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 2025 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 Software Corporation ("Progress," the "Company," "we," "us," or "our") 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, Nature of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements in Item 8 of our 2025 Annual Report. There have been no significant changes to our critical accounting policies and estimates since our 2025 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 accounting principles generally accepted in the United States of America. Results of Operations Revenue Three Months Ended Percentage Change (in thousands) February 28, 2026 February 28, 2025 As Reported Constant Currency Revenue $ 247,799 $ 238,015 4 % 2 % Total revenue increased as compared to the same period last year primarily due to increases in license sales of our OpenEdge product offering and a positive foreign currency impact. Software Licenses Revenue Three Months Ended Percentage Change (in thousands) February 28, 2026 February 28, 2025 As Reported Constant Currency Software licenses $ 67,581 $ 58,445 16 % 11 % As a percentage of total revenue 27 % 25 % Software licenses revenue increased in the first quarter of fiscal year 2026 primarily due to increases in our OpenEdge product offering. Maintenance, SaaS, and Professional Services Revenue Three Months Ended Percentage Change (in thousands) February 28, 2026 February 28, 2025 As Reported Constant Currency Maintenance $ 100,339 $ 99,535 1 % (2) % As a percentage of total revenue 40 % 42 % SaaS 70,461 69,410 2 % 1 % As a percentage of total revenue 28 % 29 % Professional services 9,418 10,625 (11) % (13) % As a percentage of total revenue 4 % 4 % Total maintenance, SaaS, and professional services $ 180,218 $ 179,570 — % (2) % As a percentage of total revenue 73 % 75 % Maintenance revenue increased in the first quarter of fiscal year 2026 due to a positive foreign currency impact. SaaS revenue slightly increased as compared to the same period last year. Professional services revenue decreased across multiple product offerings as compared to the same period last year. 19 Cost of Software Licenses Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Cost of software licenses $ 3,013 $ 2,925 3 % As a percentage of software licenses revenue 4 % 5 % 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. The increase in the first quarter of fiscal year 2026 compared to the same period last year was related to increased royalty costs. Cost of Maintenance, SaaS, and Professional Services Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Cost of maintenance, SaaS, and professional services $ 32,100 $ 32,884 (2) % As a percentage of maintenance, SaaS, and professional services revenue 18 % 18 % Cost of maintenance, SaaS, and professional services consist primarily of hosting costs, and personnel-related costs attributable to customer support, cloud operations, consulting, and education. The decrease year-over-year was primarily due to decreased contractors and headcount related costs in fiscal year 2026. Amortization of Acquired Intangibles – Costs of Revenue Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Amortization of acquired intangibles $ 8,751 $ 10,422 (16) % As a percentage of total revenue 4 % 4 % Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. The year-over-year decrease is due to certain existing intangible assets being fully amortized as compared to the prior period. Sales and Marketing Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Sales and marketing $ 51,997 $ 51,296 1 % As a percentage of total revenue 21 % 22 % Sales and marketing expenses increased due to increased marketing and sales events costs, partially offset by lower personnel-related costs. 20 Product Development Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Product development $ 50,474 $ 46,375 9 % As a percentage of total revenue 20 % 19 % Product development expenses increased primarily due to increased personnel-related costs associated with higher headcount. General and Administrative Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change General and administrative $ 26,504 $ 25,623 3 % As a percentage of total revenue 11 % 11 % General and administrative expenses include the costs of our finance, human resources, legal, information systems, and administrative departments. The increase was due to higher stock-based compensation expense, partially offset by lower contractors and outside services and other general and administrative costs. Amortization of Acquired Intangibles – Operating Expenses Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Amortization of acquired intangibles $ 25,617 $ 25,808 (1) % As a percentage of total revenue 10 % 11 % Amortization of acquired intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. Amortization of acquired intangibles decreased in the first quarter of fiscal year 2026 due to certain existing intangible assets being fully amortized as compared to the prior period. Cyber Vulnerability Response Expenses, Net Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Cyber vulnerability response expenses, net $ 1,358 $ 737 84 % As a percentage of total revenue 1 % — % As previously disclosed, since the discovery of the MOVEit Vulnerability that was disclosed on June 5, 2023, we have incurred expenses and will incur future costs related to litigation and governmental investigations related to the MOVEit Vulnerability. Such costs and expenses 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. 21 Restructuring Expenses Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Restructuring expenses $ 706 $ 7,029 (90) % As a percentage of total revenue — % 3 % Restructuring expenses recorded in the first quarter of fiscal year 2026 primarily relate to the headcount reduction action in November 2025, and facility closures in other existing restructuring actions. 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, 2026 February 28, 2025 Percentage Change Acquisition-related expenses $ 814 $ 2,490 (67) % As a percentage of total revenue — % 1 % Acquisition-related costs are expensed as incurred and include those costs incurred as a result of business combinations. 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 2026 primarily related to our pursuit of other acquisition opportunities. Acquisition-related expenses in the same period of fiscal year 2025 were primarily related to our acquisition of ShareFile. Other (Expense) Income Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Interest expense $ (15,246) $ (18,429) (17) % Interest income and other, net 317 487 (35) % Foreign currency loss, net (1,244) (1,182) 5 % Total other expense, net $ (16,173) $ (19,124) 15 % As a percentage of total revenue (7) % (8) % Total other expense, net, decreased in the first quarter of fiscal year 2026 as compared to the same period last year primarily due to a decrease in interest expense resulting from principal payments made on our revolving line of credit. 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. Provision for Income Taxes Three Months Ended (in thousands) February 28, 2026 February 28, 2025 Percentage Change Provision for income taxes $ 7,479 $ 2,356 217 % As a percentage of income before income taxes 25 % 18 % Our effective tax rate was 25% and 18% in the first fiscal quarters of 2026 and 2025, respectively. The increase in the effective rate is primarily due to changes in the jurisdictional mix of earnings, including the proportion of U.S. versus non-U.S. income and discrete tax expense of $0.5 million in the first fiscal quarter of 2026 compared to a discrete tax benefit of $0.3 million in the first fiscal quarter of 2025. 22 On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted into law, introducing significant changes to the U.S. federal income tax system. The legislation contains key modifications to the provisions of the 2017 Tax Cuts and Jobs Act and has multiple effective dates. In our fiscal 2026, provisions under OBBBA allow for an immediate deduction of U.S. Research & Experimental expenditures and a return to interest expense limitations based on EBITDA, which results in a reduction to the current taxes payable. Select Performance Metrics: Management evaluates 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 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 $863.0 million and $849.0 million as of February 28, 2026 and February 28, 2025, respectively, which is an increase of 2% year-over-year. 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 99% and 100% for all periods presented. We believe net retention rates can be a helpful indicator of the durability of top line performance. 23 Liquidity and Capital Resources Cash and Cash Equivalents (in thousands) February 28, 2026 November 30, 2025 Cash and cash equivalents $ 113,171 $ 94,807 The increase in cash and cash equivalents of $18.4 million from the end of fiscal year 2025 was due to cash inflows from operations of $98.6 million, $1.7 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $1.3 million. The cash inflows described above were offset by cash outflows of $60.0 million to pay down the revolving line of credit, repurchases of common stock of $20.4 million, and purchases of property and equipment of $2.7 million. Except as described below, there are no limitations on our ability to access our cash and cash equivalents. As of February 28, 2026, $69.0 million of our cash and cash equivalents was held by our foreign subsidiaries. The Company has 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, 2026 February 28, 2025 Net cash flows provided by operating activities $ 98,626 $ 68,947 Net cash flows used in investing activities $ (2,705) $ (2,485) Net cash flows used in financing activities $ (78,877) $ (58,870) Cash Flows Provided by Operating Activities The increase in cash generated from operations in the first three months of fiscal year 2026 as compared to the same period last year was primarily due to increased collections in fiscal year 2026. Our gross accounts receivable as of February 28, 2026, decreased by $50.8 million from the end of fiscal year 2025. Our days sales outstanding ("DSO") in accounts receivable was 52 days in the first quarter of fiscal year 2026 compared to 48 days and 73 days in the first and fourth fiscal quarters of 2025, respectively, due to the timing of billings and collections. 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 2026, we purchased $2.7 million of property and equipment. In the first quarter of fiscal year 2025 we had $1.3 million of purchases of property and equipment and a payment of $1.2 million related to the acquisition of ShareFile. Cash Flows Used in Financing Activities We received $5.4 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 2026 as compared to $6.2 million in the first three months of fiscal year 2025. We made withholding tax payments related to net share settlements of equity awards of $3.7 million in the first three months of fiscal year 2026 as compared to $4.6 million in the first three months of fiscal year 2025. We repurchased $20.4 million of our common stock under our share repurchase plan in the first three months of fiscal year 2026 as compared to $30.1 million in the same period of the prior year. Further, we made payments on our revolving line of credit of $60.0 million through the first quarter of fiscal year 2026 as compared to $30.0 million in the first quarter of fiscal year 2025. 24 Share Repurchases On September 23, 2025, our Board of Directors increased the share repurchase authorization by $200.0 million to an aggregate authorization of $242.2 million. In the three months ended February 28, 2026 and 2025, we repurchased and retired 0.5 million shares for $20.0 million and 0.5 million shares for $30.0 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, 2026, there was $182.2 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. Convertible Senior Notes and Long-Term Debt See Note 5, Debt to the condensed consolidated financial statements. Liquidity Outlook Cash from operations in fiscal year 2026 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 2025 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. We expect to continue to make payments on the revolving credit facility and are also continuously evaluating additional financing options, the net proceeds of which could be used for general corporate purposes or to repay outstanding indebtedness. In the future, we may use the available capacity under our revolving credit facility for any payments made in connection with any settlement of the 2026 Notes upon conversion, redemption, or repayment of our 2026 Notes at or prior to the 2026 Notes maturity. We may also use the available capacity for general corporate purposes. 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 has also consolidated an insurance subrogation complaint (where an insurer is seeking recovery for expenses incurred on behalf of its insured in connection with the MOVEit Vulnerability) and, as of the date of this filing, one customer cross-claim. The MDL remains in a relatively early stage and is not expected to conclude within the next twelve months. Motions to dismiss were filed and partially granted in July 2025, then further partially granted in January 2026 in response to our motions for reconsideration. In all, the court has dismissed, in whole or in part, 23 of the 33 claims asserted by the plaintiffs in the MDL. As previously disclosed, we have also cooperated with inquiries and investigations from various governmental authorities, a number of which have been formally closed and, as of the date of this filing, have not resulted in any prosecution or enforcement actions. 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. 25 Recent Accounting Pronouncements Refer to Note 1, Summary of Significant Accounting Policies to the condensed consolidated financial statements for further discussion.