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Item 7. Management’s Discussion and Analysis

2022-01-27 compared with 2021-01-27 · 187 added, 450 removed, 272 unchanged (70% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Progress Software Corporation.

MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

This section generally discusses the results of our operations for the year ended November 30, 2021 compared to the year ended November 30, 2020.

For a discussion of the year ended November 30, 2020 compared to the year ended November 30, 2019, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended November 30, 2020, as amended.

Forward-Looking Statements

Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions.

Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A.

Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Part I, Item 1A.

“Risk Factors” of this Annual Report on Form 10-K.

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and the world.

COVID-19 has disrupted the business of our customers and partners, and negatively impacted our business and consolidated results of operations, and could impact our financial condition in the future.

We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K.

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") provides the best products to develop, deploy and manage high-impact business applications.

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

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

We operate as three distinct segments:

OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.

Beginning in the second quarter of fiscal year 2021, we operate as one operating segment.

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

Trusted Provider 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 need to build modern, strategic business applications.

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

A key element of our strategy is centered on providing the platform and tools enterprises need to build, deploy, and manage 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.

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

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 and other criteria, which should enable us to drive significant stockholder returns by providing scale and increased cash flows.

These acquisitions must meet strict financial and other criteria, with the goal of driving 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 are expected to meet 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 .

We have adopted a shareholder friendly capital allocation policy that utilizes dividends and share repurchases to return capital to shareholders.

Pursuant to our capital allocation strategy that we initially announced in September 2017, we have targeted to return approximately 25% of our annual cash flows from operations to stockholders in the form of dividends.

We also intend to repurchase our shares in sufficient quantities to offset dilution from our equity plans.

and in October 2020, we acquired Chef Software.

acquisitions met our strict financial criteria.

As described below, in November 2021, we acquired Kemp Technologies.

This acquisition is expected to meet our strict financial criteria.

Kemp is the always-on application experience company that helps enterprises deliver, optimize and secure applications and networks across any cloud or hybrid environment.

The purchase price for Kemp was $258 million and we funded the purchase price with existing cash balances.

With this acquisition, we extended our portfolio of market-leading products in DevOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX).

Kemp Loadmaster and Flowmon Network Visibility products monitor application performance, and distribute and balance traffic and workloads across servers, in the cloud or on premise, ensuring high performance and availability.

Multi-Faceted Capital Allocation Strategy .

Our capital allocation policy emphasizes accretive M&A, which allows us to expand our business and drive significant stockholder returns, and utilizes dividends and share repurchases to return capital to stockholders.

We intend to repurchase our shares in sufficient quantities to offset dilution from our equity plans.

Lastly, we return a significant portion of our annual cash flows from operations to stockholders in the form of dividends.

In fiscal year 2021, we repurchased and retired 0.8 million shares of our common stock for $35.0 million.

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On September 22, 2020, our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from $0.165 to $0.175 and declared a quarterly dividend of $0.175 per share of common stock.

We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

We expect to continue to pursue acquisitions meeting our financial criteria and designed to expand our business and drive significant stockholder returns.

Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

We will continue to pursue acquisitions meeting our financial criteria and 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.

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Revenue $ 531,313 $ 442,150 20 % 19 %

Total revenue increased in fiscal year 2020 primarily due to the acquisitions of Ipswitch, during the second quarter of fiscal year 2019, and of Chef, during the fourth quarter of fiscal year 2020.

These increases were offset by a decrease in license sales in our Data Connectivity and Integration segment.

Ipswitch and Chef contributed $67.5 million and $3.8 million in revenue in fiscal year 2020, respectively.

The increase in revenue in fiscal year 2021 was driven by the acquisition of Chef which closed during the fourth quarter of fiscal year 2020, increased demand for our OpenEdge and Ipswitch product offerings and to a lesser extent, the acquisition of Kemp which contributed $5.9 million of revenue during the fourth quarter of fiscal year 2021.

Changes in prices from fiscal year 2020 to 2021 did not have a significant impact on our revenue.

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As a percentage of total revenue 29 % 26 %

Software license revenue decreased in fiscal year 2020 primarily due to a decrease in license sales in our Data Connectivity and Integration segment, partially offset by an increase in Ipswitch license sales, which are included in our OpenEdge segment.

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

Software license revenue increased in fiscal year 2021 primarily due to the acquisitions of Chef and Kemp, as well as increased demand for our OpenEdge, DataDirect, and Ipswitch product offerings.

Maintenance and Services Revenue

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As a percentage of total revenue 71 % 74 %

Maintenance revenue increased in fiscal year 2020 primarily due to the acquisitions of Ipswitch and Chef.

This increase was offset by an unfavorable impact from currency exchange rates on our OpenEdge segment maintenance revenue in fiscal year 2020.

Professional services revenue increased primarily due to an increase in Application Development and Deployment professional services revenue.

Maintenance revenue increased in fiscal year 2021 primarily due to the acquisitions of Chef and Kemp, as well as an increase in maintenance revenue from our Ipswitch and OpenEdge product offerings.

Professional services revenue increased primarily due to the acquisition of Chef, as well as an increase in professional services revenue from our OpenEdge product offerings.

Revenue by Region

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Total revenue generated in North America increased $56.8 million, and total revenue generated outside North America increased $32.3 million, in fiscal year 2021.

The increase in North America was primarily due to the acquisitions of Ipswitch and Chef, offset by decreased license sales in our Data Connectivity and Integration segment.

The increase in revenue generated in EMEA was also due to the acquisitions of Ipswitch and Chef.

Revenue generated in Latin America decreased due to a decrease in license sales in our OpenEdge segment.

The revenue generated in Asia Pacific increased slightly primarily due to the acquisition of Ipswitch.

The increases in North America and EMEA were primarily due to the acquisitions of Chef and Kemp and increases in license and maintenance revenues from our OpenEdge and Ipswitch product offerings.

Revenue from Latin America increased due to an increase in OpenEdge license sales.

Revenue from Asia Pacific increased slightly, which was primarily due to the acquisition of Chef.

Total revenue generated in markets outside North America represented 40% of total revenue in fiscal year 2021 compared to 41% of total revenue in the same period last year.

If exchange rates had remained constant in fiscal year 2021 as compared to the exchange rates in effect in fiscal year 2020, total revenue generated in markets outside North America would have been 39% of total revenue.

Revenue by Segment

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage Change

OpenEdge segment $ 326,444 $ 296,929 10 %

Data Connectivity and Integration segment 34,187 39,903 (14) %

Application Development and Deployment segment 81,519 76,466 7 %

Total revenue $ 442,150 $ 413,298 7 %

Revenue in the OpenEdge segment increased year-over-year primarily due to the acquisition of Ipswitch, partially offset by an unfavorable impact from currency exchange rates in fiscal year 2020.

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

Application Development and Deployment segment revenue increased primarily due to the acquisition of Chef and an increase in professional services revenue.

Cost of Software Licenses

Fiscal Year Ended

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

(In thousands) November 30, 2021 November 30, 2020 Change

Cost of software licenses $ 5,271 $ 4,473 $ 798 18 %

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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 was the result of lower payments of royalties to third parties as compared to the prior fiscal year.

The increase in cost of software licenses was the result of higher payments of royalties to third parties as compared to the prior fiscal year.

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

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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 increased primarily due to higher personnel and contractor related costs resulting from the acquisitions of Ipswitch and Chef.

Cost of maintenance and services increased primarily due to higher personnel, contractor, and hosting related costs resulting from the acquisitions of Chef and Kemp.

Amortization of Acquired Intangibles

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Amortization of acquired intangibles $ 14,936 $ 7,897 89 %

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Amortization of acquired 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 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, offset by the addition of Ipswitch and Chef acquired intangibles.

The year over year increase was due to the addition of Chef and Kemp acquired intangibles.

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Gross profit $ 452,864 $ 380,036 19 %

As a percentage of total revenue 85 % 86 %

Our gross profit increased 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

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Total sales and marketing $ 125,890 $ 100,113 $ 25,777 26 %

Sales and marketing expenses decreased in fiscal year 2020 primarily due to decreased travel and in-person events as a result of the COVID-19 pandemic, as well as cost reductions we implemented within our cognitive application product lines in the fourth quarter of fiscal year 2019.

These decreases were partially offset by increased personnel costs resulting from the acquisitions of Ipswitch and Chef.

Sales and marketing expenses increased in fiscal year 2021 primarily due to increased personnel related costs resulting from the acquisitions of Chef and Kemp, increased variable compensation due t o company wide performance, and increased marketing programs .

Product Development

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Total product developments costs $ 103,338 $ 88,599 $ 14,739 17 %

Product development expenses remained flat year-over-year primarily due to increased personnel related expenses due to the acquisitions of Ipswitch and Chef, offset by decreased travel resulting due to the COVID-19 pandemic, and cost reductions we implemented within our cognitive application product lines in the fourth quarter of fiscal year 2019.

Product development expenses increased in fiscal year 2021 due to increased personnel related, contractors and outside services costs resulting from the acquisitions of Chef and Kemp .

General and Administrative

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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 increased slightly primarily due to higher personnel related costs due to the acquisitions of Ipswitch and Chef, as well as higher contractor and outside services costs, offset by decreases in other various general and administrative costs.

Amortization of Acquired Intangibles

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

Amortization of acquired intangibles $ 20,049 $ 22,255 (10) %

As a percentage of total revenue 5 % 5 %

Amortization of acquired 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 acquired intangibles decreased year-over-year due to certain intangible assets being fully amortized and the impairment of certain other intangible assets, offset by the addition of Ipswitch and Chef acquired intangibles.

Impairment of Intangible and Long-Lived Assets

General and administrative expenses increased in fiscal year 2021 primarily due to higher personnel related costs associated with our acquisitions of Chef and Kemp, as well as increases in contractors and outside services and other general and administrative costs.

Amortization of Intangibles

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

Impairment of intangible and long-lived assets $ — $ 24,096 *

(In thousands) November 30, 2021 November 30, 2020 % Change

Amortization of intangibles $ 31,996 $ 20,049 60 %

As a percentage of total revenue 6 % 5 %

*Not meaningful

In the fourth quarter of fiscal year 2019 we determined that the intangible assets associated with the technology obtained in connection with the acquisitions of DataRPM and Kinvey were fully impaired.

As a result, we incurred an impairment charge of $22.7 million in the fourth quarter of fiscal year 2019.

See Note 6 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.

In addition, during the fourth quarter of fiscal year 2019, we incurred an additional asset impairment charge of $1.4 million related to the abandonment of certain long-lived assets associated with a sale of corporate land and buildings.

See Note 5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.

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 acquired intangibles increased in fiscal year 2021 due to the additions of Chef and Kemp acquired intangibles.

Restructuring Expenses

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Restructuring expenses $ 6,308 $ 5,906 7 %

As a percentage of total revenue 1 % 1 %

Restructuring expenses recorded in fiscal year 2020 relate to the restructuring activities that occurred in fiscal years 2020, 2019 and 2017.

See Note 15 to our Consolidated Financial Statements in Item 8 of this Form 10-K 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 fiscal year 2021 primarily relate to the restructuring activities that occurred in fiscal years 2021 and 2020.

Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional details, including types of expenses incurred and the timing of future expenses and cash payments.

Acquisition-Related Expenses

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Acquisition-related expenses $ 4,102 $ 3,637 13 %

As a percentage of total revenue 1 % 1 %

*Not meaningful

Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination.

These costs consist of professional services fees, including third-party legal and valuation-related fees, as well as retention fees, and earn-out payments treated as compensation expense.

Acquisition-related expenses in fiscal year 2020 were primarily related to the acquisition of Chef.

Acquisition-related expenses in fiscal year 2019 were related to the acquisition of Ipswitch.

These costs primarily consist of professional services fees, including third-party legal and valuation-related fees, as well as retention fees.

Acquisition-related expenses in fiscal year 2021 were primarily related to the acquisition of Kemp, as well as our pursuit of other acquisition opportunities.

Acquisition-related expenses in fiscal year 2020 were primarily related to the acquisitions of Chef and Ipswitch.

Income from Operations

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Income from operations $ 116,102 $ 107,728 8 %

As a percentage of total revenue 22 % 24 %

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

Income from Operations by Segment

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage Change

OpenEdge segment $ 250,092 $ 211,720 18 %

Data Connectivity and Integration segment 25,790 31,930 (19) %

Application Development and Deployment segment 44,770 52,473 (15) %

Other unallocated expenses (212,924) (256,039) 17 %

Total income from operations $ 107,728 $ 40,084 169 %

Note that 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, loss on assets held for sale, stock-based compensation, fees related to shareholder activist, restructuring, and acquisition-related expenses.

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

Other (Expense) Income

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Interest expense $ (20,045) $ (10,170) (97) %

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As a percentage of total revenue (4) % (3) %

Other expense, net, decreased in fiscal year 2020 as a result of lower foreign currency loss offset by increased interest expense over the period.

The increase in interest expense is due to an increase in the outstanding principle balance of our debt to fund the Ipswitch and Chef acquisitions, offset by declining rates throughout fiscal year 2020.

Provision for Income Taxes

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

Total other expense, net, increased in fiscal year 2021 as a result of increased interest expense over the period, offset by lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts.

The increase in interest expense is due to our convertible senior notes, which we issued in April 2021.

See the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a description of the convertible senior notes.

Provision for Income Taxes

As a percentage of total revenue 4 % <1%

*Not meaningful

Our effective income tax rate was 18% in fiscal year 2020 and 7% in fiscal year 2019.

The primary reason for the increase in the effective rate was due to the loss incurred by our US operations in fiscal year 2019 resulting from the amortization and impairment of intangibles described above.

In addition, the majority of our international profits in fiscal year 2019 were earned in a jurisdiction with a statutory tax rate of 10%.

Fiscal Year Ended

(In thousands) November 30, 2020 November 30, 2019 Percentage

Net income $ 79,722 $ 26,400 202 %

As a percentage of total revenue 18 % 6 %

Fiscal 2019 Compared to Fiscal 2018

Adoption of New Accounting Standard

We adopted the new accounting standard related to revenue recognition ("ASC 606") effective December 1, 2018, using the full retrospective method, which required us to restate prior comparable periods.

Nature of Business and Summary of Significant Accounting Policies for further information.

Management’s Discussion and Analysis of Financial Condition and Results of Operations has also been adjusted to reflect the full retrospective adoption of ASC 606.

Fiscal Year Ended Percentage Change

(In thousands) November 30, 2019 November 30, 2018 As Reported Constant

Revenue $ 413,298 $ 378,981 9 % 11 %

Total revenue increased in fiscal year 2019 primarily due to the acquisition of Ipswitch during the second quarter of fiscal year 2019, and an increase in license sales in our Data Connectivity and Integration segment.

Ipswitch contributed $28.2 million in revenue in fiscal year 2019.

The increase in total revenue was partially offset by an unfavorable impact from currency exchange rates in fiscal year 2019.

Changes in prices from fiscal year 2018 to 2019 did not have a significant impact on our revenue.

License Revenue

Fiscal Year Ended Percentage Change

(In thousands) November 30, 2019 November 30, 2018 As Reported Constant

License $ 122,552 $ 99,800 23 % 25 %

As a percentage of total revenue 30 % 26 %

Software license revenue increased in fiscal year 2019 primarily due to the acquisition of Ipswitch and an increase in license sales in our Data Connectivity and Integration segment.

The increase in license revenue was partially offset by an unfavorable impact from currency exchange rates in fiscal year 2019.

Maintenance and Services Revenue

Fiscal Year Ended Percentage Change

(In thousands) November 30, 2019 November 30, 2018 As Reported Constant

Maintenance $ 259,006 $ 249,171 4 % 6 %

As a percentage of total revenue 63 % 66 %

Professional services $ 31,740 $ 30,010 6 % 7 %

As a percentage of total revenue 8 % 8 %

Total maintenance and services revenue $ 290,746 $ 279,181 4 % 6 %

As a percentage of total revenue 70 % 74 %

Maintenance revenue increased in fiscal year 2019 due to the acquisition of Ipswitch and a slight increase in maintenance revenue in our Application Development and Deployment segment.

This increase was offset by an unfavorable impact from currency exchange rates on our OpenEdge segment maintenance revenue in fiscal year 2019.

Professional services revenue increased in fiscal year 2019 primarily due to an increase in OpenEdge professional services revenue, partially offset by lower professional services revenue generated by our Application Development and Deployment segment.

Revenue by Region

Fiscal Year Ended Percentage Change

(In thousands) November 30, 2019 November 30, 2018 As Reported Constant

North America $ 233,911 $ 204,257 15 % 15 %

As a percentage of total revenue 57 % 54 %

EMEA $ 137,301 $ 135,055 2 % 6 %

As a percentage of total revenue 33 % 35 %

Latin America $ 19,665 $ 18,046 9 % 16 %

As a percentage of total revenue 5 % 5 %

Asia Pacific $ 22,421 $ 21,623 4 % 7 %

As a percentage of total revenue 5 % 6 %

Total revenue generated in North America increased $29.7 million, and total revenue generated outside North America increased $4.7 million, in fiscal year 2019.

The increase in North America was primarily due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment.

The increase in revenue generated in EMEA in fiscal year 2019 was also due to the acquisition of Ipswitch and higher license revenue generated by our Data Connectivity and Integration segment, partially offset by the unfavorable effect of foreign exchange rates.

Revenue generated in Latin America increased in fiscal year 2019 due to an increase in license sales in our OpenEdge segment.

The revenue generated in Asia Pacific increased slightly in fiscal year 2019 primarily due to the acquisition of Ipswitch.

Total revenue generated in markets outside North America represented 43% of total revenue in fiscal year 2019 compared to 46% of total revenue in the prior fiscal year.

If exchange rates had remained constant in fiscal year 2019 as compared to the exchange rates in effect in fiscal year 2018, total revenue generated in markets outside North America would have been 44% of total revenue.

Revenue by Segment

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage Change

OpenEdge segment $ 296,929 $ 277,806 7 %

Data Connectivity and Integration segment 39,903 23,129 73 %

Application Development and Deployment segment 76,466 78,046 (2) %

Total revenue $ 413,298 $ 378,981 9 %

Revenue in the OpenEdge segment increased in fiscal year 2019 primarily due to the acquisition of Ipswitch, partially offset by an unfavorable impact from currency exchange rates in fiscal year 2019.

Data Connectivity and Integration segment revenue increased in fiscal year 2019 primarily due to the timing of certain renewals by OEMs.

Application Development and Deployment segment revenue decreased in fiscal year 2019, primarily due to lower license and professional services revenue, partially offset by an increase in maintenance revenue.

Cost of Software Licenses

Fiscal Year Ended

(In thousands) November 30, 2021 November 30, 2020 % Change

Cost of software licenses $ 4,894 $ 4,769 $ 125 3 %

As a percentage of software license revenue 4 % 5 %

As a percentage of total revenue 1 % 1 %

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

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

During the periods presented above, cost of software licenses remained relatively flat as a percentage of revenue.

Cost of Maintenance and Services

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Change

Cost of maintenance and services $ 44,463 $ 39,470 $ 4,993 13 %

As a percentage of maintenance and services revenue 15 % 14 %

As a percentage of total revenue 11 % 10 %

Components of cost of maintenance and services:

Personnel Related Costs $ 31,935 $ 28,052 $ 3,883 14 %

Contractors and Outside Services 9,329 8,639 690 8 %

Hosting and Other 3,199 2,779 420 15 %

Total cost of maintenance and services $ 44,463 $ 39,470 $ 4,993 13 %

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

Cost of maintenance and services increased in fiscal year 2019 primarily due to higher personnel related costs resulting from the acquisition of Ipswitch.

Amortization of Acquired Intangibles

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Amortization of acquired intangibles $ 25,884 $ 22,734 14 %

As a percentage of total revenue 6 % 6 %

Amortization of acquired intangibles increased in fiscal year 2019, primarily due to the addition of intangible assets associated with the technologies obtained in connection with the acquisition of Ipswitch.

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Gross profit $ 338,057 $ 312,008 8 %

As a percentage of total revenue 82 % 82 %

Our gross profit increased in fiscal year 2019 primarily due to the increases of license and maintenance revenue, offset slightly by the increase of cost of maintenance and services and the amortization of acquired intangibles, each as described above.

Sales and Marketing

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Change

Sales and marketing $ 101,701 $ 93,036 $ 8,665 9 %

As a percentage of total revenue 25 % 25 %

Components of sales and marketing:

Personnel related costs $ 83,957 $ 75,394 $ 8,563 11 %

Contractors and outside services 2,307 2,046 261 13 %

Marketing programs and other 15,437 15,596 (159) (1) %

Total sales and marketing $ 101,701 $ 93,036 $ 8,665 9 %

Sales and marketing expenses increased in fiscal year 2019 primarily due to increased personnel related expenses as a result of

increased headcount from the acquisition of Ipswitch.

Product Development

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Change

Product development $ 88,572 $ 79,739 $ 8,833 11 %

As a percentage of total revenue 21 % 21 %

Components of product development costs:

Personnel related costs $ 85,107 $ 76,766 $ 8,341 11 %

Contractors and outside services 2,586 2,263 323 14 %

Other product development costs 879 710 169 24 %

Total product developments costs $ 88,572 $ 79,739 $ 8,833 11 %

Product development expenses increased in fiscal year 2019 primarily due to increased personnel related expenses as a result of the acquisition of Ipswitch.

General and Administrative

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Change

General and administrative $ 53,360 $ 49,050 $ 4,310 9 %

As a percentage of total revenue 13 % 13 %

Components of general and administrative:

Personnel Related Costs $ 42,447 $ 34,749 $ 7,698 22 %

Contractors and Outside Services 7,375 9,447 (2,072) (22) %

Other general and administrative costs 3,538 4,854 (1,316) (27) %

Total cost of general and administrative $ 53,360 $ 49,050 $ 4,310 9 %

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

General and administrative expenses increased in fiscal year 2019 primarily due to increased stock-based compensation expense.

Amortization of Acquired Intangibles

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Amortization of acquired intangibles $ 22,255 $ 13,241 68 %

As a percentage of total revenue 5 % 3 %

Amortization of acquired intangibles increased in fiscal year 2019 due to the addition of intangible assets obtained in connection with the acquisition of Ipswitch.

Impairment of Intangible and Long-Lived Assets

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Impairment of intangible and long-lived assets $ 24,096 $ — *

As a percentage of total revenue 6 % — %

*Not meaningful

As a result, we incurred an impairment charge of $22.7 million in the fourth quarter of fiscal year 2019.

See Note 6 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.

See Note 5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.

Restructuring Expenses

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Restructuring expenses $ 6,331 $ 2,251 181 %

As a percentage of total revenue 2 % 1 %

Restructuring expenses recorded in fiscal year 2019 related to the restructuring activities that occurred in fiscal years 2019 and 2017.

See Note 15 to our Consolidated Financial Statements in Item 8 of this Form 10-K 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.

Acquisition-Related Expenses

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Acquisition-related expenses $ 1,658 $ 258 *

As a percentage of total revenue — % — %

*Not meaningful

Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination.

These costs consist of professional services fees, including third-party legal and valuation-related fees, as well as retention fees, and earn-out payments treated as compensation expense.

Acquisition-related expenses in fiscal year 2019 were related to the acquisition of Ipswitch.

Loss on Assets Held for Sale

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2017 Percentage

Loss on assets held for sale $ — $ 5,147 *

As a percentage of total revenue — % 1 %

*Not meaningful

In the fourth quarter of fiscal year 2018, we reclassified certain corporate land and building assets previously reported as property and equipment to assets held for sale on our consolidated balance sheets as we were actively marketing them and expected to sell them within one year.

As a result, we recognized an impairment charge of $5.1 million, which represented the difference between the fair value less cost to sell and the carrying value of the assets.

The impairment charge was recorded to loss on assets held for sale within operating expenses on our fiscal year 2018 consolidated statement of operations.

See Note 5 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional details.

Fees Related to Shareholder Activist

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Fees related to shareholder activist $ — $ 1,472 *

As a percentage of total revenue — % — %

*Not meaningful

In September 2017, Praesidium Investment Management, then one of our largest stockholders, publicly announced its disagreement with our strategy in a Schedule 13D filed with the SEC and stated that it was seeking changes in the composition of our Board of Directors.

In fiscal year 2018, we incurred professional and other fees relating to Praesidium’s actions.

Income from Operations

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Income from operations $ 40,084 $ 67,814 (41) %

As a percentage of total revenue 10 % 18 %

Income from operations decreased in fiscal year 2019.

As described above, the decrease was primarily driven by the impairment of intangible and long-lived assets in the fourth quarter of fiscal year 2019, as well as increases in operating expenses, amortization of acquired intangible assets, restructuring expenses and acquisition expenses recorded in fiscal year 2019 as a result of the acquisition of Ipswitch.

This decrease was partially offset by increased revenue in fiscal year 2019 and the loss on assets held for sale recorded in fiscal year 2018, as described above.

Income from Operations by Segment

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage Change

OpenEdge segment $ 211,720 $ 209,986 1 %

Data Connectivity and Integration segment 31,930 15,495 106 %

Application Development and Deployment segment 52,473 50,959 3 %

Other unallocated expenses (256,039) (208,626) (23) %

Total income from operations $ 40,084 $ 67,814 (41) %

Note that 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:

Other (Expense) Income

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Interest expense $ (9,913) $ (5,149) 93 %

Interest income and other, net 1,143 1,220 (6) %

Foreign currency loss (2,819) (3,089) (9) %

Total other expense, net $ (11,589) $ (7,018) (65) %

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

Other expense, net, increased in fiscal year 2019 primarily due to an increase in interest expense.

The change in interest expense is a result of an increase in the principal balance of our debt, which was used to fund the Ipswitch acquisition.

Provision for income taxes $ 17,114 $ 16,913 1 %

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

Provision for income taxes $ 2,095 $ 11,126 (81) %

As a percentage of total revenue 3 % 4 %

Our effective income tax rate was 7% in fiscal year 2019 and 18% in fiscal year 2018.

The primary reason for the decrease in the effective rate was due to the loss incurred by our US operations in fiscal year 2019 resulting from the amortization and impairment of intangibles.

In addition, the majority of our international profits were earned in a jurisdiction with a statutory tax rate of 10%.

Our effective income tax rate was 18% for both fiscal years 2021 and 2020.

Our jurisdictional mix of profits remained consistent which resulted in a relatively flat tax provision and effective tax rate year-over-year.

Fiscal Year Ended

(In thousands) November 30, 2019 November 30, 2018 Percentage

(In thousands) November 30, 2021 November 30, 2020 % Change

Net income $ 78,420 $ 79,722 (2) %

As a percentage of total revenue 15 % 18 %

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)

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 is not calculated in accordance with GAAP.

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.

The calculation is done at constant currency using the current year budgeted exchange rates for all periods presented.

Our ARR was $486.0 million and $434.0 million as of November 30, 2021 and 2020, respectively, which is an increase of 12% year-over-year.

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

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.

Net dollar retention rate is not calculated in accordance with GAAP.

Our net dollar retention rates have generally ranged between 98% and 101% for all periods presented.

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

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments

(In thousands) November 30,

2020 November 30,

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

Cash and cash equivalents $ 155,406 $ 97,990

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Total cash, cash equivalents and short-term investments $ 157,373 $ 105,995

The decrease in cash, cash equivalents and short-term investments of $67.7 million from the end of fiscal year 2019 was primarily due to payments for acquisitions, net of cash acquired, of $213.1 million, dividend payments of $29.9 million, repurchases of common stock of $60.0 million, payments of debt obligations in the amount of $11.3 million, and purchases of property and equipment of $6.5 million.

These cash outflows were offset by cash inflows from operations of $144.8 million, proceeds from the issuance of long term debt of $98.5 million, $5.8 million in cash received from the issuance of common stock, a positive effect of exchange rates on cash of $3.1 million, and proceeds from sale of intangible assets of $0.9 million.

The increase in cash, cash equivalents and short-term investments of $51.4 million from the end of fiscal year 2020 was primarily due to cash inflow from the issuance of the convertible senior notes of $349.2 million, cash inflows from operations of $178.5 million, $9.8 million in cash received from the issuance of common stock, and a decrease in escrow receivable of $2.1 million.

These cash inflows were offset by payments for acquisitions, net of cash acquired, of $254.0 million, payments of debt obligations in the amount of $117.3 million, cash paid for the purchase of capped calls of $43.1 million in connection with the convertible note offering, dividend payments of $31.6 million, repurchases of common stock of $35.0 million, purchases of property and equipment of $4.7 million, and the effect of exchange rates on cash of $2.9 million.

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

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As of November 30, 2021, there was $155.0 million remaining under the current share repurchase 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.

On September 24, 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.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and have paid quarterly dividends since that time.

On September 21, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on December 15, 2021 to stockholders of record as of the close of business on December 1, 2021.

We have paid aggregate cash dividends totaling $31.6 million, $29.9 million and $27.8 million for the years ended November 30, 2021, November 30, 2020 and November 30, 2019, respectively.

We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

Restructuring Activities

During the first quarter of fiscal year 2017, we announced certain operational restructuring initiatives intended to significantly reduce annual costs.

As part of this action, management committed to a new strategic plan highlighted by a new product strategy and a streamlined operating approach.

To execute these operational restructuring initiatives, we reduced our global workforce by over 20%.

These workforce reductions occurred in substantially all functional units and across all geographies in which we then operated.

As part of this fiscal year 2017 restructuring, for the fiscal years ended November 30, 2020 and 2019, we incurred expenses of $0.4 million and $0.7 million, respectively, which are recorded as restructuring expenses on the consolidated statements of operations.

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

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.

For the fiscal years ended November 30, 2020 and 2019, we incurred expenses of $1.5 million and $3.1 million, respectively, as part of this action related to employee costs and facility closures as we consolidated offices in various locations.

These expenses are recorded as restructuring expenses in the consolidated statements of operations.

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 consisted primarily of our DataRPM and Kinvey products.

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

For the fiscal years ended November 30, 2020 and 2019, we incurred expenses of $0.1 million and $2.5 million, respectively, in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations.

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

In connection with this restructuring action, during the fourth quarter of fiscal year 2019, we evaluated the ongoing value of the intangible assets primarily associated with the technologies and trade names obtained in the acquisitions of DataRPM and Kinvey.

As a result, we wrote down these assets to fair value, which resulted in a $22.7 million asset impairment charge.

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

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

For the fiscal years ended November 30, 2021 and 2020, we incurred expenses of $4.1 million and $3.9 million, respectively, relating to this restructuring.

The expenses are recorded as restructuring expenses in the consolidated statements of operations.

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 2022, but we do not expect these costs to be material.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2022.

Accordingly, the balance of the restructuring reserve of $4.5 million is included in other accrued liabilities on the consolidated balance sheet at November 30, 2021.

During the fourth quarter of fiscal year 2021, we restructured our operations in connection with the acquisition of Kemp.

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

For the fiscal year ended November 30, 2021, we incurred expenses of $2.0 million relating to this restructuring.

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Credit Facility

Our credit agreement provides for a $301.0 million secured term loan and a $100.0 million secured revolving credit facility.

The revolving credit facility may be made available in U.S.

Dollars and certain other currencies and may be increased by up to an additional $125.0 million if the existing or additional lenders are willing to make such increased commitments.

On January 25, 2022, we entered into an amended credit agreement providing for a $275.0 million secured term loan and a $300.0 million secured revolving credit facility.

The revolving credit facility may be increased, and new term loan commitments may be entered into, by up to an additional amount up to the sum of (A) the greater of (x) $260.0 million and (y) 100% of our consolidated EBITDA and (B) an unlimited additional amount subject to pro forma compliance with a consolidated senior secured net leverage ratio of no greater than 3.75 to 1.00 if the existing or additional lenders are willing to make such increased commitments.

This new credit facility replaces our existing secured credit facility dated April 30, 2019.

The amount of the term loan outstanding under our existing secured credit facility was incorporated into the amended and restated credit facility.

The revolving credit facility has sublimits for swing line loans up to $25.0 million and for the issuance of standby letters of credit in a face amount up to $25.0 million.

We expect to use the revolving credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital.

The Credit Agreement modified our prior credit facility by extending the maturity date to April 30, 2024 and extending the principal repayments of the term loan.

We borrowed an additional $185.0 million under the term loan as part of this modified credit facility.

The new term loan was used to partially fund our acquisition of Ipswitch in April 2019.

During October 2020, we partially funded our acquisition of Chef by drawing down $98.5 million under the revolving line of credit (Note 7).

The credit facility matures on April 30, 2024, when all amounts outstanding will be due and payable in full.

We expect to use the revolving credit facility for general corporate purposes, which may include the acquisitions of other businesses, and may also use it for working capital.

Interest rates for the term loan and revolving credit facility are determined by reference to a term benchmark rate or a base rate at our option and would range from 1.00% to 2.00% above the term benchmark rate or would range from 0.00% to 1.00% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio.

Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective term benchmark rates for those currencies, based on our leverage ratio.

We will incur a quarterly commitment fee on the undrawn portion of the revolving credit facility, ranging from 0.125% to 0.275% per annum, based upon our leverage ratio.

At closing of the revolving credit facility, the applicable interest rate and commitment fee are at the third lowest rate in each range.

The credit facility matures on the earlier of (i) January 25, 2027 and (ii) the date that is 181 days prior to the maturity date of our Convertible Senior Notes subject to certain conditions as set forth in the amended credit agreement, including the repayment of the Convertible Senior Notes, the refinancing of the Convertible Senior Notes including a maturity date that is at least 181 days after January 25, 2027 and compliance with a liquidity test when all amounts outstanding will be due and payable in full.

The revolving credit facility does not require amortization of principal.

The outstanding balance of the term loan as of November 30, 2020 was $286.0 million, with $18.8 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.

The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ending February 28, 2022.

The first eight payments are in the principal amount of $1,718,750 each, the following four payments are in the principal amount of $3,437,500 each, the following eight payments are in the principal amount of $5,156,250 each and 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 average interest rate of the credit facility during the fiscal year ended November 30, 2020 was 2.41% and the interest rate as of November 30, 2020 was 1.81%.

In July 2019, we entered into an interest rate swap contract with an initial notional amount of $150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt.

The contract matures on April 30, 2024 and requires periodic interest rate settlements.

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

As of November 30, 2020, there was $98.5 million outstanding under the revolving line and $2.1 million of letters of credit.

The credit facility contains customary affirmative and negative covenants, 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 November 30, 2020.

We are the sole borrower under the credit facility.

Our obligations under the amended credit agreement are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and such material domestic subsidiaries, as well as 100% of the capital stock of our domestic subsidiaries and 65% of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions as described in the amended credit agreement.

Future material domestic subsidiaries will be required to guaranty our obligations under the amended credit agreement, and to grant security interests in substantially all of their assets to secure such obligations.

The amended credit agreement generally prohibits, with certain exceptions, any other liens on our assets and the assets of our subsidiaries, subject to certain exceptions as described in the amended credit agreement.

The amended credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ 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 its 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 interest charge coverage ratio and a consolidated total net leverage ratio.

The amended credit agreement includes customary events of default that include, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default.

The occurrence of an event of default could result in the acceleration of the obligations under the amended credit agreement.

Convertible Senior Notes

In April 2021, we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted.

There are no required principal payments prior to the maturity of the Notes.

In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 million of additional Notes were purchased for total proceeds of $360 million.

The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021.

Debt for further discussion.

Cash Flows from Operating Activities

Fiscal Year Ended

(In thousands) November 30,

2020 November 30,

2019 November 30,

(In thousands) November 30, 2021 November 30, 2020 November 30, 2019

Net income $ 78,420 $ 79,722 $ 26,400

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Net cash flows from operating activities $ 178,530 $ 144,847 $ 128,484

The increase in cash generated from operations in fiscal year 2020 as compared to fiscal year 2019 was primarily due to higher operating income.

There were not any significant non-cash reconciling items in fiscal year 2020.

Cash flows in fiscal year 2020 increased significantly due to increased collections resulting from the acquisitions of Ipswitch and Chef, partially offset by increased personnel related expenditures.

Cash flows in fiscal year 2020 also increased due to lower operating expenses primarily as a result of decreased travel and in-person events resulting from the COVID-19 pandemic, as well as cost reductions we implemented within our cognitive application product lines in the fourth quarter of fiscal year 2019.

Our gross accounts receivable as of November 30, 2020 increased by $11.7 million from the end of fiscal year 2019, which is primarily due to the acquisition of Chef, offset by strong collections.

Days sales outstanding ("DSO") in accounts receivable decreased to 54 days at the end of fiscal year 2020 compared to 56 days at the end of fiscal year 2019, with the increase due to the timing of billings.

The increase in cash generated from operations in fiscal year 2021 as compared to fiscal year 2020 was primarily due to increased collections resulting from the acquisitions of Chef and Kemp, as well as particularly strong collections generated from the rest of the business, partially offset by increased personnel related expenditures.

The increase in non-cash reconciling items included in net income primarily relates to the increase in amortization of intangibles due to the recent acquisitions of Chef and Kemp.

Our gross accounts receivable as of November 30, 2021 increased by $15.1 million from the end of fiscal year 2020, which is primarily due to the acquisition of Kemp and the timing of billings.

Days sales outstanding ("DSO") in accounts receivable increased to 60 days at the end of fiscal year 2021 compared to 54 days at the end of fiscal year 2020, with the increase also due to the timing of billings.

In addition, our total deferred revenue as of November 30, 2021 increased by $59.1 million from the end of fiscal year 2020.

The significant changes in operating assets and liabilities in fiscal year 2019 as compared to fiscal year 2018 were primarily due to an increase in deferred revenue and personnel related expenditures.

In fiscal year 2019 there was a $22.7 million intangible asset impairment charge, which was the most significant non-cash reconciling item included in net income (see Note 4 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge).

In fiscal year

2018 there was a non-cash reconciling item included in net income for a $5.1 million loss on assets held for sale (see Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information on the impairment charge).

In addition, our gross accounts receivable as of November 30, 2019 increased by $13.1 million from the end of fiscal year 2018, which was primarily due to the acquisition of Ipswitch.

DSO in accounts receivable increased to 56 days at the end of fiscal year 2019 compared to 47 days at the end of fiscal year 2018.

The significant changes in operating assets and liabilities in fiscal year 2020 as compared to fiscal year 2019 were primarily due to a decrease in accounts receivable and unbilled receivables.

There weren’t any significant non-cash reconciling items included in net income in fiscal year 2020.

In fiscal year 2019 there was a $22.7 million intangible asset impairment charge, which was the most significant non-cash reconciling item included in net income.

Fair Value Measurements for further discussion.

In addition, our gross accounts receivable as of November 30, 2020 increased by $11.7 million from the end of fiscal year 2019, which was primarily due to the acquisition of Chef.

DSO in accounts receivable decreased to 54 days at the end of fiscal year 2020 compared to 56 days at the end of fiscal year 2019.

Cash Flows (used in) from Investing Activities

Fiscal Year Ended

(In thousands) November 30,

2020 November 30,

2019 November 30,

(In thousands) November 30, 2021 November 30, 2020 November 30, 2019

Net investment activity $ 5,950 $ 11,392 $ 14,770

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Proceeds from sale of long-lived assets, net — 889 6,146

Decrease in escrow receivable and other 2,330 — —

Payments for acquisitions, net of cash acquired (253,961) (213,057) (225,298)

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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, as well as the timing of acquisitions and divestitures.

Cash used in investing activities was impacted by the acquisition of Chef for a net cash amount of $213.1 million and Ipswitch for a net cash amount of $225.3 million, in fiscal years 2020 and 2019, respectively.

We did not complete any acquisitions during fiscal year 2018.

Cash used in investing activities was impacted by the acquisition of Kemp for a net cash amount of $254.0 million, and Chef for a net cash amount of $213.1 million, in fiscal years 2021 and 2020, respectively.

In fiscal year 2019 we acquired Ipswitch for a net cash amount of $225.3 million.

In addition, we purchased $4.7 million of property and equipment in fiscal year 2021, as compared to $6.5 million in fiscal year 2020 and $4.0 million in fiscal year 2019.

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Fiscal Year Ended

(In thousands) November 30,

2020 November 30,

2019 November 30,

(In thousands) November 30, 2021 November 30, 2020 November 30, 2019

Proceeds from stock-based compensation plans $ 15,033 $ 11,099 $ 9,265

Repurchases of common stock (35,000) (60,000) (25,000)

Dividend payment to shareholders (29,900) (27,760) (25,789)

Dividend payment to stockholders (31,561) (29,900) (27,760)

Proceeds from issuance of senior convertible notes, net of issuance costs of $9.9 million 350,100 — —

Purchase of capped calls (43,056) — —

Proceeds from the issuance of debt, net of payments of principal and debt issuance costs (118,217) 87,212 178,065

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In addition, we made dividend payments of $31.6 million to our stockholders in fiscal year 2021, as compared to dividend payments of $29.9 million and $27.8 million in fiscal years 2020 and 2019, respectively.

Most significantly, we received proceeds from the issuance of debt of $98.5 million in fiscal year 2020 and $185.0 million in fiscal year 2019 in connection with the acquisitions of Chef and Ipswitch, respectively.

Most significantly, in the second quarter of fiscal year 2021, we received $349.2 million in net proceeds from the issuance of convertible senior notes and paid $43.1 million to purchase capped calls in connection with the convertible note offering.

We received proceeds from the issuance of debt of $98.5 million in fiscal year 2020 and $185.0 million in fiscal year 2019 in connection with the acquisitions of Chef and Ipswitch, respectively.

In addition, we repurchased $35.0 million of our common stock under our share repurchase plan in fiscal year 2021, compared to $60.0 million in fiscal year 2020 and $25.0 million in fiscal year 2019.

We also made principal payments on our debt of $11.3 million during fiscal year 2020, as compared to $5.3 million in fiscal year 2019 and $6.2 million in fiscal year 2018.

We also made principal payments on our debt of $117.3 million (including a $98.5 million repayment on the revolving line of credit) during fiscal year 2021, as compared to $11.3 million in fiscal year 2020 and $5.3 million in fiscal year 2019.

Indemnification Obligations

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Liquidity Outlook

Cash from operations in fiscal year 2021 could be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part I, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.

Cash from operations in fiscal year 2022 could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part I, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets generally which could adversely affect our liquidity and capital resources in the future.

However, based on our current business plan, 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 through at least the next twelve months.

We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S.

Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, acquisitions, lease commitments, restructuring obligations and other long-term obligations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

The following table details our contractual obligations as of November 30, 2020 (in thousands):

Payments Due by Period

Total Less than 1

Years More than 5

Long-term debt:

Long-term debt obligations $ 384,450 $ 18,812 $ 60,201 $ 305,437 $ —

Interest payments on long-term debt (1)

21,984 6,857 12,402 2,725 —

Operating leases 33,981 7,707 14,072 11,327 875

Purchase obligations (2)

8,670 1,664 7,006 — —

Unrecognized tax benefits (3)

303 303 — — —

Total $ 449,388 $ 35,343 $ 93,681 $ 319,489 $ 875

(1) Interest on our long-term debt is due and payable monthly and is estimated using the effective interest rate as of November 30, 2020 as the interest rate is variable.

See Note 8 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

(2) Represents the fixed or minimum amounts due under purchase obligations for support service agreements.

(3) Our other noncurrent liabilities on the consolidated balance sheet include unrecognized tax benefits and related interest and penalties.

As of November 30, 2020 , we had unrecognized tax benefits of $6.2 million and an additional $0.4 million for interest and penalties classified as noncurrent liabilities.

Currently, we are only able to estimate a FY21 payment of $0.3 million related to an audit settlement.

For the remaining balance we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities;

therefore, such amounts are not included in the above contractual obligation table.

See Note 16 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP.

Our foreseeable cash needs include capital expenditures, acquisitions, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations.

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with GAAP.

We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities.

We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances.

However, actual results may differ from these estimates.

We have identified the following critical accounting policies that require the use of significant judgments and estimates in the preparation of our consolidated financial statements.

This listing is not a comprehensive list of all of our accounting policies.

For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of filing of this Annual Report on Form 10-K with the SEC.

These estimates may change as new events occur and additional information is obtained.

Actual results could differ materially from these estimates under different assumptions or conditions.

We have identified the following critical accounting estimates that require the use of significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue Recognition

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We had goodwill and net intangible assets of $958.3 million at November 30, 2021.

We evaluate goodwill and other intangible assets with indefinite useful lives, if any, for impairment annually or on an interim basis when events and circumstances arise that indicate impairment may have occurred.

We evaluate goodwill and other intangible assets with indefinite useful lives for impairment annually or on an interim basis when events and circumstances arise that indicate impairment may have occurred.

We perform our annual goodwill impairment as of October 31st of each fiscal year.

We believe this date aligns the timing of the annual goodwill impairment testing with our planning and budgeting process, which is a key component of the tests, and alleviates administrative burden during our year-end reporting period.

In performing our annual assessment, we first perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and if necessary, perform a quantitative test.

To conduct the quantitative impairment test of goodwill, we compare the fair value of a reporting unit to its carrying value.

If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.

We estimate the fair values of our reporting units using discounted cash flow models or other valuation models, such as comparative transactions and market multiples.

We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models.

Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.

Application of the goodwill impairment test requires judgment, including the identification of reporting units.

We periodically reevaluate our business and have determined during fiscal year 2021 that we have one operating segment and one reporting unit.

As such, our goodwill is tested at the entity-level.

During fiscal years 2020 and 2019, we operated as three distinct segments.

If our assumptions change in the future, we may be required to record impairment charges to reduce our goodwill's carrying value.

Changes in the valuation of goodwill could materially impact our operating results and financial position.

When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets.

Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time.

The determination of reporting units also requires management judgment.

We consider whether a reporting unit exists within a reportable segment based on the availability of discrete financial information that is regularly reviewed by segment management.

As of November 30, 2020, our three reporting units were OpenEdge, Data Connectivity and Integration, and Application Development and Deployment

During fiscal year 2020, we tested goodwill for impairment for each of our reporting units as of October 31, 2020.

Our reporting units each had fair values which significantly exceeded their carrying values as of the annual impairment date.

We did not recognize any goodwill impairment charges during fiscal years 2020, 2019 or 2018.

During fiscal year 2019, we evaluated the ongoing value of the intangible assets associated with the technology obtained in connection with the acquisitions of DataRPM and Kinvey.

As a result of our decision to reduce our current and ongoing spending levels within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products, we determined that the intangible assets were fully impaired.

Therefore, we incurred an impairment charge of $22.7 million in the fourth quarter of fiscal year 2019 (Note 4).

We did not recognize any intangible asset impairment charges during fiscal years 2020 and 2018.

Income Tax Accounting

We had a net deferred tax asset of $14.5 million at November 30, 2020.

We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized.

We had a net deferred tax liability of $12.7 million at November 30, 2021.

We consider scheduled reversals of temporary differences, projected future taxable income, tax planning strategies and other matters in assessing the need for and the amount of a valuation allowance.

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If management made different estimates or judgments, material differences in the amount accrued for uncertain tax positions would occur.

Convertible Senior Notes and Capped Calls

In April 2021, we issued Convertible Senior Notes (the "Notes") and also entered into privately negotiated capped call transactions ("Capped Call Transactions") with certain financial institutions.

Applying the accounting framework for the Notes and the Capped Call Transaction requires the exercise of judgment and the determination of the fair value of the liability component of the Notes and the fair value of the Capped Calls requires the Company to make significant estimates and assumptions.

In accounting for the Notes and the Capped Call Transactions:

• The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, referred to as the debt discount, is amortized as interest expense over the Notes’ contractual term.

The fair value was determined based on a discounted cash flow model.

The discount rate used reflected both the time value of money and credit risk inherent in the Notes.

• The Notes’ fair value, inclusive of the conversion feature embedded in the Notes, is determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period.

• The equity component, which represents the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes.

• The Capped Call Transactions are accounted for as derivative instruments.

The Capped Call Transactions qualify for the equity scope exception to derivative accounting pursuant to ASC 815 and are measured at fair value, which is the premium paid, at issuance.

No subsequent measurement is required as long as they continue to meet the equity scope exception.

Stock-Based Compensation

We recognize stock-based compensation expense based on the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the date of grant.

Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the award, and is adjusted each period for actual forfeitures.

We estimate the fair value of each stock-based award on the measurement date using either the current market price, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model.

The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to the expected stock price volatility, the expected term of the option, a risk-free interest rate and a dividend yield.

The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to the expected stock price volatility, the expected term of the award, a risk-free interest rate and a dividend yield.

The expected volatility is based on the historical volatility of our stock price.

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The expected dividend yield is based on our historical behavior and future expectations of dividend declarations.

The valuations determined by the Monte Carlo Simulation simulate 250,000 future stock prices for Progress and our peer group.

We have chosen this amount for the simulation as to minimize the standard modeling error and believe that the resulting distribution gives a reasonable estimate of the grant date fair value.

Business Combinations

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Recent Accounting Pronouncements

Refer to Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.

Refer to Note 1:

Nature of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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-K

Item 7. Management’s Discussion and Analysis