's even more fascinating because we sit inside our environment in our software is helping people run their environments well, govern their environments as well, get access to the data, leverage that data for business-critical work, do their workflows internally, manage their content, deliver digital experiences. And all of those that are becoming AI-enabled, but it doesn't mean that people won't want to do that, right? People will still want to have digital experiences. They just want to be able to have AI natural language interface and easy to build those and easy to connect them to existing data. Which we do today, right?

So I think as long as we continue to invest in our products, we will see continued success in the market. And it's interesting that we have a footprint out in the world that ranges from fundamental design of ASIC companies to people who manufacture machines to build chips to chip manufacturers themselves to everywhere up and down the tech stack also. And we're seeing interesting things happening there where they are using our products more because their needs are growing.

So whenever a business grows and sometimes the financial industry goes, sometimes manufacturing goes, sometimes chip industry goes. It doesn't matter which one it is. Right? For us, it is -- as industries grow, as certain sectors grow because we are so broad based. And we are, by the way, in large companies and extremely small and midsized companies as well. We are actually quite well, in my mind, broad-based and hedged that way that I expect us to continue to do well, which is why I am excited about progress, which is why we basically think that our growth this year will reflect what it was last year that our ARR organic will continue to grow at a 2% rate.

It all is a reflection of how we feel and how I feel about our business.

Thank you very much for that perspective, Yogesh, it sounds, if I could -- just as I was listening to you talk, it sounds like there's a lot of complications here that you can't just gloss over. But one thing sounds clear is that software companies, including progress are going to have to embrace AI and help customers leverage it. But thanks a lot.

Absolutely, John. You're absolutely correct. And that is why we as well as others are, I think, doing it aggressively..

One moment for our next question and that will come from the line of Fatima Boolani with Citi.

Yogesh, I wanted to drill down into the same line of questioning writing on [ John Coals ] a little bit. the last time you had a conversation around, hey, how does progress insert itself in the monetization path of AI because clearly, there has been a lot considered and deliberate investments in your entire portfolio as it relates to AI and AI enablement. I think one of the things you said very clearly was this should show up maybe more imminently or more materially visibly in net retention rates.

And so when I kind of look at the trajectory of the 100% net retention rate level, as you've kind of pretty consistently put up for the last -- for 5 quarters. I wanted to ask you why we haven't seen maybe more of a meaningful uptick in that -- in terms of the monetization manifesting in that figure, especially because you gave some very clear examples of how you are at the nexus of transformation for a lot of your customers. So any incremental detail around that would be very helpful. And I have a follow-up for Anthony, please.

Sure. Happy to. So I think -- and I'll share my view and Anthony in fact if you want to chime in as well. I think that in terms of net retention rate growth and increasing it over 100% means there's meaningful expansion across the broad customer base. And I think that even today, vast majority of investment in AI is limited, to be honest, a relatively small number of tech companies.

A lot of other companies actually are doing things that are more around trying to leverage infrastructure that is already being built by others and so on. So they're spending money on data centers, we are spending money on things that are truly bottom level. And in the business space, in the business community, I don't see yet a spend that is taking place to the same level that I expect as time goes on. So I think it is early. This is sort of like, it reminds me of the Internet pipeline where everybody was saying, let's lay down dot fiber as fast as we can. And then we'll figure out how to leverage it.

And if you noticed, right, it took Amazon a decade, to then really start getting into its stride after that. And people forget that what Amazon's trajectory was earlier. And then, of course, Amazon has been unbelievable over the last 20 years. So I think that it is just -- it takes time, and I think people always underestimate the short-term time it will take, but then they also underestimate how quickly it accelerates when it actually does accelerate.

I appreciate that nuance perspective Yogesh. Anthony, maybe a more tactical 1 for you. You very specifically mentioned that from a revenue growth perspective in fiscal '26, you are not going to see as much of a material impact from multiyear contract renewals. I'm wondering if you can translate that into how we should think about free cash flow and free cash flow linearity and seasonality over fiscal '26. And maybe if you can also sneak in some commentary on some of the 4Q free cash flow performance that maybe it was a little bit like from the seasonality side relative to where some broader expectations were.

Sure. So I guess maybe the second part of that question first. Q4 was a great quarter in terms of cash flow. Q4 was all a quarter where we had a significant beat on bookings. And a lot of what we do in the quarter is back-end loaded. So as we sort of worked our way through year-end, we saw a pretty significant uplift in cash flow for the quarter and also for '26, right? I think a lot of the beat when a significant beat in bookings happened back-end loaded, a little bit of benefit in '25, but really where we thought it was in '26. And I think you can see the growth in free cash flow in '26, certainly outpacing growth in revenue or margins.

And so I think we feel pretty good about sort of an acceleration that we're starting to see in terms of free cash flow. In terms of the linearity, I don't know that it's going to be any different. I think ShareFile is I would say, less subject to seasonal fluctuations than the rest of our business would have been just because of the nature of that business. And so I wouldn't expect material differences in the seasonality or the linearity of our free cash flow from where we've been historically.

[Operator Instructions] And our next question will come from the line of Lucky Schreiner with D.A. Davidson.

Great. Congrats on the quarter and some impressive results here. It looked like your SaaS revenues had a pretty strong sequential increase. And I guess I was wondering what drove that. Was there anything to call out? And maybe translating that to guidance I assume you're not baking in similar strength on the SaaS side. Would you say it's roughly a similar mix in 2026 as in 2025 in terms of the different revenue lines.

Yes. Lucky, it was a very good quarter. Q4 was a really strong quarter on the SaaS line. I think sequentially, you can see the move up and I think there was a lot of strength in ShareFile and there was a lot of strength in some of the other products, some of our other SaaS offerings. So both of those combined were really what led to the uptick. I guess I would say this, as we look forward to 2026, ShareFile is growing well, but it's a single-digit grower. It's not a significant outlier with the rest of our business.

So I don't -- I wouldn't want to leave anybody with the impression that ShareFile or SaaS generally is sort of driving outsized growth. It's a little bit better than the rest of our business, but it's not so dramatically different. So Q4 was a pleasant upside surprise for us on the SaaS side. I think we're probably looking for in '26, something that's a little more consistent with the annual results, right? So sort of a steady up and to the right growth trajectory as we go.

Got you. That makes a lot of sense. And then maybe for Yogesh, a little bit of another philosophical question. You guys look at a lot of private companies, right, with your growth strategy, and I feel like you might have a unique vantage point here. Have you noticed any notice any change in retention rates of the targets of the software companies that you're looking at acquiring as there are these overhanging fears of AI start-ups disrupting fundamental software businesses. I'm just curious if you've noticed any change in retention rates at some of the companies you look to acquire?

To be honest, Lucky, yes. And I mentioned that it's tough to find really good quality companies. I think one of the challenges, I think smaller companies are facing is that the customers are questioning whether they will make it and they're trying to decide whether they should switch to somebody larger or something like that. So there is a bit more of a turn some of the businesses we have seen that have had exposure to the federal government that has been significantly larger as a proportion of their business.

I think they have seen challenges as well. So yes, we are seeing softening in their both gross and net retention rates. And again, look, from our perspective, we want to buy a business that is a solid business that we believe we can sustain the 100% net retention rate going forward. And so we continue to be very selective in what we look for, and we continue to make sure that whatever we buy is a good quality business. There's a lot of stuff that's available cheap, but it doesn't mean it's a good business to have.

I think that's why you guys have been so successful so far. So I appreciate that context.

One moment for our next question. And that will come from the line of Ittai Kidron with Oppenheimer.

This is Nolan Jenevein on for Ittai. I just kind of want to double-click a little bit on operating margins. It was a really strong quarter for operating margin. But you're kind of guiding for roughly flat next year, it feels like you still have a lot of initiatives going on that seem to be favorable to operating margins. So I just kind of want to double-click, what are the sort of implicit assumptions for operating margins next year in terms of the fundamental puts and takes?

Yes, sure. So I guess maybe the 1 thing I would point to is when you look at 2025 and sort of look back at the year, coming into the year, I think our initial guide was something like 37%, maybe 37.5% as an operating margin. And I mean we just blew that away, right? I think we were able to integrate ShareFile more quickly and at a much lower cost than we expected. And we ended up getting to our target margin a lot faster. And so we end the year with roughly 39% margins, which is pretty much where we were at prior to ShareFile.

And so I think the -- to me, sort of the upside or the positive in this is that the ShareFile integration and the execution around it was fantastic. I think the team did an absolutely outstanding job got us to our target margin a lot faster. And ultimately, as we look out into we're already at our target margin. That gives us an ability to make investments in other areas in the business. We acquired Nuclia. We continue to make investments in AI, smart investments, we think they are going to continue to propel us forward.

And I think those are the dynamics. Those are really the puts and takes. But I think really the positive there is getting to that target margin in '25, a lot more quickly. was just a really -- a lot of upside and a big positive for us.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.

Thank you, Shari, and thank you, everyone, for joining us today. We look forward to speaking with you in the near future. Have a good night.

This concludes today's program. Thank you all for participating. You may now disconnect.

Hello, and thank you for standing by. Welcome to Progress Software's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Michael Micciche, you may begin.

Okay. Thank you, Towanda. Good afternoon, everyone, and thanks for joining us for Progress Software's Third Fiscal Quarter 2025 Financial Results Conference Call. With me this afternoon are our President and CEO, Yogesh Gupta; and our Chief Financial Officer, Anthony Folger.

Before we get started, let me go over our safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our integration of ShareFile and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties, and our actual results may differ materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the Risk Factors section of our most recent Form 10-K and 10-Q.

Progress assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all financial figures referenced in the call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the third quarter of fiscal year 2025, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our third quarter and provide highlights and additional financial metrics.

Both earnings -- the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Today's call is being recorded in its entirety, and it will be available for replay on the Investor Relations section of our website shortly after we finish tonight. So let me turn it over to you, Yogesh, go ahead, please.

Thank you, Mike. Good afternoon, everyone. We're glad you can join us for our third quarter earnings conference call today. As you saw from our press release earlier, we reported another outstanding quarter during which we outperformed on every metric as our business benefited from our customers' investments in their AI initiatives. Revenues, earnings, cash flow and margins were all ahead of our guidance. Net retention was solid at 100% and ARR grew 47% year-over-year. Solid market demand was backed by outstanding execution from our team. Our sales efforts in the field, our organizational discipline in controlling expenses and our extensive and detail-oriented integration of ShareFile were all key to delivering these great results.

Revenues of $250 million were well above our previous guidance and were again strong across products and geographies. Earnings, which came in at $1.50 per share were well above the high end of our guidance, and operating margin was 40% and above our expectations and reflective of ongoing excellence in execution and cost control. We also continued adding to the strength of our balance sheet by paying down $40 million of debt and increasing our revolver capacity from $900 million to $1.5 billion, providing increased flexibility. We also repurchased $15 million of our shares in Q3 and for a total of $65 million so far this year. And just last week, our Board of Directors further increased our repurchase authorization by $200 million to $242 million. As always, we will continue to be disciplined in deploying our capital towards delivering the best returns for our shareholders. As Anthony will describe in detail, annualized recurring revenue, or ARR, continues to grow consistently.

Our Q3 results show the durability of our installed base, the continued relevance and value of our products and the strength of our customer relationships. We remain confident that the strength in demand for our products as well as our ability to execute well, will continue through the rest of fiscal 2025, and well beyond because our customers' VI initiatives are driving demand for our products. They look to us as a trusted partner to deliver the benefits of AI with clear ROI for their business. and we expect this demand to continue as businesses are still in the very early stages of AI adoption. Let me provide some color and detail around the quarter, starting with our ShareFile business, which is turning out to be the best acquisition we have done so far and was certainly the most in ticket to integrate. We met every integration challenge, passed all major milestones on or before schedule and overcame every obstacle with have encountered.

The net retention rate, or NRR, of the ShareFile business continues to improve as customers increase their adoption of AI capabilities we've delivered in ShareFile. Currently, for example, over 3,000 customers have started using the new AI document assistant with over 1/3 of those users already up and running and using it regularly. And the AI-powered secure share recommender has identified and protected nearly 15,000 files that contain PII, or personally identifiable information. The use of these AI capabilities, along with our focused customer success and account management efforts is helping to improve share net retention rates and has led to better-than-expected ARR and top line growth in the business. On the operational front, the team we acquired is completely on board and has become an integral part of progress. All vital systems are now integrated within progress and in the process of being fully optimized with no major issues so far.

The ShareFile engine team continues to deliver new capabilities. ShareFile infrastructure is fully migrated and the condition to product progress branding is complete. As we have previously discussed, we measure the operational performance of our products by tracking ARR. This is key because the revenue recognition of on-prem subscriptions is lumpy and does not accurately reflect the underlying strength of the business. In addition to a meaningful portion of our strong ARR performance both year-over-year and quarter-over-quarter being due to share file, I want to highlight the strength of our other products such as OpenEdge, MarkLogic, Sitefinity, WhatsUp Gold, DevTools and mOVEit, all of which continue to exceed our expectations.

Innovation is a foundational pillar of our total growth strategy, and it ensures that our products continue to deliver increasingly greater value to our customers, especially during times of rapid technology changes. Having successfully navigated multiple technology disruptions in the past, Progress' ability to rapidly evolve our products to meet the changing needs of the market is an integral part of our DNA. Over the past 12 months, we have delivered dozens of new AI capabilities across our products that are benefiting our customers and helping drive our success in the market. To that end, you may have seen a string of recent press releases showcasing the AI capabilities we have delivered within our products, some of which include the latest version of retrieval augmented generation or WAG enabled MarkLogic called Progress MarkLogic 12, the availability of new product, Progress Agentic [indiscernible] built on the technology we acquired last quarter with nuclear.

AI coding assistance in our developer tools that enable developers to use our products as part of their workflow, driven from their AI code generator of choice. AI-powered insights and questions and answers from Documents and ShareFile that deliver new efficiencies to users in their document workflows and the launch of GenAI capabilities within the OpenEdge platform to accelerate the development and modernization of OpenEdge applications. Our customers are extremely excited about the possibility of gaining valuable business insights from their existing data across progress products using our Gen AI-enabled technologies. A couple of weeks ago, at our progress Data Platform Summit in Washington, D.C., we brought together over 200 customers to share how advancements in agent, Symantec AI and data integration can help organizations break down data silos and drive tangible business impact.

At that event, the state of Mississippi division of Medicaid, a new progress customer shared that when they needed a solution to meet federal compliance and internal business requirements for secure, responsible and accelerated AI adoption they chose progress. They showcased their progress operational data store initiatives built on the progress data platform to help the state agency address these needs by integrating data from various different sources and harmonizing it to drive valid verifiable responses to Gen AI queries. We launched new AI coding assistance in our DevTools products for laser and react in early third quarter which we continue to extend and now being used by thousands of developers across the world. Develop -- delivering developer efficiency gains of over 30% and while seamlessly integrating with coding tools such as WindSurf, CloudCode and GitHub Copilot, our products are leading the UI developer tools market with AI capabilities.

Similarly, we announced today the OpenEdge MCP connector for ABL, which brings the power of gene coding tools, such as WindSurf, Cursor and VS Code for the development, maintenance and modernization of OpenEdge applications. The OpenEdge MCP connector for ABL is purpose-built for our customers' workflows, enabling faster development, reduced risk and smarter modernization strategies and has been extremely well received by the OpenEdge ISV partners and customers who are early testers of this product. And on from this Agentic offering, which was previously known as nuclear is delivering value to dozens of customers like SRS, which is a wholly owned subsidiary of Home Depot by enabling them to unify their structured and unstructured data, power intelligence search and insights and automation.

By turning information into actionable intelligence, Progress Agentic [indiscernible] makes GenAI practical, verifiable and reliable for customers of all sizes. We're also seeing the downstream benefits of the AI adoption wave as it drives demand for our infrastructure management products. For example, this quarter, a leading chip equipment manufacturer significantly expanded their relationship with us to meet the needs of managing the growing complexity of their own IT infrastructure. As IT environments continue to grow and scale as well as increasing complexity due to the adoption of AI, we expect this trend to continue. I also want to touch upon the fact that our engineers across our products are using AI tools in their day-to-day tasks. This is accelerating the delivery of product capabilities without increasing our R&D expenses, which we continue to maintain at the 18% of revenue levels.

As you know, M&A is another key pillar of our total growth strategy. And when it's done well, as we've consistently demonstrated, including most recently with ShareFile, it meaningfully drives our success. Our approach to M&A is highly selective and disciplined. So with that in mind, let me give a quick update on M&A before closing the discussion. Our corporate development efforts remain ongoing, and we continue to evaluate a strong pipeline of deals. As I mentioned earlier, in the third quarter, we both aggressively paid down our outstanding debt to reduce capital constraints and we refinanced and significantly expanded our revolver to give ourselves additional flexibility. We think the market for M&A is still a very favorable one for us with many potential infrastructure software targets that would fit well in any of our three key areas: application and development platforms; digital experience; and infrastructure management.

And we are encouraged by the potential to combine any potentially new acquisition with our expanded AI capabilities, in particular with the Agentic technology we obtained with nuclear. While valuations remain mixed across product, technology and business types, and there's still some disparity between public and private markets. We intend to keep our focus in finding great companies with great technology and the potential for high-margin synergies at a reasonable valuation. Finally, and as always, I want to thank all of our progress teams around the world for their dedication and hard work that led to our great results in Q3. I am inspired every day by their commitment to excellence and especially this quarter with the outcomes we have delivered across the board. With that, I'll turn it over to Anthony.

All right. Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call. As Yogesh mentioned, we're thrilled with our third quarter results. and the underlying momentum in our business that allows us to raise our full year outlook yet again. With that, let's jump right into the numbers. I'll start with ARR, which is our key metric for assessing top line performance. We closed Q3 with ARR of $849 million, representing approximately 47% growth on a year-over-year basis and 3% pro forma growth on a year-over-year basis. To be clear, the 3% pro forma growth includes ShareFile in all periods, and the growth was driven by multiple products across our portfolio, including ShareFile, OpenEdge, DevTools, MarkLogic, WhatsUp Gold, Sitefinity and Corticon, quite a list.

We also had another strong quarter of customer retention with Q3 net retention rates coming in at 100%. In addition to solid ARR growth, Q3 revenue of $250 million meaningfully exceeded the high end of the guidance range we provided in June and represents approximately 40% year-over-year growth. Our strong revenue performance in the quarter was driven by stronger-than-expected demand from multiple products in our portfolio, most notably ShareFile and OpenEdge. Turning now to expenses. Our total costs and operating expenses were $150 million for the quarter, an increase of $46 million compared to Q3 of last year. This year-over-year increase was largely driven by the addition of ShareFile to our business. Operating income for the quarter was $99 million, an increase of $25 million compared to the same quarter last year, and our operating margin was 40% in Q3 and compared to 41% in the year ago quarter.

Earnings per share for Q3 were $1.50, which has also meaningfully exceeded at the high end of the guidance range that we provided in June. Compared to the prior year quarter, earnings per share were up $0.24 or 19%, with the increase being driven by the addition of ShareFile to our business. Okay. Now I'll transition to a few balance sheet and cash flow metrics. We ended the quarter with cash, cash equivalents and short-term investments totaling $99 million. and total debt of $1.4 billion, resulting in a net debt position of $1.3 billion. This represents net leverage of approximately 3.5x using our trailing 12-month adjusted EBITDA. DSO for the quarter was 55 days, up 2 days compared to Q2. Deferred revenue was $381 million at the end of the third quarter, down slightly from the second quarter, reflecting normal seasonality in our business, adjusted free cash flow was $74 million for the quarter, an increase of $17 million or 29% from the year ago quarter, and unlevered free cash flow was $89 million for the quarter, an increase of $26 million or 40% from the year ago quarter.

In July, we announced an amendment to our revolving credit facility, that increased our borrowing capacity from $900 million to $1.5 billion. It also lowered our borrowing costs and provides more flexibility to grow as we execute our total growth strategy. During the third quarter, we repaid $40 million against this revolving credit facility, bringing our total year-to-date debt repayment to $110 million. At the end of Q3, our revolving line of credit has a balance of $620 million, and we have available capacity of approximately $880 million. In addition, during the third quarter, we repurchased $15 million of progress stock, bringing our year-to-date total to $65 million. At the end of Q3, we had $42 million remaining under our share repurchase authorization. However, on September 23, our Board of Directors authorized an increase of $200 million to our share repurchase authorization, bringing the total amount available for repurchase to $242 million.

When it comes to our capital allocation outlook, I'd like to reiterate the point Yogesh made in his remarks that we will be disciplined and deploy capital to deliver the best returns for our shareholders. To be clear, our Q4 guidance contemplates $50 million in debt repayment and no share repurchases. This mix may change during the quarter, depending on several factors, including our share price, and we are prepared to reduce debt repayment and increase share repurchases if we believe doing so will generate the best returns for our shareholders.

Okay. Now let's get into our outlook for the fourth quarter and full year 2025. For the fourth quarter of 2025, we expect revenue between $250 million and $256 million, and earnings per share of between $1.29 and $1.35. For the full year 2025, we expect revenue between $975 million and $981 million, an increase from our prior guidance. We expect an operating margin for the year of 38% to 39%. We expect adjusted free cash flow between $232 million and $242 million and unlevered free cash flow of between $289 million and $299 million, an increase from our prior guidance for both. Finally, we expect earnings per share between $5.50 and $5.56, again, an increase from our prior guidance. Our guidance for full year EPS assumes a tax rate of approximately 20%, the repurchase of $65 million in progress shares, total debt repayment of $160 million and approximately 44 million shares outstanding.

I will reiterate, though, our mix of debt repayment and share repurchases may change during Q4, depending on several factors, including our share price. In closing, we're excited to deliver another quarter of exceptional results, and we're very encouraged with the momentum across our business. With that, let's open the call for questions.

[Operator Instructions]. Our first question comes from the line of Fatima Boolani with Citi.

Yogesh, I wanted to ask at a very, very high level, the AI strategy. So the mandate is very clear and that there is an aspiration to infuse AI as well as a genetic rag across the portfolio. And I think in your prepared remarks, you did talk to multiple streams of value creation and helping your customers drive ROI. But I was hoping you can talk to us and give us a flavor of how some of these initiatives from an AI investment perspective are going to manifest or show up in the external benchmarks that you share? And specifically around if there is going to be more torque on the net retention rate side? Or is an opportunity to drive more pricing power. I'd love for you to flush out some of the implications of an AI infusion strategy. And I have a follow-up for Anthony, please.

Thanks, Fatima. And so I think that's a really good question, right? Fundamentally, I think the first place it shows up in MRR, right, net retention rate because as we've talked about before, if we don't innovate and if we don't bring our products along and if we don't make our customers successful in their journey towards whatever is new in this case, it happens to be they would decide to move to somebody else. And so we have actually seen that. I mentioned earlier that the combination of the AI capabilities as well as, of course, the team's effort to make sure that we improve our customer relationships are helping us with our ShareFile net retention rate, right, which has picked up.

So I think, to me, MRR is the first place we are going to see it. I think that as you are also fully aware, we don't really put a lot of wood behind the new customer acquisition effort at progress. That is part of our overall strategy. And so therefore, yes, we will probably see more new customers who do AI work with us. But I think it's too early to say whether that will be something that we will see in the near term. I think if we start seeing some momentum there, Fatima will come back to you and share that with you. But again, to us, it is a combination of retaining customers and then, of course, finding additional customers. Expansion is the middle part, which is also key. And you mentioned pricing as a lever. One of the interesting things that we do in a variety of our products, especially the ones that sell to the smaller market segment is that we have multiple additions of those products.

And we often add these new capabilities to the higher-end additions of those products, which leads those customers to upgrade from the lower end to the higher end versions. And as they do, obviously, they pay more to us. So it's an indirect pricing opportunity. It isn't in a, hey, what we're going to increase your price because it's here. It is -- if you want to use this, here it is in the higher addition version of the product, and of course, you pay more for it. So it's a combination of things. I think NRR is where it will show up first, which is a combination of gross retention and expansions. And then over time, we're looking forward to sharing what happens on the new side.

Thank you, Yogesh. I appreciate that detail. Anthony, I wanted to ask you about guidance for the year. So a nice outperformance this quarter, but you're only taking the midpoint the full year range up by about 10 bps by my calculation. So I wanted to really unpack the source of the conservatism there, especially by your telling and us watching you blow past all of the shared file integration milestones above and beyond kind of what you had committed to at the start of the year. So I just kind of wanted to appreciate that. And also that in the context of what Yogesh was mentioning was holding the line for R&D at 18% levels

Yes, sure, Fatima. I think looking at the beats we had in Q3 at every point in the range, low, mid and high, I think we at least rolled everything through. And so I don't -- certainly don't view it as being conservative. I think the Q3 results on their own, I guess, I would say, showed probably slightly better growth than we expected coming into the quarter. and maybe some incremental momentum there. I think they showed a slightly better margin than what we expected coming into the quarter and certainly much better earnings per share as a result. And our expectation, certainly is that we're going to be able to hold Q4 to where we were originally.

Q4, I think, generally speaking, is always kind of an exciting quarter for us. But our view was it was a strong quarter and we felt very good about rolling through the entire beat that we had this quarter for our full year results. So I'm not sure if that completely answers the question, but that was the thought process behind the guide.

I guess it's a notional versus a percentage impact.

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

This is Lawrence Vensko on for John DiFucci. So it's great to share the headwind that you're making with the ShareFile integrations since it was your largest acquisition with an especially different financial profile. You touched on in your prepared remarks, but is there anything in that business that has surprised you either positive or negative that wasn't really expected prior to the acquisition? Any additional color would be really helpful on that.

You're welcome, Lawrence, and thank you for your kind words. It is a -- with any acquisition, you always find something that you did not expect, right? Being a carve-out out of another large entity, I think, created some challenges, right? It created challenges in terms of figuring out how to move the systems over. That is like cutting over engines while you are flying while keeping the plane flying, right? And then I think -- so I think those kind of challenges, we sort of expected them, but at the same time, the nuance of those is always a little more challenging when it actually does happen, and we actually are trying to do it. But to me, the wonderful part was how well we were able to navigate that and how effectively we've been able to do the integration and so on. So that was on the challenge side.

On the positive side, I would say there are a couple of them. One, I think the people culture has been really, really wonderful, right? The acquired teams are very engaged. They have done a great job the folks that joined from ShareFile, they have just done such an amazing job of continuing to work on product and continuing to work on customers and helping the field be successful. And all the things that we need to do to run our business. So that has been a really, really great positive. And then the second, I think, is also we are discovering that the customers. We knew this to some degree, but we didn't realize how much the customers love the product and how much really their businesses are just so reliant on those, right? They just -- most businesses that use this product their workflows get completely intertwined into the document-centric workflows that they need to do because these are -- most of these customers are document-centric businesses.

So that's the important part. So because they're document-centric businesses and their workflows around those documents become such an integral part of their day-to-day work that ShareFile becomes sort of second nature to their internal systems. And so I think those two things have been really positive for us. So I'm really delighted with the way things have turned out and we hope to continue the momentum.

[Operator Instructions]. Next question comes from the line of Ittai Kidron with Oppenheimer & Company.

This is Nolan Jenevein on for Ittai. I actually want to follow up a little bit on Fatima's first question about you guys are clearly using Gen AI across the portfolio. You've infused existing products with new capabilities. You also explicitly mentioned the new Agentic rag product built on top of Nuclear. Can you put maybe a finer point on how you're monetizing that specific product. Does this represent sort of an incremental cross-sell opportunity? I understand it's probably very, very small today. Just trying to get my sort of hands around finer points on how you're monetizing this.

Absolutely. Yes. So I think you're right. I think to us, the initial opportunity is primarily around integrating it with our existing other products. and therefore, creating cross-sell opportunities for ourselves. We are going out and also trying to sell new to brand new customers who are not our customers for any of our products. But I think the bigger opportunity for progress is to bring this to market and bring this to bear as a cross-sell opportunity to our existing customers. And I think to that end, right, we are aggressively integrating the product across our portfolio as we speak.

Understood. And then a quick follow-up. You had a nice pop in gross margins this quarter sequentially. Despite SaaS growing as a portion of revenue mix, can you maybe talk about just the puts and takes on gross margin in the quarter?

Yes. So gross margin -- I mean, we are -- again, if you look at it, right, so our gross margin is a blend between the SaaS business gross margin, the ShareFile gross margin, which is, as you know, was just a hair above 80% in the low 80s. And our business, which was in the high 80s, right? So as the those things blend weighted average. Thank you for the kind comment. But we are continuing to see, I think, ways of even running our own existing SaaS products a bit better. So I think those are a little click here and there. I appreciate the positive commentary, on the gross margin. Thank you.

[Operator Instructions]. Please stand by for our next question. Our next question comes from the line of Lucky Schreiner with D.A. Davidson.

Great. It was good to hear about the updated M&A environment. I guess I just wanted to ask a follow-up on that. And here, if you felt like there were any of the -- your 3 categories that really stand out as looking more attractive today, especially as AI starts to impact these markets. And a second question would be after acquiring ShareFile, anything to call out between your SaaS opportunities for M&A and your propensity to acquire a SaaS company in the future?

Absolutely, Lucky. On the first one, I think really what is happening with AI is that all 3 of our businesses are becoming -- the right companies and the right products in all 3 areas are becoming really interesting, even more interesting than they were before. And think about it, right? The one area which is around data platforms, obviously, for businesses and organizations that are trying to make sure that their Gen AI efforts are based on 2 business data so that they can get verifiable, relevant to reliable answers from Gen AI queries, right? It requires them to bring that data into that game. And to us, therefore, data platform businesses are continuing to be a very interesting place.

Similarly, when it comes to digital experiences, there you think of the end user experience is completely dramatically changing, right? We have a very interesting vision of the no 2 visits to, for example, a website will be the same ever again, right? And the web experience will be completely dynamically created by Gen AI. But that requires, again, a set of technologies and back-end platforms around that can manage content that can manage the marketing platform that can manage the web delivery and so on.

Similarly, in the digital experience space, the workflow. I mean, ShareFile is such a wonderful product in that portfolio and workflow automation and leveraging AI for content within ShareFile as well as leveraging content for any -- sorry, leveraging AI for any content-centric application is going to be very interesting. So I believe that the digital experience aspect whose foundation lies on content right, I think, is going to be a very interesting space with the right type of companies. And last but not least, I mentioned in my prepared remarks, right? This -- Gen AI, I think one of the big things or AI in general, not just Gen AI, is driving significant investments in IT across the board. And so with Increasing IT comes increasing IT infrastructure comes increasing complexity of environments comes the challenge of managing, securing, running it reliably.

So if you can have the right type of products who can do that without requiring greater resources and they themselves leverage AI to automate that work, that is a very, very powerful set of offerings. So I think really lucky, across all 3 categories, we are active, we are interested and we continue to look. The second part of your question was SaaS. And as we even said when we acquired ShareFile, right, we found a SaaS asset, which has 80% gross margins and now slightly higher. That is a remarkable thing for a SaaS business that is a modest size to have. And it allows us, therefore, to have the kind of operating margins that we deliver. And so we have learned quite a bit about SaaS. We have a very strong cloud operations team that came over from ShareFile that now runs all of the SaaS product operations for progress.

And I think we are very much looking at SaaS as well as non-SaaS companies when it comes to acquiring them. So I don't -- it used to be we were hesitant about SaaS, but I think that hesitancy has significantly reduced. Obviously, we need to make sure that there isn't something so flawed in their business that their gross margins can get to where we need to get. But beyond that, I think we now find ourselves hunting for not just traditional long-term software companies but SaaS companies as well.

Very helpful.

You're welcome. And that really expands our market opportunities quite, quite significantly.

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

Well, thank you, everyone, again, for joining our call today. I'm really excited about our performance in the third quarter and pleased to share our confidence in the outlook for the rest of fiscal 2025 and we look forward to talking to you again soon, and thank you very much, and have a wonderful evening. Bye-bye.

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