What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-04-05 compared with 2020-10-08 · 165 added, 218 removed, 252 unchanged (60% of the section changed)

17 unchanged sentences

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements.

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees

from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.

Actual future results may differ materially.

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(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.

(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.

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(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, including our acquisition of Chef, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations.

(9) Failure to recognize the benefits of the proposed acquisition of Chef could negatively impact our future results of operations and financial condition;

(10) The coronavirus disease (COVID-19) outbreak and the impact it could have on our employees, customers, partners, and the global financial markets could adversely affect our business, results of operations and financial condition.

For further information regarding risks and uncertainties associated with Progress' business, please refer to Progress' filings with the Securities and Exchange Commission, including its 2019 10-K.

(7) If the security measures for our software, services, other offerings or our internal information technology infrastructure are compromised or subject to a successful cyber-attack, or if our software 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.

(9) Delay or failure to realize the expected synergies and benefits of the Chef acquisition could negatively impact our future results of operations and financial condition;

(10) The continuing impact of the coronavirus disease (COVID-19) outbreak on our employees, customers, partners, and the global financial markets could adversely affect our business, results of operations and financial condition.

For further information regarding risks and uncertainties associated with Progress' business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our 2020 10-K.

Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized.

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We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.

Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") 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, the flexibility of a cloud-native app dev platform to deliver modern apps, leading data connectivity technology, web content management, business rules, secure file transfer and network monitoring.

Over 1,700 independent software vendors, 100,000 enterprise customers, and two million developers rely on Progress to power their applications.

Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact business applications.

Our comprehensive product stack is designed to make technology teams more productive and we have a deep commitment to the developer community, both open source and commercial alike.

With Progress, organizations can accelerate the creation and delivery of strategic business applications, automate the process by which apps are configured, deployed and scaled, and make critical data and content more accessible and secure—leading to

competitive differentiation and business success.

Over 1,700 independent software vendors, 100,000 enterprise customers, and three million developers rely on Progress to power their applications.

We operate as three distinct segments:

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The key tenets of our strategic plan and operating model are as follows:

Align Resources to Drive Profitability .

Our organizational philosophy and operating principles focus primarily on customer and partner retention and success for our products and a streamlined operating approach in order to more efficiently drive revenue.

Protect and Strengthen Our Core Business .

A key element of our strategy is centered on providing the platform and tools enterprises need to build modern, strategic business applications.

Trusted Partner of the Best Products to Develop, Deploy and Manage High Impact Business Applications .

A key element of our strategy is centered on providing the platform and tools enterprises needed to build modern, strategic business applications.

We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems.

This strategy builds on our inherent DNA and our vast experience in application development that we've acquired over the past 40 years.

Our offerings enable developers to build the most modern applications quickly and easily, and include:

◦ our OpenEdge software, which provides a unified development environment consisting of development tools, application servers, application management tools, an embedded relational database management system and the capability to connect and integrate with other applications and data sources;

◦ our leading UI development tools, which enable organizations to easily build engaging user interfaces for any device or front end;

◦ our data connectivity and integration offerings;

◦ our business logic and rules offerings;

◦ our secure file transfer solutions, which provide secure collaboration and automated file transfers of sensitive data and advanced workflow automation offerings;

◦ our network management offerings, which enable small and medium-sized businesses to monitor and manage their IT infrastructure and applications;

◦ web content management for delivering personalized and engaging digital experiences.

Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability .

Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operating approach in order to more efficiently drive predictable and stable recurring revenue.

Total Growth Strategy Driven by Accretive M&A.

We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the software infrastructure space, with products that appeal to both IT organizations and individual developers.

These acquisitions must meet strict financial criteria, which will enable us to drive significant stockholder returns by providing scale and increased cash flows.

As described below, in April 2019, we acquired Ipswitch in a transaction that met these strict financial criteria.

In addition, and as described below, in October 2020, we acquired Chef Software in a transaction that we expect will meet these strict financial criteria.

These acquisitions must meet strict financial and other criteria, which should enable us to drive significant stockholder returns by providing scale and increased cash flows.

In April 2019, we acquired Ipswitch, Inc.

and as described below, in October 2020, we acquired Chef Software.

Both acquisitions have met these strict financial criteria.

Chef is a global leader in providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises.

The purchase price for Chef was $220 million and we funded the purchase price with a combination of existing cash balances and drawings under our revolving credit facility.

Chef is the developer of Chef Enterprise Automation Stack, automating infrastructure, compliance and application delivery for many of the Fortune 500.

Holistic Capital Allocation Approach .

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In January 2020, our Board of Directors increased the total share repurchase authorization from $75.0 million to $250.0 million.

We repurchased and retired 0.4 million shares of our common stock for $20.0 million in the nine months ended August 31, 2020.

We repurchased and retired 0.4 million shares of our common stock for $15.0 million in the three months ended February 28, 2021.

The shares were repurchased as part of our Board of Directors authorized share repurchase program.

As of August 31, 2020, there was $230.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend to $0.14 per share in September 2017.

In September 2018, the quarterly cash dividend was increased to $0.155 per share of common stock.

On September 24, 2019, our Board of Directors approved an additional increase to our quarterly cash dividend from $0.155 to $0.165 per share of common stock.

As of February 28, 2021, there was $175.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend in fiscal years 2017, 2018 and 2019.

On September 23, 2020, our Board of Directors approved an additional 6% increase to our quarterly cash dividend from $0.165 to $0.175 per share of common stock.

On September 23, 2020, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on December 15, 2020 to shareholders of record as of the close of business on December 1, 2020.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

On March 23, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on June 15, 2021 to shareholders of record as of the close of business on June 1, 2021.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

In furtherance of our acquisition strategy, on April 30, 2019, we acquired all of the outstanding equity interests of Ipswitch, a provider of award-winning and easy-to-use secure data file transfer and network management software, for an aggregate purchase price of approximately $225.0 million.

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We expect to continue to evaluate possible acquisitions designed to expand our business and drive significant stockholder returns.

As a result, our expected uses of cash could change, our cash position could be reduced, and we may incur additional

debt obligations to the extent we complete additional acquisitions.

As a result, our expected uses of cash could change, our cash position could be reduced, and we may incur additional debt obligations to the extent we complete additional acquisitions.

However, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through at least the next twelve months.

We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future, which has included reductions in revenue and delays in payments from customers and partners.

The challenges posed by COVID-19 on our business continues to evolve rapidly.

We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future.

The challenges posed by COVID-19 on our business continues to evolve.

Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.

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Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in fiscal year 2021 have been impacted by fluctuations in foreign currency exchange rates.

We currently report results based on three business segments.

We are in the process of updating how we allocate resources and assess performance, which will affect our determination of business segments.

Although this process has not been completed, we anticipate that we will begin operating as one distinct segment during the fiscal second quarter ending May 31, 2021 based on expected updates to how our management internally analyzes our business.

Once we have completed our update, we will begin reporting any updates to our segments.

Select Performance Metrics:

Management evaluates our financial performance using a number of financial and operating metrics.

These metrics are periodically reviewed and revised to reflect changes in our business.

Annual Recurring Revenue (ARR)

Beginning this period, we are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years.

ARR represents the annualized contract value for all active and contractually binding term-based contracts at the end of a period.

ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions and managed services.

ARR mitigates fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS.

ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies.

ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items.

ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

We define ARR as the annual recurring revenue of term-based contracts from all customers at a point in time.

We calculate ARR by taking monthly recurring revenue, or MRR, and multiplying it by 12.

MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions.

Our ARR was $432 million and $355 million as of February 28, 2021 and 2020, respectively, which is an increase of 21.7% year-over-year.

The growth in our ARR is primarily driven by the acquisition of Chef.

Net Dollar Retention Rate

We calculate net dollar retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end (“Prior Period ARR”).

We then calculate the ARR from these same customers as of the current period end (“Current Period ARR”).

Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period.

We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net dollar retention rate.

Our net dollar retention rates were 98.8% and 99.1% for the trailing twelve months ended February 28, 2021 and 2020, respectively.

Our high net dollar retention rates illustrate our predictable and durable top line performance.

