PROGRESS SOFTWARE CORP /MA 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on 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. 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 2024 Annual Report as well as any risk factors described in Part II, Item 1A of this Quarterly 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. 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. Overview Progress provides software products that enable our customers to develop, deploy and manage responsible AI-powered applications and digital experiences. 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, loss contingencies and the MOVEit Vulnerability, and business combinations. For further information regarding the application of these and other accounting policies, see Note 1: Basis of Presentation to our Consolidated Financial Statements in Item 8 of our 2024 Annual Report. There have been no significant changes to our critical accounting policies and estimates since our 2024 Annual Report. 18 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. Results of Operations Business Development On October 31, 2024, we acquired ShareFile from Cloud. As a result of this acquisition, we recorded $96.2 million of deferred revenue and $464.0 million of intangible assets, as further described in Note 4: Business Combinations. We expect to recognize additional SaaS revenue, as well as increased amortization expense and interest expense, in future periods as a result of this acquisition. Revenue Three Months Ended % Change (in thousands) February 28, 2025 February 29, 2024 As Reported Constant Currency Revenue $ 238,015 $ 184,685 29 % 30 % Total revenue increased as compared to the same period last year primarily due to our acquisition of ShareFile in the fourth quarter of fiscal year 2024. ShareFile revenue in the first quarter of fiscal year 2025 was $63.6 million. These increases were partially offset by a decrease in our DataDirect product offering as a result of the timing of renewals on multiyear subscription contracts. Software License Revenue Three Months Ended % Change (in thousands) February 28, 2025 February 29, 2024 As Reported Constant Currency Software licenses $ 58,445 $ 64,100 (9) % (8) % As a percentage of total revenue 25 % 35 % Software license revenue decreased compared to the same period last year primarily due to the decrease in our DataDirect product offering, as described above. 19 Maintenance, SaaS, and Professional Services Revenue Three Months Ended % Change (in thousands) February 28, 2025 February 29, 2024 As Reported Constant Currency Maintenance $ 99,535 $ 102,025 (2) % (1) % As a percentage of total revenue 42 % 55 % SaaS 69,410 5,571 1,146 % 1,146 % As a percentage of total revenue 29 % 3 % Professional services 10,625 12,989 (18) % (18) % As a percentage of total revenue 4 % 7 % Total maintenance, SaaS, and professional services revenue $ 179,570 $ 120,585 49 % 50 % As a percentage of total revenue 75 % 65 % Maintenance revenue slightly decreased as compared to the same period last year primarily due to the negative impact of foreign exchange. SaaS revenue increased as compared to the same period last year due to our acquisition of ShareFile. Professional services revenue decreased as compared to the same period last year primarily due to a decrease in MarkLogic professional services revenue. Revenue by Region Three Months Ended % Change (in thousands) February 28, 2025 February 29, 2024 As Reported Constant Currency North America $ 154,646 $ 107,282 44 % 44 % As a percentage of total revenue 65 % 58 % Europe, the Middle East and Africa ("EMEA") $ 66,943 $ 63,087 6 % 8 % As a percentage of total revenue 28 % 34 % Latin America $ 5,052 $ 4,668 8 % 20 % As a percentage of total revenue 2 % 3 % Asia Pacific $ 11,374 $ 9,648 18 % 20 % As a percentage of total revenue 5 % 5 % Total revenue generated in North America increased $47.4 million, and total revenue generated outside North America increased $6.0 million, as compared to the same period last year. The increases in each region were primarily due to the acquisition of ShareFile. Total revenue generated in markets outside North America represented 35% and 42% of total revenue in the first three months of fiscal year 2025 and fiscal year 2024, respectively. Cost of Software Licenses Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Change Cost of software licenses $ 2,925 $ 2,731 $ 194 7 % As a percentage of software license revenue 5 % 4 % Cost of software licenses consists primarily of royalties, electronic software distribution, duplication, and packaging. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix. 20 Cost of Maintenance, SaaS, and Professional Services Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Change Cost of maintenance, SaaS, and professional services $ 32,884 $ 22,219 $ 10,665 48 % As a percentage of maintenance, SaaS, and professional services revenue 18 % 18 % Components of cost of maintenance, SaaS, and professional services: Personnel related costs $ 20,770 $ 17,045 $ 3,725 22 % Hosting and other 8,910 1,766 7,144 405 % Contractors and outside services 3,204 3,408 (204) (6) % Total cost of maintenance, SaaS, and professional services $ 32,884 $ 22,219 $ 10,665 48 % Cost of maintenance, SaaS, and professional services consists primarily of hosting costs, and personnel related costs attributable to customer support, cloud operations, consulting, and education. The increase year-over-year was primarily due to increased hosting and headcount related costs resulting from our acquisition of ShareFile. Amortization of Intangibles Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Amortization of intangibles $ 10,422 $ 7,859 33 % As a percentage of total revenue 4 % 4 % 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 year-over-year increase is due to the acquisition of ShareFile. Gross Profit Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Gross profit $ 191,784 $ 151,876 26 % As a percentage of total revenue 81 % 82 % Our gross profit increased primarily due to the increase in revenue, partially offset by the increases in costs of maintenance, SaaS, and professional services, and amortization of intangibles. Sales and Marketing Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Change Sales and marketing $ 51,296 $ 39,111 $ 12,185 31 % As a percentage of total revenue 22 % 21 % Components of sales and marketing: Personnel related costs $ 43,818 $ 33,093 $ 10,725 32 % Marketing programs and other 6,462 5,425 1,037 19 % Contractors and outside services 1,016 593 423 71 % Total sales and marketing $ 51,296 $ 39,111 $ 12,185 31 % Sales and marketing expenses increased primarily due to increased personnel related costs, increased marketing and sales events costs, and increased contractors and outside services costs, each associated with our acquisition of ShareFile. 21 Product Development Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Change Product development costs $ 46,375 $ 34,988 $ 11,387 33 % As a percentage of total revenue 19 % 19 % Components of product development costs: Personnel related costs $ 44,537 $ 33,596 $ 10,941 33 % Contractors and outside services 1,511 1,082 429 40 % Other product development costs 327 310 17 5 % Total product development costs $ 46,375 $ 34,988 $ 11,387 33 % Product development expenses increased primarily due to increased personnel related costs, as well as increased contractors and outside services costs, each associated with our acquisition of ShareFile. General and Administrative Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Change General and administrative $ 25,623 $ 21,344 $ 4,279 20 % As a percentage of total revenue 11 % 12 % Components of general and administrative: Personnel related costs $ 18,840 $ 17,963 $ 877 5 % Contractors and outside services 4,064 2,575 1,489 58 % Other general and administrative costs 2,719 806 1,913 237 % Total cost of general and administrative $ 25,623 $ 21,344 $ 4,279 20 % General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. The increases in personnel related costs, contractors and outside services, and other general and administrative costs were primarily related to our acquisition of ShareFile. Amortization of Intangibles Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Amortization of intangibles $ 25,808 $ 17,389 48 % As a percentage of total revenue 11 % 9 % 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 due to the addition of ShareFile intangible assets, as discussed above. Cyber Vulnerability Response Expenses, Net Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Cyber vulnerability response expenses, net $ 737 $ 987 (25) % As a percentage of total revenue — % 1 % As previously disclosed, following the discovery of the MOVEit Vulnerability that was disclosed on June 5, 2023, we engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of this matter. Cyber vulnerability response costs relate to the engagement of external cybersecurity experts and other 22 incident response professionals and are net of received and expected insurance recoveries. Please refer to Note 12: Cyber Related Matters for additional details and updates regarding the MOVEit Vulnerability. Restructuring Expenses Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Restructuring expenses $ 7,029 $ 2,349 199 % As a percentage of total revenue 3 % 1 % Restructuring expenses recorded in the first quarter of fiscal year 2025 primarily relate to headcount reductions and a facility closure in connection with the restructuring action related to the ShareFile acquisition in November 2024. See Note 9: Restructuring for additional details, including types of expenses incurred and the timing of future expenses and cash payments. Acquisition-Related Expenses Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Acquisition-related expenses $ 2,490 $ 702 255 % As a percentage of total revenue 1 % — % Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs consist of professional service fees, including third-party legal and valuation-related fees. Acquisition-related expenses in the first quarter of fiscal year 2025 were primarily related to our acquisition of ShareFile. Acquisition-related expenses in the same periods of fiscal year 2024 were primarily related to our pursuit of other acquisition opportunities. Income from Operations Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Income from operations $ 32,426 $ 35,006 (7) % As a percentage of total revenue 14 % 19 % Income from operations decreased year-over-year due to an increase in costs of revenue and operating expenses, offset by an increase in revenue, as shown above. Other (Expense) Income Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Interest expense $ (18,429) $ (7,344) 151 % Interest income and other, net 487 624 (22) % Foreign currency loss, net (1,182) (679) 74 % Total other expense, net $ (19,124) $ (7,399) 158 % As a percentage of total revenue (8) % (4) % Total other expense, net, increased in the first quarter of fiscal year 2025 as compared to the same period last year primarily due to an increase in interest expense resulting from costs associated with drawing on our revolving line of credit to acquire ShareFile. Refer to Note 5: Debt, for further discussion. Foreign currency loss increased year-over-year due to rate volatility and timing of intercompany and hedge settlement activities. 23 Provision for Income Taxes Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Provision for income taxes $ 2,356 $ 4,968 (53) % As a percentage of income before income taxes 18 % 18 % Our effective income tax rate was 18% in the first fiscal quarter of both 2025 and 2024. In the first fiscal quarter of 2024, there were discrete tax benefits related to stock-based compensation and the statute of limitations expiring on uncertain tax positions. While there were no significant discrete tax benefits in the first fiscal quarter of 2025, the overall effective tax rate is lower due to the geographical mix of profit. Net Income Three Months Ended (in thousands) February 28, 2025 February 29, 2024 % Change Net income $ 10,946 $ 22,639 (52) % As a percentage of total revenue 5 % 12 % Select Performance Metrics: We evaluate our financial performance using a number of financial and operating metrics. These metrics are periodically reviewed and revised to reflect changes in our business. Annualized Recurring Revenue ("ARR") We disclose ARR as a performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources currently represents the substantial majority of our revenues and is expected to continue in the future. We define ARR as the annualized revenue of all active and contractually binding term-based contracts from all customers at a point in time. ARR includes revenue from maintenance, software upgrade rights, public cloud, and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations in revenue due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. We use ARR to understand customer trends and the overall health of our business, helping us to formulate strategic business decisions. We calculate the annualized value of annual and multi-year contracts, and contracts with terms less than one year, by dividing the total contract value of each contract by the number of months in the term and then multiplying by 12. Annualizing contracts with terms less than one-year results in amounts being included in our ARR that are in excess of the total contract value for those contracts at the end of the reporting period. We generally do not sell non-SaaS-based contracts with a term of less than one year unless a customer is purchasing additional licenses under an existing annual or multi-year contract. The expectation is that at the time of renewal, such contracts with a term less than one year will renew with the same term as the existing contracts being renewed, such that both contracts are co-termed. Historically, such contracts with a term of less than one year renew at rates equal to or better than annual or multi-year contracts. For SaaS-based contracts, there is a meaningful percentage of monthly auto-renewing contracts for which annualizing the contracts results in amounts being included in our ARR that are in excess of the total contract value for those contracts at the end of the reporting period. Revenue from term-based license and on-premises subscription arrangements include a portion of the arrangement consideration that is allocated to the software license that is recognized up-front at the point in time control is transferred under ASC 606 revenue recognition principles. ARR for these arrangements is calculated as described above. The expectation is that the total contract value, inclusive of revenue recognized as software license, will be renewed at the end of the contract term. The calculation is done at constant currency using the current year budgeted exchange rates for all periods presented. ARR is not defined in GAAP and is not derived from a GAAP measure. Rather, ARR generally aligns to billings (as opposed to GAAP revenue which aligns to the transfer of control of each performance obligation). ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those 24 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. Our ARR was $836 million and $566 million as of February 28, 2025 and February 29, 2024, respectively, which is an increase of 48% year-over-year. The growth in ARR was primarily driven by the acquisition of ShareFile. 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 retention rate. Net retention rate is not calculated in accordance with GAAP and is not derived from a GAAP measure. Our net retention rates have generally ranged between 100% and 102% for all periods presented. We believe net retention rates can be a helpful indicator of the durability of top line performance. Liquidity and Capital Resources Cash and Cash Equivalents (in thousands) February 28, 2025 November 30, 2024 Cash and cash equivalents $ 124,161 $ 118,077 The increase in cash and cash equivalents of $6.1 million from the end of fiscal year 2024 was due to cash inflows from operations of $68.7 million, and $1.6 million in cash received from the issuance of common stock. The cash inflows described above were offset by cash outflows of $30.0 million to pay down the revolving line of credit, repurchases of common stock of $30.1 million, the effect of exchange rates on cash of $1.5 million, purchases of property and equipment of $1.3 million, and a $1.2 million payment related to the acquisition of ShareFile. Except as described below, there are no limitations on our ability to access our cash and cash equivalents. As of February 28, 2025, $63.3 million of our cash and cash equivalents was held by our foreign subsidiaries. As a result of the debt obligations arising from the ShareFile acquisition, in the fourth quarter of fiscal 2024 we determined that a substantial portion of unremitted foreign earnings are no longer indefinitely reinvested. As a result of this, we plan to utilize worldwide cash based on the needs of the parent entity. These amounts will be repatriated as needed. Deferred taxes are recorded for earnings of our foreign operations that we determine are not indefinitely reinvested. Three Months Ended (in thousands) February 28, 2025 February 29, 2024 Net cash flows from operating activities $ 68,947 $ 70,504 Net cash flows used in investing activities $ (2,485) $ (309) Net cash flows used in financing activities $ (58,870) $ (62,415) Cash Flows From Operating Activities The decrease in cash generated from operations in the first quarter of fiscal year 2025 as compared to the same period last year was primarily due to increased costs of maintenance, SaaS, and professional services, and operating expenses, as well as increased interest expense resulting from the draw down on our revolving line of credit in the fourth quarter of fiscal year 2024. This was offset by higher billings and collections. Our gross accounts receivable as of February 28, 2025, decreased by $36.0 million from the end of fiscal year 2024. Our days sales outstanding (DSO) in accounts receivable decreased to 48 days the first quarter of fiscal year 2025 from 50 days in the first fiscal quarter of 2024 due to the timing of billings and collections. 25 Cash Flows Used in Investing Activities 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, as well as the timing of acquisitions and divestitures. In the first three months of fiscal year 2025, we purchased $1.3 million of property and equipment, and had payments for acquisitions of $1.2 million. In the first quarter of fiscal year 2024 we had $0.3 million of purchases of property and equipment. Cash Flows Used in Financing Activities We received $6.2 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan in the first three months of fiscal year 2025 as compared to $7.6 million in the first three months of fiscal year 2024. We made withholding tax payments related to net share settlements of equity awards of $4.6 million in the three months of fiscal year 2025 as compared to $5.9 million in the first three months of fiscal year 2024. We repurchased $30.1 million of our common stock under our share repurchase plan in the first three months of fiscal year 2025 as compared to $22.5 million in the same period of the prior year. Further, we made payments on our revolving line of credit of $30.0 million in the first quarter of fiscal years 2025 and 2024. Finally, we made dividend payments of $8.2 million to our stockholders during the first three months of fiscal year 2024. We also made payments on our pre-existing term loan of $3.4 million in the first quarter of fiscal year 2024. Share Repurchase Program 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, 2025 and February 29, 2024, we repurchased and retired 0.5 million shares for $30.0 million and 0.4 million shares for $22.5 million, respectively. The shares were repurchased in both periods as part of the share repurchase program as authorized by our Board of Directors. As of February 28, 2025, there was $77.2 million remaining under the current authorization. Dividends As announced on September 9, 2024, our Board of Directors approved the suspension of our quarterly dividend in connection with the ShareFile acquisition and plans to redirect such capital toward the repayment of debt to increase liquidity for future M&A and for share repurchases, both of which are prioritized in our capital allocation policy. Restructuring Activities See Note 9: Restructuring to the condensed consolidated financial statements. Long-term Debt and Credit Facility See Note 5: Debt to the condensed consolidated financial statements. Liquidity Outlook Cash from operations in fiscal year 2025 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 2024 Annual Report, including 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 revolving credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. Our foreseeable cash needs include capital expenditures, acquisitions, debt repayments, share repurchases, lease commitments, restructuring obligations and other long-term obligations. 26 Legal and Other Regulatory Matters MOVEit Vulnerability As previously disclosed, on the evening of May 28, 2023, we learned that our MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer) products were attacked by a threat actor who compromised and exfiltrated personal data from various customer-controlled MOVEit Transfer environments. As a result of the MOVEit Vulnerability, we are party to certain class action lawsuits filed by individuals who claim to have been impacted by the exfiltration of data from the environments of our MOVEit Transfer customers, which have been centralized in the MDL. The MDL remains in a relatively early litigation stage in which motions to dismiss have been filed but not yet ruled upon. In the event dismissals are not granted, the MDL is not expected to conclude within this fiscal year. We have also been cooperating with inquires and investigations from various governmental authorities, none of which have, as of this filing, resulted in any prosecution or enforcement actions. Please see our 2024 Annual Report and previous SEC filings for additional information, including risk factors, related to the MOVEit Vulnerability. We are subject to litigation and governmental investigations related to the MOVEit Vulnerability, for which we have incurred expenses and will incur future costs. We expect our exposure to such expenses and liabilities to be reduced by insurance. Please refer to Note 12: Cyber Related Matters to the condensed consolidated financial statements for additional details and updates regarding the MOVEit Vulnerability. Recent Accounting Pronouncements Refer to Note 1: Basis of Presentation to the condensed consolidated financial statements for further discussion.