Progress 2018 Second Quarter Results Exceed Guidance

June 27, 2018 4:15 PM

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

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

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

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

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

Additional financial highlights included:


	Three Months Ended
	GAAP								Non-GAAP
(In thousands, except percentages and per share amounts)	May 31,2018			May 31,2017			% Change		May 31,2018			May 31,2017			% Change
Revenue	$	96,102		$	93,213		3	%	$	96,212		$	93,427		3	%
Income from operations	21,788			20,284			7	%	37,378			32,579			15	%
Operating margin	23		%	22		%	5	%	39		%	35		%	11	%
Net income	15,403			10,341			49	%	27,763			20,530			35	%
Diluted earnings per share	0.33			0.21			57	%	0.60			0.42			43	%
Cash from operations (GAAP) /Adjusted free cash flow (Non-GAAP)	$	42,129		$	22,429		88	%	$	42,761		$	27,855		54	%

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

Other fiscal second quarter 2018 metrics and recent results included:

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

2018 Business Outlook

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


(In millions, except percentages and per share amounts)	FY 2018GAAP		FY 2018Non-GAAP		Q3 2018GAAP	Q3 2018Non-GAAP
Revenue	$398 - $404		$399 - $404		$95 - $97	$95 - $97
Diluted earnings per share	$1.33 - $1.39		$2.45 - $2.50		$0.30 - $0.33	$0.56 - $0.58
Operating margin	22% - 23%		38%		*	*
Cash from operations (GAAP) / Adjusted free cash flow (Non-GAAP)	$120 - $126		$120 - $125		*	*
Effective tax rate	26	%	22	%	*	*

* We do not provide guidance for this financial measure.

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

Conference Call

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

Non-GAAP Financial Information

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

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

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

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

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

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

Constant Currency

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

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

Note Regarding Forward-Looking Statements

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

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

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

About Progress

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

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


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

	Three Months Ended								Six Months Ended
(In thousands, except per share data)	May 31,2018			May 31,2017			% Change		May 31,2018			May 31,2017			% Change
Revenue:
Software licenses	$	26,439		$	25,592		3	%	$	51,782		$	49,914		4	%
Maintenance and services	69,663			67,621			3	%	138,367			134,269			3	%
Total revenue	96,102			93,213			3	%	190,149			184,183			3	%
Costs of revenue:
Cost of software licenses	1,233			1,422			(13	)%	2,494			3,010			(17	)%
Cost of maintenance and services	9,511			11,262			(16	)%	19,335			21,754			(11	)%
Amortization of acquired intangibles	5,899			4,683			26	%	11,717			8,361			40	%
Total costs of revenue	16,643			17,367			(4	)%	33,546			33,125			1	%
Gross profit	79,459			75,846			5	%	156,603			151,058			4	%
Operating expenses:
Sales and marketing	21,658			21,236			2	%	43,086			46,957			(8	)%
Product development	19,822			18,791			5	%	40,067			36,125			11	%
General and administrative	12,190			11,606			5	%	23,452			22,174			6	%
Amortization of acquired intangibles	3,318			3,223			3	%	6,637			6,402			4	%
Fees related to shareholder activist	214			—			*		1,472			—			*
Restructuring expense	426			662			(36	)%	2,247			17,801			(87	)%
Acquisition-related expenses	43			44			(2	)%	86			93			(8	)%
Total operating expenses	57,671			55,562			4	%	117,047			129,552			(10	)%
Income from operations	21,788			20,284			7	%	39,556			21,506			84	%
Other (expense) income, net	(1,284		)	(1,552		)	17	%	(2,869		)	(2,899		)	1	%
Income before income taxes	20,504			18,732			9	%	36,687			18,607			97	%
Provision for income taxes	5,101			8,391			(39	)%	8,372			8,791			(5	)%
Net income	$	15,403		$	10,341		49	%	$	28,315		$	9,816		188	%

Earnings per share:
Basic	$	0.34		$	0.21		62	%	$	0.62		$	0.20		210	%
Diluted	$	0.33		$	0.21		57	%	$	0.61		$	0.20		205	%
Weighted average shares outstanding:
Basic	45,531			48,221			(6	)%	46,030			48,477			(5	)%
Diluted	46,087			48,490			(5	)%	46,781			48,762			(4	)%

Cash dividends declared per common share	$	0.140		$	0.125		12	%	$	0.280		$	0.250		12	%

Stock-based compensation is included in the condensed consolidated statements of operations, as follows:

Cost of revenue	$	269	$	294	(9	)%	$	515	$	551	(7	)%
Sales and marketing	995		200		398	%	1,365		563		142	%
Product development	1,984		1,158		71	%	4,030		1,054		282	%
General and administrative	2,332		1,981		18	%	4,240		3,095		37	%
Total	$	5,580	$	3,633	54	%	$	10,150	$	5,263	93	%