Results of Operations

Three Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

Reported Constant

Revenue $ 109,699 $ 106,716 3 % 3 %

Nine Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant

Revenue $ 121,280 $ 109,683 11 % 9 %

Total revenue increased in both the three and nine month periods ended August 31, 2020 compared to the corresponding periods in 2019, primarily due to the acquisition of Ipswitch, which was reflected in our results for the final seven months of fiscal 2019, partially offset by a decrease in license sales in our Data Connectivity and Integration segment.

Ipswitch revenue was $17.6 million and $50.1 million for the third quarter and first nine months of fiscal year 2020, respectively.

Ipswitch revenue was $10.7 million and $14.0 million for the third quarter and first nine months of fiscal year 2019, respectively.

Total revenue increased compared to the same quarter last year primarily due to our acquisition of Chef in the fourth quarter of fiscal year 2020, as well as increases in our OpenEdge and Ipswitch product lines.

Chef revenue was $12.0 million in our first fiscal quarter of 2021.

These increases were offset by lower license revenue in our Data Connectivity and Integration segment.

Software License Revenue

Three Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

Reported Constant

Software Licenses $ 27,514 $ 30,686 (10) % (10) %

As a percentage of total revenue 25 % 29 %

Nine Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant

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As a percentage of total revenue 27 % 28 %

Software license revenue decreased compared to the same periods last year primarily due to a decrease in license sales in our Data Connectivity and Integration and Application Development and Deployment segments, partially offset by an increase in Ipswitch license sales, which are included in our OpenEdge segment.

Software license revenue increased compared to the same period last year primarily due to our acquisition of Chef and increases in license sales in our OpenEdge segment, partially offset by a decrease in license sales in our Data Connectivity and Integration segment.

Refer to the Revenue by Segment section below for further discussion.

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Three Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

Reported Constant

Maintenance $ 72,764 $ 67,611 8 % 8 %

As a percentage of total revenue 66 % 63 %

Services 9,421 8,419 12 % 11 %

As a percentage of total revenue 9 % 8 %

Total maintenance and services revenue $ 82,185 $ 76,030 8 % 8 %

As a percentage of total revenue 75 % 71 %

Nine Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant

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As a percentage of total revenue 73 % 72 %

Maintenance and services revenue increased in all periods due to our acquisition of Ipswitch.

The increase in services revenue was also driven by our Application Development and Deployment segment.

Maintenance and services revenue both increased compared to the same quarter last year primarily due to our acquisition of Chef and increased maintenance revenue from our OpenEdge segment.

Revenue by Region

Three Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant

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As a percentage of total revenue 5 % 5 %

Nine Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

Reported Constant

North America $ 184,904 $ 163,766 13 % 13 %

As a percentage of total revenue 58 % 55 %

EMEA $ 106,592 $ 102,114 4 % 5 %

As a percentage of total revenue 33 % 34 %

Latin America $ 10,893 $ 14,039 (22) % (11) %

As a percentage of total revenue 4 % 5 %

Asia Pacific $ 17,376 $ 16,341 6 % 8 %

As a percentage of total revenue 5 % 6 %

Total revenue generated in North America increased by $2.7 million and $21.1 million for the three and nine month periods ended August 31, 2020, compared to the corresponding periods in 2019, primarily due to our acquisition of Ipswitch, offset by

decreased license sales in our Data Connectivity and Integration segment.

The increase in revenue generated in EMEA in all periods was also due to our acquisition of Ipswitch.

Revenue in Latin America decreased in all periods primarily due to the effect of foreign exchange rates.

Revenue in Asia Pacific remained flat in the three month period ended August 31, 2020 compared to the same quarter last year.

The increase in revenue generated in Asia Pacific in the nine month period ended August 31, 2020 was primarily due to an increase in OpenEdge maintenance and services revenue, driven by our acquisition of Ipswitch.

In the first nine months of fiscal year 2020, revenue generated in markets outside North America represented 42% of total revenue compared to 43% of total revenue on a constant currency basis and 45% of total revenue in the same period last year.

Total revenue generated in North America increased $6.1 million, primarily due to our acquisition of Chef and increased OpenEdge segment maintenance revenue, partially offset by decreased license sales in our Data Connectivity and Integration segment.

The increase in revenue generated in both EMEA and Asia Pacific was primarily due to increases in our OpenEdge segment as well as our acquisition of Chef.

The increase in EMEA was also partially offset by decreased license sales in our Data Connectivity and Integration segment.

Revenue in Latin America decreased due to lower maintenance revenue in our OpenEdge segment.

In the first three months of fiscal years 2021 and 2020, revenue generated in markets outside North America represented 41% of total revenue compared to 40% of total revenue on a constant currency basis.

Revenue by Segment

Three Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

Reported Constant Currency

OpenEdge segment $ 85,794 $ 78,607 9 % 9 %

Data Connectivity and Integration segment 4,468 8,754 (49) % (49) %

Application Development and Deployment segment 19,437 19,355 — % — %

Total revenue $ 109,699 $ 106,716 3 % 3 %

Nine Months Ended % Change

(In thousands) August 31, 2020 August 31, 2019 As

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant Currency

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Total revenue $ 121,280 $ 109,683 11 % 9 %

Revenue in our OpenEdge segment increased in all periods primarily due to our acquisition of Ipswitch.

Data Connectivity and Integration revenue decreased in all periods due to the timing of term license renewals by certain of our OEM partners.

Application Development and Deployment revenue increased in all periods shown primarily due to higher professional services and maintenance revenues, offset by lower license revenues.

Revenue in our OpenEdge segment increased primarily due to higher OpenEdge license sales as well as increased Ipswitch product line revenue.

Data Connectivity and Integration revenue decreased due to the timing of term license renewals by certain of our OEM partners.

Application Development and Deployment revenue increased due to our acquisition of Chef.

Cost of Software Licenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 % Change August 31, 2020 August 31, 2019 % Change

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 Change

Cost of software licenses $ 1,151 $ 1,389 $ (238) (17) %

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Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging.

The decrease in cost of software licenses in the three month period ending August 31, 2020, compared to the corresponding period in 2019, was the result of lower payments of royalties to third parties as compared to the prior period.

Cost of software licenses remained flat in the nine month period ended August 31, 2020 as compared to the same period in 2019.

The year over year decrease was the result of lower payments of royalties to third parties as compared to the prior period.

Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 Change August 31, 2020 August 31, 2019 Change

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 Change

Cost of maintenance and services $ 13,319 $ 11,851 $ 1,468 12 %

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Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education.

Cost of maintenance and services in the three month period ending August 31, 2020 as compared to the prior year period remained flat.

The increase in the nine month period ending August 31, 2020 as compared to the prior year period was primarily due to personnel related costs resulting from our acquisition of Ipswitch and increased contractor costs associated with professional services costs.

The year over year increase was primarily due to increased headcount resulting from our acquisition of Chef and increased hosting costs.

Amortization of Intangibles

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Amortization of intangibles $ 3,521 $ 1,646 114 %

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Amortization of intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations.

The year over year decrease in all periods was due to certain intangible assets being fully amortized and the impairment of intangible assets recorded in the fourth fiscal quarter of 2019 associated with the technology of our Kinvey and DataRPM acquisitions.

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

The year over year increase was primarily due to the acquisition of Chef in the fourth quarter of 2020.

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Gross profit $ 103,289 $ 94,797 9 %

As a percentage of total revenue 85 % 86 %

Our gross profit increased in both periods primarily due to the increase in maintenance revenue and the decrease in the amortization of intangibles, offset slightly by the decrease of license revenue and increase of cost of maintenance and services, each as described above.

Our gross profit increased primarily due to the increase in revenue, offset by the increase of costs of maintenance and services and the amortization of intangibles, each as described above.

Sales and Marketing

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Change August 31, 2020 August 31, 2019

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Sales and marketing $ 29,469 $ 24,198 $ 5,271 22 %

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Total sales and marketing $ 29,469 $ 24,198 $ 5,271 22 %

Sales and marketing expenses decreased in both periods shown as compared to the corresponding periods last year.

For the three and nine month periods ended August 31, 2020, the change as compared to the same periods in 2019 was due to decreased travel and in-person events resulting from restrictions related to the COVID-19 pandemic, as well as cost reductions resulting from our decision to reduce our current and ongoing investment levels within our cognitive application product lines in the fourth quarter of fiscal year 2019.

These decreases were partially offset by increased costs resulting from the acquisition of Ipswitch on April 30, 2019.

Sales and marketing expenses increased year over year primarily due to increased personnel related costs associated with our acquisition of Chef.

Product Development

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Change August 31, 2020 August 31, 2019 Change

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Product development costs $ 24,548 $ 21,654 $ 2,894 13 %

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Total product development costs $ 24,548 $ 21,654 $ 2,894 13 %

Product development expenses decreased in both periods presented as compared to the same periods last year primarily due to decreased travel resulting from restrictions related to the COVID-19 pandemic, and cost reductions resulting from our decision to reduce our current and ongoing investment levels within our cognitive application product lines in the fourth quarter of fiscal year 2019.

Product development expenses increased as compared to the same period last year primarily due to increased personnel related costs associated with our acquisition of Chef.

General and Administrative

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Change August 31, 2020 August 31, 2019 Change

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

General and administrative $ 13,424 $ 12,748 $ 676 5 %

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General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments.

General and administrative expenses remained flat during the three month period ended August 31, 2020 as compared to the same quarter last year.

General and administrative expenses increased during the nine month period ended August 31, 2020 as compared to the same period last year primarily due to higher outside services and contractor costs.

General and administrative expenses increased as compared to the same quarter last year primarily due to higher personnel costs associated with our acquisition of Chef, partially offset by decreased other general and administrative costs.

Amortization of Intangibles

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Amortization of intangibles $ 6,879 $ 4,131 67 %

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Amortization of intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology.

Amortization of intangibles decreased in all periods presented compared to the corresponding period in 2019 due to certain intangible assets being fully amortized and the impairment of intangible assets, as discussed above.

Amortization of intangibles increased compared to the corresponding period in 2020 due to the addition of Chef intangible assets in the fourth quarter of 2020, as discussed above.

Restructuring Expenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Restructuring expenses $ 1,157 $ 1,040 11 %

As a percentage of total revenue 1 % 1 %

Restructuring expenses recorded in the first nine months of fiscal year 2020 relate primarily to the restructuring activities that occurred in fiscal year 2019.

See Note 13 to the condensed consolidated financial statements for additional details, including types of expenses incurred and the timing of future expenses and cash payments.

See also the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Restructuring expenses recorded in the first three months of fiscal year 2021 relate primarily to the restructuring activities that occurred in the fourth quarter of fiscal year 2020 relating to the acquisition of Chef.

Restructuring expenses recorded in the first three months of fiscal year 2020 are comprised mostly of costs related to the Ipswitch and Cognitive restructuring actions of 2019.

See the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Acquisition-Related Expenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Acquisition-related expenses $ 396 $ 314 26 %

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These costs consist of professional service fees, including third-party legal and valuation-related fees.

Acquisition-related expenses in both the third quarter and first nine months of fiscal year 2020 increased compared to the same periods in 2019 and were primarily related to the acquisition of Chef, which was completed on October 5, 2020.

Acquisition-related expenses in both the third quarter and first nine months of fiscal year 2019 were related to the acquisition of Ipswitch.

Acquisition-related expenses in increased slightly compared to the same period in 2020 and were related to the acquisition of Chef, which was completed in the

fourth quarter of 2020.

Acquisition-related expenses in the same period of fiscal year 2020 were related to the acquisition of Ipswitch.

Income from Operations

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Income from operations $ 27,416 $ 30,712 (11) %

As a percentage of total revenue 23 % 28 %

Income from operations increased year over year in both periods due to an increase in revenue and decreases in costs of revenue and operating expenses as shown above.

Income from operations decreased year over year due to an increase in costs of revenue and operating expenses, offset by increases in revenue as shown above.

Income from Operations by Segment

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

OpenEdge segment $ 65,687 $ 57,329 15 %

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Other (Expense) Income, Net

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Interest expense $ (2,514) $ (2,792) 10 %

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As a percentage of total revenue (2) % (3) %

Other expense, net, decreased in the three month period ended August 31, 2020 as compared to the same period in the prior year is a result of lower interest expense due to declining interest rates and a lower principal balance on outstanding debt in the period.

Other expense, net, increased in the nine month period ended August 31, 2020 due to an increase in interest expense

resulting from an increase in the principle balance of our debt in the second quarter of fiscal year 2019 to fund the Ipswitch acquisition, offset by declining rates throughout fiscal year 2020.

Provision (Benefit) for Income Taxes

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Other expense, net, decreased in the three month period ended February 28, 2021 as compared to the same period in the prior year.

This is a result of a lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts and lower interest expense due to declining interest rates.

Provision (Benefit) for Income Taxes

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Provision for income taxes $ 5,803 $ 6,199 (6) %

As a percentage of total revenue 5 % 6 %

Our effective tax rate was 21% in the third fiscal quarter of 2020 compared to (11)% in the third fiscal quarter of 2019.

Our effective tax rate was 22% in the nine month period ended August 31, 2020 compared to 18% in the same period of 2019.The primary reason for the increase in effective rate is that during the preparation of our financial statements for the three months ended August 31, 2019, we identified an error in our income tax provisions for the first and second quarters of fiscal year 2019 related to the tax treatment of an intercompany sale of intellectual property that occurred in fiscal year 2018.

As a result of the error, income tax expense was overstated by $1.1 million and $2.5 million during the first and second quarters of fiscal year 2019, respectively.

We determined that the error was not material to the first and second quarters of fiscal year 2019 and corrected the error by recording an out of period $3.6 million tax benefit in our financial statements for the period ended August 31, 2019.

If the error had not occurred, the effective tax rate in the third quarter of fiscal year 2019 would have been 18%.

The primary reason why the effective tax rate would have been lower in fiscal year 2019 versus fiscal year 2020 is due to a shift in a significant amount of income from a low tax jurisdiction to the United States from fiscal year 2019 to fiscal year 2020.

Three Months Ended Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019 %

Change August 31, 2020 August 31, 2019 %

Our effective tax rate was 23% in both the first fiscal quarter of 2021 and the first fiscal quarter of 2020.

There were no significant discrete tax items in either the first fiscal quarter of 2021 or the first fiscal quarter of 2020.

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Net income $ 18,961 $ 21,116 (10) %

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Cash, Cash Equivalents and Short-Term Investments

(In thousands) August 31, 2020 November 30, 2019

(In thousands) February 28, 2021 November 30, 2020

Cash and cash equivalents $ 107,698 $ 97,990

1 unchanged sentence

Total cash, cash equivalents and short-term investments $ 114,371 $ 105,995

The increase in cash, cash equivalents and short-term investments of $56.4 million from the end of fiscal year 2019 was due to cash inflows from operations of $102.1 million, $5.0 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $2.7 million.

These cash inflows were offset by repurchases of common stock of $20.0 million, dividend payments of $22.4 million, payments of debt obligations in the amount of $7.5 million, and purchases of property and equipment of $3.4 million.

The increase in cash, cash equivalents and short-term investments of $8.4 million from the end of fiscal year 2020 was due to cash inflows from operations of $44.7 million, $2.6 million in cash received from the issuance of common stock, a decrease in other noncurrent assets of $2.1 million, and the effect of exchange rates on cash of $1.8 million.

These cash inflows were offset by payments of debt obligations in the amount of $18.8 million, repurchases of common stock of $15.0 million, dividend payments of $7.9 million, and purchases of property and equipment of $1.2 million.

Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments.

As of August 31, 2020, $25.1 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

As of February 28, 2021, $30.6 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S.

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In January 2020, our Board of Directors increased the total share repurchase authorization from $75.0 million to $250.0 million.

We repurchased and retired 0.4 million shares of our common stock for $20.0 million in the nine months ended

August 31, 2020 and 0.7 million shares for $25.0 million in the nine months ended August 31, 2019.

We did not repurchase and retire any shares of our common stock in the three month periods ended August 31, 2020 and August 31, 2019.

We repurchased and retired 0.4 million shares of our common stock for $15.0 million in the three months ended

February 28, 2021 and 0.4 million shares for $20.0 million in the three months ended February 29, 2020.

The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program.

As of August 31, 2020, there was $230.0 million remaining under the current authorization.

As of February 28, 2021, there was $175.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend to $0.14 per share in September 2017.

1 unchanged sentence

On September 24, 2019, our Board of Directors approved an additional increase to our quarterly cash dividend from $0.155 to $0.165 per share of common stock.

On September 23, 2020, our Board of Directors approved an additional increase to our quarterly cash dividend from $0.165 to $0.175 per share of common stock

On September 23, 2020, our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from $0.165 to $0.175 per share of common stock.

On January 12, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on March 15, 2021 to stockholders of record as of the close of business on March 1, 2021.

On March 18, 2020, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock that was paid on June 15, 2020 to shareholders of record as of the close of business on June 1, 2020.

On June 23, 2020, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock that was paid on September 15, 2020 to shareholders of record as of the close of business on September 1, 2020.

Restructuring Activities

During the second quarter of fiscal year 2019, we restructured our operations in connection with the acquisition of Ipswitch.

This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Ipswitch.

We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2020, but we do not expect these costs to be material.

Costs incurred related to this restructuring event were minimal during the three months ended August 31, 2020.

For the nine months ended August 31, 2020, we incurred expenses of $1.4 million related to this restructuring, which are recorded as restructuring expenses in the consolidated statements of operations.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2020.

We do not expect to incur additional material costs with respect to this restructuring.

During the fourth quarter of fiscal year 2019, we announced the reduction of our current and ongoing investment level within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products.

This restructuring resulted in a reduction in positions primarily within the sales and product development functions.

We did not incur any expenses related to this restructuring in the three months ended August 31, 2020.

For the nine months ended August 31, 2020, we incurred expenses of $0.1 million related to this restructuring, which are recorded as restructuring expenses in the consolidated statements of operations.

During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef (Note 6).

This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef.

For the three months ended February 28, 2021, we incurred expenses of $0.9 million relating to this restructuring.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2021.

We do not expect to incur additional material costs with respect to this restructuring.

Accordingly, the balance of the restructuring reserve of $1.9 million is included in other accrued liabilities on the consolidated balance sheet at February 28, 2021.

We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2021, but we do not expect these costs to be material.

Credit Facility

6 unchanged sentences

The revolving line of credit does not require amortization of principal.

The outstanding balance of the term loan as of August 31, 2020 was $289.7 million, with $16.9 million due in the next 12 months.

The outstanding balance of the term loan as of February 28, 2021 was $282.2 million, with $20.7 million due in the next 12 months.

The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended August 31, 2019.

The principal repayment amounts are in accordance with the following schedule:

(i) four payments of $1.9 million each, (ii) four payments of $3.8 million each, (iii) four payments of $5.6

million each, (iv) four payments of $7.5 million each, (v) three payments of $9.4 million each, and (vi) the last payment is of the remaining principal amount.

(i) four payments of $1.9 million each, (ii) four payments of $3.8 million each, (iii) four payments of $5.6 million each, (iv) four payments of $7.5 million each, (v) three payments of $9.4 million each, and (vi) the last payment is of the remaining principal amount.

Any amounts outstanding under the term loan thereafter would be due on the maturity date.

The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium.

The interest rate as of August 31, 2020 was 1.81%.

The interest rate as of February 28, 2021 was 1.75%.

Revolving loans may be borrowed, repaid, and reborrowed until April 30, 2024, at which time all amounts outstanding must be repaid.

As of August 31, 2020, there were no amounts outstanding under the revolving line of credit and $1.9 million of letters of credit.

On October 1, 2020, we utilized in full the revolving line of credit to partially fund our acquisition of Chef Software (Note 17).

During October 2020, we partially funded our acquisition of Chef by drawing down $98.5 million under the revolving line of credit (Note 6).

During the first fiscal quarter of 2021, we paid down $15.0 million on the revolving line of credit.

As of February 28, 2021, there was $83.5 million outstanding under the revolving line of credit and $2.1 million of letters of credit.

The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type.

We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio.

We are in compliance with these financial covenants as of August 31, 2020.

We are in compliance with these financial covenants as of February 28, 2021.

Cash Flows from Operating Activities

Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Net income $ 18,961 $ 21,116

2 unchanged sentences

Net cash flows from operating activities $ 44,688 $ 33,016

The year over year increase in cash generated from operations was primarily due to higher operating income.

Our gross accounts receivable as of August 31, 2020 decreased by $12.3 million from the end of fiscal year 2019 and our days sales outstanding (DSO) in accounts receivable decreased to 49 days from 53 days in the fiscal third quarter of 2019 due to the timing of billings and collections.

The year over year increase in cash generated from operations was primarily due to particularly strong collections of our receivables, partially offset by increased expenses.

Our gross accounts receivable as of February 28, 2021 decreased by $7.0

million from the end of fiscal year 2020 and our days sales outstanding (DSO) in accounts receivable increased to 53 days from 49 days in the fiscal first quarter of 2020 due to the timing of billings and collections.

Cash Flows from (used in) Investing Activities

Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Net investment activity $ 1,300 $ 3,508

Proceeds from sale of property, plant and equipment, net — 6,146

Purchases of property and equipment (1,166) (1,148)

Payments for acquisitions, net of cash acquired — (225,298)

Net cash flows from (used in) investing activities $ 6,473 $ (208,102)

Decrease in escrow receivable 2,130 —

Net cash flows from investing activities $ 2,264 $ 2,360

Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities.

We acquired Ipswitch for a net cash amount of $225.3 million in the second quarter of fiscal year 2019, which is driving the change in investing cash flows for the nine months ended August 31, 2019.

In addition, we purchased $3.4 million of property and equipment in the first nine months of fiscal year 2020, as compared to $1.8 million in the first nine months of fiscal year 2019.

We also sold $6.1 million of certain corporate land and building assets in the first nine months of fiscal year 2019.

We also purchased $1.2 million of property and equipment in the first three months of fiscal year 2021, as compared to $1.1 million in the first three months of fiscal year 2020.

Cash Flows (used in) from Financing Activities

Nine Months Ended

(In thousands) August 31, 2020 August 31, 2019

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Proceeds from stock-based compensation plans $ 3,485 $ 4,245

Proceeds from the issuance of debt — 184,984

Repurchases of common stock (15,000) (20,000)

Payment of principle on long-term debt (7,525) (3,427)

Payment of principal on long-term debt (18,763) (1,882)

Dividend payments to shareholders (7,854) (7,468)

Other financing activities (892) (1,949)

Net cash flows (used in) from financing activities $ (44,928) $ 138,837

During the first nine months of fiscal year 2020, we received $9.0 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $6.3 million in the first nine months of fiscal year 2019.

In addition, in the first nine months of fiscal year 2020, we did not receive any proceeds from the issuance of debt as compared to $185.0 million in the same period of the prior year to fund the acquisition of Ipswitch.

Net cash flows used in financing activities $ (39,024) $ (27,054)

During the first three months of fiscal year 2021, we received $3.5 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $4.2 million in the first three months of fiscal year 2020.

Further, we repurchased $15.0 million of our common stock under our share repurchase plan compared to $20.0 million in the same period of the prior year.

We also made principal payments on our long-term debt of $7.5 million in the first nine months of fiscal year 2020 compared to $3.4 million in the same period of the prior year.

Finally, we made dividend payments of $22.4 million to our shareholders during the first nine months of fiscal 2020, as compared to $20.8 million in the first nine months of fiscal 2019.

We also made payments on our long-term debt of $18.8 million (including a $15.0 million repayment on the revolving line of credit) in the first three months of fiscal year 2021 compared to $1.9 million in the same period of the prior year.

Finally, we made dividend payments of $7.9 million to our shareholders during the first three months of fiscal 2021, as compared to $7.5 million in the first three months of fiscal 2020.

Indemnification Obligations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis