Item 1. Business
Item 1. Business
Overview
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. 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. Hundreds of thousands of enterprises, plus approximately 1,700 software companies and 3.5 million developers, depend on Progress to achieve their business goals.
Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally ISVs, original equipment manufacturers ("OEMs"), distributors and value-added resellers.
We operate in North America and Latin America (the "Americas"); Europe, the Middle East and Africa ("EMEA"); and the Asia Pacific region, through local subsidiaries as well as independent distributors.
Strategic Plan and Operating Model
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 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 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 and high levels of profitability.
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, with the goal of driving significant stockholder returns by providing scale and increased cash flows. As described below, in November 2021, we acquired Kemp Technologies, Inc. ("Kemp") in a transaction that we expect will meet these 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.
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We expect to continue to pursue acquisitions meeting our financial criteria and designed to expand our business and drive significant stockholder returns.
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. As of November 30, 2021, there was $155.0 million remaining under share repurchase authorization. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand or discontinue the repurchase program at any time.
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. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.
Our Products and Solutions
We provide 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. Described below are some of the solutions that make up our comprehensive product portfolio.
OpenEdge
OpenEdge is development software for building dynamic multi-language applications for secure deployment across any platform, any device, and any cloud. OpenEdge provides a unified environment comprising 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 independently or with other Progress products.
Developer Tools
Our Developer Tools products consist of a leading set of components for user interface (UI) development for Web, Mobile, Desktop, Chat and AR/VR apps, plus automated application testing and reporting tools. These products make development of modern, engaging application UIs fast and easy for .NET and JavaScript developers. Developer Tools is focused on serving the evolving needs of our substantial developer community in creating modern and engaging applications. The products within Developer Tools are Telerik, Kendo UI, Fiddler and Test Studio.
Sitefinity
Sitefinity is a next-generation web content management and customer analytics platform for managing and optimizing digital experiences. Sitefinity combines superior end user experience with a high level of customization capabilities for developers.
Corticon
Corticon is a market-leading Business Rules Management System that provides applications with decision automation, decision change process and decision-related insight capabilities. Corticon helps both business and IT users to quickly create or reuse business rules as well as create, improve, collaborate on, and maintain decision logic.
DataDirect Connect
DataDirect Connect provides data connectivity using industry-standard interfaces to connect applications running on various platforms to any major database, for both corporate IT organizations and software vendors. With software components embedded in the products of over 350 software companies and in the applications of thousands of large enterprises, DataDirect Connect is a global leader in the data connectivity market. The primary products, in addition to other drivers we have developed, are ODBC drivers, JDBC drivers and ADO.NET providers. They provide the capability to connect and integrate with other applications and data sources independently or with our cloud-based offerings.
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MOVEit
MOVEit provides secure collaboration and automated file transfers of critical business information between users, locations and partners in compliance with data security regulations such as the Health Insurance Portability and Accountability Act (HIPAA), the Payment Card Industry Data Security Standard and the European Union's General Data Protection Regulation, and advanced workflow automation capabilities without the need for scripting.
Chef
Chef is a complete infrastructure automation platform to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises. Chef Enterprise Automation Stack is the full suite of enterprise infrastructure, application and DevSecOps automation technologies delivering change quickly, repeatedly and securely. For more than ten years, Chef has led the industry in DevOps innovation, uniting teams at organizations of all sizes and optimizing processes and outcomes to accelerate its customers’ business growth. Chef software is developed as 100% open source.
The primary solutions within the Chef Enterprise Automation Stack are Chef Infra, Chef InSpec, Chef Habitat, Chef Compliance, Chef Automate and Chef Desktop. Chef Infra automates infrastructure configuration, ensuring every system is configured correctly and consistently. Chef InSpec provides a language for describing security and compliance rules that can be shared between software engineers, operations and security engineers. Chef Habitat provides automation capabilities for defining, packages and delivering applications to almost any environment, regardless of operating system or deployment platform. Chef Automate is an enterprise dashboard and analytics tool enabling cross-team collaboration with actionable insights for configuration and compliance and an auditable history of changes to environments. Chef Compliance helps enterprises maintain compliance and prevent security incidents across heterogenous estates. Chef Desktop allows IT teams to automate the deployment, management and ongoing compliance of IT resources.
WhatsUp Gold
WhatsUp Gold is an award-winning network monitoring solution, which enables small and medium-sized businesses and enterprises to continuously monitor and manage their IT infrastructure and applications, assuring high levels of performance and availability.
Kemp Loadmaster
The Kemp LoadMaster load balancing solutions and extensive library of application deployment templates provide high performance and secure delivery of application workloads from a wide range of vendors in multiple sectors.
Kemp Flowmon Network Visibility
The Kemp Flowmon network performance monitoring and diagnostic (NPMD) solutions collect and analyze rich network telemetry from various sources, saving hours of tedious network troubleshooting and accelerating time-to-resolution. The Kemp Flowmon network detection and response (NDR) solutions combine machine learning, heuristics and advanced analytics to improve network performance, alert on network anomalies and provide early detection of advanced persistent threats.
Product Development
Most of our products have been developed by our internal product development staff or the internal staffs of acquired companies. We believe that the features and performance of our products are competitive with those of other available development and deployment tools and that none of the current versions of our products are approaching obsolescence. However, we have invested, and expect to continue to invest in new product development and enhancements of our current products to maintain our competitive position.
Our primary development offices are located in Bedford, Massachusetts; Morrisville, North Carolina; Alpharetta, Georgia; Madison, Wisconsin; Sofia, Bulgaria; Limerick, Ireland; Brno, Czech Republic; and Bangalore and Hyderabad, India.
Customers
We sell our products globally through several channels: directly to end users and indirectly through independent software vendors, OEMs, and system integrators. Sales of our solutions and products through our direct sales force have historically been to business
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managers or IT managers in corporations and governmental agencies. We also target developers who create business applications, from individuals to teams, within enterprises of all sizes.
We also sell our products through indirect channels, primarily ISVs. OEMs, and value-added resellers, who embed or add features to our products as part of an integrated solution. We use distributors and resellers, both internationally and domestically, in certain locations where we do not have a direct presence or where it is more economically or contractually feasible for us to do so. More than half of our license revenues are derived from these indirect channels.
Independent Software Vendors
Our ISVs cover a broad range of markets, offer an extensive library of business applications and are a source of recurring revenue. We have kept entry costs, consisting primarily of the initial purchase of development licenses, low to encourage a wide variety of ISVs to build applications. If an ISV succeeds in marketing its applications, we obtain recurring revenue as the ISV licenses our deployment products to allow its application to be installed and used by customers. In recent years, a significantly increasing amount of our revenue from ISVs has been generated from ISVs who have chosen to enable their business applications under a software-as-a-service ("SaaS") platform.
Original Equipment Manufacturers
We enter into arrangements with OEMs in which the OEM embeds our products into its solutions, typically either software or technology devices. OEMs typically license the right to embed our products into their solutions and distribute those solutions for initial terms ranging from one to three years. Historically, most of our OEMs have renewed their agreements upon the expiration of the initial term. However, there is no assurance that they will continue to renew in the future. If any of our largest OEM customers were not to renew their agreements in the future, this could materially impact our DataDirect Connect product line.
Value Added Resellers
We enter into arrangements with value-added resellers (VARs) in which the VAR adds features or services to our products, then resell those products as an integrated product or complete "turn-key" solution .
No single customer or partner has accounted for more than 10% of our total revenue in any of our last three fiscal years.
Sales and Marketing
We sell our products and solutions through our direct sales force and indirect channel partners. We have sold our products and solutions to enterprises in over 180 countries. Our sales and field marketing groups are organized primarily by region. We operate by region in the Americas, EMEA and Asia Pacific. We believe this structure allows us to maintain direct contact with our customers and support their diverse market requirements. Our international operations provide focused local sales, support and marketing efforts and are able to respond directly to changes in local conditions.
In addition to our direct sales efforts, we distribute our products through ISVs, systems integrators, resellers, distributors, and OEM partners in the United States and internationally. Systems integrators typically have expertise in vertical or functional markets. In some cases, they resell our products, bundling them with their broader service offerings. In other cases, they refer sales opportunities for our products to our direct sales force. Distributors sublicense our products and provide service and support within their territories. OEMs embed portions of our technology in their product offerings.
Sales personnel are responsible for developing new direct end user accounts, recruiting new indirect channel partners and new independent distributors, managing existing channel partner relationships and servicing existing customers. We actively seek to avoid conflict between the sales efforts of our ISVs and our own direct sales efforts. We use our inside sales teams to enhance our direct sales efforts and to generate new business and follow-on business from existing customers.
Our marketing personnel conduct a variety of marketing engagement programs designed to create demand for our products, enhance the market readiness of our products, raise the general awareness of our company and our products and solutions, generate leads for the sales organization and promote our various products. These programs include press relations, analyst relations, investor relations, digital/web marketing, marketing communications, participation in trade shows and industry conferences, and production of sales and marketing literature. We also hold and participate in global events, as well as regional user events in various locations throughout the world.
Our sales and marketing efforts with respect to certain of our products differ from our traditional sales and marketing efforts because the target markets are different. For these products, we have designed our marketing and sales model to be efficient for high volumes
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of lower-price transactions. Our marketing efforts focus on driving traffic to our websites and on generating high quality sales leads, in many cases, consisting of developer end users who download a free evaluation of our software. Our sales efforts then focus on converting these leads into paying customers through a high volume, short duration sales process. Of particular importance to our target market, we enable our customers to buy our products in a manner convenient to them, whether by purchase order, online with a credit card or through our channel partners.
Customer Support
Our customer support staff provides telephone and Web-based support to end users, application developers and OEMs. Customers purchase maintenance services entitling them to software updates, technical support and technical bulletins. Maintenance is generally not required with our products and is purchased at the customer's option. We provide support to customers primarily through our main regional customer support centers in Bedford, Massachusetts; Melville, New York; Morrisville, North Carolina; Alpharetta, Georgia; Madison, Wisconsin; Limerick, Ireland; Rotterdam, The Netherlands; Brno, Czech Republic; Hyderabad, India; Singapore; and Sofia, Bulgaria. Local technical support for specific products is provided in certain other countries as well.
Professional Services
Our global professional services organization delivers business solutions for customers through a combination of products, consulting and education. Our consulting organization offers project management, implementation services, custom development, programming and other services. Our consulting organization also provides services to Web-enable existing applications or to take advantage of the capabilities of new product releases. Our education organization offers numerous training options, from traditional instructor-led courses to advanced learning modules available via the web or on digital media.
Our services offerings include: application modernization; infrastructure automation; development operations; data management, managed database services; performance enhancements and tuning; and analytics/business intelligence.
Competition
The computer software industry is intensely competitive. We experience significant competition from a variety of sources with respect to all of our products. We believe that certain competitive factors affect the market for our software products and services, which may include: (i) vendor and product reputation; (ii) product quality, performance and price; (iii) the availability of software products on multiple platforms; (iv) product scalability; (v) product integration with other enterprise applications; (vi) software functionality and features; (vii) software ease of use; (viii) the quality of professional services, customer support services and training; and (ix) the ability to address specific customer business problems. We believe the relative importance of each of these factors depends upon the concerns and needs of each specific customer.
We compete with multiple companies, some that have single or narrow solutions, and some that have a range of enterprise infrastructure solutions such as Salesforce.com, Inc., Amazon.com, Inc. and Microsoft Corporation. Many of these vendors offer platform-as-a-service, application development, data integration and other tools in conjunction with their CRM, web services, operating systems, and relational database management systems. We compete with software vendors that offer their products under a typical proprietary software license model, and various other vendors that offer their solutions in an open source licensing or freely available distribution model.
We do not believe that there is a dominant vendor in the infrastructure software markets in which we compete. However, some of our competitors have greater financial, marketing or technical resources than we have and/or may have experience in, or be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can. Increased competition could make it more difficult for us to maintain our revenue and market presence.
Intellectual Property
We rely on a combination of contractual provisions and copyright, patent, trademark and trade secret laws to protect our proprietary rights in our products. Except as described below with respect to our Chef products, we generally distribute our products under software license agreements that grant customers a perpetual nonexclusive license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. We also distribute our products through various channel partners, including ISVs, OEMs and system integrators. We also license our products under term or subscription arrangements. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with employees, consultants and channel partners. Although we intend to protect our rights vigorously, there is no assurance that these measures will be successful.
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We seek to protect the source code of our products as trade secrets and as unpublished copyrighted works. We hold numerous patents covering portions of our products. We also have several patent applications for some of our other product technologies. Where possible, we seek to obtain protection of our product names and service offerings through trademark registration and other similar procedures throughout the world.
Our Chef offerings incorporate software components licensed to the general public under open source licenses. We obtain many components from software developed and released by contributors to independent open source components of our offerings. Open source licenses grant licensees broad permissions to use, copy, modify and redistribute our platform. As a result, open source development and licensing practices can limit the value of our software copyright assets.
We believe that due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are as important in establishing and maintaining a leadership position within the industry as are the various legal protections of our technology. In addition, we believe that the nature of our customers, the importance of our products to them and their need for continuing product support may reduce the risk of unauthorized reproduction, although no assurances can be made in this regard.
Business Segment and Geographical Information
Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer.
Beginning in the second quarter of fiscal year 2021, we operate as one operating segment: software products to develop, deploy, and manage high-impact business applications. Our CODM evaluates financial information on a consolidated basis. As we operate as one operating segment, the required financial segment information can be found in the condensed consolidated financial statements. Refer to Note 15: Revenue Recognition and Note 19: Business Segments and International Operations to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for information by geographic area.
Human Capital
As of November 30, 2021, we had 2,103 employees worldwide, including 719 in sales and marketing, 326 in customer support and services, 818 in product development and 240 in administration.
None of our U.S. employees are subject to a collective bargaining agreement. Employees in certain foreign jurisdictions are represented by local workers’ councils and/or collective bargaining agreements as may be customary or required in those jurisdictions. We have experienced no work stoppages and believe our relations with employees are good.
We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. We provide our employees with competitive compensation and benefits, opportunities for equity ownership, and development programs that enable continued learning and growth.
Employee Engagement, Development and Training
We invest significant resources to develop our in-house talent and deepen our employees’ skill sets, both to strengthen our company and help further our employees’ personal career goals. We empower our employees to drive their career aspirations and set personal development objectives in partnership with their managers. To strengthen these conversations, we train managers across the globe to partner with employees through career conversations, as well as provide career development training for all employees so that they can successfully leverage the many tools in place to support them.
To match the location and learning specifics of our people, we combine various channels for personal and technical development: on-demand videos, webinars, classroom trainings, text-based resources, coaching, and more. We also believe strongly in fostering our employees’ personal growth and offer programs like tuition reimbursement.
Our efforts to recruit and retain a diverse and inclusive workforce include providing competitive compensation and benefit packages worldwide and ensuring we listen to our employees. To that end, we regularly survey our employees to obtain their views and assess employee satisfaction. We use the views expressed in the surveys to influence our people strategy and policies. We also use employee survey information to gain insights into how and where we work.
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COVID-19 Response
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the vast majority of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work. We also provided a work-from-home reimbursement policy to assist employees in that transition and added several company-wide paid days off and caregiving support to help employees balance their work and life responsibilities.
Flexible Work Approach
The COVID‐19 pandemic has significantly changed the way employees think about where and how they work. For most of our employees, productivity is no longer tied to being in an office and collaboration can happen between people anywhere. Our view of our offices has evolved to places for collaboration and in-person interactions rather than the only places where productive work can occur. In 2021 we announced a modern approach to work that gives our employees more flexibility to choose where to work. Depending on their role, this means that employees can choose their office location, as well as continue to work from home some or all the time. We expect this flexible approach will help us recruit and retain employees.
Inclusion and Diversity
As a multicultural company serving a global community, we encourage a wide range of views and celebrate our diverse backgrounds. We are committed to creating a culture of innovation and inspiration, where employees feel a strong sense of community and pride in the company and the successes they have helped to achieve.
We launched an inclusion and diversity (I&D) undertaking focused on fostering an inclusive environment and diverse workforce by strengthening the following core areas of our organization: culture and belonging; talent acquisition; leveraging talent; management and leadership; and career development. To ensure success of our I&D efforts, we formed an Inclusion and Diversity Advisory Committee, made up of a diverse group of Progress employees from around the globe with varying backgrounds, skill sets and viewpoints. This committee has been tasked with supporting the formation and implementation of enterprise-wide I&D initiatives and ensuring a clear I&D vision is established and articulated in a way that is authentic for everyone at Progress. Among its many accomplishments, the committee helped to establish a governance framework for Progress Employee Resource Groups (ERGs), supported the formation of our first ERGs, , and contributed to the strengthening of our career and hiring processes. We now have six ERGs: Progress for Her, Blacks at Progress, Plus (LGTBQ+), veterans@progress, ASPIRE (Asian Pacific Islanders) and Unidos en Progress.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.progress.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC at www.sec.gov. The information posted on our website is not incorporated into this Annual Report.
Our Code of Conduct and Business Ethics is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Form 10-K.
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