What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-07 compared with 2022-10-06 · 146 added, 278 removed, 180 unchanged (70% of the section changed)

5 unchanged sentences

However, actual results may differ from these estimates.

The most significant estimates relate to:

the timing and amounts of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations;

the realization of tax assets and estimates of tax liabilities;

fair values of investments in marketable securities;

assets held for sale;

intangible assets and goodwill valuations;

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 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.

The most significant estimates relate to revenue recognition and business combinations.

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 2022 Annual Report.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements.

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.

Actual future results may differ materially.

Statements indicating that we “believe,” “may,” “could,” “would,” “might,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate” and “continue,” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred.

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:

(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

(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.

This Form 10-Q may contain information that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended;

Section 21E of the Securities Exchange Act of 1934, as amended;

and the Private Securities Litigation Reform Act of 1995.

Whenever we use words such as "believe," "may," "could," "would," "might," "should," "expect," "intend," "plan," "estimate," "target," "anticipate" and negatives and derivatives of these or similar expressions, or when we make statements concerning future financial results, product offerings or other events that have not yet occurred, we are making forward-looking statements.

These forward-looking statements are based upon our present intent, beliefs or expectations, but are not guaranteed to occur and may not occur.

Actual future results may differ materially from those contained in or implied by our forward-looking statements due to various factors which are more fully described in Part I, Item 1A.

Risk Factors in our 2022 Annual Report.

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.

We also cannot assure you that we have identified all possible issues which we might face.

We also cannot assure you that we have identified all possible issues that we might face.

We undertake no obligation to update any forward-looking statements that we make.

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

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

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

We operate as one operating segment.

Progress is the trusted provider of the best products to develop, deploy and manage high-impact 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 Partner of the Best Products to Develop, Deploy and Manage High Impact Business Applications .

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

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

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.

2 unchanged sentences

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

and in November 2021, we acquired Kemp Technologies.

in November 2021, we acquired Kemp Technologies;

and in February 2023, we acquired MarkLogic.

These acquisitions met our strict financial criteria.

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

As our portfolio continues to evolve, we continuously evaluate our organization for additional synergies and efficiencies.

Therefore, we are working to realign our go-to-market, product, and operational teams, as well as the increased centralization of additional shared services

and functions across our company.

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

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.

In connection therewith, 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.

Multi-Faceted Capital Allocation Approach .

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

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

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

In the first nine months of 2022, we repurchased and retired 1.7 million shares of our common stock for $75.5 million.

As of August 31, 2022, there was $79.5 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.

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.

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.

We expect to continue to pursue acquisitions meeting our financial criteria that are 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 derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies.

As a result, changes in the value of these foreign currencies relative to the U.S.

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 recent volatility in the global economy, our revenue results in the third fiscal quarter of 2022 were impacted by fluctuations in foreign currency exchange rates.

However, we currently 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.

Results of Operations

Three Months Ended % Change

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

Reported Constant

Revenue $ 151,217 $ 147,417 3 % 6 %

Nine Months Ended % Change

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

Reported Constant

(In thousands) February 28, 2023 February 28, 2022 As Reported Constant Currency

Revenue $ 164,226 $ 144,922 13 % 15 %

Total revenue increased in both the third fiscal quarter and nine month period ended August 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 an increase in our Chef product offerings.

These increases were partially offset by decreases in our OpenEdge and DataDirect product offerings, as well as the negative impact of foreign exchange on license and maintenance revenue in our EMEA region.

Total revenue increased as compared to the same period last year primarily due to increases in our DataDirect product offerings, as well as our acquisition of MarkLogic in the first quarter of fiscal year 2023.

These increases were partially offset by decreases in our OpenEdge product offerings, as well as the negative impact of foreign exchange on license and maintenance revenue in our EMEA region.

Software License Revenue

Three Months Ended % Change

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

Reported Constant

Software licenses $ 47,618 $ 51,930 (8) % (5) %

As a percentage of total revenue 31 % 35 %

Nine Months Ended % Change

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

Reported Constant

(In thousands) February 28, 2023 February 28, 2022 As Reported Constant Currency

Software licenses $ 57,568 $ 42,750 35 % 36 %

As a percentage of total revenue 35 % 29 %

Software license revenue decreased in the third quarter of fiscal year 2022 as compared to the same period last year primarily due to decreases in our DataDirect and OpenEdge product offerings, partially offset by our acquisition of Kemp and increases in license sales in our Chef product offerings.

Software license revenue increased in the first nine months of fiscal year 2022 as compared to the same period last year primarily due to our acquisition of Kemp and increases in license sales in our Chef product offerings, partially offset by decreases in license sales in our OpenEdge, DataDirect, and Ipswitch product offerings.

Software license revenue increased as compared to the same period last year primarily due to an increase in our DataDirect product offerings, as well as our acquisition of MarkLogic in the first quarter of fiscal year 2023.

These increases were partially offset by a decrease in our OpenEdge product offerings, as well as the negative impact of foreign exchange in our EMEA region.

Maintenance and Services Revenue

Three Months Ended % Change

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

Reported Constant

Maintenance $ 91,043 $ 82,875 10 % 14 %

As a percentage of total revenue 60 % 56 %

Services 12,556 12,612 — % 2 %

As a percentage of total revenue 9 % 9 %

Total maintenance and services revenue $ 103,599 $ 95,487 8 % 12 %

As a percentage of total revenue 69 % 65 %

Nine Months Ended % Change

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

Reported Constant

(In thousands) February 28, 2023 February 28, 2022 As Reported Constant Currency

Maintenance $ 92,513 $ 89,963 3 % 4 %

4 unchanged sentences

As a percentage of total revenue 65 % 71 %

Maintenance revenue increased in the third quarter and first nine 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, Ipswitch, and DevTools product offerings.

Services revenue remained flat in the third quarter of fiscal year 2022 as compared to the same period last year.

Services revenue increased in the first nine months of fiscal year 2022 as compared to the same period last year primarily due to increased services revenue from our Sitefinity and Ipswitch product offerings.

Maintenance revenue increased as compared to the same period last year primarily due to our acquisition of MarkLogic and increased maintenance revenue from our Chef product offerings.

Services revenue increased as compared to the same period last year primarily due to increased services revenue from our acquisition of MarkLogic.

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

1 unchanged sentence

Three Months Ended % Change

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

Reported Constant

North America $ 84,826 $ 93,880 (10) % (10) %

As a percentage of total revenue 56 % 64 %

Europe, the Middle East and Africa ("EMEA") $ 52,670 $ 40,999 28 % 40 %

As a percentage of total revenue 35 % 28 %

Latin America $ 4,577 $ 5,298 (14) % (13) %

As a percentage of total revenue 3 % 3 %

Asia Pacific $ 9,144 $ 7,240 26 % 30 %

As a percentage of total revenue 6 % 5 %

Nine Months Ended % Change

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

Reported Constant

(In thousands) February 28, 2023 February 28, 2022 As Reported Constant Currency

North America $ 98,828 $ 78,093 27 % 27 %

6 unchanged sentences

As a percentage of total revenue 5 % 6 %

Total revenue generated in North America decreased $9.1 million and increased $11.8 million in the third quarter and first nine months of fiscal year 2022, respectively.

The decrease in the third quarter was primarily due to decreases from our DataDirect and OpenEdge product offerings.

The increase in the first nine months was primarily due to our acquisition of Kemp and increases from our 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 decrease in revenue in Latin America in third fiscal quarter of 2022 was primarily due to decreases in our OpenEdge product offerings.

The increases in revenue generated in Latin America in the first nine months of fiscal year 2022 and in all periods for Asia Pacific was due to our acquisition of Kemp.

In the first nine months of fiscal year 2022 revenue generated in markets outside North America represented 44% of total revenue compared to 46% of total revenue on a constant currency basis.

In the first nine months of fiscal year 2021 revenue generated in markets outside North America represented 40% of total revenue at both actual rates and on a constant currency basis.

Total revenue generated in North America increased $20.7 million as compared to the same period last year.

The increase was primarily due to increases from our DataDirect product offerings and our acquisition of MarkLogic.

The decrease in revenue generated in EMEA was primarily due to a negative impact of foreign exchange, partially offset by our acquisition of MarkLogic and increased revenue from our Chef product offerings.

The increase in revenue in Latin America was primarily due to increases in our OpenEdge product offerings.

The decreases in revenue generated in Asia Pacific was due to decreases in our OpenEdge product offerings.

In the first three months of fiscal year 2023 revenue generated in markets outside North America represented 40% of total revenue compared to 42% of total revenue on a constant currency basis.

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.

Cost of Software Licenses

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 Change

Cost of software licenses $ 2,452 $ 2,609 $ (157) (6) %

3 unchanged sentences

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

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

Cost of Maintenance and Services

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 Change

Cost of maintenance and services $ 17,501 $ 15,145 $ 2,356 16 %

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

The increases in all periods were primarily due to increased headcount and hosting costs resulting from our acquisition of Kemp, partially offset by decreased contractors and outside services costs.

The increase year over year was primarily due to increased headcount and hosting costs resulting from our acquisition of MarkLogic, partially offset by decreased contractors and outside services costs.

Amortization of Intangibles

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Amortization of intangibles $ 6,264 $ 5,458 15 %

1 unchanged sentence

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

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

Three Months Ended Nine Months Ended

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

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Gross profit $ 138,009 $ 121,710 13 %

As a percentage of total revenue 84 % 84 %

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

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

Sales and Marketing

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 Change

Sales and marketing $ 33,754 $ 33,469 $ 285 1 %

5 unchanged sentences

Total sales and marketing $ 33,754 $ 33,469 $ 285 1 %

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.

Sales and marketing expenses increased primarily due to increased personnel related costs associated with our acquisition of MarkLogic, offset by decreases in marketing and sales events costs and contractors and outside services costs.

Product Development

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 Change

Product development costs $ 30,438 $ 28,673 $ 1,765 6 %

5 unchanged sentences

Total product development costs $ 30,438 $ 28,673 $ 1,765 6 %

Product development expenses increased in both periods shown primarily due to increased personnel related costs associated with our acquisition of Kemp, partially offset by decreased contractors and outside services costs.

Product development expenses increased primarily due to increased personnel related costs associated with our acquisition of MarkLogic, partially offset by decreased contractors and outside services costs.

General and Administrative

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 Change

General and administrative $ 18,786 $ 16,991 $ 1,795 11 %

6 unchanged sentences

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

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

General and administrative expenses increased primarily due to higher personnel costs associated with our acquisition of MarkLogic, as well as an increase in contractors and outside services costs, partially offset by a decrease in other general and administrative costs.

Amortization of Intangibles

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Amortization of intangibles $ 13,611 $ 11,722 16 %

1 unchanged sentence

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

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

Amortization of intangibles increased due to the addition of MarkLogic intangible assets, as discussed above.

Cyber Incident

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Cyber incident $ 2,692 $ — *

As a percentage of total revenue 2 % — %

*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.

Restructuring Expenses

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Restructuring expenses $ 1,397 $ 511 173 %

As a percentage of total revenue 1 % — %

Restructuring expenses recorded in the third quarter and first nine 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 third quarter and first nine months of fiscal year 2021 are comprised mostly of costs related to the Chef restructuring action of 2020.

Restructuring expenses recorded in the first quarter of fiscal year 2023 relate to the restructuring activities that occurred in the first and fourth quarters of fiscal years 2023 and 2020, respectively, resulting from the acquisitions of MarkLogic and Chef, respectively.

Restructuring expenses recorded in the first quarter of fiscal year 2022 are comprised mostly of costs related to the acquisition of Kemp and 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 Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Acquisition-related expenses $ 1,743 $ 912 91 %

2 unchanged sentences

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

Acquisition-related expenses were higher in the third quarter of fiscal year 2021 compared to the current quarter due to costs incurred associated with our acquisition of Kemp.

Acquisition-related expenses increased in the first nine 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 Kemp.

Gain on Sale of Assets Held for Sale

Three Months Ended Nine Months Ended

(In thousands) August 31, 2022 August 31, 2021 % Change August 31, 2022 August 31, 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.

Acquisition-related expenses increased due to our acquisition of MarkLogic, as well as our pursuit of other acquisition opportunities.

Acquisition-related expenses in the same periods of fiscal year 2022 were primarily related to the acquisition of Kemp as well as our pursuit of other acquisition opportunities.

Income from Operations

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Income from operations $ 35,588 $ 29,432 21 %

As a percentage of total revenue 22 % 20 %

Income from operations decreased in the third quarter of fiscal year 2022 due to increases in costs of revenue and operating expenses, offset by an increase to revenue.

Income from operations increased in the first nine months of fiscal year 2022 due to increases of revenue, offset by an increase in costs of revenue and operating expenses as shown above.

Income from operations increased in the first quarter of fiscal year 2023 due to increased revenue, offset by an increase in costs of revenue and operating expenses as shown above.

Other (Expense) Income, Net

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Interest expense $ (5,848) $ (3,703) 58 %

Interest income and other, net 515 589 (13) %

Foreign currency gain (loss), net (577) (128) (351) % (832) (1,006) 17 %

Foreign currency loss, net (331) (366) (10) %

Total other expense, net $ (5,664) $ (3,480) 63 %

As a percentage of total revenue 3 % 2 %

*not meaningful

Other expense, net, decreased in the third quarter and first nine months of fiscal year 2022 as compared to the same periods last year primarily 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.

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

Foreign currency loss increased in the third quarter of fiscal year 2022 and decreased in the first nine months of fiscal year 2022.

Other expense, net, increased in the first quarter of fiscal year 2023 as compared to the same period last year primarily due to increased interest expense on our term loan and our revolving line of credit, which we drew on to fund part of our acquisition of MarkLogic.

Interest income and other, net, decreased slightly due to the timing of grant income recognition.

Foreign currency loss decreased in the first quarter of fiscal year 2023.

Provision for Income Taxes

Three Months Ended Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Provision for income taxes $ 6,250 $ 5,498 14 %

As a percentage of total revenue 4 % 6 % 4 % 5 %

Our effective tax rate was 21% in the third fiscal quarter of 2022, compared to 22% in the third fiscal quarter of 2021.

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

Three Months Ended Nine Months Ended

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

As a percentage of income before income taxes 21 % 21 %

Our effective tax rate was 21% in the first fiscal quarter of both 2023 and 2022.

There were no significant discrete tax items in the first fiscal quarter of either 2023 or 2022.

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022 % Change

Net income $ 23,674 $ 20,454 16 %

8 unchanged sentences

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

ARR is not calculated in accordance with GAAP.

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

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

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

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

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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.

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

Our ARR was $495.0 million and $439.0 million as of August 31, 2022 and 2021, respectively, which is an increase of 12.7% year-over-year.

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

Net Dollar Retention Rate

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

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

Our ARR was $569.0 million and $472.0 million as of February 28, 2023 and 2022, respectively, which is an increase of 20% year-over-year.

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

Net Retention Rate

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

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

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

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

Our net dollar retention rates have generally ranged between 101% and 102% for all periods presented.

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

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

Net retention rate is not calculated in accordance with GAAP.

Our net retention rates have generally ranged between 101% and 102% for all periods presented.

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

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments

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

(In thousands) February 28, 2023 November 30, 2022

Cash and cash equivalents $ 107,981 $ 256,277

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Total cash, cash equivalents and short-term investments $ 122,925 $ 256,277

The increase in cash, cash equivalents and short-term investments of $67.5 million from the end of fiscal year 2021 was due to cash inflows from operations of $152.0 million, proceeds from the sale of long-lived assets of $26.0 million, proceeds from the issuance of debt of $7.5 million, and $5.0 million in cash received from the issuance of common stock.

These cash inflows were offset by repurchases of common stock of $75.5 million, dividend payments of $23.4 million, the effect of exchange rates on cash of $14.0 million, payments of debt obligations of $5.2 million, payments of issuance costs for long-term debt of $2.0 million, and purchases of property and equipment of $3.1 million.

The decrease in cash, cash equivalents and short-term investments of $133.4 million from the end of fiscal year 2022 was due cash outflows of $355.8 million for cash paid for acquisitions, net of cash acquired, repurchases of common stock of $15.0 million, dividend payments of $8.0 million, payments of debt obligations of $1.7 million, and purchases of property and equipment of $0.4 million.

These cash outflows were offset by proceeds from the issuance of debt of $195.0 million, cash inflows from operations of $46.8 million, $4.5 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $1.2 million.

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

As of August 31, 2022, $56.5 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

As of February 28, 2023, $75.5 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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Share Repurchase Program

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

In the nine months ended August 31, 2022 and August 31, 2021, we repurchased and retired 1.7 million shares for $75.5 million and 0.8 million shares for $35.0 million, respectively.

In January 2023, our Board of Directors increased our share repurchase authorization by $150 million, to an aggregate authorization of $228.0 million.

In the three months ended February 28, 2023 and February 28, 2022, we repurchased and retired 0.3 million shares for $15.0 million and 0.6 million shares for $25.0 million, respectively.

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

As of August 31, 2022, there was $79.5 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 September 23, 2022, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock which will be paid on December 15, 2022 to stockholders of record as of the close of business on December 1, 2022.

As of February 28, 2023, there was $213.0 million remaining under the current authorization.

On March 17, 2023, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock, which will be paid on June 15, 2023 to stockholders of record as of the close of business on June 1, 2023.

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

Restructuring Activities

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

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

For the three and nine months ended August 31, 2022, we incurred expenses of $0.1 million and $0.5 million, respectively, relating to this restructuring.

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

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

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

Accordingly, the balance of the restructuring liability of $0.1 million is included in other accrued liabilities on the consolidated balance sheet at August 31, 2022.

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

Refer to Note 7:

Business Combinations for further discussion.

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

For the three and nine months ended August 31, 2022, we incurred expenses of $0.2 million and $0.3 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, $1.0 million and $3.0 million of the total balance of the restructuring liability of $4.0 million is included in short-term and long-term lease liabilities, respectively, on the condensed consolidated balance sheet at August 31, 2022.

We do not expect to incur additional material expenses as part of this action.

Credit Facility

On January 25, 2022, we entered into an amended and restated credit agreement (the "Credit Agreement") providing for a $275.0 million secured term loan and a $300.0 million secured revolving credit facility.

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

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

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

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

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

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

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

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

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

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

The revolving credit facility does not require amortization of principal.

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

The first eight payments are in the principal amount of $1.7 million each, the following four payments are in the principal amount of $3.4 million each, the following eight payments are in the principal amount of $5.2 million each and the last payment is of the remaining principal amount.

Any amounts outstanding under the term loan thereafter would be due on the maturity date.

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

We are the sole borrower under the credit facility.

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

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

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

The amended credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of its business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary

exceptions for a credit facility of this size and type.

We are also required to maintain compliance with a consolidated interest charge coverage ratio and a consolidated total net leverage ratio.

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

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

The outstanding balance of the term loan as of August 31, 2022 was $269.8 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 August 31, 2022 was 3.81%.

As of August 31, 2022, there were no amounts outstanding under the revolving line of credit and $2.1 million of letters of credit outstanding.

Refer to Note 8:

Debt for further discussion.

Convertible Senior Notes

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

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

In addition, the Company granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, of which $35 million of additional Notes were purchased for total proceeds of $360 million.

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

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

Refer to Note 8:

Debt for further discussion.

See Note 12 to the condensed consolidated financial statements.

Long-term Debt and Credit Facility

See Note 7 to the condensed consolidated financial statements.

Cash Flows From Operating Activities

Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022

Net income $ 23,674 $ 20,454

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Net cash flows from operating activities $ 46,767 $ 44,093

In the first nine 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 August 31, 2022, decreased by $17.0 million from the end of fiscal year 2021 and our days sales outstanding (DSO) in accounts receivable decreased to 48 days from 54 days in the third fiscal quarter of 2021 due to the timing of billings and collections.

In the first three months of fiscal year 2023, operating cash flows increased as a result of higher billings and collections, partially offset by higher operating expenses as compared to the same period in 2022.

Our gross accounts receivable as of

February 28, 2023, increased by $4.5 million from the end of fiscal year 2022 and our days sales outstanding (DSO) in accounts receivable decreased to 42 days from 52 days in the first fiscal quarter of 2022 due to the timing of billings and collections.

Cash Flows From Investing Activities

Nine Months Ended

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

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022

Net investment activity $ (14,862) $ 300

Purchases of property and equipment (385) (831)

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

Decrease in escrow receivable and other 134 2,330

Payments for acquisitions, net of cash acquired (355,821) —

Net cash flows from investing activities $ (371,068) $ (531)

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.

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 $3.1 million of property and equipment in the first nine months of fiscal year 2022, as compared to $2.7 million in the first nine months of fiscal year 2021.

Cash Flows (Used in) From Financing Activities

Nine Months Ended

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

In the first quarter of fiscal year 2023 had payments for acquisitions net of cash acquired of $355.8 million.

We also purchased $0.4 million of property and equipment in the first three months of fiscal year 2023, as compared to $0.8 million in the first three months of fiscal year 2022.

Cash Flows From (Used in) Financing Activities

Three Months Ended

(In thousands) February 28, 2023 February 28, 2022

Proceeds from stock-based compensation plans $ 9,357 $ 4,094

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

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 (8,023) (7,784)

Other financing activities (4,817) (3,139)

Net cash flows (used in) from financing activities $ (93,533) $ 142,948

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

During the first nine months of fiscal year 2021, we received $349.2 million in net proceeds from the issuance of convertible senior notes and paid $43.1 million to purchase capped calls in connection with the convertible note offering.

We received $10.4 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $9.2 million in the first nine months of fiscal year 2021.

Net cash flows from (used in) financing activities $ 174,798 $ (28,031)

During the first three months of fiscal year 2023, we received $195.0 million in net proceeds from the issuance of debt.

During the first three months of fiscal year 2022, we received $7.5 million in net proceeds from the issuance of debt in connection with our amended term loan.

We received $9.4 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $4.1 million in the first three months of fiscal year 2022.

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

We also made payments on our long-term debt of $5.2 million in the first nine months of fiscal year 2022 compared to $111.7 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 $23.4 million to our stockholders during the first nine months of both fiscal year 2022 and 2021.

Indemnification Obligations

We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business.

Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products.

Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors.

Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant.

Accordingly, the estimated fair value of these indemnification provisions is immaterial.

We also made payments on our long-term debt of $1.7 million in the first three months of both fiscal year 2023 and 2022.

Finally, we made dividend payments of $8.0 million to our stockholders during the first three months of fiscal year 2023 and $7.8 million in the first three months of fiscal year 2022.

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 II, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets generally which could adversely affect our liquidity and capital resources in the future.

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

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.

Risk Factors in our 2022 Annual Report which have led to increased disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources in the future.

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

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

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

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

Legal and Other Regulatory Matters

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What changed 10-Q

Item 2. Management’s Discussion and Analysis