What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-07 compared with 2022-04-07 · 168 added, 127 removed, 276 unchanged (52% of the section changed)

11 unchanged sentences

intangible assets and goodwill valuations;

the recognition and

disclosure of contingent liabilities;

the recognition and disclosure of contingent liabilities;

the collectability of accounts receivable;

and assumptions used to determine the fair value of stock-based compensation.

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

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

For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of our 2021 10-K.

5 unchanged sentences

There are a number of factors that could cause actual results or future events to differ materially from those anticipated by the forward-looking statements, including, without limitation:

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

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

(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.

(4) If we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts.

(5) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners.

(6) Our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses.

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

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

(9) Delay or failure to realize the expected synergies and benefits of the 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.

(i) 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;

(ii) 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;

(iii) 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;

(iv) if we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts;

(v) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners;

(vi) our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses;

(vii) 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;

(viii) 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;

(ix) 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;

(x) 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;

(xi) 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 our Quarterly Report on Form 10-Q, as

filed with the SEC on April 7, 2022;

and in Part I, Item 1A (Risk Factors) in our 2021 10-K.

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

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These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Impact of COVID-19

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") is dedicated to propelling business forward in a technology-driven world.

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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.

In April 2019, we acquired Ipswitch, Inc.;

in October 2020, we acquired Chef Software, Inc.;

and 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 .

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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.

In the first six months of 2022, we repurchased and retired 1.1 million shares of our common stock for $51.5 million.

As of May 31, 2022, there was $103.5 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.

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.

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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 the first fiscal quarter of 2022 were impacted by fluctuations in foreign currency exchange rates.

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

Results of Operations

Three Months Ended % Change

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

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

Revenue $ 148,747 $ 122,488 21 % 24 %

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.

Six Months Ended % Change

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

Revenue $ 293,669 $ 243,768 20 % 23 %

Total revenue increased in both the second fiscal quarter and six month period ended May 31, 2022 as compared to the same periods last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as increases in our DataDirect and Chef product offerings.

These increases were partially offset by the negative impact of foreign exchange on license and maintenance revenue in our EMEA region.

Software License Revenue

Three Months Ended % Change

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

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

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As a percentage of total revenue 30 % 25 %

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.

Six Months Ended % Change

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

Software licenses $ 87,564 $ 63,424 38 % 41 %

As a percentage of total revenue 30 % 26 %

Software license revenue increased in both the second quarter and first six months of fiscal year 2022 as compared to the same periods last year primarily due to our acquisition of Kemp and increases in license sales in our DataDirect product offerings.

Maintenance and Services Revenue

Three Months Ended % Change

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

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

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As a percentage of total revenue 70 % 75 %

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.

Six Months Ended % Change

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

Maintenance $ 181,294 $ 157,046 15 % 18 %

As a percentage of total revenue 62 % 64 %

Services 24,811 23,298 6 % 8 %

As a percentage of total revenue 8 % 10 %

Total maintenance and services revenue $ 206,105 $ 180,344 14 % 16 %

As a percentage of total revenue 70 % 74 %

Maintenance revenue increased in the second quarter and first six months of fiscal year 2022 as compared to the same periods last year primarily due to our acquisition of Kemp and increased maintenance revenue from our Chef product offerings.

Our Ipswitch and DevTools product offerings also contributed to the year to date increase in maintenance revenue.

Services revenue increased in the second quarter and first six months of fiscal year 2022 as compared to the same periods last year primarily due to increased services revenue from our OpenEdge and Ipswitch product offerings.

The maintenance and services increases were partially offset by the negative impact of foreign exchange in our EMEA region.

Revenue by Region

Three Months Ended % Change

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

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

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As a percentage of total revenue 6 % 5 %

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.

Six Months Ended % Change

(In thousands) May 31, 2022 May 31, 2021 As

Reported Constant

North America $ 163,487 $ 142,599 15 % 15 %

As a percentage of total revenue 56 % 58 %

Europe, the Middle East and Africa ("EMEA") $ 103,336 $ 81,561 27 % 33 %

As a percentage of total revenue 35 % 34 %

Latin America $ 8,561 $ 7,246 18 % 15 %

As a percentage of total revenue 3 % 3 %

Asia Pacific $ 18,285 $ 12,362 48 % 52 %

As a percentage of total revenue 6 % 5 %

Total revenue generated in North America increased $14.3 million and $20.9 million in the second quarter and first six months of fiscal year 2022, respectively.

The increases were primarily due to our acquisition of Kemp, as well as increases from our DataDirect and Chef product offerings.

The increase in revenue generated in EMEA was primarily due to our acquisition of Kemp, as well as increased revenue from Chef, partially offset by a negative impact of foreign exchange.

The increases in revenue generated in both Latin America and Asia Pacific were due to our acquisition of Kemp, as well as increased revenue from our OpenEdge product offerings.

In the first six months of fiscal year 2022 revenue generated in markets outside North America represented 44% of total revenue compared to 45% of total revenue on a constant currency basis.

In the first six months of fiscal year 2021 revenue generated in markets outside North America represented 42% of total revenue at both actual rates and on a constant currency basis.

Cost of Software Licenses

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 Change May 31, 2022 May 31, 2021 Change

Cost of software licenses $ 2,583 $ 1,038 $ 1,545 149 % $ 5,192 $ 2,189 $ 3,003 137 %

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

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.

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Cost of Maintenance and Services

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 Change May 31, 2022 May 31, 2021 Change

Cost of maintenance and services $ 15,801 $ 14,673 $ 1,128 8 % $ 30,946 $ 27,992 $ 2,954 11 %

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

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

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

Amortization of Intangibles

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 %

Amortization of intangibles $ 5,573 $ 3,599 55 % $ 11,031 $ 7,120 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 increase year over year is due to the acquisition of Kemp.

Three Months Ended

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

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 %

Gross profit $ 124,790 $ 103,178 21 % $ 246,500 $ 206,467 19 %

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Sales and Marketing

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 Change May 31, 2022 May 31, 2021

Sales and marketing $ 32,704 $ 29,262 $ 3,442 12 % $ 66,173 $ 58,731 $ 7,442 13 %

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Total sales and marketing $ 32,704 $ 29,262 $ 3,442 12 % $ 66,173 $ 58,731 $ 7,442 13 %

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.

Sales and marketing expenses increased in both periods shown, primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as increases in marketing and sales events costs.

Product Development

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 Change May 31, 2022 May 31, 2021 Change

Product development costs $ 28,643 $ 26,415 $ 2,228 8 % $ 57,316 $ 50,963 $ 6,353 12 %

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Total product development costs $ 28,643 $ 26,415 $ 2,228 8 % $ 57,316 $ 50,963 $ 6,353 12 %

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.

Product development expenses increased in both periods shown primarily due to increased personnel related costs associated with our acquisition of Kemp.

General and Administrative

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 Change May 31, 2022 May 31, 2021 Change

General and administrative $ 19,207 $ 16,460 $ 2,747 17 % $ 36,198 $ 29,884 $ 6,314 21 %

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Total cost of general and administrative $ 19,207 $ 16,460 $ 2,747 17 % $ 36,198 $ 29,884 $ 6,314 21 %

*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 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.

General and administrative expenses increased in both periods shown 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

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Amortization of intangibles $ 11,892 $ 7,979 49 % $ 23,614 $ 14,858 59 %

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

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

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

Restructuring Expenses

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Restructuring expenses $ 143 $ (64) (323) % $ 654 $ 1,093 (40) %

As a percentage of total revenue — % — % — % — %

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.

Restructuring expenses recorded in the second quarter and first six months of fiscal year 2022 relate 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 second quarter and first six months of fiscal year 2021 are comprised mostly of costs related to the Chef restructuring action 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

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Acquisition-related expenses $ 2,736 $ 844 224 % $ 3,648 $ 1,240 194 %

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

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.

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

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

Gain on Sale of Assets Held for Sale

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Gain of sale of assets held for sale $ (10,770) $ — * $ (10,770) $ — *

As a percentage of total revenue (7) % — % (4) % — %

*not meaningful

In the second quarter of fiscal year 2022, we sold corporate land and building assets previously reported as assets held for sale on our consolidated balance sheet.

As the sale price less cost to sell was greater than the carrying value of these assets we recognized a net gain on the sale of approximately $10.8 million in the second quarter of fiscal year 2022.

Income from Operations

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Income from operations $ 40,235 $ 22,282 81 % $ 69,667 $ 49,698 40 %

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Other (Expense) Income, Net

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Interest expense $ (3,656) $ (4,601) 21 % $ (7,359) $ (7,115) (3) %

Interest income and other, net 155 4 * 744 123 505 %

Foreign currency loss, net (366) (257) (42) %

Foreign currency gain (loss), net 111 (621) 118 % (255) (878) 71 %

Total other expense, net $ (3,390) $ (5,218) 35 % $ (6,870) $ (7,870) 13 %

As a percentage of total revenue (2) % (4) % (2) % (3) %

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.

*not meaningful

Other expense, net, decreased in the second quarter and first six months of fiscal year 2022 as compared to the same periods last year primarily due to decreased foreign currency loss, net, in both periods, as well as higher interest income and other, net, which resulted from the recognition of grant income during the first quarter of fiscal year 2022.

Interest expense decreased in the second quarter of fiscal year 2022 as compared to the same period last year due to decreased interest expense on our convertible senior notes resulting from the adoption of ASU 2020-06.

Refer to Note 1, Basis of Presentation for further details on the impact of adoption.

The decrease in interest expense on our convertible senior notes was offset by increased interest expense on our term loan, which was amended in the first quarter of fiscal year 2022.

Refer to Note 8, Debt.

for further details on the impact of the amendment.

Provision for Income Taxes

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Provision for income taxes $ 7,735 $ 3,507 121 % $ 13,233 $ 9,310 42 %

As a percentage of total revenue 5 % 3 % 5 % 4 %

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

Our effective tax rate was 21% in the second fiscal quarter of both 2022 and 2021.

There were no significant discrete tax items in the second fiscal quarter of either 2022 or 2021.

Three Months Ended Six Months Ended

(In thousands) May 31, 2022 May 31, 2021 % Change May 31, 2022 May 31, 2021 % Change

Net income $ 29,110 $ 13,557 115 % $ 49,564 $ 32,518 52 %

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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 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.

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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.

All periods are reported in constant currency, using current year budgeted exchange rates.

Our ARR was $486.0 million and $432.0 million as of May 31, 2022 and 2021, respectively, which is an increase

of 12.5% year-over-year.

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

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Cash, Cash Equivalents and Short-Term Investments

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

(In thousands) May 31, 2022 November 30, 2021

Cash and cash equivalents $ 224,863 $ 155,406

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Total cash, cash equivalents and short-term investments $ 225,913 $ 157,373

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.

The increase in cash, cash equivalents and short-term investments of $68.5 million from the end of fiscal year 2021 was due to cash inflows from operations of $112.4 million, proceeds from the sale of long-lived assets of $26.0 million, proceeds from the issuance of debt of $7.5 million, and $2.4 million in cash received from the issuance of common stock.

These cash inflows were offset by repurchases of common stock of $51.5 million, dividend payments of $15.6 million, the effect of exchange rates on cash of $5.2 million, payments of debt obligations of $3.4 million, payments of issuance costs for long-term debt of $2.0 million, and purchases of property and equipment of $2.0 million.

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

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

As of May 31, 2022, $56.1 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 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.

In the six months ended May 31, 2022 and May 31, 2021, we repurchased and retired 1.1 million shares for $51.5 million and 0.8 million shares for $35.0 million, respectively.

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

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

As of May 31, 2022, there was $103.5 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.

On June 21, 2022, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on September 15, 2022 to stockholders of record as of the close of business on September 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.

2 unchanged sentences

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.

For the three and six months ended May 31, 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.

1 unchanged sentence

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.

Accordingly, the balance of the restructuring liability of $0.5 million is included in other accrued liabilities on the consolidated balance sheet at May 31, 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 February 28, 2022, we incurred expenses of $0.1 million relating to this restructuring.

For the three and six months ended May 31, 2022, we incurred expenses of $0.1 million and $0.2 million, respectively, 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 of $4.3 million is included in short-term and long-term lease liabilities on the condensed consolidated balance sheet at February 28, 2022.

Accordingly, the balance of the restructuring liability of $4.2 million is included in short-term and long-term lease liabilities on the condensed consolidated balance sheet at May 31, 2022.

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.

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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.

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.

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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 outstanding balance of the term loan as of May 31, 2022 was $271.6 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).

The interest rate as

of May 31, 2022 was 2.63%.

As of May 31, 2022, there were no amounts outstanding under the revolving line of credit and $2.1 million of letters of credit outstanding (Note 8).

Convertible Senior Notes

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Cash Flows From Operating Activities

Three Months Ended

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

Six Months Ended

(In thousands) May 31, 2022 May 31, 2021

Net income $ 49,564 $ 32,518

2 unchanged sentences

Net cash flows from operating activities $ 112,353 $ 99,378

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

Three Months Ended

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

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

Our gross accounts receivable as of May 31, 2022, decreased by $34.8 million from the end of fiscal year 2021 and our days sales outstanding (DSO) in accounts receivable decreased to 39 days from 44 days in the second fiscal quarter of 2021 due to the timing of billings and collections.

Cash Flows From Investing Activities

Six Months Ended

(In thousands) May 31, 2022 May 31, 2021

Net investment activity $ 900 $ 2,650

Purchases of property and equipment (1,979) (2,116)

Proceeds from sale of long-lived assets, net 25,998 —

Decrease in escrow receivable and other — 2,130

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

Net cash flows from investing activities $ 24,919 $ 2,664

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 $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

Three Months Ended

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

In the second quarter of fiscal year 2022 we received $26.0 million net proceeds from the sale of long-lived assets.

We also purchased $2.0 million of property and equipment in the first six months of fiscal year 2022, as compared to $2.1 million in the first six months of fiscal year 2021.

Cash Flows (Used in) From Financing Activities

Six Months Ended

(In thousands) May 31, 2022 May 31, 2021

Proceeds from stock-based compensation plans $ 7,771 $ 6,300

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Payment of principal on long-term debt (3,435) (106,025)

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

Purchase of capped calls — (43,056)

Dividend payments to stockholders (15,573) (15,617)

Other financing activities (5,405) (2,373)

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

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.

Net cash flows (used in) from financing activities $ (62,598) $ 153,425

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

During the first six 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 $7.8 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $6.3 million in the first six months of fiscal year 2021.

Further, we repurchased $51.5 million of our common stock under our share repurchase plan compared to $35.0 million in the same period of the prior year.

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.

We also made payments on our long-term debt of $3.4 million in the first six months of fiscal year 2022 compared to $106.0 million in the same period of the prior year (including a $98.5 million repayment on the revolving line of credit).

Finally, we made dividend payments of $15.6 million to our stockholders during the first six months of both fiscal year 2022 and 2021.

Indemnification Obligations

15 unchanged sentences

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