Progress Software Raises Full-Year Guidance as Data Platform Demand Accelerates in AI Era
Second Quarter 2026 Earnings Call, June 30, 2026
Progress Software delivered a strong second quarter that exceeded expectations across every metric, with management citing accelerating demand for its data platform products as enterprises increasingly recognize that context and control are essential for effective AI deployments. The company raised full-year guidance for the second consecutive quarter, driven by what CEO Yogesh Gupta characterized as broad-based strength throughout the portfolio and improved customer engagement around AI-enabled offerings.
Revenue of $253 million grew 7% year-over-year and came in well above the high end of guidance. Annual recurring revenue reached $868 million, up 2% year-over-year in constant currency, while operating margin hit 40% and earnings per share of $1.62 beat expectations. The company generated approximately $79 million in adjusted free cash flow and reported a net retention rate of 100%, up from 99% in the prior quarter.
Data Platform Emerges as AI Growth Driver
The standout performance came from Progress's data platform products, including DataDirect, Chef, and MarkLogic, as customers move beyond AI experimentation into production deployments. Gupta emphasized that successful AI outcomes depend fundamentally on leveraging enterprise data for context, noting that "AI agents are only as effective as the enterprise knowledge that underlies them." Much of this knowledge resides in disconnected systems of record and unstructured content like documents, emails, and support records.
The challenge, according to Gupta, is that simply providing all available context to AI systems becomes prohibitively expensive and counterproductive. "Token expenses rise dramatically and the accuracy of outcomes continually worsens as the context window grows for AI," he explained. Progress's Agentic RAG and data platform offerings transform fragmented business information into governed, AI-ready intelligence, significantly improving what the company calls "tokenomics" as well as the speed, accuracy and reliability of AI output.
The data and content business, which includes workflow automation capabilities, now represents more than two-thirds of Progress's total revenue. The company reported particular strength in DataDirect, Chef, MarkLogic, and LoadMaster during the quarter. Management highlighted a seven-figure deal in the prior quarter and said momentum continued through the second quarter, though specific deal metrics were not disclosed.
NVIDIA Partnership Extends Infrastructure Management to AI Edge
Progress announced a partnership with NVIDIA on the day of the earnings call, launching Chef Enterprise Management for NVIDIA's DGX Spark, described by NVIDIA as the world's smallest AI supercomputer. As these systems proliferate across offices, research facilities, edge locations and secure facilities, organizations need to manage them with the same rigor as other critical infrastructure. NVIDIA identified Progress and its Chef platform as a critical enterprise manageability partner for DGX Spark deployments.
This partnership underscores Progress's broader strategy to help organizations develop, deploy and manage AI securely across data, digital experiences and underlying infrastructure. The company positions itself uniquely across three foundational software layers that remain critical in an AI-driven world: business logic and workflows, data and content, and security and infrastructure management.
Balance Sheet Strengthening Continues
CFO Anthony Folger reported significant progress on deleveraging, with the company paying down another $50 million of debt in the second quarter. Combined with first quarter actions, Progress has reduced debt by approximately $110 million during the first half of fiscal 2026. The net leverage ratio improved to 2.9x on a trailing twelve-month basis, down from 3.4x at the beginning of the fiscal year.
The company's convertible notes totaling $360 million matured in April and were paid using the revolving credit facility. Total debt now consists of $850 million drawn on the revolver and $450 million in convertible notes due in 2030. Progress ended the quarter with $103 million in cash and $650 million in unused revolver capacity.
Collections improved significantly, with days sales outstanding declining to 49 days from 53 days in the year-ago quarter. Much of the improvement stems from cleanup work following the ShareFile acquisition, which had extended receivables and depressed cash flow in the second quarter of fiscal 2025. Adjusted free cash flow of $79 million in the quarter compared to just $37 million in the prior year period. First half adjusted free cash flow totaled $178 million, reflecting strong operating performance and improved collections spanning both quarters.
Capital Allocation Shifts Slightly Toward Buybacks
Management updated its capital allocation plan to reflect current valuation levels. The company now expects to repay approximately $220 million of net debt for the full year and repurchase approximately $75 million of shares, up from the initial plan. Folger stated that at current valuation levels, Progress shares represent an attractive value, justifying the allocation of additional capital toward repurchases while maintaining aggressive deleveraging. The company has approximately $148 million remaining under its current share repurchase authorization.
Progress expects to end the year with approximately $740 million drawn on the revolving credit facility and a net leverage ratio of approximately 2.8x. The capital allocation strategy remains unchanged in priority: first, reduce leverage and strengthen the balance sheet, and second, repurchase shares when valuation presents an attractive opportunity.
M&A Pipeline Improving as Seller Expectations Reset
Gupta offered cautiously optimistic commentary on the M&A environment, noting that potential sellers are beginning to adjust their expectations after several quarters of disconnect between seller pricing and market reality. "We're beginning to see folks going, yes, we understand that the software industry is being reset in terms of valuations," he said, adding that the company speaks to 50 to 60 potential targets every quarter.
While seller expectations have not completely reset, Gupta characterized the movement as meaningful. The company remains disciplined on return thresholds and continues to prioritize AI relevance as a key criterion when evaluating acquisition targets. Progress is comfortable pursuing acquisitions in the 10% to 25% range of its revenue base, similar in scale to the ShareFile acquisition, and is open to cloud-based businesses provided they demonstrate strong future AI relevance.
With approximately $750 million in available capacity between the revolver and cash on hand, Progress believes it can execute on attractive opportunities without expanding its credit facility, though management noted they would consider exceptions for uniquely compelling transactions.
Guidance Raised Across All Metrics
For the third quarter of fiscal 2026, Progress expects revenue between $244 million and $250 million, with earnings per share of between $1.53 and $1.59. The third quarter guidance reflects some deal timing dynamics, as Folger noted that slightly more than half the second quarter beat was attributable to deals that closed earlier than expected.
For the full year, the company raised its outlook and now expects revenue between $990 million and just over $1 billion, an increase of $2 million from prior guidance, reflecting approximately 1% to 2.5% growth over fiscal 2025. Operating margin is expected to be approximately 39% for the year. Adjusted free cash flow guidance increased to between $271 million and $283 million, with unlevered free cash flow of between $323 million and $334 million. Earnings per share guidance increased by $0.18 to a range of $6.09 to $6.21.
The full year EPS guidance assumes a 20% tax rate, the repurchase of approximately $75 million in Progress shares, total debt repayment of approximately $220 million, and approximately 42 million weighted shares outstanding.
Management emphasized that first half revenue growth of more than 5%, including 7% in the second quarter, was partially influenced by deal timing. The company continues to view ARR, which grew 2% year-over-year, as the clearest indicator of underlying top line momentum. That 2% organic growth rate remains the level where management feels confident about the business going forward, driven by a combination of volume and capacity-based expansion rather than pricing increases.
Regarding contract duration, Folger noted that despite widespread industry discussion about companies reevaluating their software portfolios in light of AI, Progress has not seen any shortening of contract terms. Deals that previously came in at three-year or five-year durations continue to renew for similar periods, suggesting customers view Progress's offerings as mission-critical and durable regardless of the evolving technology landscape.