What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-07 compared with 2021-10-07 · 193 added, 205 removed, 210 unchanged (65% of the section changed)

9 unchanged sentences

fair values of investments in marketable securities;

assets held for sale;

intangible assets and goodwill valuations;

the recognition and disclosure of contingent liabilities;

the recognition and

disclosure of contingent liabilities;

the collectability of accounts receivable;

9 unchanged sentences

(1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price.

may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts.

(2) We may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts.

(3) Our ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy, may not be successful.

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(7) If the security measures for our software, services, other offerings or our internal information technology infrastructure are compromised or subject to a successful cyber-attack, or if our software offerings contain significant coding or configuration errors, we may experience reputational harm, legal claims and financial exposure.

(8) We have made acquisitions, and may make acquisitions in the future, including the pending acquisition of Kemp, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations.

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

(8) We have made acquisitions, and may make acquisitions in the future, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations.

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

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

(11) Russia's recent invasion of Ukraine, and the international community's response, have created substantial political and economic disruption, uncertainty, and risk.

For further information regarding risks and uncertainties associated with Progress' business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our 2021 10-K.

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Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.

COVID-19 has impacted the health and well-being of people on a global basis, restricted travel worldwide and caused significant economic disruption and uncertainty.

Our fiscal 2020 results of operations, as well as the financial results of our customers and partners, were negatively impacted by COVID-19.

The COVID-19 pandemic continues to have widespread and unpredictable impacts on people, businesses, and organizations around the world.

During the second and third fiscal quarters of 2021, we saw greater demand for our products and solutions across almost all of our product lines.

Although the impacts of COVID-19 continue to evolve, and the rate and pace of recovery from COVID-19 differs by geography and industry, we expect demand for our products and solutions to continue to be strong during the remainder of fiscal 2021.

We are continuing our return to our offices on a limited basis, where permissible, with limited business travel as needed, while the well-being of our employees remains our priority.

We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration and nature 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 II, Item 1A “Risk Factors” in this Form 10-Q.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to impact the U.S.

and the world.

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, the risk of additional, currently-unknown COVID-19 variations necessitating further measures to mitigate risk and seek to protect employee and vendor health and safety, and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q.

We will continue to evaluate the scope 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.

Our comprehensive product stack is designed to make technology teams more

productive and we have a deep commitment to the developer community, both open source and commercial alike.

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

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

Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") is dedicated to propelling business forward in a technology-driven world.

As the trusted provider of the leading products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences the need, deploy where and how they want and manage it all safely and securely.

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.

Progress previously reported results based on three segments but began operating as one business segment in the second fiscal quarter of 2021.

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

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

A key element of our strategy is centered on providing the platform and tools enterprises need to build modern, strategic business 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 infrastructure software space, with products that appeal to both IT organizations and individual developers.

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

In April 2019, we acquired Ipswitch, Inc., in October 2020, we acquired Chef Software, Inc., and as described below, in September 2021, we entered into a definitive agreement to acquire Kemp.

The Ipswitch and Chef acquisitions met, and the acquisition of Kemp is expected to meet, our strict financial criteria.

Kemp powers the always-on application experience that enterprises and service providers need to succeed.

The purchase price for Kemp will be approximately $258 million and we will fund the purchase price with existing cash balances.

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

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

Holistic Capital Allocation Approach .

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

Pursuant to our capital allocation strategy that we implemented in September 2017, we have returned approximately 20% of our annual cash flows from operations to stockholders in the form of dividends.

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

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

In the three months ended August 31, 2021, we did not repurchase any shares of our common stock.

As of August 31, 2021, there was $155.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and 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 will be paid on December 15, 2021 to shareholders of record as of the close of business on December 1, 2021.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

Our existing cash balances, together with funds generated from operations and amounts available under our credit facility, are expected to be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through the foreseeable future.

Our cash position will be reduced by the acquisition of Kemp as well as by any additional acquisitions we complete in the future and we may incur additional debt obligations in connection with those future acquisitions.

These acquisitions must meet strict financial and other criteria, which help further our goal to provide significant stockholder returns by providing scale and increased cash flows.

In April 2019, we acquired Ipswitch, Inc., in October 2020, we acquired Chef Software, Inc., and, as described below, in November 2021, we acquired Kemp Technologies.

These acquisitions met 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/DevSecOps, 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 Approach .

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 the first fiscal quarter of 2022, we repurchased and retired 0.6 million shares of our common stock for $25.0 million.

As of February 28, 2022, there was $130.0 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 increased the quarterly cash dividend annually in fiscal years 2017, 2018 and 2019.

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.

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.

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

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

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

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

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies.

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dollar have significantly impacted our results of operations and may impact our future results of operations.

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

We will derive additional revenues denominated in foreign currency from Kemp's international operations, which could further impact our revenue results in fiscal year 2021, if the Kemp acquisition Closing occurs in fiscal year 2021.

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

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

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

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

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

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

Our ARR was $444.0 million and $356.0 million as of August 31, 2021 and 2020, respectively, which is an increase of 25% year-over-year.

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

Net Dollar Retention Rate

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

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

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

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

Our net dollar retention rates 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.

Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in the first fiscal quarter of 2022 were impacted by fluctuations in foreign currency exchange rates.

Results of Operations

Three Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

Reported Constant

Revenue $ 147,417 $ 109,699 34 % 33 %

Nine Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

(In thousands) February 28, 2022 February 28, 2021 As

Reported Constant

Revenue $ 144,922 $ 121,280 19 % 21 %

Total revenue increased in both the third fiscal quarter and nine month period ended August 31, 2021 as compared to the same periods last year primarily due to our acquisition of Chef in the fourth quarter of fiscal year 2020, as well as increases in our DataDirect, OpenEdge, and Ipswitch product offerings.

Total revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as increases in our Chef, OpenEdge, and DevTools product offerings.

Software License Revenue

Three Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

Reported Constant

Software Licenses $ 51,930 $ 27,514 89 % 87 %

As a percentage of total revenue 35 % 25 %

Nine Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

(In thousands) February 28, 2022 February 28, 2021 As

Reported Constant

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As a percentage of total revenue 29 % 27 %

Software license revenue increased in both the third fiscal quarter and first nine months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increases in license sales in our DataDirect, OpenEdge, and Ipswitch product offerings.

Software license revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021.

Maintenance and Services Revenue

Three Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

Reported Constant

Maintenance $ 82,875 $ 72,764 14 % 13 %

As a percentage of total revenue 56 % 66 %

Services 12,612 9,421 34 % 33 %

As a percentage of total revenue 9 % 9 %

Total maintenance and services revenue $ 95,487 $ 82,185 16 % 15 %

As a percentage of total revenue 65 % 75 %

Nine Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

(In thousands) February 28, 2022 February 28, 2021 As

Reported Constant

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As a percentage of total revenue 71 % 73 %

Maintenance and services revenue both increased in the third fiscal quarter and first nine months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increased maintenance revenue from our OpenEdge and Ipswitch product lines.

Maintenance and services revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as increases in our Chef, Ipswitch, DevTools, and OpenEdge product offerings.

Revenue by Region

Three Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

Reported Constant

North America $ 93,880 $ 62,927 49 % 49 %

As a percentage of total revenue 64 % 57 %

Europe, the Middle East and Africa ("EMEA") $ 40,999 $ 37,447 9 % 6 %

As a percentage of total revenue 28 % 34 %

Latin America $ 5,298 $ 3,547 49 % 47 %

As a percentage of total revenue 3 % 3 %

Asia Pacific $ 7,240 $ 5,778 25 % 23 %

As a percentage of total revenue 5 % 6 %

Nine Months Ended % Change

(In thousands) August 31, 2021 August 31, 2020 As

(In thousands) February 28, 2022 February 28, 2021 As

Reported Constant

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As a percentage of total revenue 6 % 5 %

Total revenue generated in North America increased $31.0 million and $51.6 million in the third fiscal quarter and first nine months of fiscal year 2021, respectively.

The increases were primarily due to our acquisition of Chef, increased OpenEdge and DataDirect license revenue, and increased Ipswitch license and maintenance revenue.

The increase in revenue generated in both EMEA and Asia Pacific was due to our acquisition of Chef, as well as increased OpenEdge and Sitefinity revenue in EMEA.

Revenue in Latin America increased in the third fiscal quarter and first nine months of 2021 due to higher license and maintenance revenue in our OpenEdge product line.

In the first nine months of fiscal year 2021 revenue generated in markets outside North America represented 40% of total revenue compared to 39% of total revenue on a constant currency basis.

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

Total revenue generated in North America increased $6.6 million in the first quarter of fiscal year 2022.

The increase was primarily due to our acquisition of Kemp and increased Chef maintenance revenue, partially offset by decreased revenue from our OpenEdge product offerings.

The increase in revenue generated in both EMEA and Asia Pacific was due to our acquisition of Kemp, as well as increased Chef and OpenEdge revenue in both regions.

Revenue in Latin America increased due to the acquisition of Kemp and higher maintenance revenue from our OpenEdge product offerings.

In the first three months of fiscal year 2022 revenue generated in markets outside North America represented 46% of total revenue compared to 47% of total revenue on a constant currency basis.

In the first three months of fiscal year 2021 revenue generated in markets outside North America represented 41% of total revenue at both actual rates and on a constant currency basis.

Cost of Software Licenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 Change

Cost of software licenses $ 2,609 $ 1,151 $ 1,458 127 %

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

The increases in all periods were the result of higher payments of royalties to third parties as compared to the prior period.

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

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

The year over year increase is due to our acquisition of Kemp in the fourth quarter of fiscal year 2021.

Cost of Maintenance and Services

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 Change August 31, 2021 August 31, 2020 Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 Change

Cost of maintenance and services $ 15,145 $ 13,319 $ 1,826 14 %

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

The increases in all periods were primarily due to increased headcount, hosting, and outside services costs resulting from our acquisition of Chef.

The increase year over year was primarily due to increased headcount, outside services and hosting costs resulting from our acquisition of Kemp.

Amortization of Intangibles

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 %

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Amortization of intangibles $ 5,458 $ 3,521 55 %

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

The increases in both periods shown were primarily due to the acquisition of Chef.

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 %

The increase year over year is due to the acquisition of Kemp.

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Gross profit $ 121,710 $ 103,289 18 %

As a percentage of total revenue 84 % 85 %

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.

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

Sales and Marketing

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Change August 31, 2021 August 31, 2020

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 Change

Sales and marketing $ 33,469 $ 29,469 $ 4,000 14 %

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Total sales and marketing $ 33,469 $ 29,469 $ 4,000 14 %

Sales and marketing expenses increased in both periods shown, primarily due to increased personnel related costs associated with our acquisition of Chef.

Sales and marketing expenses increased year over year, primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as increases in contractors and outside services and marketing and sales events costs.

Product Development

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Change August 31, 2021 August 31, 2020 Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 Change

Product development costs $ 28,673 $ 24,548 $ 4,125 17 %

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Total product development costs $ 28,673 $ 24,548 $ 4,125 17 %

Product development expenses increased in both periods shown, primarily due to increased personnel related costs associated with our acquisition of Chef, as well as an increase in contractors and outside services and other product development costs.

Product development expenses increased year over year primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as an increase in contractors and outside services costs.

General and Administrative

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Change August 31, 2021 August 31, 2020 Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 Change

General and administrative $ 16,991 $ 13,424 $ 3,567 27 %

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Total cost of general and administrative $ 16,991 $ 13,424 $ 3,567 27 %

*not meaningful

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

General and administrative expenses increased in both periods shown, primarily due to higher personnel costs associated with our acquisition of Chef, as well as an increase in contractors and outside services and other general and administrative costs.

General and administrative expenses increased year over year primarily due to higher personnel costs and contractors and outside services costs associated with our acquisition of Kemp, as well as an increase in other general and administrative costs.

Amortization of Intangibles

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Amortization of intangibles $ 11,722 $ 6,879 70 %

1 unchanged sentence

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

Amortization of intangibles increased in both periods shown, due to the addition of Chef intangible assets, as discussed above.

Amortization of intangibles increased year over year due to the addition of Kemp intangible assets, as discussed above.

Restructuring Expenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Restructuring expenses $ 511 $ 1,157 (56) %

As a percentage of total revenue — % 1 %

Restructuring expenses recorded in the third quarter and first nine months of fiscal year 2021 primarily relate to the restructuring activities that occurred in the fourth quarter of fiscal year 2020 resulting from the acquisition of Chef.

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

Restructuring expenses recorded in the first quarter of fiscal year 2022 primarily relates to the restructuring activities that occurred in the fourth quarters of fiscal years 2021 and 2020 resulting from the acquisitions of Kemp and Chef, respectively.

Restructuring expenses recorded in the first quarter of fiscal year 2020 are comprised mostly of costs related to the Chef restructuring actions of 2020.

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

Acquisition-Related Expenses

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Acquisition-related expenses $ 912 $ 396 130 %

2 unchanged sentences

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

Acquisition-related expenses increased in the third quarter and first nine months of fiscal year 2021 due to the acquisition of Chef, as well as our pursuit of other acquisition opportunities.

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

Acquisition-related expenses increased in the first quarter of fiscal year 2022 due to the acquisition of Kemp, as well as our pursuit of other acquisition opportunities.

Acquisition-related expenses in the same period of fiscal year 2021 were primarily related to the acquisition of Chef.

Income from Operations

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Income from operations $ 29,432 $ 27,416 7 %

2 unchanged sentences

Other (Expense) Income, Net

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Interest expense $ (3,703) $ (2,514) (47) %

3 unchanged sentences

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

Other expense, net, increased in both the third fiscal quarter and the nine month period ended August 31, 2021 as compared to the same periods in the prior year.

This is a result of increased interest expense associated with our convertible senior notes, which we issued in April 2021.

In both periods shown, the increases in interest expense were offset by lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts.

Other expense, net, increased year over year primarily due to increased interest expense associated with our convertible senior notes, which we issued in April 2021.

The increase in interest expense was offset by higher interest income and other, net, which resulted from the recognition of grant income during the quarter.

Provision for Income Taxes

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Provision for income taxes $ 5,498 $ 5,803 (5) %

As a percentage of total revenue 4 % 5 %

Our effective tax rate was 22% in the third fiscal quarter of 2021 compared to 21% in the third fiscal quarter of 2020.

The increase is due primarily to discrete tax benefits in the third fiscal quarter of 2020.

There were no significant discrete tax items in the third fiscal quarter of 2021.

Three Months Ended Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020 % Change August 31, 2021 August 31, 2020 % Change

Our effective tax rate was 21% in the first fiscal quarter of 2022 compared to 23% in the first fiscal quarter of 2021.

The decrease is due primarily to discrete tax expense related to the vesting of our Long-Term Incentive Plan ("LTIP") in the first fiscal quarter of 2021.

There were no significant discrete tax items in the first fiscal quarter of 2022.

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021 % Change

Net income $ 20,454 $ 18,961 8 %

As a percentage of total revenue 14 % 16 %

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)

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

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

ARR mitigates

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

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

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

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

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

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

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

Our ARR was $479.0 million and $426.0 million as of February 28, 2022 and 2021, 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.

Our net dollar retention rates have generally ranged between 100% and 102% 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) August 31, 2021 November 30, 2020

(In thousands) February 28, 2022 November 30, 2021

Cash and cash equivalents $ 171,666 $ 155,406

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Total cash, cash equivalents and short-term investments $ 173,322 $ 157,373

The increase in cash, cash equivalents and short-term investments of $277.7 million from the end of fiscal year 2020 was due to cash inflow from the issuance of the convertible senior notes of $349.2 million, cash inflows from operations of $134.6 million, $6.8 million in cash received from the issuance of common stock, a decrease in escrow receivable of $2.1 million, and the effect of exchange rates on cash of $0.6 million.

These cash inflows were offset by payments of debt obligations of $111.7 million, cash paid for the purchase of capped calls of $43.1 million in connection with the convertible note offering, repurchases of common stock of $35.0 million, dividend payments of $23.4 million, and purchases of property and equipment of $2.7 million.

The increase in cash, cash equivalents and short-term investments of $15.9 million from the end of fiscal year 2021 was due to cash inflows from operations of $44.1 million, proceeds from the issuance of debt of $7.5 million, $1.0 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $0.7 million.

These cash inflows were offset by repurchases of common stock of $25.0 million, dividend payments of $7.8 million, payments of issuance costs for long-term debt of $2.0 million, payments of debt obligations of $1.7 million, and purchases of property and equipment of $0.8 million.

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

As of August 31, 2021, $30.7 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

As of February 28, 2022, $45.9 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

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

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In January 2020, our Board of Directors increased the total share repurchase authorization from $75 million to $250 million.

In each of the three months ended August 31, 2021 and August 31, 2020, we did not repurchase any shares of our common stock.

In the nine months ended August 31, 2021 and August 31, 2020, we repurchased and retired 0.8 million shares for $35.0 million and 0.4 million shares for $20.0 million, respectively.

In the three months ended February 28, 2022 and February 28, 2021, we repurchased and retired 0.6 million shares for $25.0 million and 0.4 million shares for $15.0 million, respectively.

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

As of August 31, 2021, there was $155.0 million remaining under the current authorization.

We began paying quarterly cash dividends to Progress stockholders in December 2016, with annual increases in the quarterly cash dividend since such time.

On June 22, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on September 15, 2021.

As of February 28, 2022, there was $130.0 million remaining under the current authorization.

We began paying quarterly cash dividends to Progress stockholders in December 2016, and have paid a quarterly cash dividend since that time.

On March 29, 2022, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on June 15, 2022 to stockholders of record as of the close of business on June 1, 2022.

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 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 three months ended February 28, 2022, we incurred expenses of $0.4 million 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 $1.1 million is included in other accrued liabilities on the consolidated balance sheet at February 28, 2022.

During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef (Note 7).

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

For the three months ended August 31, 2021, we incurred minimal expenses relating to this restructuring.

For the nine months ended August 31, 2021, we incurred expenses of $0.9 million relating to this restructuring.

For the three months ended February 28, 2022, we incurred expenses of $0.1 million relating to this restructuring.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2027.

Accordingly, the balance of the restructuring reserve, which is not material, is included in other accrued liabilities on the condensed consolidated balance sheet at August 31, 2021.

We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2021.

In September 2021, we closed a facility as part of this restructuring and expect to incur restructuring charges of approximately $2.9 million during the fourth quarter of fiscal year 2021.

Accordingly, the balance of the restructuring reserve of $4.3 million is included in short-term and long-term lease liabilities on the condensed consolidated balance sheet at February 28, 2022.

Credit Facility

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

The revolving line of credit 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 and restated credit agreement (the "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 prior secured credit facility dated April 30, 2019.

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

The revolving line of credit 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.

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

The outstanding balance of the term loan as of August 31, 2021 was $272.8 million, with $24.5 million due in the next 12 months.

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 Credit Agreement 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 Agreement matures on the earlier of (i) January 25, 2027 and (ii) the date that is 181 days prior to the maturity date of our Notes subject to certain conditions as set forth in the amended credit agreement, including the repayment of the Notes, the refinancing of the 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 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 $1.7 million each, the following

four payments are in the principal amount of $3.4 million each, the following eight payments are in the principal amount of $5.2 million 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 interest rate as of August 31, 2021 was 2.13%.

As of August 31, 2021, there were no amounts outstanding under the revolving line of credit and $2.4 million of letters of credit outstanding (Note 7).

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.

The outstanding balance of the term loan as of February 28, 2022 was $273.3 million, with $6.9 million due in the next 12 months.

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

The interest rate as of February 28, 2022 was 1.79%.

As of February 28, 2022, there were no amounts outstanding under the revolving line of credit and $2.2 million of letters of credit outstanding (Note 8).

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.

In April 2021, we issued, in a private placement, Convertible Senior Notes (the "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 (Note 7).

In addition, the Company granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, 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.

The adoption of ASU 2020-06 had no impact on the Company's debt covenant compliance under the current arrangement.

Refer to Note 8:

Debt for further discussion.

Cash Flows From Operating Activities

Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021

Net income $ 20,454 $ 18,961

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Net cash flows from operating activities $ 44,093 $ 44,688

The year over year increase in cash generated from operations was primarily due to the addition of Chef for a full year, as well as particularly strong collections of our receivables, partially offset by increased expenses.

Our gross accounts receivable as of August 31, 2021 decreased by $7.7 million from the end of fiscal year 2020 and our days sales outstanding (DSO) in accounts receivable increased to 54 days from 49 days in the fiscal third quarter of 2020 due to the timing of billings and collections.

In the first quarter of fiscal year 2022, operating cash flows decreased due to higher compensation related payments as compared to the same period in 2021, partially offset by increased cash generated from the acquisition of Kemp and particularly strong collections of our receivables.

Our gross accounts receivable as of February 28, 2022, decreased by $13.1 million from the end of fiscal year 2021 and our days sales outstanding (DSO) in accounts receivable decreased to 52 days from 53 days in the first fiscal quarter of 2021 due to the timing of billings and collections.

Cash Flows From (Used in) Investing Activities

Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021

Net investment activity $ 300 $ 1,300

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Decrease in escrow receivable and other — 2,130

Net cash flows from investing activities $ 3,739 $ 6,473

Net cash flows (used in) from investing activities $ (531) $ 2,264

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

We also purchased $2.7 million of property and equipment in the first nine months of fiscal year 2021, as compared to $3.4 million in the first nine months of fiscal year 2020.

We also purchased $0.8 million of property and equipment in the first three months of fiscal year 2022, as compared to $1.2 million in the first three months of fiscal year 2021.

Cash Flows From (Used in) Financing Activities

Nine Months Ended

(In thousands) August 31, 2021 August 31, 2020

Three Months Ended

(In thousands) February 28, 2022 February 28, 2021

Proceeds from stock-based compensation plans $ 4,094 $ 3,485

Repurchases of common stock (25,000) (15,000)

Payment of principal on long-term debt (111,669) (7,525)

Proceeds from issuance of senior convertible notes, net of issuance costs of $9,900 350,100 —

Purchase of capped calls (43,056) —

Dividend payments to shareholders (23,372) (22,358)

Proceeds from the issuance of debt 7,474 —

Payment of debt issuance costs (1,957) —

Payment of principal on long-term debt (1,719) (18,763)

Dividend payments to stockholders (7,784) (7,854)

Other financing activities (3,139) (892)

Net cash flows from (used in) financing activities $ (28,031) $ (39,024)

During the first nine months 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 also received $9.2 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $9.0 million in the first nine months of fiscal year 2020.

During the first three months of fiscal year 2022, we received $5.5 million in net proceeds from the issuance of debt.

We also received $4.1 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $3.5 million in the first three months of fiscal year 2021.

Further, we repurchased $25.0 million of our common stock under our share repurchase plan compared to $15.0 million in the same period of the prior year.

We also made payments on our long-term debt of $111.7 million (including a $98.5 million repayment on the revolving line of credit) in the first nine months of fiscal year 2021 compared to $7.5 million in the same period of the prior year.

Finally, we made dividend payments of $23.4 million to our shareholders during the first nine months of fiscal year 2021, as compared to $22.4 million in the first nine months of fiscal year 2020.

We also made payments on our long-term debt of $1.7 million in the first three months of fiscal year 2022 compared to $18.8 million in the same period of the prior year (including a $15.0 million repayment on the revolving line of credit).

Finally, we made dividend payments of $7.8 million to our stockholders during the first three months of fiscal year 2022, as compared to $7.9 million in the first three months of fiscal year 2021.

Indemnification Obligations

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Liquidity Outlook

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 cash requirements for the foreseeable 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 II, 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 cash requirements for the foreseeable future.

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.

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

Legal and Other Regulatory Matters

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Legal Proceedings.

Off-Balance Sheet Arrangements

We have no “off-balance sheet arrangements” within the meaning of Item 303(a)(4) of Regulation S-K.

Contractual Obligations

There have been no material changes to our contractual obligations disclosed in tabular format in our 2020 10-K.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis