What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-01-27 compared with 2022-01-27 · 118 added, 150 removed, 309 unchanged (46% of the section changed)

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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 and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K.

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

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

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

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

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

We enable our customers to develop the applications and experiences they need, deploy where and how they want, and manage it all safely and securely.

Progress helps customers drive faster cycles of innovation, fuel momentum and accelerate their path to success.

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

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

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

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

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

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

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

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

Total Growth Strategy Driven by Accretive M&A.

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

These acquisitions must meet strict financial and other criteria, with the goal of driving significant stockholder returns by providing scale and increased cash flows.

Follow a Total Growth Strategy through 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 help further our goal to provide significant stockholder returns by providing scale and increased cash flows.

In April 2019, we acquired Ipswitch, Inc.;

and in October 2020, we acquired Chef Software.

acquisitions met our strict financial criteria.

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

This acquisition is expected to meet our strict financial criteria.

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

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

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

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

Multi-Faceted Capital Allocation Strategy .

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

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

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

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

and in November 2021, we acquired Kemp Technologies.

These acquisitions met our strict financial criteria.

In addition, on January 3, 2023, we announced our entry into a definitive agreement with Vector Maven Holdings, Inc.

and Vector Maven Holdings, L.P.

to acquire MarkLogic, a leader in managing complex data and metadata (subject to the satisfaction of the terms and conditions set forth in the definitive agreement).

In recent years, our total growth strategy described above has resulted in the rapid expansion of our product portfolio.

As our portfolio evolves, we continuously evaluate our organization for additional synergies and efficiencies.

Therefore, we are working to realign our go-to-market, product, and operational teams and to increase centralization of shared services and functions across our company.

We believe that these changes will improve collaboration among the teams that develop, sell, and support our products;

enhance our ability to integrate acquired businesses;

and lead to greater system uniformity and increased operating efficiency.

Employ a Multi-Faceted Capital Allocation Strategy .

Our capital allocation policy emphasizes accretive M&A, which allows us to expand our business and drive significant stockholder returns.

We also utilize dividends and share repurchases to return capital to stockholders.

We intend to continue to repurchase our shares in sufficient quantities to offset dilution from our equity plans and to continue to return a portion of our annual cash flows from operations to stockholders in the form of dividends.

In fiscal year 2022, we repurchased and retired 1.7 million shares of our common stock for $77.0 million.

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

As of November 30, 2022, there was $78.0 million remaining under the share repurchase program authorized by our Board of Directors.

On January 10, 2023,

our Board of Directors increased our total share repurchase authorization by $150.0 million, to an aggregate authorization of $228.0 million.

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.

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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 described above, we expect to 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 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 fiscal year 2021 and 2022 were impacted by fluctuations in foreign currency exchange rates.

Results of Operations

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Revenue $ 602,013 $ 531,313 13 % 16 %

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

The increase in revenue in fiscal year 2022 was driven by the acquisition of Kemp, which closed during the fourth quarter of fiscal year 2021, and increases in our OpenEdge, DevTools, Sitefinity, and Corticon product offerings.

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

Changes in prices from fiscal year 2021 to 2022 did not have a significant impact on our revenue.

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As a percentage of total revenue 31 % 29 %

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

Software license revenue increased in fiscal year 2022 primarily due to the acquisition of Kemp, as well as increases in license sales in our DataDirect and Corticon product offerings, which was partially offset by the negative impact of foreign exchange.

Maintenance and Services Revenue

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As a percentage of total revenue 69 % 71 %

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

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

Maintenance revenue increased in fiscal year 2022 primarily due to the acquisition of Kemp, as well as an increase in maintenance revenue from our Chef, Ipswitch and DevTools product offerings, partially offset by the negative impact of foreign exchange in our EMEA region .

Professional services revenue increased primarily due to increased services revenue from our Sitefinity, Ipswitch, and DevTools product offerings.

Revenue by Region

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Total revenue generated in North America increased $23.3 million, and total revenue generated outside North America increased $47.4 million, in fiscal year 2022.

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

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

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

The increases in North America and EMEA were primarily due to the acquisition of Kemp and increases in license revenue from our DataDirect product offerings and maintenance revenue from our Ipswitch product offerings.

Revenue from Latin America increased due to the acquisition of Kemp, and an increase in Sitefinity license and maintenance revenue.

Revenue from Asia Pacific increased due to the acquisition of Kemp as well as increases in our OpenEdge, DevTools, and Sitefinity product offerings.

Total revenue generated in markets outside North America represented 43% of total revenue in fiscal year 2022 compared to 40% of total revenue in the same period last year.

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As a percentage of total revenue 2 % 1 %

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

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

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

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

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

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

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

Cost of maintenance and services increased primarily due to higher personnel and hosting related costs resulting from the acquisition of Kemp, offset by decreased contractors and outside services costs.

Amortization of Acquired Intangibles

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

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

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

Fiscal Year Ended

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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 of costs of licenses, costs of maintenance and services, and the amortization of intangibles, each as described above.

Sales and Marketing

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Total sales and marketing $ 140,760 $ 125,890 $ 14,870 12 %

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

Sales and marketing expenses increased in fiscal year 2022 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

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Total product developments costs $ 114,568 $ 103,338 $ 11,230 11 %

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

Product development expenses increased in fiscal year 2022 primarily due to increased personnel related costs associated with our acquisition of Kemp, partially offset by decreased contractors and outside services costs and other product development costs .

General and Administrative

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

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

General and administrative expenses increased in fiscal year 2022 primarily due to higher personnel related costs associated with our acquisition of Kemp, as well as increases in contractors and outside services and other general and administrative costs.

Amortization of Intangibles

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

Amortization of acquired intangibles increased in fiscal year 2022 due to the addition of Kemp acquired intangibles, as discussed above.

Restructuring Expenses

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

Acquisition-related expenses in fiscal year 2022 were primarily related to our pursuit of other acquisition opportunities.

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

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

Cyber Incident

Fiscal Year Ended

(In thousands) November 30, 2022 November 30, 2021 % Change

Cyber incident $ 602 $ — *

As a percentage of total revenue — % — %

*Not meaningful

As previously disclosed on December 19, 2022, following the detection of irregular activity on certain portions of our corporate network, we engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the cyber incident.

Cyber incident costs relate to the engagement of external cybersecurity experts and other incident response professionals.

Gain on Sale of Assets Held for Sale

Fiscal Year Ended

(In thousands) November 30, 2022 November 30, 2021 % Change

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

As a percentage of total revenue 2 % — %

*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

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

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

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

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

Total other expense, net, decreased in fiscal year 2022 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 partially offset by increased interest expense on our term loan, which was amended in the first quarter of fiscal year 2022.

Refer to Note 9:

Debt, for further details on the impact of the amendment.

Interest income and other, net, was higher in fiscal year 2022, resulting from the recognition of grant income during the first quarter of the year.

Foreign currency loss decreased year over year.

Provision for Income Taxes

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As a percentage of total revenue 4 % 3 %

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

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

Our effective income tax rate was 19% and 18% for fiscal years 2022 and 2021 respectively.

The primary reason for the increase in the effective rate was due to the jurisdictional mix of profits.

Fiscal Year Ended

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Our ARR was $497.0 million and $480.0 million as of November 30, 2022 and 2021, respectively, which is an increase of 3.5% year-over-year.

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

The growth in ARR was driven by multiple products including OpenEdge, DataDirect, Sitefinity, Chef, DevTools and FileTransfer.

Net Dollar Retention Rate

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Total cash, cash equivalents and short-term investments $ 256,277 $ 157,373

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

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

The increase in cash, cash equivalents and short-term investments of $98.9 million from the end of fiscal year 2021 was primarily due to cash inflows from operations of $192.2 million, proceeds from the sale of long-lived assets of $26.0 million, $8.3 million in cash received from the issuance of common stock, and proceeds from the issuance of debt of $7.5 million.

These cash inflows were offset by repurchases of common stock of $77.0 million, dividend payments of $31.1 million, the effect of exchange rates on cash of $11.9 million, payments of debt obligations of $6.9 million, purchases of property and equipment of $6.1 million, and payments of issuance costs for long-term debt of $2.3 million.

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

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Share Repurchases

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

In fiscal years 2021 and 2020, we repurchased and retired 0.8 million shares of our common stock for $35.0 million and 1.4 million shares of our common stock for $60.0 million, respectively, under this current authorization.

In fiscal years 2022 and 2021, we repurchased and retired 1.7 million shares of our common stock for $77.0 million and 0.8 million shares of our common stock for $35.0 million, respectively.

In fiscal year 2020, we repurchased and retired 1.4 million shares of our common stock for $60.0 million.

As of November 30, 2022, there was $78.0 million remaining under the current share repurchase authorization.

On January 10, 2023, our Board of Directors increased our share repurchase authorization by $150.0 million, to an aggregate authorization of $228.0 million.

The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand, or discontinue the repurchase program at any time.

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

On September 23, 2022, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on December 15, 2022 to stockholders of record as of the close of business on December 1, 2022.

On January 10, 2023, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on March 15, 2023 to shareholders of record as of the close of business on March 1, 2023.

We have paid aggregate cash dividends totaling $31.1 million, $31.6 million and $29.9 million for the years ended November 30, 2022, November 30, 2021 and November 30, 2020, respectively.

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

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

For the fiscal years ended November 30, 2022, 2021, and 2020, we incurred expenses of $0.4 million, $4.1 million and $3.9 million, respectively, relating to this restructuring.

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

We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2022, but we do not expect these costs to be material.

We expect to incur additional expenses as part of this action related to facility closures as we consolidate offices in various locations during fiscal year 2023, 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 2027.

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

Accordingly, the balance of the restructuring reserve of $3.9 million is included in short-term and long-term lease liabilities on the consolidated balance sheet at November 30, 2022.

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

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

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

For the fiscal years ended November 30, 2022 and 2021, we incurred expenses of $0.5 million and $2.0 million, respectively, relating to this restructuring.

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

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

Accordingly, the balance of the restructuring reserve of $1.9 million is included in other accrued liabilities on the consolidated balance sheet at November 30, 2021.

We expect to incur additional expenses as part of this action related to employee costs, but we do not expect these costs to be material.

Minimal cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2023.

Accordingly, the minimal balance of the restructuring reserve is included in other accrued liabilities on the consolidated balance sheet at November 30, 2022.

Credit Facility

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

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

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

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

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

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

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

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

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

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

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

On January 25, 2022, we entered into the Credit Agreement providing for a $275.0 million secured term loan and a $300.0 million secured revolving credit facility.

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 (defined below) subject to certain conditions.

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 $1,718,750 each, the following four payments are in the principal amount of $3,437,500 each, the following eight payments are in the principal amount of $5,156,250 each and the last payment is of the remaining principal amount.

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.

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.

Revolving loans may be borrowed, repaid, and reborrowed until January 25, 2027, at which time all amounts outstanding must be repaid.

As of November 30, 2022, there were no outstanding amounts under the revolving line of credit and $2.3 million of letters of credit.

The Credit Agreement contains customary affirmative and negative covenants, in each case subject to customary exceptions for a credit facility of this size and type.

We are also required to maintain compliance with a consolidated 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.

Additionally, the Credit Agreement includes customary events of default, that in event of, could result in the acceleration of the obligations under the Credit Agreement.

We are in compliance with all financial covenants as of November 30, 2022.

Debt for further discussion.

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 with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted (the "Notes").

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

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Net cash flows from operating activities $ 192,160 $ 178,530 $ 144,847

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

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

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

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

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

The increase in cash generated from operations in fiscal year 2022 as compared to fiscal year 2021 was primarily due to increased collections resulting from the acquisition of Kemp, as well as particularly strong collections generated from the rest of the business, partially offset by higher compensation related payments as compared to the same period in 2021.

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

Our gross accounts receivable as of November 30, 2022 decreased by $1.8 million from the end of fiscal year 2021.

Days sales outstanding ("DSO") in accounts receivable increased to 62 days at the end of fiscal year 2022 compared to 60 days at the end of fiscal year 2021, due to the timing of billings and collections.

In addition, our net deferred revenue as of November 30, 2022 increased by $30.1 million from the end of fiscal year 2021.

The significant changes in operating assets and liabilities in fiscal year 2021 as compared to fiscal year 2020 were primarily due to a decrease in accounts receivable and unbilled receivables.

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

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

Fair Value Measurements for further discussion.

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

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

Cash Flows (used in) from Investing Activities

There weren’t any significant non-cash reconciling items included in net income in fiscal year 2021 or 2020.

In addition, our gross accounts receivable as of November 30, 2021 increased by $15.1 million from the end of fiscal year 2020, which was primarily due to the acquisition of Kemp.

DSO in accounts receivable increased to 60 days at the end of fiscal year 2021 compared to 54 days at the end of fiscal year 2020.

Cash Flows from (used in) Investing Activities

Fiscal Year Ended

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

Net cash flows (used in) from investing activities $ (250,335) $ (207,293) $ (208,380)

Net cash flows from (used in) investing activities $ 21,992 $ (250,335) $ (207,293)

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

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

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

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

In addition, we purchased $6.1 million of property and equipment in fiscal year 2022, as compared to $4.7 million in fiscal year 2021, and $6.5 million in fiscal year 2020.

We also sold $0.9 million of intangible assets in the fourth quarter of fiscal year 2020 and $6.1 million of certain corporate land and building assets in the second quarter of fiscal year 2019.

Cash Flows from (used in) Financing Activities

We also sold $0.9 million of intangible assets in the fourth quarter of fiscal year 2020.

Cash Flows (used in) from Financing Activities

Fiscal Year Ended

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Dividend payment to stockholders (31,063) (31,561) (29,900)

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

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

Purchase of capped calls — (43,056) —

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Other financing activities (7,824) (5,186) (5,331)

Net cash flows from (used in) financing activities $ 132,113 $ 3,080 $ 130,292

Net cash flows (used in) from financing activities $ (101,423) $ 132,113 $ 3,080

During fiscal year 2022, we received $16.2 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $15.0 million in fiscal year 2021 and $11.1 million in fiscal year 2020.

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

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

We received proceeds from the issuance of debt of $7.5 million in fiscal year 2022 and $98.5 million in fiscal year 2020.

The debt proceeds were offset by payments on our long-term debt of $6.9 million in fiscal year 2022 compared to $117.3 million in fiscal year 2021 (including a $98.5 million repayment on the revolving line of credit), and $11.3 million in fiscal year 2020.

In addition, we repurchased $77.0 million of our common stock under our share repurchase plan in fiscal year 2022, compared to $35.0 million in fiscal year 2021, and $60.0 million in fiscal year 2020.

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

Indemnification Obligations

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Liquidity Outlook

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

Cash from operations in fiscal year 2023 could be affected by various risks and uncertainties, including, but not limited to, the effects of various risks detailed in Part I, Item 1A titled “Risk Factors” which have led to increased disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources.

However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months.

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

On January 3, 2023, we entered into a definitive agreement to acquire MarkLogic for approximately $355 million, subject to certain working capital and other adjustments.

We expect to fund the acquisition through a combination of approximately $155.0 million of existing cash resources and by drawing down approximately $200.0 million from our existing revolving credit facility.

The acquisition is currently expected to close in early 2023, subject to obtaining regulatory approvals and satisfaction of other customary closing conditions set forth in the definitive agreement.

See Item 8, Note 20:

Subsequent Events for further discussion.

Critical Accounting Estimates

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

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

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

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We also consider whether an arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations, although we do not have a history of offering these elements.

Goodwill and Intangible Asset Impairment

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

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

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

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

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

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

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

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

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

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

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

Income Tax Accounting

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

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

If we were to change our assumptions or otherwise determine that we were unable to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period that such change or determination was made.

Management judgment is also required in evaluating whether a tax position taken or expected to be taken in a tax return, based on the weight of available evidence, indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.

Management judgment is also required in measuring the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

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

Convertible Senior Notes and Capped Calls

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

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

In accounting for the Notes and the Capped Call Transactions:

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

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

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

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

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

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

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

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

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

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

Stock-Based Compensation

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

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

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

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

The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior.

The risk-free interest rate is based on the yield of zero-coupon U.S.

Treasury securities for the period that is commensurate with the expected option term at the time of grant.

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

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

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

Business Combinations

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

What changed 10-K

Item 7. Management’s Discussion and Analysis