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Item 2. Management’s Discussion and Analysis

2023-07-07 compared with 2023-04-07 · 205 added, 114 removed, 212 unchanged (60% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities.

We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances.

However, actual results may differ from these estimates.

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

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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.

Risk Factors in our 2022 Annual Report as well as the risk factors described in Part II, Item 1A of this Report on Form 10-Q.

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.

1 unchanged sentence

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

Use of Constant Currency

Revenue from our international operations has historically represented a substantial portion of our total revenue.

As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates.

For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S.

dollars are positively impacted.

As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods.

The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates.

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

Progress is the trusted provider of the best products to develop, deploy and manage high-impact applications.

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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.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances.

However, actual results may differ from these estimates.

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.

There have been no significant changes to our critical accounting policies and estimates since our 2022 Annual Report.

Use of Constant Currency

Revenue from our international operations has historically represented a substantial portion of our total revenue.

As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates.

For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S.

dollars are positively impacted.

performance in comparison to prior periods.

The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates.

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

Results of Operations

Three Months Ended % Change

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

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Revenue $ 178,251 $ 148,747 20 % 20 %

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.

Six Months Ended % Change

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Revenue $ 342,477 $ 293,669 17 % 18 %

Total revenue increased as compared to the same periods last year primarily due to our acquisition of MarkLogic in February 2023, as well as increases in our OpenEdge, Chef, and Kemp product offerings.

In the second fiscal quarter, these increases were partially offset by a decrease in our DataDirect product offering.

In the first six months of fiscal year 2023, there was also an increase in our DataDirect product offering, offset by the negative impact of foreign exchange on license and maintenance revenue in our EMEA region.

Software License Revenue

Three Months Ended % Change

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

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Software licenses $ 56,407 $ 44,814 26 % 26 %

As a percentage of total revenue 32 % 30 %

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.

Six Months Ended % Change

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Software licenses $ 113,975 $ 87,564 30 % 31 %

As a percentage of total revenue 33 % 30 %

Software license revenue increased as compared to the same period last year primarily due to our acquisition of MarkLogic in February 2023, as well as increases in our OpenEdge, Chef, and Kemp product offerings.

In the second fiscal quarter, these increases were partially offset by decreases in our DataDirect product offering.

In the first six months of fiscal year 2023, there was also an increase in our DataDirect product offering.

Maintenance and Services Revenue

Three Months Ended % Change

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

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Maintenance $ 102,240 $ 91,331 12 % 12 %

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As a percentage of total revenue 68 % 70 %

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.

Six Months Ended % Change

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

Maintenance $ 194,753 $ 181,294 7 % 8 %

As a percentage of total revenue 57 % 62 %

Services 33,749 24,811 36 % 36 %

As a percentage of total revenue 10 % 8 %

Total maintenance and services revenue $ 228,502 $ 206,105 11 % 12 %

As a percentage of total revenue 67 % 70 %

Maintenance revenue increased as compared to the same periods last year primarily due to our acquisition of MarkLogic in February 2023, as well as increases in our DevTools and 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, as well as increases in our Sitefinity product offerings.

The maintenance increase in the first six months of fiscal year 2023 was partially offset by the negative impact of foreign exchange in our EMEA region.

Revenue by Region

Three Months Ended % Change

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

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

North America $ 105,732 $ 85,394 24 % 24 %

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As a percentage of total revenue 6 % 6 %

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.

Six Months Ended % Change

(In thousands) May 31, 2023 May 31, 2022 As Reported Constant Currency

North America $ 204,560 $ 163,487 25 % 25 %

As a percentage of total revenue 60 % 56 %

Europe, the Middle East and Africa ("EMEA") $ 109,590 $ 103,336 6 % 8 %

As a percentage of total revenue 32 % 35 %

Latin America $ 8,979 $ 8,561 5 % 5 %

As a percentage of total revenue 3 % 3 %

Asia Pacific $ 19,348 $ 18,285 6 % 8 %

As a percentage of total revenue 5 % 6 %

Total revenue generated in North America increased $20.3 million and $41.1 million in the second quarter and first six months of fiscal year 2023, respectively.

The increase was primarily due to our acquisition of MarkLogic.

The increases in revenue over both periods generated in EMEA was primarily due to our acquisition of MarkLogic and increased revenue from our Chef product offerings.

The increase in the first six months of fiscal year 2023 was partially offset by the negative impact of foreign exchange in our EMEA region.

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

The increases in revenue generated in Asia Pacific in both periods was due to increases in our Chef product offerings.

In the first six months of fiscal year 2023 revenue generated in markets outside North America represented 40% of total revenue compared to 41% of total revenue on a constant currency basis.

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

Cost of Software Licenses

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 Change May 31, 2023 May 31, 2022 Change

Cost of software licenses $ 2,814 $ 2,583 $ 231 9 % $ 5,266 $ 5,192 $ 74 1 %

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Cost of Maintenance and Services

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 Change May 31, 2023 May 31, 2022 Change

Cost of maintenance and services $ 22,970 $ 15,801 $ 7,169 45 % $ 40,471 $ 30,946 $ 9,525 31 %

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

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

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

Amortization of Intangibles

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Amortization of intangibles $ 7,994 $ 5,573 43 % $ 14,258 $ 11,031 29 %

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

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

Three Months Ended

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

The increases in all periods are due to the acquisition of MarkLogic.

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Gross profit $ 144,473 $ 124,790 16 % $ 282,482 $ 246,500 15 %

As a percentage of total revenue 81 % 84 % 82 % 84 %

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.

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

Sales and Marketing

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 Change May 31, 2023 May 31, 2022 Change

Sales and marketing $ 40,147 $ 32,704 $ 7,443 23 % $ 73,901 $ 66,173 $ 7,728 12 %

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Total sales and marketing $ 40,147 $ 32,704 $ 7,443 23 % $ 73,901 $ 66,173 $ 7,728 12 %

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.

Sales and marketing expenses increased in all periods primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as increases in contractors and outside services costs.

These increases were partially offset by decreases in marketing and sales events costs in the first six months of fiscal year 2023.

Product Development

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 Change May 31, 2023 May 31, 2022 Change

Product development costs $ 34,820 $ 28,643 $ 6,177 22 % $ 65,258 $ 57,316 $ 7,942 14 %

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Total product development costs $ 34,820 $ 28,643 $ 6,177 22 % $ 65,258 $ 57,316 $ 7,942 14 %

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.

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

General and Administrative

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 Change May 31, 2023 May 31, 2022 Change

General and administrative $ 21,469 $ 19,207 $ 2,262 12 % $ 40,255 $ 36,198 $ 4,057 11 %

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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 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.

General and administrative expenses increased in all periods 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

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Amortization of intangibles $ 17,546 $ 11,892 48 % $ 31,157 $ 23,614 32 %

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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 $ — *

Cyber Incident and Vulnerability Response Expenses, Net

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Cyber incident and vulnerability response expenses, net $ 1,483 $ — * $ 4,175 $ — *

As a percentage of total revenue 1 % — % 1 % — %

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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.

Cyber incident costs relate to the engagement of external cybersecurity experts and other incident response professionals and are net of received and expected insurance recoveries.

Restructuring Expenses

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Restructuring expenses $ 3,990 $ 143 * $ 5,387 $ 654 724 %

As a percentage of total revenue 2 % — % 2 % — %

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.

*not meaningful

Restructuring expenses recorded in the second fiscal quarter and six month period 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 second 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

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Acquisition-related expenses $ 1,991 $ 2,736 (27) % $ 3,734 $ 3,648 2 %

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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.

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

Gain on Sale of Assets Held for Sale

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Gain on sale of assets held for sale $ — $ (10,770) (100) % $ — $ (10,770) (100) %

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

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

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

Income from Operations

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Income from operations $ 23,027 $ 40,235 (43) % $ 58,615 $ 69,667 (16) %

As a percentage of total revenue 13 % 27 % 17 % 24 %

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.

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

Other (Expense) Income, Net

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Interest expense $ (8,514) $ (3,656) 133 % $ (14,362) $ (7,359) 95 %

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As a percentage of total revenue (5) % (2) % (4) % (2) %

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.

Other expense, net, increased in both periods shown 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 increased due to the our acquisition of MarkLogic.

Foreign currency loss increased in all periods shown.

Provision for Income Taxes

Three Months Ended

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

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Provision for income taxes $ 2,519 $ 7,735 (67) % $ 8,769 $ 13,233 (34) %

As a percentage of income before income taxes 17 % 21 % 20 % 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

Our effective tax rate was 17% and 21% for the three months ended May 31, 2023 and 2022 respectively.

The primary reason for the decrease in the effective rate was due to discrete tax benefits related to stock-based compensation and an audit settlement in the second fiscal quarter of 2023.

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

Our effective tax rate was 20% and 21% for the six months ended May 31, 2023 and 2022 respectively.

The primary reason for the decrease in the effective rate was due to discrete tax benefits related to stock-based compensation and an audit settlement in the second fiscal quarter of 2023.

There were no significant discrete tax items in the six months ended May 31, 2022.

Three Months Ended Six Months Ended

(In thousands) May 31, 2023 May 31, 2022 % Change May 31, 2023 May 31, 2022 % Change

Net income $ 12,090 $ 29,110 (58) % $ 35,764 $ 49,564 (28) %

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

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

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

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

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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.

Our ARR was $569.0 million and $479.0 million as of May 31, 2023 and 2022, respectively, which is an increase of 19% year-over-year.

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

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Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments

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

Cash and Cash Equivalents

Short-term investments 14,944 —

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

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.

(In thousands) May 31, 2023 November 30, 2022

Cash and cash equivalents $ 125,531 $ 256,277

The decrease in cash and cash equivalents of $130.7 million from the end of fiscal year 2022 was due to cash outflows of $356.1 million for cash paid for acquisitions, net of cash acquired, repurchases of common stock of $30.0 million, repayment of the revolving line of credit of $25.0 million, dividend payments of $15.9 million, payments of debt obligations of $3.4 million, and purchases of property and equipment of $2.0 million.

These cash outflows were offset by proceeds from the issuance of debt of $195.0 million, cash inflows from operations of $94.7 million, $8.3 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $3.2 million.

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

As of February 28, 2023, $75.5 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

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

As of May 31, 2023, $77.1 million of our cash and cash equivalents was held by our foreign subsidiaries.

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

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In January 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.

In the six months ended May 31, 2023 and May 31, 2022, we repurchased and retired 0.5 million shares for $30.0 million and 1.1 million shares for $51.5 million, respectively.

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

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.

As of May 31, 2023, there was $198.0 million remaining under the current authorization.

On June 21, 2023, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock, which will be paid on September 15, 2023 to stockholders of record as of the close of business on September 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.

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Cash Flows From Operating Activities

Three Months Ended

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

Six Months Ended

(In thousands) May 31, 2023 May 31, 2022

Net income $ 35,764 $ 49,564

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Net cash flows from operating activities $ 94,718 $ 112,353

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

Three Months Ended

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

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

Our gross accounts receivable as of May 31, 2023, decreased by $10.8 million from the end of fiscal year 2022 and our days sales outstanding (DSO) in accounts receivable increased to 44 days from 39 days in the second fiscal quarter of 2022 due to the timing of billings and collections.

Cash Flows (Used in) From Investing Activities

Six Months Ended

(In thousands) May 31, 2023 May 31, 2022

Net investment activity $ 438 $ 900

1 unchanged sentence

Payments for acquisitions, net of cash acquired (356,096) —

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

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

Net cash flows (used in) from investing activities $ (357,627) $ 24,919

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 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.

In the second quarter of fiscal year 2023 had payments for acquisitions net of cash acquired of $356.1 million.

We also purchased $2.0 million of property and equipment in the first six months of fiscal year 2023, as compared to $2.0 million in the first six months of fiscal year 2022.

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

Cash Flows From (Used in) Financing Activities

Three Months Ended

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

Six Months Ended

(In thousands) May 31, 2023 May 31, 2022

Proceeds from stock-based compensation plans $ 16,365 $ 7,771

2 unchanged sentences

Payment of debt issuance costs — (1,957)

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

Principal payment on term loan (28,437) (3,435)

Dividend payments to stockholders (15,871) (15,573)

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Net cash flows from (used in) financing activities $ 128,956 $ (62,598)

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.

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

During the first six 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 $16.4 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $7.8 million in the first six months of fiscal year 2022.

Further, we repurchased $30.0 million of our common stock under our share repurchase plan compared to $51.5 million in the same period of the prior year.

We also made payments on our long-term debt of $1.7 million in the first three months of 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.

We also made payments on our long-term debt of $28.4 million (including a $25.0 million repayment on the revolving line of credit) in the first six months of fiscal year 2023 and $3.4 million in the same period in 2022.

Finally, we made dividend payments of $15.9 million to our stockholders during the first six months of fiscal year 2023 and $15.6 million in the first six months of fiscal year 2022.

Liquidity Outlook

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Legal and Other Regulatory Matters

See discussion regarding legal and other regulatory matters in Part II, Item 1.

See discussion below in Part I, Item 2, regarding Recent Developments:

MOVEit Vulnerability, as well as legal and other regulatory matters in Part II, Item 1.

Legal Proceedings.

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Refer to Note 1 - Nature of Business and Basis of Presentation (Part I, Item 1 of this Form 10-Q) for further discussion.

Recent Developments:

MOVEit Vulnerability

Description of Event

As disclosed via a Form 8-K filed on June 5, 2023, on the evening of May 28, 2023 (Eastern Time), our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance.

An investigative team was mobilized and, on May 30, 2023, the investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted version of MOVEit Transfer known as MOVEit Cloud).

The investigative team determined the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (the cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as, (ii) for a small group of customers, in a customer-dedicated cloud instance that is managed separately from the public-cloud).

We promptly took down

MOVEit Cloud for further investigation and notified all then-known MOVEit Transfer and MOVEit Cloud customers in order to apprise them of the MOVEit Vulnerability and alert them to immediate remedial actions.

In parallel, our team developed a patch for all supported versions of MOVEit Transfer and MOVEit Cloud, which was released on May 31, 2023, and allowed for the restoration of MOVEit Cloud that same day.

MOVEit Transfer is a secure file-transfer software that is installed by customers on-premise and does not have any on-going telemetry after installation that allows us to track, among other things, a customer’s product usage, deployed version, file transfer activity (including any data that is transferred by or stored within the customer’s MOVEit Transfer instance), or whether the customer has applied any security patches or bug fixes to their MOVEit Transfer instance.

However, certain MOVEit Transfer customers have reported that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to their environments and portions of their sensitive customer data.

Furthermore, while we continue to investigate this vulnerability in MOVEit Cloud, we currently have not seen any evidence that sensitive customer data has been exfiltrated from the public MOVEit Cloud instances.

For a small group of customers, we provide a dedicated MOVEit Cloud instance which is hosted, for each such customer, separate and apart from the public instances of our MOVEit Cloud platform.

Two of our dedicated MOVEit Cloud customers have reported that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to its environment.

As of the date of the filing of this report on Form 10-Q, one such customer has confirmed that no sensitive data was compromised and another has not revealed the nature of the data that may have been accessed.

Since our disclosures regarding the MOVEit Vulnerability, various third-parties have been actively scrutinizing MOVEit Transfer and MOVEit Cloud, leading to the discovery and our prompt patching of additional vulnerabilities.

We are not aware of any evidence that these additional vulnerabilities were exploited by malicious threat actors prior to creating patches to address them and making those patches available to our MOVEit Transfer customers and applying those patches to the MOVEit Cloud environments – both the public and dedicated cloud instances.

Progress has remained fully operational at all times before and after the discovery of the MOVEit Vulnerability and, as of the time of the filing of this report on Form 10-Q, has not uncovered evidence of unauthorized activity or impact to products beyond MOVEit Transfer and MOVEit Cloud.

MOVEit Transfer and MOVEit Cloud represented approximately 4% in aggregate of the Company’s revenue for the six months ended May 31, 2023.

Progress has engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the MOVEit Vulnerability.

While Progress’ investigation remains ongoing, the Company (i) has and is continuing to implement a series of additional security and related measures aimed at addressing the MOVEit Vulnerability and subsequently discovered vulnerabilities and further strengthening the overall security of our MOVEit applications, (ii) has engaged outside legal counsel to conduct a thorough independent investigation of the MOVEit Vulnerability, and (iii) has engaged with federal law enforcement and other federal agencies with respect to the MOVEit Vulnerability.

As the investigation remains ongoing, Progress will continue to assess the potential impact on its business, operations and financial results.

Expenses Incurred and Amounts Accrued

Given that the MOVEit Vulnerability was only discovered on May 30, 2023, and our second quarter ended on May 31, 2023, we incurred minimal costs and expenses with respect to the MOVEit Vulnerability during the second quarter.

We expect to incur investigation, legal and professional services expenses associated with the MOVEit Vulnerability in future periods.

We will recognize these expenses as services are received, net of received and expected insurance recoveries.

Our financial liability arising from any of the foregoing will depend on many factors, including limitations contained within our customer contracts, the amount of private litigation, and whether governmental entities launch formal investigations into the matter, and it is not possible at this time to estimate the quantitative impact of any such liability with any reasonable degree of certainty.

Insurance Coverage

We maintain cybersecurity insurance and other types of insurance coverage for up to $15.0 million in losses, which are expected to reduce our exposure to liabilities arising from the MOVEit Vulnerability.

We will pursue recoveries to the maximum extent available under the policies.

As of May 31, 2023, we have recorded approximately $3.0 million in insurance recoveries, all of which was related to the November 2022 cyber incident, providing us with $12.0 million of additional coverage (which is subject to a $0.5 million per claim deductible).

Future Capital Investments

In addition, we may accelerate or make additional investments in our information technology systems, but we are unable to estimate such investments because the nature and scope has not yet been determined.

We currently do not expect such amounts to be material to any fiscal period.

Effect on Sales and Customer Loyalty

The MOVEit Vulnerability may adversely affect our future performance and financial results.

Customer confidence in Progress may also be impacted by the MOVEit Vulnerability.

Through our response speed and transparent communications, we are committed to, and actively engaged in, activities to restore any loss in customer confidence.

We currently cannot predict the length or extent of any ongoing impact to sales.

Litigation and Governmental Investigations

As of the date of the filing of this report on Form 10-Q, (i) four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability, and (ii) there have been eleven class action lawsuits filed by individuals who claim to have been impacted by exfiltration of data from the environments of our MOVEit Transfer customers.

We have also been cooperating with several inquiries and one formal investigation from domestic and foreign law enforcement agencies and data privacy regulators.

As of the date of the filing of this report, the law enforcement investigation that we are cooperating with is not an enforcement action or formal governmental investigation of which we have been told that we are a target.

Such claims and investigations may have an adverse effect on how we operate our business and our results of operations, and in the future, we may be subject to additional governmental or regulatory investigations, as well as additional litigation or indemnification claims.

While a loss from these matters is possible, we cannot reasonably estimate a range of possible losses at this time and our investigation into the matter is ongoing.

Furthermore, with respect to the litigation, the proceedings remain in the early stages, alleged damages have not been specified, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.

As such, we have not recorded a loss contingency liability for litigation, claims and governmental investigations in the second quarter.

See Note 15 to Consolidated Financial Statements included in Item 1, Financial Statements.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis