PROGRESS SOFTWARE CORP /MA Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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: the timing and amounts of
revenue recognition, including the determination of the nature and timing of the
satisfaction of performance obligations, the standalone selling price of
performance obligations, and the transaction price allocated to performance
obligations; the realization of tax assets and estimates of tax liabilities;
fair values of investments in marketable securities; assets held for sale;
intangible assets and goodwill valuations; the recognition and disclosure of
contingent liabilities; the collectability of accounts receivable; and
assumptions used to determine the fair value of stock-based compensation. This
is not a comprehensive list of all of our accounting policies. For further
information regarding the application of these and other accounting policies,
see Note 1 to our Consolidated Financial Statements in Item 8 of our 2021 10-K.

Caution Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe
harbor provisions regarding forward-looking statements. This Form 10-Q, and
other information provided by us or statements made by our directors, officers
or employees from time to time, may contain "forward-looking" statements and
information, which involve risks and uncertainties. Actual future results may
differ materially. Statements indicating that we "believe," "may," "could,"
"would," "might," "should," "expect," "intend," "plan," "target," "anticipate"
and "continue," are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are a number of factors that could cause actual results or future events
to differ materially from those anticipated by the forward-looking statements,
including, without limitation: (i) Economic, geopolitical and market conditions
can adversely affect our business, results of operations and financial
condition, including our revenue growth and profitability, which in turn could
adversely affect our stock price; (ii) we may fail to achieve our financial
forecasts due to such factors as delays or size reductions in transactions,
fewer large transactions in a particular quarter, fluctuations in currency
exchange rates, or a decline in our renewal rates for contracts; (iii) our
ability to successfully manage transitions to new business models and markets,
including an increased emphasis on a cloud and subscription strategy, may not be
successful; (iv) if we are unable to develop new or sufficiently differentiated
products and services, or to enhance and improve our existing products and
services in a timely manner to meet market demand, partners and customers may
not purchase new software licenses or subscriptions or purchase or renew support
contracts; (v) We depend upon our extensive partner channel and we may not be
successful in retaining or expanding our relationships with channel
                                       28
--------------------------------------------------------------------------------

partners; (vi) our international sales and operations subject us to additional
risks that can adversely affect our operating results, including risks relating
to foreign currency gains and losses; (vii) If the security measures for our
software, services, other offerings or our internal information technology
infrastructure are compromised or subject to a successful cyber-attack, or if
our software offerings contain significant coding or configuration errors, we
may experience reputational harm, legal claims and financial exposure; (viii) we
have made acquisitions, and may make acquisitions in the future, and those
acquisitions may not be successful, may involve unanticipated costs or other
integration issues or may disrupt our existing operations; (ix) delay or failure
to realize the expected synergies and benefits of the Kemp acquisition could
negatively impact our future results of operations and financial condition; (x)
the continuing impact of the coronavirus disease (COVID-19) outbreak on our
employees, customers, partners, and the global financial markets could adversely
affect our business, results of operations and financial condition; (xi)
Russia's recent invasion of Ukraine, and the international community's response,
have created substantial political and economic disruption, uncertainty, and
risk. For further information regarding risks and uncertainties associated with
Progress' business, please refer to Part II, Item 1A (Risk Factors) in our
Quarterly Report on Form 10-Q, as filed with the SEC on April 7, 2022; and in
Part I, Item 1A (Risk Factors) in our 2021 10-K. Although we have sought to
identify the most significant risks to our business, we cannot predict whether,
or to what extent, any of such risks may be realized. We also cannot assure you
that we have identified all possible issues which we might face. We 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.

Overview

Progress Software Corporation ("Progress," the "Company," "we," "us," or "our")
is dedicated to propelling business forward in a technology-driven world. As the
trusted provider of the leading products to develop, deploy and manage
high-impact applications, Progress enables customers to develop the applications
and experiences the need, deploy where and how they want and manage it all
safely and securely. We operate as one operating segment.

The key principles of our strategic plan and operating model are:

Trusted Partner of the Best Products to Develop, Deploy and Manage High Impact
Business Applications. A key element of our strategy is centered on providing
the platform and tools enterprises need to build, deploy, and manage modern,
strategic business applications. We offer these products and tools to both new
customers and partners as well as our existing partner and customer ecosystems.
This strategy builds on our vast experience in application development that
we've acquired over the past 40 years.

Focus on retaining customers and partners to drive recurring revenue and profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operational approach to more effectively generate predictable and stable recurring revenue and high levels of profitability.

Total Growth Strategy Driven by Accretive M&A. We are pursuing a total growth
strategy driven by accretive acquisitions of businesses within the
infrastructure software space, with products that appeal to both IT
organizations and individual developers. These acquisitions must meet strict
financial and other criteria, which help further our goal to provide significant
stockholder returns by providing scale and increased cash flows. In April 2019,
we acquired Ipswitch, Inc.; in October 2020, we acquired Chef Software, Inc.;
and in November 2021, we acquired Kemp Technologies. These acquisitions met our
strict financial criteria.

In recent years, our total growth strategy has resulted in the rapid expansion
of our product portfolio. As our portfolio continues to evolve, we continuously
evaluate our organization for additional synergies and efficiencies. Therefore,
we are working to realign our go-to-market, product, and operational teams, as
well as the increased centralization of additional shared services
                                       29
--------------------------------------------------------------------------------

and functions within our company. We believe these planned changes will improve collaboration between the teams that develop, sell and support our products; improve our ability to integrate acquired businesses; and lead to greater system uniformity and increased operating efficiency.

Multi-Faceted Capital Allocation Approach. Our capital allocation policy
emphasizes accretive M&A, which allows us to expand our business and drive
significant stockholder returns, and utilizes dividends and share repurchases to
return capital to stockholders. We intend to repurchase our shares in sufficient
quantities to offset dilution from our equity plans. Lastly, we return a
significant portion of our annual cash flows from operations to stockholders in
the form of dividends.

In the first nine months of 2022, we repurchased and retired 1.7 million shares
of our common stock for $75.5 million. As of August 31, 2022, there was $79.5
million remaining under share repurchase authorization. The timing and amount of
any shares repurchased will be determined by management based on its evaluation
of market conditions and other factors, and the Board of Directors may choose to
suspend, expand or discontinue the repurchase program at any time.

We began paying quarterly cash dividends of $0.125 per share of common stock to
Progress stockholders in December 2016 and increased the quarterly cash dividend
annually in fiscal years 2017, 2018 and 2019. On September 22, 2020, our Board
of Directors approved an additional increase of 6% to our quarterly cash
dividend from $0.165 to $0.175 and declared a quarterly dividend of $0.175 per
share of common stock. Future declarations of dividends and the establishment of
future record and payment dates are subject to the final determination of our
Board of Directors.

We will continue to pursue acquisitions meeting our financial criteria and
designed to expand our business and drive significant stockholder returns. As a
result, our expected uses of cash could change, our cash position could be
reduced, and we may incur additional debt obligations to the extent we complete
additional acquisitions. However, we believe that existing cash balances,
together with funds generated from operations and amounts available under our
credit facility, will be sufficient to finance our operations and meet our
foreseeable cash requirements, including quarterly cash dividends and stock
repurchases to Progress stockholders, as applicable, through at least the next
twelve months.

We derive a significant portion of our revenue from international operations,
which are primarily conducted in foreign currencies. As a result, changes in the
value of these foreign currencies relative to the U.S. dollar have significantly
impacted our results of operations and may impact our future results of
operations. Since approximately one-third of our revenue is denominated in
foreign currency, and given the recent volatility in the global economy, our
revenue results in the third fiscal quarter of 2022 were impacted by
fluctuations in foreign currency exchange rates.

Results of Operations

Revenue
                            Three Months Ended                       % Change
                                                                As          Constant
(In thousands)    August 31, 2022       August 31, 2021       Reported      Currency
Revenue          $        151,217      $        147,417            3  %          6  %



                            Nine Months Ended                        % Change
                                                                As          Constant
(In thousands)    August 31, 2022       August 31, 2021       Reported      Currency
Revenue          $        444,886      $        391,185           14  %         16  %



Total revenue increased in both the third fiscal quarter and nine month period
ended August 31, 2022 as compared to the same periods last year primarily due to
our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as an
increase in our Chef product offerings. These increases were partially offset by
decreases in our OpenEdge and DataDirect product offerings, as well as the
negative impact of foreign exchange on license and maintenance revenue in our
EMEA region.

                                       30
--------------------------------------------------------------------------------
Software License Revenue
                                             Three Months Ended                      % Change
                                                                                As          Constant
(In thousands)                      August 31, 2022      August 31, 2021      Reported      Currency
Software licenses                  $       47,618       $       51,930            (8) %         (5) %
As a percentage of total revenue               31  %                35  %



                                             Nine Months Ended                       % Change
                                                                                As          Constant
(In thousands)                      August 31, 2022      August 31, 2021      Reported      Currency
Software licenses                  $      135,182       $      115,354            17  %         20  %
As a percentage of total revenue               30  %                29  %



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

Maintenance and Services revenue

                                                           Three Months Ended                                   % Change
                                                                                                       As                   Constant
(In thousands)                                   August 31, 2022         August 31, 2021            Reported                Currency
Maintenance                                     $       91,043          $       82,875                      10  %                   14  %
As a percentage of total revenue                            60  %                   56  %
Services                                                12,556                  12,612                       -  %                    2  %
As a percentage of total revenue                             9  %                    9  %
Total maintenance and services revenue          $      103,599          $       95,487                       8  %                   12  %
As a percentage of total revenue                            69  %                   65  %


                                                            Nine Months Ended                                   % Change
                                                                                                       As                   Constant
(In thousands)                                   August 31, 2022         August 31, 2021            Reported                Currency
Maintenance                                     $      272,337          $      239,921                      14  %                   16  %
As a percentage of total revenue                            61  %                   61  %
Services                                                37,367                  35,910                       4  %                    6  %
As a percentage of total revenue                             9  %                   10  %
Total maintenance and services revenue          $      309,704          $      275,831                      12  %                   15  %
As a percentage of total revenue                            70  %           

71%



Maintenance revenue increased in the third quarter and first nine months of
fiscal year 2022 as compared to the same periods last year primarily due to our
acquisition of Kemp and increased maintenance revenue from our Chef, Ipswitch,
and DevTools product offerings. Services revenue remained flat in the third
quarter of fiscal year 2022 as compared to the same period last year. Services
revenue increased in the first nine months of fiscal year 2022 as compared to
the same period last year primarily due to increased services revenue from our
Sitefinity and Ipswitch product offerings. The maintenance and services
increases were partially offset by the negative impact of foreign exchange in
our EMEA region.

                                       31
--------------------------------------------------------------------------------
Revenue by Region
                                                          Three Months Ended                                   % Change
                                                                                                      As                   Constant
(In thousands)                                  August 31, 2022         August 31, 2021            Reported                Currency
North America                                  $       84,826          $       93,880                     (10) %                  (10) %
As a percentage of total revenue                           56  %                   64  %
Europe, the Middle East and Africa ("EMEA")    $       52,670          $       40,999                      28  %                   40  %
As a percentage of total revenue                           35  %                   28  %
Latin America                                  $        4,577          $        5,298                     (14) %                  (13) %
As a percentage of total revenue                            3  %                    3  %
Asia Pacific                                   $        9,144          $        7,240                      26  %                   30  %
As a percentage of total revenue                            6  %                    5  %



                                                           Nine Months Ended                                   % Change
                                                                                                      As                   Constant
(In thousands)                                  August 31, 2022         August 31, 2021            Reported                Currency
North America                                  $      248,313          $      236,479                       5  %                    5  %
As a percentage of total revenue                           56  %                   60  %
Europe, the Middle East and Africa ("EMEA")    $      156,006          $      122,560                      27  %                   36  %
As a percentage of total revenue                           35  %                   31  %
Latin America                                  $       13,138          $       12,544                       5  %                    3  %
As a percentage of total revenue                            3  %                    3  %
Asia Pacific                                   $       27,429          $       19,602                      40  %                   44  %
As a percentage of total revenue                            6  %            

6%



Total revenue generated in North America decreased $9.1 million and increased
$11.8 million in the third quarter and first nine months of fiscal year 2022,
respectively. The decrease in the third quarter was primarily due to decreases
from our DataDirect and OpenEdge product offerings. The increase in the first
nine months was primarily due to our acquisition of Kemp and increases from our
Chef product offerings. The increase in revenue generated in EMEA was primarily
due to our acquisition of Kemp, as well as increased revenue from Chef,
partially offset by a negative impact of foreign exchange. The decrease in
revenue in Latin America in third fiscal quarter of 2022 was primarily due to
decreases in our OpenEdge product offerings. The increases in revenue generated
in Latin America in the first nine months of fiscal year 2022 and in all periods
for Asia Pacific was due to our acquisition of Kemp.

In the first nine months of fiscal year 2022 revenue generated in markets
outside North America represented 44% of total revenue compared to 46% of total
revenue on a constant currency basis. In the first nine months of fiscal year
2021 revenue generated in markets outside North America represented 40% of total
revenue at both actual rates and on a constant currency basis.

Cost of software licenses

                                                     Three Months Ended                                                Nine Months Ended
                                 August 31,        August 31,                                     August 31,        August 31,
(In thousands)                      2022              2021                   Change                  2022              2021                    Change

Cost of software licenses $2,477 $1,574 $903

           57  %       $  7,669          $  3,763          $ 3,906           104  %
As a percentage of software
license revenue                         5  %              3  %                                           6  %              3  %
As a percentage of total revenue        2  %              1  %                                           2  %              1  %



Cost of software licenses consists primarily of costs of inventories, royalties,
electronic software distribution, duplication, and packaging. Cost of software
licenses as a percentage of software license revenue varies from period to
period depending upon the relative product mix. The year over year increase is
due to our acquisition of Kemp in the fourth quarter of fiscal year 2021.

                                       32
--------------------------------------------------------------------------------

Cost of maintenance and services

                                                             Three Months Ended                                                              Nine Months Ended
(In thousands)                     August 31, 2022         August 31, 2021                 Change                  August 31, 2022         August 31, 2021                 Change

Cost of maintenance and services $15,761 $14,895

       $   866              6  %       $       46,707          $       42,887          $ 3,820             9  %
As a percentage of maintenance
and services revenue                          15  %                   16  %                                                   15  %                   16  %
As a percentage of total revenue              10  %                   10  %                                                   10  %                   11  %
Components of cost of maintenance
and services:
Personnel related costs           $       11,338          $       10,056          $ 1,282             13  %       $       33,175          $       29,634          $ 3,541            12  %
Contractors and outside services           2,956                   3,504             (548)           (16) %                9,178                   9,539             (361)           (4) %
Hosting and other                          1,467                   1,335              132             10  %                4,354                   3,714              640            17  %
Total cost of maintenance and
services                          $       15,761          $       14,895          $   866              6  %       $       46,707          $       42,887          $ 3,820             9  %



Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. The increases in all periods were
primarily due to increased headcount and hosting costs resulting from our
acquisition of Kemp, partially offset by decreased contractors and outside
services costs.

Amortization of Intangibles


                                                            Three Months Ended                                                 Nine Months Ended
                                                                 August 31,                                                                                    %
(In thousands)                            August 31, 2022           2021              % Change            August 31, 2022         August 31, 2021           Change
Amortization of intangibles              $        5,558          $  3,599                    54  %       $       16,589          $       10,719                  55  %
As a percentage of total revenue                      4  %              2  %                                          4  %                    3  %



Amortization of intangibles included in costs of revenue primarily represents
the amortization of the value assigned to technology-related intangible assets
obtained in business combinations. The increases in both periods shown were due
to the acquisition of Kemp.

Gross Profit


                                                             Three Months Ended                                                    Nine Months Ended
                                                                                                                                                                   %
(In thousands)                          August 31, 2022         August 31, 2021           % Change            August 31, 2022         August 31, 2021           Change
Gross profit                           $      127,421          $      127,349                     -  %       $      373,921          $      333,816                  12  %
As a percentage of total revenue                   84  %                   86  %                                         84  %                   85  %



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

                                       33
--------------------------------------------------------------------------------
Sales and Marketing
                                                            Three Months Ended                                                              Nine Months Ended
(In thousands)                    August 31, 2022         August 31, 2021                 Change                 August 31, 2022         August 31, 2021                 Change
Sales and marketing              $       34,595          $       29,737          $ 4,858            16  %       $      100,768          $       88,468          $ 12,300            14  %
As a percentage of total revenue             23  %                   20  %                                                  23  %                   23  %
Components of sales and
marketing:
Personnel related costs          $       29,994          $       25,538          $ 4,456            17  %       $       86,145          $       76,678          $  9,467            12  %
Contractors and outside services            592                     833             (241)          (29) %                2,171                   2,189               (18)           (1) %
Marketing programs and other              4,009                   3,366              643            19  %               12,452                   9,601             2,851            30  %
Total sales and marketing        $       34,595          $       29,737          $ 4,858            16  %       $      100,768          $       88,468          $ 12,300            14  %



Sales and marketing expenses increased in both periods shown, primarily due to
increased personnel related costs associated with our acquisition of Kemp, as
well as increases in marketing and sales events costs.

Product Development

                                                            Three Months Ended                                                             Nine Months Ended
(In thousands)                    August 31, 2022         August 31, 2021                 Change                 August 31, 2022         August 31, 2021                 Change

Product development costs $28,650 $25,616

     $ 3,034            12  %       $       85,966          $       76,579          $ 9,387            12  %
As a percentage of total revenue             19  %                   17  %                                                  19  %                   20  %
Components of product
development costs:
Personnel related costs          $       28,044          $       24,550          $ 3,494            14  %       $       83,277          $       73,379          $ 9,898            13  %
Contractors and outside services            275                     934             (659)          (71) %                1,989                   2,645             (656)          (25) %
Other product development costs             331                     132              199           151  %                  700                     555              145            26  %

Total product development costs $28,650 $25,616

     $ 3,034            12  %       $       85,966          $       76,579          $ 9,387            12  %


Product development expenses increased in both periods shown, primarily due to higher personnel costs associated with our acquisition of Kemp, partially offset by lower costs for contractors and external services.

General and Administrative

                                                                 Three Months Ended                                                              Nine Months Ended
(In thousands)                         August 31, 2022         August 31, 2021                 Change                 August 31, 2022         August 31, 2021                 Change
General and administrative            $       20,141          $       16,451          $ 3,690            22  %       $       56,339          $       46,335          $ 10,004            22  %
As a percentage of total revenue                  13  %                   11  %                                                  13  %                   12  %
Components of general and
administrative:
Personnel related costs               $       14,798          $       12,732          $ 2,066            16  %       $       44,600          $       38,046          $  6,554            17  %
Contractors and outside services               2,152                   2,522             (370)          (15) %                6,481                   6,037               444             7  %
Other general and administrative
costs                                          3,191                   1,197            1,994           167  %                5,258                   2,252             3,006           133  %
Total cost of general and
administrative                        $       20,141          $       16,451          $ 3,690            22  %       $       56,339          $       46,335          $ 10,004            22  %



General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses increased in both periods shown primarily due to
higher personnel costs associated with our acquisition of Kemp, as well as an
increase in other general and administrative costs.

                                       34
--------------------------------------------------------------------------------

Amortization of Intangibles
                                                           Three Months Ended                                                   Nine Months Ended
                                                                August 31,
(In thousands)                           August 31, 2022           2021              % Change            August 31, 2022         August 31, 2021            % Change
Amortization of intangibles             $       11,716          $  7,978                    47  %       $       35,330          $       22,836                      55  %
As a percentage of total revenue                     8  %              5  %                                          8  %                    6  %



Amortization of intangibles included in operating expenses primarily represents
the amortization of value assigned to intangible assets obtained in business
combinations other than assets identified as purchased technology. Amortization
of intangibles increased in both periods shown due to the addition of Kemp
intangible assets, as discussed above.

Restructuring Expenses
                                                                  Three Months Ended                                                    Nine Months Ended
                                                                                                                                            August 31,
(In thousands)                            August 31, 2022              August 31, 2021           % Change            August 31, 2022           2021               % Change
Restructuring expenses                   $        130                 $         40                     225  %       $          784          $  1,133                    (31) %
As a percentage of total revenue                    -    %                       -    %                                          -  %              -  %



Restructuring expenses recorded in the third quarter and first nine months of
fiscal year 2022 relate to the restructuring activities that occurred in the
fourth quarters of fiscal years 2021 and 2020 resulting from the acquisitions of
Kemp and Chef, respectively. Restructuring expenses recorded in the third
quarter and first nine months of fiscal year 2021 are comprised mostly of costs
related to the Chef restructuring action of 2020. See the Liquidity and Capital
Resources section of this Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.

Acquisition-related expenses

                                                                   Three Months Ended                                            Nine Months Ended
                                                                        August 31,                              August 31,        August 31,
(In thousands)                                   August 31, 2022           2021              % Change              2022              2021              % Change
Acquisition-related expenses                    $         168           $  1,481                   (89) %       $  3,816          $  2,721                    40  %
As a percentage of total revenue                            -   %              1  %                                    1  %              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 were higher in the third quarter of fiscal
year 2021 compared to the current quarter due to costs incurred associated with
our acquisition of Kemp. Acquisition-related expenses increased in the first
nine months of fiscal year 2022 due to our pursuit of other acquisition
opportunities, as well as our acquisition of Kemp. Acquisition-related expenses
in the same periods of fiscal year 2021 were primarily related to the
acquisition of Kemp.

Gain on sale of assets held for sale

                                                             Three Months Ended                                                    Nine Months Ended
(In thousands)                          August 31, 2022         August 31, 2021           % Change           August 31, 2022          August 31, 2021           % Change
Gain on sale of assets held for sale   $          -            $          -                         *       $       (10,770)         $          -                         *
As a percentage of total revenue                  -    %                  -     %                                        (2) %                  -     %


*not meaningful

In the second quarter of fiscal year 2022, we sold corporate land and building
assets previously reported as assets held for sale on our consolidated balance
sheet. As the sale price less cost to sell was greater than the carrying value
of these assets we recognized a net gain on the sale of approximately $10.8
million in the second quarter of fiscal year 2022.
                                       35
--------------------------------------------------------------------------------
Income from Operations


                                                             Three Months Ended                                                     Nine Months Ended
(In thousands)                          August 31, 2022         August 31, 2021           % Change            August 31, 2022         August 31, 2021           % Change
Income from operations                 $       32,021          $       46,046                   (30) %       $      101,688          $       95,744                     6  %
As a percentage of total revenue                   21  %                   31  %                                         23  %                   24  %



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

Other (expenses) income, net

                                                             Three Months Ended                                                     Nine Months Ended
(In thousands)                          August 31, 2022         August 31, 2021           % Change            August 31, 2022         August 31, 2021           % Change
Interest expense                       $       (4,009)         $       (6,510)                   38  %       $      (11,368)         $      (13,625)                   17  %
Interest income and other, net                    247                      99                   149  %                  991                     222                   346  %
Foreign currency gain (loss), net                (577)                   (128)                 (351) %                 (832)                 (1,006)                   17  %
Total other expense, net               $       (4,339)         $       (6,539)                   34  %       $      (11,209)         $      (14,409)                   22  %
As a percentage of total revenue                   (3) %                   (4) %                                         (3) %                   (4) %


*not meaningful


Other expense, net, decreased in the third quarter and first nine months of
fiscal year 2022 as compared to the same periods last year primarily due to
decreased interest expense on our convertible senior notes resulting from the
adoption of ASU 2020-06. Refer to Note 1, Basis of Presentation for further
details on the impact of adoption. The decrease in interest expense on our
convertible senior notes was offset by increased interest expense on our term
loan, which was amended in the first quarter of fiscal year 2022. Refer to Note
8: Debt, for further details on the impact of the amendment. Interest income and
other, net, was higher in the first nine months of fiscal year 2022, resulting
from the recognition of grant income during the first quarter of the year.
Foreign currency loss increased in the third quarter of fiscal year 2022 and
decreased in the first nine months of fiscal year 2022.

                                       36
--------------------------------------------------------------------------------

Provision for Income Taxes


                                                          Three Months Ended                                                  Nine Months Ended
                                                               August 31,
(In thousands)                          August 31, 2022           2021              % Change            August 31, 2022         August 31, 2021           % Change
Provision for income taxes             $        5,885          $  8,531                   (31) %       $       19,118          $       17,841                     7  %
As a percentage of total revenue                    4  %              6  %                                          4  %                    5  %



Our effective tax rate was 21% in the third fiscal quarter of 2022, compared to
22% in the third fiscal quarter of 2021. There were no significant discrete tax
items in the third fiscal quarter of either 2022 or 2021.

Net Income
                                                             Three Months Ended                                                     Nine Months Ended
(In thousands)                          August 31, 2022         August 31, 2021           % Change            August 31, 2022         August 31, 2021           % Change
Net income                             $       21,797          $       30,976                   (30) %       $       71,361          $       63,494                    12  %
As a percentage of total revenue                   14  %                   21  %                                         16  %                   16  %



Select Performance Metrics:

Management assesses our financial performance using a number of financial and operational measures. These measures are periodically reviewed and revised to reflect changes in our business.

Recurring Annual Income (ARR)

We are providing an ARR performance metric to help investors better understand
and assess the performance of our business because our mix of revenue generated
from recurring sources has increased in recent years. 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 mitigates fluctuations due to seasonality, contract term and the
sales mix of subscriptions for term-based licenses and SaaS. ARR does not have
any standardized meaning and is therefore unlikely to be comparable to similarly
titled measures presented by other companies. ARR should be viewed independently
of GAAP revenue and deferred revenue and is not intended to be combined with or
to replace, not be superior to, either of those items. ARR 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.

We define ARR as the annual recurring revenue of term-based contracts from all
customers at a point in time. We calculate ARR by taking monthly recurring
revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by
aggregating, for all customers during that month, monthly revenue from committed
contractual amounts, additional usage and monthly subscriptions. All periods are
reported in constant currency, using current year budgeted exchange rates.

Our ARR was $495.0 million and $439.0 million as of August 31, 2022 and 2021,
respectively, which is an increase of 12.7% year-over-year. The growth in our
ARR is primarily driven by the acquisition of Kemp.

Net retention rate in dollars

We calculate net dollar retention rate as of a period end by starting with the
ARR from the cohort of all customers as of 12 months prior to such period end
("Prior Period ARR"). We then calculate the ARR from these same customers as of
the current period end ("Current Period ARR"). Current Period ARR includes any
expansion and is net of contraction or attrition over the last 12 months but
excludes ARR from new customers in the current period. We then divide the total
Current Period ARR by the total Prior Period ARR to arrive at the net dollar
retention rate.

Our net dollar retention rates have generally fluctuated between 101% and 102% for all periods presented. Our high retention rates in net dollars illustrate our predictable and sustainable revenue performance.

                                       37
--------------------------------------------------------------------------------

Cash and capital resources

Cash, cash equivalents and short-term investments

(In thousands)                                              August 31, 2022           November 30, 2021
Cash and cash equivalents                                 $        224,115          $          155,406
Short-term investments                                                 749                       1,967

Total cash, cash equivalents and short-term investments $224,864

$157,373



The increase in cash, cash equivalents and short-term investments of $67.5
million from the end of fiscal year 2021 was due to cash inflows from operations
of $152.0 million, proceeds from the sale of long-lived assets of $26.0 million,
proceeds from the issuance of debt of $7.5 million, and $5.0 million in cash
received from the issuance of common stock. These cash inflows were offset by
repurchases of common stock of $75.5 million, dividend payments of $23.4
million, the effect of exchange rates on cash of $14.0 million, payments of debt
obligations of $5.2 million, payments of issuance costs for long-term debt of
$2.0 million, and purchases of property and equipment of $3.1 million. Except as
described below, there are no limitations on our ability to access our cash,
cash equivalents and short-term investments.

As of August 31, 2022, $56.5 million of our cash, cash equivalents and
short-term investments was held by our foreign subsidiaries. Foreign cash
includes unremitted foreign earnings, which are invested indefinitely outside of
the U.S. As such, it is not available to fund our domestic operations. If we
were to repatriate these earnings, we may be subject to income tax withholding
in certain tax jurisdictions and a portion of the repatriated earnings may be
subject to U.S. income tax. However, we do not anticipate that this would have a
material adverse impact on our liquidity.

Share buyback program

In January 2020, our Board of Directors increased the total share repurchase
authorization from $75 million to $250 million. In the nine months ended
August 31, 2022 and August 31, 2021, we repurchased and retired 1.7 million
shares for $75.5 million and 0.8 million shares for $35.0 million, respectively.
The shares were repurchased in both periods as part of our Board of Directors
authorized share repurchase program. As of August 31, 2022, there was $79.5
million remaining under the current authorization.

Dividends

We began paying quarterly cash dividends to Progress stockholders in December
2016, and have paid a quarterly cash dividend since that time. On September 23,
2022, our Board of Directors declared a quarterly dividend of $0.175 per share
of common stock which will be paid on December 15, 2022 to stockholders of
record as of the close of business on December 1, 2022. Future declarations of
dividends and the establishment of future record and payment dates are subject
to the final determination of our Board of Directors.

Restructuring activities

During the fourth quarter of fiscal year 2021, we restructured our operations in
connection with the acquisition of Kemp. This restructuring resulted in a
reduction in redundant positions, primarily within administrative functions of
Kemp. For the three and nine months ended August 31, 2022, we incurred expenses
of $0.1 million and $0.5 million, respectively, relating to this restructuring.
The expenses are recorded as restructuring expenses in the consolidated
statements of operations. We expect to incur additional expenses as part of this
action related to employee costs and facility closures as we consolidate offices
in various locations during fiscal year 2022, but we do not expect these costs
to be material. Cash disbursements for expenses incurred to date under this
restructuring are expected to be made through fiscal year 2022. Accordingly, the
balance of the restructuring liability of $0.1 million is included in other
accrued liabilities on the consolidated balance sheet at August 31, 2022.

                                       38
--------------------------------------------------------------------------------

During the fourth quarter of fiscal year 2020, we restructured our operations in
connection with the acquisition of Chef. Refer to Note 7: Business Combinations
for further discussion. This restructuring resulted in a reduction in redundant
positions, primarily within administrative functions of Chef. For the three and
nine months ended August 31, 2022, we incurred expenses of $0.2 million and $0.3
million, respectively, relating to this restructuring. Cash disbursements for
expenses incurred to date under this restructuring are expected to be made
through fiscal year 2027. Accordingly, $1.0 million and $3.0 million of the
total balance of the restructuring liability of $4.0 million is included in
short-term and long-term lease liabilities, respectively, on the condensed
consolidated balance sheet at August 31, 2022. We do not expect to incur
additional material expenses as part of this action.

Credit facility

On January 25, 2022, we entered into an amended and restated credit agreement
(the "Credit Agreement") providing for a $275.0 million secured term loan and a
$300.0 million secured revolving credit facility. The revolving credit facility
may be increased, and new term loan commitments may be entered into, by up to an
additional amount up to the sum of (A) the greater of (x) $260.0 million and (y)
100% of our consolidated EBITDA and (B) an unlimited additional amount subject
to pro forma compliance with a consolidated senior secured net leverage ratio of
no greater than 3.75 to 1.00 if the existing or additional lenders are willing
to make such increased commitments. This new credit facility replaces our prior
secured credit facility dated April 30, 2019.

The term loan amount outstanding under our old secured credit facility has been incorporated into the amended and restated credit facility.

The revolving line of credit has sublimits for swing line loans up to $25.0
million and for the issuance of standby letters of credit in a face amount up to
$25.0 million. We expect to use the revolving credit facility for general
corporate purposes, which may include the acquisitions of other businesses, and
may also use it for working capital.

Interest rates for the Credit Agreement are determined by reference to a term
benchmark rate or a base rate at our option and would range from 1.00% to 2.00%
above the term benchmark rate or would range from 0.00% to 1.00% above the
defined base rate for base rate borrowings, in each case based upon our leverage
ratio. Additionally, we may borrow certain foreign currencies at rates set in
the same range above the respective term benchmark rates for those currencies,
based on our leverage ratio. We will incur a quarterly commitment fee on the
undrawn portion of the revolving credit facility, ranging from 0.125% to 0.275%
per annum, based upon our leverage ratio. At closing of the revolving credit
facility, the applicable interest rate and commitment fee are at the third
lowest rate in each range.

The Credit Agreement matures on the earlier of (i) January 25, 2027 and (ii) the
date that is 181 days prior to the maturity date of our Notes subject to certain
conditions as set forth in the amended credit agreement, including the repayment
of the Notes, the refinancing of the Notes including a maturity date that is at
least 181 days after January 25, 2027 and compliance with a liquidity test, when
all amounts outstanding will be due and payable in full. The revolving credit
facility does not require amortization of principal. The term loan requires
repayment of principal at the end of each fiscal quarter, beginning with the
fiscal quarter ending February 28, 2022. The first eight payments are in the
principal amount of $1.7 million each, the following four payments are in the
principal amount of $3.4 million each, the following eight payments are in the
principal amount of $5.2 million each and the last payment is of the remaining
principal amount. Any amounts outstanding under the term loan thereafter would
be due on the maturity date. The term loan may be prepaid before maturity in
whole or in part at our option without penalty or premium.

We are the sole borrower under the credit facility. Our obligations under the
amended credit agreement are guaranteed by each of our material domestic
subsidiaries and are secured by substantially all of our assets and such
material domestic subsidiaries, as well as 100% of the capital stock of our
domestic subsidiaries and 65% of the capital stock of our first-tier foreign
subsidiaries, in each case, subject to certain exceptions as described in the
amended credit agreement. Future material domestic subsidiaries will be required
to guaranty our obligations under the amended credit agreement, and to grant
security interests in substantially all of their assets to secure such
obligations. The amended credit agreement generally prohibits, with certain
exceptions, any other liens on our assets and the assets of our subsidiaries,
subject to certain exceptions as described in the amended credit agreement.

The amended credit agreement contains customary affirmative and negative
covenants, including covenants that limit or restrict us and our subsidiaries'
ability to, among other things, grant liens, make investments, make
acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay
dividends or make distributions, repurchase stock, change the nature of its
business, enter into certain transactions with affiliates and enter into
burdensome agreements, in each case subject to customary
                                       39
--------------------------------------------------------------------------------

exceptions for a credit facility of this size and type. We are also required to
maintain compliance with a consolidated interest charge coverage ratio and a
consolidated total net leverage ratio.

The amended credit agreement includes customary events of default that include,
among other things, non-payment defaults, covenant defaults, inaccuracy of
representations and warranties, cross default to material indebtedness,
bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults
and a change of control default. The occurrence of an event of default could
result in the acceleration of the obligations under the amended credit
agreement.

The outstanding balance of the term loan as of August 31, 2022 was $269.8
million, with $6.9 million due in the next 12 months. The term loan may be
prepaid before maturity in whole or in part at our option without penalty or
premium. The interest rate as of August 31, 2022 was 3.81%. As of August 31,
2022, there were no amounts outstanding under the revolving line of credit and
$2.1 million of letters of credit outstanding. Refer to Note 8: Debt for further
discussion.

Senior Convertible Bonds

In April 2021, we issued, in a private placement, Convertible Senior Notes (the
"Notes") with an aggregate principal amount of $325 million, due April 15, 2026,
unless earlier repurchased, redeemed or converted. There are no required
principal payments prior to the maturity of the Notes. In addition, the Company
granted the initial purchasers of the Notes an option to purchase up to an
additional $50.0 million aggregate principal amount of the Notes, of which $35
million of additional Notes were purchased for total proceeds of $360 million.
The Notes bear interest at an annual rate of 1%, payable semi-annually in
arrears on April 15 and October 15 of each year, beginning on October 15, 2021.
The adoption of ASU 2020-06 had no impact on the Company's debt covenant
compliance under the current arrangement. Refer to Note 8: Debt for further
discussion.

© Edgar Online, source Previews