Good day, and welcome to the Progress Software Corporation Q4 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Micciche, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Sherry. Nice to have you back. Afternoon, everyone, and thanks for joining us for Progress Software Corporation'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 Nuclea, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software Corporation'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 10-Q. Progress Software Corporation 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 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.

Good afternoon, everyone, and thank you for joining us to discuss our Q4 and fiscal year FY '25 results. Fiscal year '25 was Progress Software Corporation's strongest year to date, driven by a combination of ShareFile and the strong performance of our overall product portfolio, especially during the second half of the year, which was increasingly propelled by our customers' AI projects. This resulted in annual revenue of $978 million, up 30% year over year, and earnings per share of $5.72, up 16% from fiscal year '24. Our business got stronger throughout the year, as evidenced by the fact that we exceeded the midpoint of our original revenue guidance from last January by approximately $14 million and beat our operating income guidance by 6%. We continue to meet our customers' needs in an AI-driven business world by investing and innovating across the products they rely on. This is demonstrated by our 100% net retention rate and 2% year-over-year ARR growth to $852 million, which now represents over 87% of our total revenue. For the fourth quarter, revenue finished at $253 million, up 18% year over year, right in line with our most recent guideline. Earnings of $1.51 were well above the high end of guidance, thanks yet again to excellent expense discipline and consistent execution. As Anthony will discuss in detail, cash flow remains strong, and we continue to both pay down our debt and make opportunistic share repurchases. Our balance sheet is in excellent shape, and we remain flexible and well-capitalized to execute M&A as we carry out our total growth strategy. Looking ahead, the high end of our initial guidance for FY '26 is $1 billion, a very exciting milestone for Progress Software Corporation, with unlevered free cash flow of nearly $320 million at the midpoint. Our confidence…

Great. Thanks, Yogesh. And good afternoon, everyone. We're very pleased to share our outstanding Q4 and full year 2025 results, closing out a very successful year for Progress Software Corporation. Let's get right into the numbers, starting with ARR, which we believe provides the best view into our top-line performance. We closed Q4 with ARR of $852 million, approximately 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 was driven by multiple products, including ShareFile, OpenEdge, WhatsUp Gold, and our DevTools products. And consistent with prior quarters, our net retention rate remained strong at 100%. In addition to growth in ARR and solid net retention, Q4 revenue was $253 million, up approximately 18% year over year. Our revenue strength in the quarter was broad-based, with outperformance coming from OpenEdge and ShareFile, both of which performed better than our internal expectations. For the full year, our revenue was $978 million, up $224 million or 30% over the prior year. That growth is entirely driven by a full-year contribution from ShareFile. Reflecting on 2025, we believe we made the right investments in our products, keeping them mission-critical in an AI-driven world. And this is validated by our strong customer retention and consistent ARR growth across multiple products throughout the year, a demonstration of the resilience in our portfolio. Turning now to expenses. Total costs and operating expenses were $156 million for the quarter, up 16% over the year-ago quarter, and $593 million for the full year, up 30% compared to fiscal 2024. The year-over-year increase for the quarter and for the year was entirely driven by the inclusion of a full year of ShareFile activity. Operating income for the quarter was $96 million for an operating margin…

Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of John Stephen DiFucci with Guggenheim Securities. Your line is open.

Thank you. And nice job here, guys, on this quarter. And you know, as usual, the execution is really impressive, especially seeing ShareFile here. I guess I have a bunch in my mind. I'm gonna 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. You've been 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 about 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 applications. So I wanna like, broadly speaking for software, how do you think this evolves? And I know there's no real like, no one really knows right now. How do you think? Yeah. What do you think it involves for software? And in that context, for Progress Software Corporation? Thank you.

Yeah. Absolutely, John. Thank you. And you know, 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 know, you said specifically, let me start with applications even though that's not our business. You know, I have yet to speak to a CIO of any meaningful size business who realistically is planning to write their own ERP, write their own financial system, their own HR system, like their own whatever. Right? So I think, you know, in the end, businesses are in the business of whatever business they are in, and the tools they use, applications they use to run their business, basically are, you know, a means to an end. And so unless they are a technology company themselves, I really don't see, you know, 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 application available in the market today. But then the question is how hard it is to do three things. One, get your data out of, let's say, a Salesforce or a ServiceNow or a whatever and move to the new offering, whoever that is, by the way, and they're not gonna be free either. So the question is, you know, how much effort will that be? Even more importantly, what risk will that create for the business? You know, we have seen historically when people have tried to move from one ERP to another, I mean, I remember, John, a long time ago when SAP was the appointed to by Fortune 50…

Thank you. 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. One thing sounds clear is that software companies, including Progress Software Corporation, are gonna have to embrace AI and help customers leverage it. Thanks a lot for that.

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

Awesome. Well, I'll turn it over to others and get back in the queue. Thanks.

Thanks, John.

One moment for our next question. And that will come from the line of Fatima Boolani with Citi. Your line is open.

Good afternoon. Thank you so much for taking my question. Yogesh, I wanted to drill down into the same line of questioning, riding on John's coattails a little bit. You know, the last time we had a conversation around, hey, how does Progress Software Corporation insert itself in the monetization path of AI? Because clearly, there has been a lot of considered and deliberate investment in your entire portfolio as it relates to AI and AI enablement. You know, I think one of the things you said very clearly was, you know, this should show up, you know, 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 levels, you kind of pretty consistently put up for the last four or five quarters. I wanted to ask you why we haven't seen maybe more of a meaningful uptick in that in terms of 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 is happy to chime in as well. You know, 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, you know, the vast majority of investment in AI is limited to, to be honest, a relatively small number of tech companies. A lot of other companies actually are doing things that are more around, you know, trying to leverage infrastructure that is already being built by others. And so on. So they're spending money on data centers, they're 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 reminds me of the, you know, Internet pipe laying era where everybody was saying, let's lay down dark fiber as fast as we can. And then we'll figure out how to leverage it. And if you notice, right, it took Amazon a decade to then really start getting into its stride after that. And people forget that, you know, what Amazon's trajectory was earlier. And then, of course, Amazon has been unbelievable over the last twenty 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 does accelerate.

I appreciate that nuanced perspective. Thank you, Yogesh. Anthony, maybe a more tactical one for you. You very specifically mentioned that from a revenue growth perspective in fiscal 2026, 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 2026? And maybe if you can also sneak in some commentary on some of the 4Q free cash flow performance that maybe was a little bit late from a seasonality side relative to where some broader expectations were. Thank you.

Sure. So I guess maybe the second part of that question first. Q4 was a great quarter in terms of cash flow. Q4 was also a quarter where we had a significant beat on bookings. And, you know, a lot of what we do in the quarter is back-end loaded. So as we sort of work 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 happens back-end loaded, a little bit of benefit in '25, but really where we saw it was '26. And I think you can see the growth in free cash flow in '26, you know, certainly outpacing growth in revenue or margins. And so, you know, 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, you know, I don't know that it's gonna be any different. I think ShareFile is, you know, I would say, 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.

Thank you. Very clear.

Thank you.

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

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

Yeah. Hey, Lucky. Yeah. 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, you know, 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, you know, were really what led to the uptick. I guess I would say this. As we look forward to 2026, you know, ShareFile's 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, you know, 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, you know, Q4 was a pleasant upside surprise for us on the SaaS side. I think we're, you know, we're probably, you know, looking for in '26, something that's a little more consistent with the annual results. Right? So sort of a steady up into the right growth trajectory as we go.

Gotcha. 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 change in retention rates of the targets, the software companies that you're looking at acquiring? As, you know, there are these overhanging fears of AI startups disrupting, you know, 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, you know, I mentioned that, you know, 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, you know, 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 churn. 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, from our perspective, we want to buy a business that is a solid business that we believe, you know, 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. Thanks.

Thank you.

And that will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Hi. This is Nolan Bruce Jenevein on for Ittai. Thanks for taking my question. 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. And it feels like you still have a lot of initiatives going on that, you know, 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. Thank you.

Yeah. Sure. So I guess maybe the one 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 and a half 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, you know, we end the year with roughly 39% margins, which is pretty much where we were at prior to ShareFile. And so, you know, I think, 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, you know, ultimately, as we look out into '26, you know, we're already at our target margin. That gives us an ability to make investments in other areas in the business. You know, we acquired Nuclea. We continue to make investments in AI. You know, smart investments, we think, that are gonna 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, you know, a lot of upside and a big positive for us.

Got it. Thank you so much.

Thank you. I'm showing no 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, Sherry, and thank you, everyone, for joining us. 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.