*Not meaningful


CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)

(In thousands)	May 31,2018		November 30,2017
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	144,200	$	183,609
Accounts receivable, net	42,577		61,210
Other current assets	13,844		18,588
Total current assets	200,621		263,407
Property and equipment, net	42,208		42,261
Goodwill and intangible assets, net	391,552		409,935
Other assets	2,592		3,115
Total assets	$	636,973	$	718,718
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and other current liabilities	$	53,842	$	69,661
Current portion of long-term debt, net	5,819		5,819
Short-term deferred revenue	135,202		132,538
Total current liabilities	194,863		208,018
Long-term deferred revenue	12,586		9,750
Long-term debt, net	113,180		116,090
Other long-term liabilities	7,207		8,776
Shareholders’ equity:
Common stock and additional paid-in capital	258,696		249,836
Retained earnings	50,441		126,248
Total shareholders’ equity	309,137		376,084
Total liabilities and shareholders’ equity	$	636,973	$	718,718


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

	Three Months Ended						Six Months Ended
(In thousands)	May 31,2018			May 31,2017			May 31,2018			May 31,2017
Cash flows from operating activities:
Net income	$	15,403		$	10,341		$	28,315		$	9,816
Depreciation and amortization	11,331			10,490			22,633			19,848
Stock-based compensation	5,580			3,633			10,150			5,263
Other non-cash adjustments	(1,117		)	444			(1,251		)	4,571
Changes in operating assets and liabilities	10,932			(2,479		)	13,877			20,231
Net cash flows from operating activities	42,129			22,429			73,724			59,729
Capital expenditures	(1,810		)	(140		)	(3,196		)	(523		)
Repurchases of common stock, net of issuances	(42,798		)	(7,503		)	(85,329		)	(19,923		)
Dividend payments to shareholders	(6,482		)	(6,044		)	(13,101		)	(12,116		)
Payments for acquisitions, net of cash acquired	—			(28,270		)	—			(28,270		)
Payments of principal on long-term debt	(1,547		)	(3,750		)	(3,094		)	(7,500		)
Other	(12,789		)	4,168			(8,413		)	3,931
Net change in cash, cash equivalents and short-term investments	(23,297		)	(19,110		)	(39,409		)	(4,672		)
Cash, cash equivalents and short-term investments, beginning of period	167,497			264,192			183,609			249,754
Cash, cash equivalents and short-term investments, end of period	$	144,200		$	245,082		$	144,200		$	245,082


RESULTS OF OPERATIONS BY SEGMENT(Unaudited)

	Three Months Ended								Six Months Ended
(In thousands)	May 31,2018			May 31,2017			%Change		May 31,2018			May 31,2017			%Change
Segment revenue:
OpenEdge	$	69,967		$	65,890		6	%	$	136,375		$	130,398		5	%
Data Connectivity and Integration	5,788			7,096			(18	)%	13,392			13,924			(4	)%
Application Development and Deployment	20,347			20,227			1	%	40,382			39,861			1	%
Total revenue	96,102			93,213			3	%	190,149			184,183			3	%
Segment costs of revenue and operating expenses:
OpenEdge	15,013			16,287			(8	)%	30,775			34,164			(10	)%
Data Connectivity and Integration	1,674			2,069			(19	)%	3,303			4,331			(24	)%
Application Development and Deployment	6,199			5,991			3	%	12,997			13,527			(4	)%
Total costs of revenue and operating expenses	22,886			24,347			(6	)%	47,075			52,022			(10	)%
Segment contribution margin:
OpenEdge	54,954			49,603			11	%	105,600			96,234			10	%
Data Connectivity and Integration	4,114			5,027			(18	)%	10,089			9,593			5	%
Application Development and Deployment	14,148			14,236			(1	)%	27,385			26,334			4	%
Total contribution margin	73,216			68,866			6	%	143,074			132,161			8	%
Other unallocated expenses (1)	51,428			48,582			6	%	103,518			110,655			(6	)%
Income from operations	21,788			20,284			7	%	39,556			21,506			84	%
Other (expense) income, net	(1,284		)	(1,552		)	17	%	(2,869		)	(2,899		)	1	%
Income before income taxes	$	20,504		$	18,732		9	%	$	36,687		$	18,607		97	%

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


SUPPLEMENTAL INFORMATION(Unaudited)

Revenue by Type

(In thousands)	Q2 2017		Q3 2017		Q4 2017		Q1 2018		Q2 2018
Software licenses	$	25,592	$	28,529	$	45,963	$	25,343	$	26,439
Maintenance	59,898		60,536		61,826		61,479		62,323
Services	7,723		8,245		8,290		7,225		7,340
Total revenue	$	93,213	$	97,310	$	116,079	$	94,047	$	96,102

Revenue by Region

(In thousands)	Q2 2017		Q3 2017		Q4 2017		Q1 2018		Q2 2018
North America	$	51,430	$	55,703	$	66,504	$	51,641	$	50,823
EMEA	30,646		31,830		38,039		33,014		35,333
Latin America	5,637		5,009		5,489		4,461		4,256
Asia Pacific	5,500		4,768		6,047		4,931		5,690
Total revenue	$	93,213	$	97,310	$	116,079	$	94,047	$	96,102

Revenue by Segment

(In thousands)	Q2 2017		Q3 2017		Q4 2017		Q1 2018		Q2 2018
OpenEdge	$	65,890	$	68,135	$	77,639	$	66,408	$	69,967
Data Connectivity and Integration	7,096		8,987		18,044		7,604		5,788
Application Development and Deployment	20,227		20,188		20,396		20,035		20,347
Total revenue	$	93,213	$	97,310	$	116,079	$	94,047	$	96,102


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

	Three Months Ended										% Change
(In thousands, except per share data)	May 31, 2018					May 31, 2017					Non-GAAP
Adjusted revenue:
GAAP revenue	$	96,102				$	93,213
Acquisition-related revenue (1)	110					214
Non-GAAP revenue	$	96,212		100	%	$	93,427		100	%	3	%

Adjusted gross margin:
GAAP gross margin	$	79,459		83	%	$	75,846		81	%
Amortization of acquired intangibles	5,899			6	%	4,683			6	%
Stock-based compensation	269			—	%	294			—	%
Acquisition-related revenue (1)	110			—	%	214			—	%
Non-GAAP gross margin	$	85,737		89	%	$	81,037		87	%	6	%

Adjusted operating expenses:
GAAP operating expenses	$	57,671		60	%	$	55,562		60	%
Amortization of acquired intangibles	(3,318		)	(3	)%	(3,223		)	(3	)%
Fees related to shareholder activist	(214		)	—	%	—			—	%
Restructuring expenses and other	(426		)	(1	)%	(498		)	(1	)%
Acquisition-related expenses	(43		)	—	%	(44		)	—	%
Stock-based compensation	(5,311		)	(6	)%	(3,339		)	(4	)%
Non-GAAP operating expenses	$	48,359		50	%	$	48,458		52	%	—	%

Adjusted income from operations:
GAAP income from operations	$	21,788		23	%	$	20,284		22	%
Amortization of acquired intangibles	9,217			10	%	7,906			8	%
Fees related to shareholder activist	214			—	%	—			—	%
Restructuring expenses and other	426			—	%	498			1	%
Stock-based compensation	5,580			6	%	3,633			4	%
Acquisition-related	153			—	%	258			—	%
Non-GAAP income from operations	$	37,378		39	%	$	32,579		35	%	15	%

Adjusted diluted earnings per share:
GAAP diluted earnings per share	$	0.33				$	0.21
Amortization of acquired intangibles	0.20					0.16
Fees related to shareholder activist	—					—
Restructuring expenses and other	0.01					0.01
Stock-based compensation	0.13					0.07
Acquisition-related	—					0.01
Provision for income taxes	(0.07		)			(0.04		)
Non-GAAP diluted earnings per share	$	0.60				$	0.42				43	%

Non-GAAP weighted avg shares outstanding - diluted	46,087					48,490					(5	)%

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


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

	Six Months Ended										% Change
(In thousands, except per share data)	May 31, 2018					May 31, 2017					Non-GAAP
Adjusted revenue:
GAAP revenue	$	190,149				$	184,183
Acquisition-related revenue (1)	257					446
Non-GAAP revenue	$	190,406		100	%	$	184,629		100	%	3	%

Adjusted gross margin:
GAAP gross margin	$	156,603		82	%	$	151,058		82	%
Amortization of acquired intangibles	11,717			6	%	8,361			5	%
Stock-based compensation	515			1	%	551			—	%
Acquisition-related revenue (1)	257			—	%	446			—	%
Non-GAAP gross margin	$	169,092		89	%	$	160,416		87	%	5	%

Adjusted operating expenses:
GAAP operating expenses	$	117,047		62	%	$	129,552		70	%
Amortization of acquired intangibles	(6,637		)	(3	)%	(6,402		)	(3	)%
Fees related to shareholder activist	(1,472		)	(1	)%	—			—	%
Restructuring expenses and other	(2,247		)	(2	)%	(17,637		)	(10	)%
Acquisition-related expenses	(86		)	—	%	(93		)	—	%
Stock-based compensation	(9,635		)	(5	)%	(4,712		)	(2	)%
Non-GAAP operating expenses	$	96,970		51	%	$	100,708		55	%	(4	)%

Adjusted income from operations:
GAAP income from operations	$	39,556		21	%	$	21,506		12	%
Amortization of acquired intangibles	18,354			10	%	14,763			8	%
Fees related to shareholder activist	1,472			1	%	—			—	%
Restructuring expenses and other	2,247			1	%	17,637			9	%
Stock-based compensation	10,150			5	%	5,263			3	%
Acquisition-related	343			—	%	539			—	%
Non-GAAP income from operations	$	72,122		38	%	$	59,708		32	%	21	%

Adjusted diluted earnings per share:
GAAP diluted earnings per share	$	0.61				$	0.20
Amortization of acquired intangibles	0.39					0.30
Fees related to shareholder activist	0.03					—
Restructuring expenses and other	0.05					0.36
Stock-based compensation	0.21					0.11
Acquisition-related	0.01					0.01
Provision for income taxes	(0.16		)			(0.21		)
Non-GAAP diluted earnings per share	$	1.14				$	0.77				48	%

Non-GAAP weighted avg shares outstanding - diluted	46,781					48,762					(4	)%


OTHER NON-GAAP FINANCIAL MEASURES(Unaudited)

Revenue by Type

(In thousands)	Q2 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
Software licenses	$	26,439	$	18	$	26,457
Maintenance	62,323		43		62,366
Services	7,340		49		7,389
Total revenue	$	96,102	$	110	$	96,212

Revenue by Region

(In thousands)	Q2 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
North America	$	50,823	$	110	$	50,933
EMEA	35,333		—		35,333
Latin America	4,256		—		4,256
Asia Pacific	5,690		—		5,690
Total revenue	$	96,102	$	110	$	96,212

Revenue by Segment

(In thousands)	Q2 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
OpenEdge	$	69,967	$	49	$	70,016
Data Connectivity and Integration	5,788		—		5,788
Application Development and Deployment	20,347		61		20,408
Total revenue	$	96,102	$	110	$	96,212


Adjusted Free Cash Flow

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


OTHER NON-GAAP FINANCIAL MEASURES(Unaudited)

Revenue by Type

(In thousands)	YTD 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
Software licenses	$	51,782	$	37	$	51,819
Maintenance	123,802		89		123,891
Services	14,565		131		14,696
Total revenue	$	190,149	$	257	$	190,406

Revenue by Region

(In thousands)	YTD 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
North America	$	102,464	$	257	$	102,721
EMEA	68,347		—		68,347
Latin America	8,717		—		8,717
Asia Pacific	10,621		—		10,621
Total revenue	$	190,149	$	257	$	190,406

Revenue by Segment

(In thousands)	YTD 2018		Non-GAAPAdjustment (1)		Non-GAAPRevenue
OpenEdge	$	136,375	$	131	$	136,506
Data Connectivity and Integration	13,392		—		13,392
Application Development and Deployment	40,382		126		40,508
Total revenue	$	190,149	$	257	$	190,406


Adjusted Free Cash Flow

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


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

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


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

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


Fiscal Year 2018 Non-GAAP Operating Margin Guidance
	Fiscal Year Ending November 30, 2018
(In millions)	Low			High
GAAP income from operations	$	89.6		$	93.1
GAAP operating margins	22		%	23		%
Acquisition-related revenue	0.3			0.3
Acquisition-related expense	0.2			0.2
Restructuring expense	3.0			2.2
Stock-based compensation	21.0			21.0
Amortization of intangibles	36.0			36.0
Fees related to shareholder activist	1.5			1.5
Total adjustments	62.0			61.2
Non-GAAP income from operations	$	151.6		$	154.3
Non-GAAP operating margin	38		%	38		%


Fiscal Year 2018 Non-GAAP Earnings per Share and Effective Tax Rate Guidance
	Fiscal Year Ending November 30, 2018
(In millions, except per share data)	Low			High
GAAP net income	$	61.8		$	64.4
Adjustments (from previous table)	62.0			61.2
Income tax adjustment (2)	(10.3		)	(10.0		)
Non-GAAP net income	$	113.5		$	115.6

GAAP diluted earnings per share	$	1.33		$	1.39
Non-GAAP diluted earnings per share	$	2.45		$	2.50

Diluted weighted average shares outstanding	46.3			46.3

(2) Tax adjustment is based on a non-GAAP effective tax rate of approximately 22% for Low and High, calculated as follows:
Non-GAAP income from operations	$	151.6		$	154.3
Other (expense) income	(6.1		)	(6.1		)
Non-GAAP income from continuing operations before income taxes	145.5			148.2
Non-GAAP net income	113.5			115.6
Tax provision	$	32.0		$	32.6
Non-GAAP tax rate	22		%	22		%


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

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


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

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


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

View source version on businesswire.com: https://www.businesswire.com/news/home/20180627005983/en/

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