UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~February 28,~~May 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to _____.

Commission File Number: 0-19417

PROGRESS SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware						04-2746201
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

15 Wayside Road, Suite 400

Burlington, Massachusetts 01803

(Address of principal executive offices) (Zip code)

(781) 280-4000

(Registrant’s telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PRGS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~March 28,~~June 29, 2023, there were ~~43,307,145~~43,365,973 shares of the registrant’s common stock, $.01 par value per share, outstanding.

PROGRESS SOFTWARE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~FEBRUARY 28,~~MAY 31, 2023

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of ~~February 28,~~May 31 , 2023 and November 30, 2022	3
	Condensed Consolidated Statements of Operations for the three and six months ended ~~February 28,~~May 31 , 2023 and 2022	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~February 28,~~May 31 , 2023 and 2022	5
	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended ~~February 28,~~M ay 31 , 2023 and 2022	6
	Condensed Consolidated Statements of Cash Flows for the three and six months ended ~~February 28,~~May 31 , 2023 and 2022	78
	Notes to Condensed Consolidated Financial Statements	910
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2934
Item 4.	Controls and Procedures	2934

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3036
Item 1A.	Risk Factors	3036
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3038
Item 5.	Other Information	38
Item 6.	Exhibits	3139

	Signatures	3240

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets


(In thousands, except share data)	(In thousands, except share data)	February 28, 2023		November 30, 2022		(In thousands, except share data)	May 31, 2023		November 30, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	107,981	$	256,277	Cash and cash equivalents	$	125,531	$	256,277
Short-term investments		14,944		—
Total cash, cash equivalents and short-term investments		122,925		256,277
Accounts receivable (less allowances of $834 and $859, respectively)		93,347		97,834
Accounts receivable (less allowances of $701 and $859, respectively)						Accounts receivable (less allowances of $701 and $859, respectively)	87,183		97,834
Unbilled receivables	Unbilled receivables	33,596		29,158		Unbilled receivables	32,958		29,158
Other current assets	Other current assets	42,833		42,784		Other current assets	35,410		42,784
Total current assets	Total current assets	292,701		426,053		Total current assets	281,082		426,053
Long-term unbilled receivables	Long-term unbilled receivables	47,922		39,936		Long-term unbilled receivables	38,727		39,936
Property and equipment, net	Property and equipment, net	14,981		14,927		Property and equipment, net	14,655		14,927
Intangible assets, net	Intangible assets, net	440,942		217,355		Intangible assets, net	404,515		217,355
Goodwill	Goodwill	811,859		671,037		Goodwill	825,944		671,037
Right-of-use lease assets	Right-of-use lease assets	21,768		17,574		Right-of-use lease assets	23,396		17,574
Deferred tax assets	Deferred tax assets	1,400		11,765		Deferred tax assets	4,374		11,765
Other assets	Other assets	12,034		12,832		Other assets	9,192		12,832
Total assets	Total assets	$	1,643,607	$	1,411,479	Total assets	$	1,601,885	$	1,411,479
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt, net	Current portion of long-term debt, net	$	7,953	$	6,234	Current portion of long-term debt, net	$	9,671	$	6,234
Accounts payable	Accounts payable	10,464		9,282		Accounts payable	7,162		9,282
Accrued compensation and related taxes	Accrued compensation and related taxes	33,291		42,467		Accrued compensation and related taxes	34,258		42,467
Dividends payable to stockholders	Dividends payable to stockholders	8,141		8,115		Dividends payable to stockholders	8,192		8,115
Short-term operating lease liabilities	Short-term operating lease liabilities	9,321		7,471		Short-term operating lease liabilities	10,090		7,471
Other accrued liabilities	Other accrued liabilities	23,254		16,765		Other accrued liabilities	26,514		16,765
Short-term deferred revenue, net	Short-term deferred revenue, net	244,733		227,670		Short-term deferred revenue, net	227,607		227,670
Total current liabilities	Total current liabilities	337,157		318,004		Total current liabilities	323,494		318,004
Long-term debt, net	Long-term debt, net	450,943		259,220		Long-term debt, net	422,666		259,220
Convertible senior notes, net	Convertible senior notes, net	353,159		352,625		Convertible senior notes, net	353,696		352,625
Long-term operating lease liabilities	Long-term operating lease liabilities	17,341		15,041		Long-term operating lease liabilities	17,654		15,041
Long-term deferred revenue, net	Long-term deferred revenue, net	57,114		54,770		Long-term deferred revenue, net	56,030		54,770
Deferred tax liabilities	Deferred tax liabilities	5,546		4,628		Deferred tax liabilities	4,547		4,628
Other noncurrent liabilities	Other noncurrent liabilities	8,904		8,687		Other noncurrent liabilities	4,983		8,687
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none	Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none	—		—		Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none	—		—
Common stock, $0.01 par value; authorized, 200,000,000 shares; issued and outstanding, 43,307,145 shares in 2023 and 43,257,008 shares in 2022		433		433
Common stock, $0.01 par value; authorized, 200,000,000 shares; issued and outstanding, 43,357,557 shares in 2023 and 43,257,008 shares in 2022						Common stock, $0.01 par value; authorized, 200,000,000 shares; issued and outstanding, 43,357,557 shares in 2023 and 43,257,008 shares in 2022	436		433
Additional paid-in capital	Additional paid-in capital	338,370		331,650		Additional paid-in capital	347,101		331,650
Retained earnings	Retained earnings	108,286		101,656		Retained earnings	103,995		101,656
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(33,646)		(35,235)		Accumulated other comprehensive loss	(32,717)		(35,235)
Total stockholders’ equity	Total stockholders’ equity	413,443		398,504		Total stockholders’ equity	418,815		398,504
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,643,607	$	1,411,479	Total liabilities and stockholders’ equity	$	1,601,885	$	1,411,479

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Operations


		Three Months Ended				Three Months Ended				Six Months Ended
(In thousands, except per share data)	(In thousands, except per share data)	February 28, 2023		February 28, 2022			(In thousands, except per share data)	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Revenue:	Revenue:						Revenue:
Software licenses	Software licenses	$	57,568	$	42,750		Software licenses	$	56,407	$	44,814	$	113,975	$	87,564
Maintenance and services	Maintenance and services	106,658		102,172			Maintenance and services	121,844		103,933		228,502		206,105
Total revenue	Total revenue	164,226		144,922			Total revenue	178,251		148,747		342,477		293,669
Costs of revenue:	Costs of revenue:						Costs of revenue:
Cost of software licenses	Cost of software licenses	2,452		2,609			Cost of software licenses	2,814		2,583		5,266		5,192
Cost of maintenance and services	Cost of maintenance and services	17,501		15,145			Cost of maintenance and services	22,970		15,801		40,471		30,946
Amortization of acquired intangibles	Amortization of acquired intangibles	6,264		5,458			Amortization of acquired intangibles	7,994		5,573		14,258		11,031
Total costs of revenue	Total costs of revenue	26,217		23,212			Total costs of revenue	33,778		23,957		59,995		47,169
Gross profit	Gross profit	138,009		121,710			Gross profit	144,473		124,790		282,482		246,500
Operating expenses:	Operating expenses:						Operating expenses:
Sales and marketing	Sales and marketing	33,754		33,469			Sales and marketing	40,147		32,704		73,901		66,173
Product development	Product development	30,438		28,673			Product development	34,820		28,643		65,258		57,316
General and administrative	General and administrative	18,786		16,991			General and administrative	21,469		19,207		40,255		36,198
Amortization of acquired intangibles	Amortization of acquired intangibles	13,611		11,722			Amortization of acquired intangibles	17,546		11,892		31,157		23,614
Cyber incident		2,692		—
Cyber incident and vulnerability response expenses, net							Cyber incident and vulnerability response expenses, net	1,483		—		4,175		—
Restructuring expenses	Restructuring expenses	1,397		511			Restructuring expenses	3,990		143		5,387		654
Acquisition-related expenses	Acquisition-related expenses	1,743		912			Acquisition-related expenses	1,991		2,736		3,734		3,648
Gain on sale of assets held for sale							Gain on sale of assets held for sale	—		(10,770)		—		(10,770)
Total operating expenses	Total operating expenses	102,421		92,278			Total operating expenses	121,446		84,555		223,867		176,833
Income from operations	Income from operations	35,588		29,432			Income from operations	23,027		40,235		58,615		69,667
Other (expense) income:	Other (expense) income:						Other (expense) income:
Interest expense	Interest expense	(5,848)		(3,703)			Interest expense	(8,514)		(3,656)		(14,362)		(7,359)
Interest income and other, net	Interest income and other, net	515		589			Interest income and other, net	592		155		1,107		744
Foreign currency loss, net	Foreign currency loss, net	(331)		(366)			Foreign currency loss, net	(496)		111		(827)		(255)
Total other expense, net	Total other expense, net	(5,664)		(3,480)			Total other expense, net	(8,418)		(3,390)		(14,082)		(6,870)
Income before income taxes	Income before income taxes	29,924		25,952			Income before income taxes	14,609		36,845		44,533		62,797
Provision for income taxes	Provision for income taxes	6,250		5,498			Provision for income taxes	2,519		7,735		8,769		13,233
Net income	Net income	$	23,674	$	20,454		Net income	$	12,090	$	29,110	$	35,764	$	49,564
Earnings per share:	Earnings per share:						Earnings per share:
Basic	Basic	$	0.55	$	0.47		Basic	$	0.28	$	0.67	$	0.83	$	1.13
Diluted	Diluted	$	0.53	$	0.46		Diluted	$	0.27	$	0.66	$	0.81	$	1.11
Weighted average shares outstanding:	Weighted average shares outstanding:						Weighted average shares outstanding:
Basic	Basic	43,300		43,981			Basic	43,343		43,575		43,321		43,778
Diluted	Diluted	44,353		44,708			Diluted	44,470		44,253		44,411		44,480

Cash dividends declared per common share	Cash dividends declared per common share	$	0.175	$	0.175		Cash dividends declared per common share	$	0.175	$	0.175	$	0.350	$	0.350

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Comprehensive Income


		Three Months Ended				Three Months Ended				Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022			(In thousands)	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Net income	Net income	$	23,674	$	20,454		Net income	$	12,090	$	29,110	$	35,764	$	49,564
Other comprehensive income, net of tax:	Other comprehensive income, net of tax:						Other comprehensive income, net of tax:
Foreign currency translation adjustments	Foreign currency translation adjustments	1,737		1,781			Foreign currency translation adjustments	1,720		(5,104)		3,457		(3,323)
Unrealized (loss) gain on hedging activity, net of tax benefit of $45 and a tax provision of $522 for the first quarter of 2023 and 2022, respectively		(127)		1,653
Unrealized loss on investments, net of tax provision of $4 and a tax benefit of $3 for the first quarter of 2023 and 2022, respectively		(21)		(7)
Unrealized gain on hedging activity, net of tax benefit of $250 and $295 for the second quarter and first six months of 2023, respectively and net of tax provision of $643 and $1,165 for the second quarter and first six months of 2022, respectively							Unrealized gain on hedging activity, net of tax benefit of $250 and $295 for the second quarter and first six months of 2023, respectively and net of tax provision of $643 and $1,165 for the second quarter and first six months of 2022, respectively	(812)		2,038		(939)		3,691
Unrealized loss on investments, net of tax benefit of $4 and $0 for the second quarter and first six months of 2023, respectively and net of a tax benefit of $1 and $4 for the second quarter and first six months of 2022, respectively							Unrealized loss on investments, net of tax benefit of $4 and $0 for the second quarter and first six months of 2023, respectively and net of a tax benefit of $1 and $4 for the second quarter and first six months of 2022, respectively	21		(5)		—		(12)
Total other comprehensive income, net of tax	Total other comprehensive income, net of tax	1,589		3,427			Total other comprehensive income, net of tax	929		(3,071)		2,518		356
Comprehensive income	Comprehensive income	$	25,263	$	23,881		Comprehensive income	$	13,019	$	26,039	$	38,282	$	49,920

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Stockholders’ Equity


		Three Months Ended February 28, 2023																			Six Months Ended May 31, 2023
		Common Stock			Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Total Stockholders' Equity				Common Stock						Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
(in thousands)	(in thousands)	Number of Shares	Amount								(in thousands)	Number of Shares								Amount
Balance, December 1, 2022	Balance, December 1, 2022	43,257	$	433			$	331,650							$	101,656			$	(35,235)		$	398,504	Balance, December 1, 2022		43,257			$	433			$	331,650			$	101,656			$	(35,235)	$	398,504
Issuance of stock under employee stock purchase plan	Issuance of stock under employee stock purchase plan	50	1		1,786				—				—				1,787			Issuance of stock under employee stock purchase plan	145			2				5,268				—				—				5,270
Exercise of stock options	Exercise of stock options	141	1		6,002				—				—				6,003			Exercise of stock options	260			3			10,766				—				—				10,769
Vesting of restricted stock units and release of deferred stock units	Vesting of restricted stock units and release of deferred stock units	215	2		(2)				—				—				—			Vesting of restricted stock units and release of deferred stock units	378			4			(4)				—				—				—
Withholding tax payments related to net issuance of RSUs	Withholding tax payments related to net issuance of RSUs	(90)	(1)		(4,816)				—				—				(4,817)			Withholding tax payments related to net issuance of RSUs	(147)			(1)			(8,100)				—				—				(8,101)
Stock-based compensation	Stock-based compensation	—	—		9,752				—				—				9,752			Stock-based compensation	—			—			20,039				—				—				20,039
Dividends declared	Dividends declared	—	—		—				(8,049)				—				(8,049)			Dividends declared	—			—			—				(15,948)				—				(15,948)
Treasury stock repurchases and retirements	Treasury stock repurchases and retirements	(266)	(3)		(6,002)				(8,995)				—				(15,000)			Treasury stock repurchases and retirements	(535)			(5)			(12,518)				(17,477)				—				(30,000)
Net income	Net income	—	—		—				23,674				—				23,674			Net income	—			—			—				35,764				—				35,764
Other comprehensive income	Other comprehensive income	—	—		—				—				1,589				1,589			Other comprehensive income	—			—			—				—				2,518				2,518
Balance, February 28, 2023		43,307	$	433	$	338,370			$	108,286			$	(33,646)			$	413,443
Balance, May 31, 2023																				Balance, May 31, 2023	43,358			$	436		$	347,101			$	103,995			$	(32,717)			$	418,815


		Three Months Ended February 28, 2022																			Three Months Ended May 31, 2023
		Common Stock			Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Total Stockholders' Equity				Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
(in thousands)	(in thousands)	Number of Shares	Amount								(in thousands)	Number of Shares								Amount
Balance, December 1, 2021		44,146	$	441			$	354,235							$	90,256			$	(32,443)		$	412,489
Cumulative effect of adoption of ASU 2020-06		—	—		(47,456)				4,893				—				(42,563)
Balance, March 1, 2023																				Balance, March 1, 2023	43,307			$	433		$	338,370		$	108,286		$	(33,646)		$	413,443
Issuance of stock under employee stock purchase plan	Issuance of stock under employee stock purchase plan	63	1		1,826				—				—				1,827			Issuance of stock under employee stock purchase plan	95			1		3,482			—			—			3,483
Exercise of stock options	Exercise of stock options	19	—		635				—				—				635			Exercise of stock options	119			2		4,764			—			—			4,766
Vesting of restricted stock units and release of deferred stock units	Vesting of restricted stock units and release of deferred stock units	90	1		(1)				—				—				—			Vesting of restricted stock units and release of deferred stock units	163			2		(2)			—			—			—
Withholding tax payments related to net issuance of RSUs	Withholding tax payments related to net issuance of RSUs	—	—		(3,139)				—				—				(3,139)			Withholding tax payments related to net issuance of RSUs	(57)			—		(3,284)			—			—			(3,284)
Stock-based compensation	Stock-based compensation	—	—		8,114				—				—				8,114			Stock-based compensation	—			—		10,287			—			—			10,287
Dividends declared	Dividends declared	—	—		—				(7,921)				—				(7,921)			Dividends declared	—			—		—			(7,899)			—			(7,899)
Treasury stock repurchases and retirements	Treasury stock repurchases and retirements	(552)	(5)		(10,974)				(14,021)				—				(25,000)			Treasury stock repurchases and retirements	(269)			(2)		(6,516)			(8,482)			—			(15,000)
Net income	Net income	—	—		—				20,454				—				20,454			Net income	—			—		—			12,090			—			12,090
Other comprehensive income	Other comprehensive income	—	—		—				—				3,427				3,427			Other comprehensive income	—			—		—			—			929			929
Balance, February 28, 2022		43,766	$	438	$	303,240			$	93,661			$	(29,016)			$	368,323
Balance, May 31, 2023																				Balance, May 31, 2023	43,358			$	436	$	347,101		$	103,995		$	(32,717)		$	418,815


	Six Months Ended May 31, 2022
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, December 1, 2021	44,146	$	441	$	354,235	$	90,256	$	(32,443)	$	412,489
Cumulative effect of adoption of ASU 2020-06	—	—		(47,456)		4,893		—		(42,563)
Issuance of stock under employee stock purchase plan	178	2		5,211		—		—		5,213
Exercise of stock options	60	1		2,235		—		—		2,236
Vesting of restricted stock units and release of deferred stock units	188	2		(2)		—		—		—
Withholding tax payments related to net issuance of RSUs	—	—		(5,405)		—		—		(5,405)
Stock-based compensation	—	—		17,471		—		—		17,471
Dividends declared	—	—		—		(15,742)		—		(15,742)
Treasury stock repurchases and retirements	(1,118)	(11)		(16,376)		(35,086)		—		(51,473)
Net income	—	—		—		49,564		—		49,564
Other comprehensive income	—	—		—		—		356		356
Balance, May 31, 2022	43,454	$	435	$	309,913	$	93,885	$	(32,087)	$	372,146


	Three Months Ended May 31, 2022
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, March 1, 2022	43,766	$	438	$	303,240	$	93,661	$	(29,016)	$	368,323
Issuance of stock under employee stock purchase plan	115	1		3,385		—		—		3,386
Exercise of stock options	41	1		1,600		—		—		1,601
Vesting of restricted stock units and release of deferred stock units	98	1		(1)		—		—		—
Withholding tax payments related to net issuance of RSUs	—	—		(2,266)		—		—		(2,266)
Stock-based compensation	—	—		9,357		—		—		9,357
Dividends declared	—	—		—		(7,821)		—		(7,821)
Treasury stock repurchases and retirements	(566)	(6)		(5,402)		(21,065)		—		(26,473)
Net income	—	—		—		29,110		—		29,110
Other comprehensive loss	—	—		—		—		(3,071)		(3,071)
Balance, May 31, 2022	43,454	$	435	$	309,913	$	93,885	$	(32,087)	$	372,146

Condensed Consolidated Statements of Cash Flows


		Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022		(In thousands)	May 31, 2023		May 31, 2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	23,674	$	20,454	Net income	$	35,764	$	49,564
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	Depreciation and amortization of property and equipment	1,671		1,207		Depreciation and amortization of property and equipment	3,171		2,432
Amortization of acquired intangibles and other	Amortization of acquired intangibles and other	19,937		17,486		Amortization of acquired intangibles and other	45,298		35,111
Amortization of debt discount and issuance costs on Notes	Amortization of debt discount and issuance costs on Notes	534		525		Amortization of debt discount and issuance costs on Notes	1,071		1,054
Stock-based compensation	Stock-based compensation	9,752		8,114		Stock-based compensation	20,039		17,471
Non-cash lease expense	Non-cash lease expense	1,959		2,075		Non-cash lease expense	4,707		4,033
Loss on disposal of long-lived assets, net	Loss on disposal of long-lived assets, net	—		4		Loss on disposal of long-lived assets, net	—		8
Gain on sale of assets held for sale						Gain on sale of assets held for sale	—		(10,770)
Deferred income taxes	Deferred income taxes	(6,324)		2,218		Deferred income taxes	(11,036)		1,735
Allowances for bad debt and sales credits	Allowances for bad debt and sales credits	158		145		Allowances for bad debt and sales credits	173		339
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	25,839		13,192		Accounts receivable	36,685		19,894
Other assets	Other assets	4,483		(1,081)		Other assets	13,066		6,833
Inventories	Inventories	(604)		418		Inventories	1,496		738
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(17,649)		(27,448)		Accounts payable and accrued liabilities	(18,822)		(20,330)
Lease liabilities	Lease liabilities	(2,314)		(2,146)		Lease liabilities	(5,138)		(4,337)
Income taxes payable	Income taxes payable	170		3		Income taxes payable	2,177		(200)
Deferred revenue, net	Deferred revenue, net	(14,519)		8,927		Deferred revenue, net	(33,933)		8,778
Net cash flows from operating activities	Net cash flows from operating activities	46,767		44,093		Net cash flows from operating activities	94,718		112,353
Cash flows (used in) from investing activities:	Cash flows (used in) from investing activities:					Cash flows (used in) from investing activities:
Purchases of investments	Purchases of investments	(15,262)		—		Purchases of investments	(15,262)		—
Sales and maturities of investments	Sales and maturities of investments	400		300		Sales and maturities of investments	15,700		900
Purchases of property and equipment	Purchases of property and equipment	(385)		(831)		Purchases of property and equipment	(1,969)		(1,979)
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	(355,821)		—		Payments for acquisitions, net of cash acquired	(356,096)		—
Net cash flows used in investing activities		(371,068)		(531)
Proceeds from sale of long-lived assets, net						Proceeds from sale of long-lived assets, net	—		25,998
Net cash flows (used in) from investing activities						Net cash flows (used in) from investing activities	(357,627)		24,919
Cash flows from (used in) financing activities:	Cash flows from (used in) financing activities:					Cash flows from (used in) financing activities:
Proceeds from stock-based compensation plans	Proceeds from stock-based compensation plans	9,357		4,094		Proceeds from stock-based compensation plans	16,365		7,771
Payments for taxes related to net share settlements of equity awards	Payments for taxes related to net share settlements of equity awards	(4,817)		(3,139)		Payments for taxes related to net share settlements of equity awards	(8,101)		(5,405)
Repurchases of common stock	Repurchases of common stock	(15,000)		(25,000)		Repurchases of common stock	(30,000)		(51,473)
Dividend payments to stockholders	Dividend payments to stockholders	(8,023)		(7,784)		Dividend payments to stockholders	(15,871)		(15,573)
Proceeds from the issuance of debt	Proceeds from the issuance of debt	195,000		7,474		Proceeds from the issuance of debt	195,000		7,474
Payment of principal on long-term debt		(1,719)		(1,719)
Repayment of revolving line of credit						Repayment of revolving line of credit	(25,000)		—
Principal payment on term loan						Principal payment on term loan	(3,437)		(3,435)
Payment of debt issuance costs	Payment of debt issuance costs	—		(1,957)		Payment of debt issuance costs	—		(1,957)
Net cash flows from (used in) financing activities	Net cash flows from (used in) financing activities	174,798		(28,031)		Net cash flows from (used in) financing activities	128,956		(62,598)
Effect of exchange rate changes on cash		1,207		729
Effect of exchange rate changes on cash and cash equivalents						Effect of exchange rate changes on cash and cash equivalents	3,207		(5,217)
Net (decrease) increase in cash and cash equivalents	Net (decrease) increase in cash and cash equivalents	(148,296)		16,260		Net (decrease) increase in cash and cash equivalents	(130,746)		69,457
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	256,277		155,406		Cash and cash equivalents, beginning of period	256,277		155,406
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	107,981	$	171,666	Cash and cash equivalents, end of period	$	125,531	$	224,863

Condensed Consolidated Statements of Cash Flows, continued


		Three Months Ended					Six Months Ended
		February 28, 2023		February 28, 2022			May 31, 2023		May 31, 2022
Supplemental disclosure:	Supplemental disclosure:					Supplemental disclosure:
Cash paid for income taxes, net of refunds of $264 in 2023 and $307 in 2022		$	3,801	$	2,389
Cash paid for income taxes, net of refunds of $841 in 2023 and $364 in 2022						Cash paid for income taxes, net of refunds of $841 in 2023 and $364 in 2022	$	5,953	$	4,982
Cash paid for interest	Cash paid for interest	$	4,060	$	1,432	Cash paid for interest	$	10,796	$	3,291
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested	Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested	$	11,535	$	7,346	Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested	$	23,077	$	18,204
Dividends declared		$	8,141	$	8,062
Dividends declared and unpaid						Dividends declared and unpaid	$	8,192	$	8,094

See notes to unaudited condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") is dedicated to propelling business forward in a technology-driven world. Progress helps customers drive faster cycles of innovation, fuel momentum and accelerate their path to success. As the trusted provider of products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences they need, deploy where and how they want and manage it all safely and securely.

Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally independent software vendors ("ISVs"), original equipment manufacturers ("OEMs"), distributors and value-added resellers. ISVs develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices. Value-added resellers are companies that add features or services to our product, then resell it as an integrated product or complete "turn-key" solution.

We operate in North America, Latin America, Europe, the Middle East and Africa ("EMEA"), and Asia and Australia ("Asia Pacific"), through local subsidiaries as well as independent distributors.

Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2022, as filed with the SEC on January 27, 2023 (our "2022 Annual Report").

We made no material changes in the application of our significant accounting policies that were disclosed in our 2022 Annual Report. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2022 Annual Report, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to revenue recognition and business combinations. Refer to Note 1 to our Consolidated Financial Statements in Item 8 of our 2022 Annual Report for further information. There have been no significant changes to our critical accounting policies and estimates since our 2022 Annual Report. Actual results could differ from those estimates.

910

Recent Accounting Pronouncements

Recently ~~Issued~~Adopted Accounting Pronouncements ~~Not Yet Adopted~~

Reference Rate Reform

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), as amended in December 2022 by Accounting Standards Update No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"). ASU 2020-04 provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. ~~Adoption~~The Company adopted ASU 2020-04 in June 2023, in connection with the amendment of its interest rate swap agreement to implement certain changes in the reference rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). The application of this expedient preserves the cash flow hedge designation of the ~~provisions of ASU 2020-04 are optional~~interest rate swaps and ~~are effective from March 12, 2020 through December 31, 2024, as amended by ASU 2022-06. As of February 28, 2023, we~~presentation consistent with past presentation and did not have ~~not adopted any expedients and exceptions under ASU 2020-04. We will continue to evaluate the~~a material impact ~~of ASU 2020-04~~ on our consolidated financial statements.

Note 2: Cash and Cash Equivalents ~~and Investments~~

A summary of our cash and cash equivalents ~~and available-for-sale investments~~ at ~~February 28,~~May 31, 2023 is as follows (in thousands):


		Amortized Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value			Amortized Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Cash	Cash	$	106,462	$	—	$	—	$	106,462	Cash	$	125,422	$	—	$	—	$	125,422
Money market funds	Money market funds	119		—		—		119		Money market funds	109		—		—		109
Commercial papers		4,781		—		—		4,781
U.S. treasuries		2,764		—		(1)		2,763
U.S. government agency bonds		8,816		—		(16)		8,800
Total	Total	$	122,942	$	—	$	(17)	$	122,925	Total	$	125,531	$	—	$	—	$	125,531

A summary of our cash and cash equivalents at November 30, 2022 is as follows (in thousands):


	Amortized Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
Cash	$	229,023	$	—	$	—	$	229,023
Money market funds	27,254		—		—		27,254


Total	$	256,277	$	—	$	—	$	256,277

~~The~~There were no debt securities ~~have a remaining~~by contractual maturity ofdue after one year ~~or less~~ as of ~~February 28,~~May 31, 2023.

1011

Note 3: Derivative Instruments

Cash Flow Hedge

On July 9, 2019, we entered into an interest rate swap contract with an initial notional amount of $150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt. The contract matures on April 30, 2024 and requires periodic interest rate settlements. Under this interest rate swap contract, we receive a floating rate based on the greater of 1-month LIBOR or 0.00%, and pay a fixed rate of 1.855% on the outstanding notional ~~amount.~~amount. In June 2023, the interest rate swap agreement was amended to implement certain changes in the reference rate from LIBOR to SOFR.

We have designated the interest rate swap as a cash flow hedge and assess the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the interest rate swap is highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative are included as a component of other comprehensive loss on our condensed consolidated balance sheets. Although we have determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term of the contract, any portion of the fair value swap subsequently determined to be ineffective will be recognized in earnings. As of ~~February 28,~~May 31, 2023,, the fair value of the hedge was a gain of ~~$4.2~~$3.2 million, which was included in other current assets on our condensed consolidated balance sheets. The net amount of accumulated other comprehensive loss reclassified to interest expense during the ~~three~~six months ended ~~February 28,~~May 31, 2023 and ~~February 28,~~May 31, 2022 was a decrease of ~~$0.7~~$1.6 million and an increase of ~~$0.6~~$1.0 million, respectively.

The following table presents our interest rate swap contract where the notional amount reflects the quarterly amortization of the interest rate swap, which is equal to approximately one-half of the corresponding reduction in the balance of our term loan as we make scheduled principal payments. The fair value of the derivative represents the discounted value of the expected future discounted cash flows for the interest rate swap, based on the amortization schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in thousands):

February 28, 2023 November 30, 2022
Notional Value Fair Value Notional Value Fair Value
Interest rate swap contracts designated as cash flow hedges $ 116,250 $ 4,235 $ 120,000 $ 4,407


	May 31, 2023				November 30, 2022
	Notional Value		Fair Value		Notional Value		Fair Value
Interest rate swap contracts designated as cash flow hedges	$	112,500	$	3,173	$	120,000	$	4,407

Forward Contracts

We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries.

All forward contracts are recorded at fair value on the consolidated balance sheets at the end of each reporting period and generally expire between 30 days and 2 years from the date the contract was entered. At ~~February 28,~~May 31, 2023, ~~$0.1 million and $3.0~~$2.9 million was recorded in other accrued liabilities ~~and other noncurrent liabilities, respectively,~~ on our condensed consolidated balance sheets. At November 30, 2022, $3.1 million and $0.1 million were recorded in other noncurrent liabilities and other current assets, respectively, on our condensed consolidated balance sheets.

In the three and six months ended ~~February 28,~~May 31, 2023, ~~and February 28, 2022,~~ realized and unrealized gains of ~~$0.5~~$1.1 million and ~~$0.3~~$1.6 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three and six months ended May 31, 2022, realized and unrealized losses of $3.9 million and $3.6 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized gains and losses in the offsetting positions.

The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):


		February 28, 2023				November 30, 2022					May 31, 2023				November 30, 2022
		Notional Value		Fair Value		Notional Value		Fair Value			Notional Value		Fair Value		Notional Value		Fair Value
Forward contracts to sell U.S. dollars	Forward contracts to sell U.S. dollars	$	70,436	$	(3,180)	$	74,578	$	(2,995)	Forward contracts to sell U.S. dollars	$	78,643	$	(2,919)	$	74,578	$	(2,995)
Forward contracts to purchase U.S. dollars	Forward contracts to purchase U.S. dollars	489		8		544		(5)		Forward contracts to purchase U.S. dollars	478		4		544		(5)
Total	Total	$	70,925	$	(3,172)	$	75,122	$	(3,000)	Total	$	79,121	$	(2,915)	$	75,122	$	(3,000)

Note 4: Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at ~~February 28,~~May 31, 2023 (in thousands):


				Fair Value Measurements Using									Fair Value Measurements Using
		Total Fair Value		Level 1		Level 2		Level 3			Total Fair Value		Level 1		Level 2		Level 3
Assets	Assets									Assets
Money market funds	Money market funds	$	119	$	119	$	—	$	—	Money market funds	$	109	$	109	$	—	$	—
Commercial papers		4,781		398		4,383		—
U.S. treasuries		2,763		498		2,265		—
U.S. government agency bonds		8,800		504		8,296		—
Interest rate swap	Interest rate swap	4,235		—		4,235		—		Interest rate swap	3,173		—		3,173		—
Liabilities	Liabilities									Liabilities
Foreign exchange derivatives	Foreign exchange derivatives	$	(3,172)	$	—	$	(3,172)	$	—	Foreign exchange derivatives	$	(2,915)	$	—	$	(2,915)	$	—

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2022 (in thousands):


			Fair Value Measurements Using
	Total Fair Value		Level 1		Level 2		Level 3
Assets
Money market funds	$	27,254	$	27,254	$	—	$	—
Interest rate swap	4,407		—		4,407		—
Liabilities
Foreign exchange derivatives	$	(3,000)	$	—	$	(3,000)	$	—

When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates.

Assets and Liabilities Not Carried at Fair Value

Fair Value of the Convertible Senior Notes

The fair value of our Convertible Senior Notes, with a carrying value of ~~$353.2~~$353.7 million and $352.6 million, was ~~$394.7~~$404.1 million and $376.0 million as of ~~February 28,~~May 31, 2023 and November 30, 2022, respectively. The fair value was determined based on the quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 1 in the fair value hierarchy.

Fair Value of Other Long-term Debt

The fair value of the borrowing outstanding detail in Note 7 approximates the carrying value of the debt due to variable rates that are applicable and no significant change in our credit ratings.

Fair Value of Other Financial Assets and Liabilities

The carrying amounts of other financial assets and liabilities including cash, accounts receivable, accounts payable, and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement.

Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):


		February 28, 2023						November 30, 2022							May 31, 2023						November 30, 2022
		Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value			Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Purchased technology	Purchased technology	$	280,300	$	(157,141)	$	123,159	$	212,700	$	(150,877)	$	61,823	Purchased technology	$	280,000	$	(165,135)	$	114,865	$	212,700	$	(150,877)	$	61,823
Customer-related	Customer-related	468,508		(173,532)		294,976		306,308		(162,341)		143,967		Customer-related	457,608		(189,183)		268,425		306,308		(162,341)		143,967
Trademarks and trade names	Trademarks and trade names	50,111		(27,304)		22,807		37,611		(26,046)		11,565		Trademarks and trade names	50,111		(28,886)		21,225		37,611		(26,046)		11,565
Non-compete agreement	Non-compete agreement	2,000		(2,000)		—		2,000		(2,000)		—		Non-compete agreement	—		—		—		2,000		(2,000)		—
Total	Total	$	800,919	$	(359,977)	$	440,942	$	558,619	$	(341,264)	$	217,355	Total	$	787,719	$	(383,204)	$	404,515	$	558,619	$	(341,264)	$	217,355

In the ~~first quarter of fiscal years~~three and six months ended May 31, 2023, amortization expense related to intangible assets was $25.5 million and $45.4 million, respectively. In the three and six months ended May 31, 2022, amortization expense related to intangible assets was ~~$19.9~~$17.5 million and ~~$17.2~~$34.6 million, respectively.

Future amortization expense for intangible assets as of ~~February 28,~~May 31, 2023, is as follows (in thousands):


Remainder of 2023	Remainder of 2023	$	77,748	Remainder of 2023	$	50,970
2024	2024	90,534		2024	88,934
2025	2025	80,024		2025	78,424
2026	2026	71,147		2026	69,453
2027	2027	46,198		2027	44,598
Thereafter	Thereafter	75,291		Thereafter	72,136
Total	Total	$	440,942	Total	$	404,515

Goodwill

Changes in the carrying amount of goodwill in the ~~three~~six months ended ~~February 28,~~May 31, 2023 are as follows (in thousands):


Balance, November 30, 2022	$	671,037
Additions(1)	~~140,964~~154,899
Translation adjustments	~~(142)~~8
Balance, ~~February 28,~~May 31, 2023	$	~~811,859~~825,944

(1) The additions to goodwill during fiscal year 2023 are related to the acquisition of MarkLogic in February 2023. See Note 6: Business Combinations for additional information.

Note 6: Business Combinations

MarkLogic Acquisition

On February 7, 2023, we completed the acquisition of the parent company of MarkLogic Corporation ("MarkLogic"), pursuant to the Stock Purchase Agreement (the "Purchase Agreement"), dated as of January 3, 2023. The acquisition was completed for a base purchase price of $355.0 million (subject to certain customary adjustments) in cash.

The acquisition consideration for MarkLogic has been preliminarily allocated to MarkLogic’s assets and assumed liabilities based on estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the acquisition date).

The ~~preliminary~~ allocation of the purchase price is as follows (in thousands):


	~~Preliminary Purchase Price Allocation~~		~~Life~~
~~Net working capital~~	$	~~49,477~~
~~Property, plant and equipment~~	~~723~~
~~Purchased technology~~	~~67,600~~		~~7 years~~
~~Trade name~~	~~12,500~~		~~7 years~~
~~Customer relationships~~	~~162,200~~		~~7 years~~
~~Other assets, including long-term unbilled receivables~~	~~6,172~~
~~Deferred taxes~~	~~(17,441)~~
~~Deferred revenue~~	~~(33,116)~~
~~Goodwill~~	~~140,964~~
~~Net assets acquired~~	$	~~389,079~~


	Initial Purchase Price Allocation		Measurement Period Adjustments		Adjusted Purchase Price Allocation		Life
Net working capital	$	49,477	$	(799)	$	48,678
Property, plant and equipment	723		—		723
Purchased technology	67,600		(300)		67,300		7 years
Trade name	12,500		—		12,500		7 years
Customer relationships	162,200		(10,900)		151,300		7 years
Other assets, including long-term unbilled receivables	6,172		(704)		5,468
Deferred taxes	(17,441)		(957)		(18,398)
Deferred revenue	(33,116)		—		(33,116)
Goodwill	140,964		13,935		154,899
Net assets acquired	$	389,079	$	275	$	389,354

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections.

We determined the acquisition date deferred revenue balance based on our assessment of the individual contracts acquired. A significant portion of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of ~~$141.0~~$154.9 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three and six months ended ~~February 28,~~May 31, 2023, we incurred approximately ~~$1.5~~$2.1 million and $3.5 million, respectively, of acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations.

The amount of revenue of MarkLogic ~~revenue~~included in our consolidated statement of operations during the three and six months ended May 31, 2023, was approximately $25.3 million and $30.3 million, respectively. We determined that disclosing the amount of MarkLogic related earnings included in the consolidated ~~statements~~statement of operations inis impracticable, as certain operations of MarkLogic were integrated into the ~~period subsequent to acquisition is not material.~~operations of the Company from the date of acquisition.

Pro Forma Information

The following pro forma financial information presents the combined results of operations of Progress and MarkLogic as if the acquisition had occurred on December 1, 2021, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the MarkLogic acquisition and factually supportable. These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense relating to the ~~$242.3~~$231.1 million of acquired identifiable intangible assets, (ii) an increase in interest expense to record interest for the period presented as a result of drawing down our revolving line of credit in connection with the acquisition, and (iii) the income tax effect of the adjustments made at the statutory tax rate of the U.S. (approximately 24.5%).

The pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on December 1, 2021.


(in thousands, except per share data)	Pro Forma Three Months Ended May 31, 2022
Revenue	$	171,111
Net income	$	21,580
Net income per basic share	$	0.50
Net income per diluted share	$	0.49


(in thousands, except per share data)	(in thousands, except per share data)	Pro Forma Three Months Ended February 28, 2023		Pro Forma Three Months Ended February 28, 2022		(in thousands, except per share data)	Pro Forma Six Months Ended May 31, 2023		Pro Forma Six Months Ended May 31, 2022
Revenue	Revenue	$	203,076	$	165,822	Revenue	$	381,327	$	336,933
Net income	Net income	$	32,705	$	10,492	Net income	$	44,996	$	32,375
Net income per basic share	Net income per basic share	$	0.76	$	0.24	Net income per basic share	$	1.04	$	0.74
Net income per diluted share	Net income per diluted share	$	0.74	$	0.23	Net income per diluted share	$	1.01	$	0.73

Note 7: Debt

As of ~~February 28,~~May 31, 2023, future maturities of the Company's long-term debt were as follows:


(In thousands)	(In thousands)	2026 Notes		Revolving Line of Credit		Term Loan		Total		(In thousands)	2026 Notes		Revolving Line of Credit		Term Loan		Total
Remainder of 2023	Remainder of 2023	$	—	$	—	$	5,156	$	5,156	Remainder of 2023	$	—	$	—	$	3,438	$	3,438
2024	2024	—		—		13,750		13,750		2024	—		—		13,750		13,750
2025	2025	—		—		20,625		20,625		2025	—		—		20,625		20,625
2026	2026	360,000		—		20,625		380,625		2026	360,000		—		20,625		380,625
2027	2027	—		195,000		206,250		401,250		2027	—		170,000		206,250		376,250
Total face value of long-term debt	Total face value of long-term debt	360,000		195,000		266,406		821,406		Total face value of long-term debt	360,000		170,000		264,688		794,688
Unamortized discount and issuance costs	Unamortized discount and issuance costs	(6,841)		—		(2,510)		(9,351)		Unamortized discount and issuance costs	(6,304)		—		(2,351)		(8,655)
Less current portion of long-term debt, net	Less current portion of long-term debt, net	—		—		(7,953)		(7,953)		Less current portion of long-term debt, net	—		—		(9,671)		(9,671)
Long-term debt	Long-term debt	$	353,159	$	195,000	$	255,943	$	804,102	Long-term debt	$	353,696	$	170,000	$	252,666	$	776,362

The revolving line of credit ~~may be borrowed, repaid, and reborrowed until~~has a term that ends on January 25, 2027, at which time all amounts outstanding must be repaid. During February 2023, we partially funded our acquisition of MarkLogic by drawing down $195.0 million under the revolving line of credit. As of ~~February 28,~~May 31, 2023, there was ~~$195.0~~$170.0 million outstanding under the revolving line of credit.

Note 8: Common Stock Repurchases

In January 2023, our Board of Directors increased the share repurchase authorization by $150.0 million, to an aggregate authorization of ~~228.0~~$228.0 million. In the three months ended ~~February 28,~~May 31, 2023 and ~~February 28,~~May 31, 2022, we repurchased and retired 0.3 million shares for $15.0 million and 0.6 million shares for ~~$25.0~~$26.5 million, respectively. In the six months ended May 31, 2023 and May 31, 2022, we repurchased and retired 0.5 million shares for $30.0 million and 1.1 million shares for $51.5 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of ~~February 28,~~May 31, 2023, there was ~~$213.0~~$198.0 million remaining under the current authorization.

Note 9: Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market price of the stock, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model.

In 2021, 2022 and 2023, we granted performance-based restricted stock units that include two performance metrics under our Long-Term Incentive Plan ("LTIP") where the performance measurement period is three years. Vesting of the LTIP awards on the 2021, 2022 and 2023 plans are based on the following: (i) 25% is based on our level of attainment of specified TSR targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods, and (ii) 75% is based on achievement of a three-year cumulative operating income target. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model for the market condition portion of the award, and used the closing price of our common stock on the date of grant for the portion related to the performance condition.

The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense related to options and restricted stock units on a straight-line basis over the service period of the award, which is generally four years for options and three years for restricted stock units. We recognize stock-based compensation expense related to our employee stock purchase plan using an accelerated attribution method.

The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
		February 28, 2023		February 28, 2022				May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Cost of maintenance and services	Cost of maintenance and services	$	620	$	411		Cost of maintenance and services	$	729	$	472	$	1,349	$	883
Sales and marketing	Sales and marketing	1,495		1,402			Sales and marketing	1,769		690		3,264		2,092
Product development	Product development	2,998		2,222			Product development	3,049		2,740		6,047		4,962
General and administrative	General and administrative	4,639		4,079			General and administrative	4,740		5,455		9,379		9,534
Total stock-based compensation	Total stock-based compensation	$	9,752	$	8,114		Total stock-based compensation	$	10,287	$	9,357	$	20,039	$	17,471

Note 10: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the ~~three~~six months ended ~~February 28,~~May 31, 2023 (in thousands):


		Foreign Currency Translation Adjustment		Unrealized Losses on Investments		Unrealized Gain (Losses) on Hedging Activity		Accumulated Other Comprehensive Loss			Foreign Currency Translation Adjustment		Unrealized Losses on Investments		Unrealized Gain (Losses) on Hedging Activity		Accumulated Other Comprehensive Loss
Balance, December 1, 2022	Balance, December 1, 2022	$	(38,523)	$	(61)	$	3,349	$	(35,235)	Balance, December 1, 2022	$	(38,523)	$	(61)	$	3,349	$	(35,235)
Other comprehensive income (loss) before reclassifications, net of tax	Other comprehensive income (loss) before reclassifications, net of tax	1,737		(21)		(127)		1,589		Other comprehensive income (loss) before reclassifications, net of tax	3,457		—		(939)		2,518
Balance, February 28, 2023		$	(36,786)	$	(82)	$	3,222	$	(33,646)
Balance, May 31, 2023										Balance, May 31, 2023	$	(35,066)	$	(61)	$	2,410	$	(32,717)

The tax effect on accumulated unrealized gains (losses) on hedging activity and unrealized losses on investments was a tax provision of $0.8 million and $1.1 million as of ~~February 28,~~May 31, 2023 and November 30, ~~2022.~~2022, respectively.

Note 11: Revenue Recognition

Timing of Revenue Recognition

Our revenues are derived from licensing our products, and from related services, which consist of maintenance, hosting services, and consulting and education. Information relating to revenue from external customers by revenue type is as follows (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022			(In thousands)	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Performance obligations transferred at a point in time:	Performance obligations transferred at a point in time:						Performance obligations transferred at a point in time:
Software licenses	Software licenses	$	57,568	$	42,750		Software licenses	$	56,407	$	44,814	$	113,975	$	87,564
Performance obligations transferred over time:	Performance obligations transferred over time:						Performance obligations transferred over time:
Maintenance	Maintenance	92,513		89,963			Maintenance	102,240		91,331		194,753		181,294
Services	Services	14,145		12,209			Services	19,604		12,602		33,749		24,811
Total revenue	Total revenue	$	164,226	$	144,922		Total revenue	$	178,251	$	148,747	$	342,477	$	293,669

Geographic Revenue

In the following table, revenue attributed to North America includes sales to customers in the U.S. and sales to certain multinational organizations. Revenue from EMEA, Latin America and the Asia Pacific region includes sales to customers in each region plus sales from the U.S. to distributors in these regions. Information relating to revenue from external customers from different geographical areas is as follows (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022			(In thousands)	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
North America	North America	$	98,828	$	78,093		North America	$	105,732	$	85,394	$	204,560	$	163,487
EMEA	EMEA	53,405		53,702			EMEA	56,185		49,634		109,590		103,336
Latin America	Latin America	4,189		3,883			Latin America	4,790		4,678		8,979		8,561
Asia Pacific	Asia Pacific	7,804		9,244			Asia Pacific	11,544		9,041		19,348		18,285
Total revenue	Total revenue	$	164,226	$	144,922		Total revenue	$	178,251	$	148,747	$	342,477	$	293,669

No single customer, partner, or country outside the U.S. has accounted for more than 10% of our total revenue for the three and six months ended ~~February 28,~~May 31, 2023 and ~~February 28,~~May 31, 2022.

Contract Balances

Unbilled Receivables and Contract Assets

As of ~~February 28,~~May 31, 2023, billing of our long-term unbilled receivables is expected to occur as follows (in thousands):


2024	2024	$	19,453	2024	$	12,880
2025	2025	15,607		2025	15,502
2026	2026	12,862		2026	9,859
2027				2027	486
Total	Total	$	47,922	Total	$	38,727

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We did not have any net contract assets as of ~~February 28,~~May 31, 2023 or November 30, 2022.

Deferred Revenue

Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is included in long-term liabilities on the consolidated balance sheets. Our deferred revenue balance is primarily made up of deferred maintenance.

As of ~~February 28,~~May 31, 2023, the changes in net deferred revenue were as follows (in thousands):


Balance, December 1, 2022	$	282,440
Billings and other	~~183,633~~343,674
Revenue recognized	~~(164,226)~~(342,477)
Balance, ~~February 28,~~May 31, 2023	$	~~301,847~~283,637

As of ~~February 28,~~May 31, 2023, transaction price allocated to remaining performance obligations was ~~$309~~$288 million. We expect to recognize approximately ~~81%~~80% of the revenue within the next year and the remainder thereafter.

Deferred Contract Costs

Certain of our sales incentive programs meet the requirements to be capitalized. Depending upon the sales incentive program and the related revenue arrangement, such capitalized costs are amortized over the longer of (i) the product life, which is generally three to five years; or (ii) the term of the related revenue contract. We determined that a three to five year product life represents the period of benefit that we receive from these incremental costs based on both qualitative and quantitative factors, which include customer contracts, industry norms, and product upgrades. Total deferred contract costs were ~~$8.4~~$7.7 million and $8.8 million as of ~~February 28,~~May 31, 2023 and November 30, 2022, respectively, and are included in other current assets and other assets on our condensed consolidated balance sheets. Amortization of deferred contract costs is included in sales and marketing expense on our condensed consolidated statement of operations and was minimal in all periods presented.

Note 12: Restructuring Charges

The following table provides a summary of activity for our restructuring actions ~~which are detailed further below~~ (in thousands):


		Excess Facilities and Other Costs		Employee Severance and Related Benefits		Total			Excess Facilities and Other Costs		Employee Severance and Related Benefits		Total
Balance, December 1, 2022	Balance, December 1, 2022	$	3,870	$	30	$	3,900	Balance, December 1, 2022	$	3,870	$	30	$	3,900
Costs incurred	Costs incurred	180		1,217		1,397		Costs incurred	448		4,939		5,387
Cash disbursements	Cash disbursements	(345)		(144)		(489)		Cash disbursements	(781)		(1,381)		(2,162)
Balance, February 28, 2023		$	3,705	$	1,103	$	4,808
Translation adjustments and other								Translation adjustments and other	—		(11)		(11)
Balance, May 31, 2023								Balance, May 31, 2023	$	3,537	$	3,577	$	7,114

During ~~the first quarter of~~ fiscal year 2023, we restructured our operations in connection with the acquisition of MarkLogic, which resulted in a reduction in redundant positions, primarily within administrative functions.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2023.

We expect to incur additional expenses as part of ~~this action~~these actions related to employee costs and facility closures during fiscal year 2023, but we do not expect these costs to be material.

~~Note 13: Income Taxes~~

~~Our effective tax rate was 21% in the first fiscal quarter of both 2023 and 2022. There were no significant discrete tax items in the first fiscal quarter of either 2023 or 2022.~~

Our federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2019. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2018.

Tax authorities for certain non-U.S. jurisdictions are also examining returns. With some exceptions, we are generally not subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2017 because they are closed by statute.

1819

Note ~~14:~~13: Earnings per share

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share on an interim basis (in thousands, except per share data):


		Three Months Ended				Three Months Ended				Six Months Ended
		February 28, 2023		February 28, 2022				May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Net income	Net income	$	23,674	$	20,454		Net income	$	12,090	$	29,110	$	35,764	$	49,564
Weighted average shares outstanding	Weighted average shares outstanding	43,300		43,981			Weighted average shares outstanding	43,343		43,575		43,321		43,778
Basic earnings per common share	Basic earnings per common share	$	0.55	$	0.47		Basic earnings per common share	$	0.28	$	0.67	$	0.83	$	1.13

Diluted earnings per common share:	Diluted earnings per common share:						Diluted earnings per common share:
Net income	Net income	$	23,674	$	20,454		Net income	$	12,090	$	29,110	$	35,764	$	49,564
Weighted average shares outstanding	Weighted average shares outstanding	43,300		43,981			Weighted average shares outstanding	43,343		43,575		43,321		43,778
Effect of dilution from common stock equivalents	Effect of dilution from common stock equivalents	1,053		727			Effect of dilution from common stock equivalents	1,127		678		1,090		702
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	44,353		44,708			Diluted weighted average shares outstanding	44,470		44,253		44,411		44,480
Diluted earnings per share	Diluted earnings per share	$	0.53	$	0.46		Diluted earnings per share	$	0.27	$	0.66	$	0.81	$	1.11

We excluded stock awards representing approximately ~~340,000~~268,000 and ~~1,536,000~~304,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended ~~February 28,~~May 31, 2023, respectively, as these awards were anti-dilutive. We excluded stock awards representing approximately 1,904,000 and ~~February 28,~~1,720,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2022, respectively, as these awards were anti-dilutive.

The dilutive impact of the Notes on our calculation of diluted earnings per share is considered using the if-converted method. However, because the principal amount of the Notes must be settled in cash, the dilutive impact of applying the if-converted method is limited to the in-the-money portion, if any, of the Notes. During the three and six months ended ~~February 28,~~May 31, 2023, we did not include the Notes in our diluted earnings per share calculation because the conversion feature in the Notes was out of the money.

Note ~~15:~~14: Segment Information

Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer.

We operate as one operating segment: software products to develop, deploy, and manage high-impact applications. Our CODM evaluates financial information on a consolidated basis. As we operate as one operating segment, the required financial segment information can be found in the condensed consolidated financial statements.

Note 15: Cyber Related Matters

November 2022 Cyber Incident

Following the detection of irregular activity on certain portions of our corporate network, we engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the cyber incident. Cyber incident costs relate to the engagement of external cybersecurity experts and other incident response professionals. We incurred $1.5 million and $4.2 million of cyber incident costs for the three and six month periods ended May 31, 2023, respectively. Costs are provided net of received and expected insurance recoveries of approximately $3.0 million, which was recognized during the first quarter of fiscal year 2023. The timing of recognizing insurance recoveries may differ from the timing of recognizing the associated expenses.

MOVEit Vulnerability

On the evening of May 28, 2023, our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance. An investigative team was mobilized and, on May 30, 2023, the

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

The Company has engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the MOVEit Vulnerability. As the investigation remains ongoing, the Company will continue to assess the potential impact on its business, operations and financial results. MOVEit Transfer and MOVEit Cloud represented approximately 4% in aggregate of the Company’s revenue for the six months ended May 31, 2023.

Litigation and Governmental Investigations

As of the date of the filing of this report on Form 10-Q, (i) four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from the Company related to the MOVEit Vulnerability, and (ii) there have been eleven class action lawsuits filed by individuals who claim to have been impacted by exfiltration of data from the environments of our MOVEit Transfer customers. The Company has also been cooperating with several inquiries and one formal investigation from domestic and foreign law enforcement agencies and data privacy regulators.

Expenses Incurred and Future Costs

Given that the MOVEit Vulnerability occurred near the end of the current quarter, we incurred minimal costs during the second quarter of fiscal year 2023. We expect to incur investigation, legal and professional services expenses associated with the MOVEit Vulnerability in future periods. We will recognize these expenses as services are received, net of received and expected insurance recoveries. While a loss from these matters is possible, we cannot reasonably estimate a range of possible losses at this time and our investigation into the matter is ongoing. Furthermore, with respect to the litigation, the proceedings remain in the early stages, alleged damages have not been specified, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved. Therefore, we have not recorded a loss contingency liability for the MOVEit Vulnerability as of May 31, 2023.

Insurance Coverage

We maintain cybersecurity insurance and other types of insurance coverage for up to $15.0 million in losses, which are expected to reduce our exposure to liabilities arising from the November 2022 cyber incident and the MOVEit Vulnerability. We will pursue recoveries to the maximum extent available under the policies. As of May 31, 2023, we have recorded approximately $3.0 million in insurance recoveries, all of which was related to the November 2022 cyber incident, providing us with $12.0 million of additional coverage (which is subject to a $0.5 million per claim deductible).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Critical Accounting Policies~~

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates. The most significant estimates relate to revenue recognition and business combinations. For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of our 2022 Annual Report.

Cautionary Note Regarding Forward-Looking Statements

This Form 10-Q may contain information that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended; Section 21E of the Securities Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act of 1995. Whenever we use words such as "believe," "may," "could," "would," "might," "should," "expect," "intend," "plan," "estimate," "target," "anticipate" and negatives and derivatives of these or similar expressions, or when we make statements concerning future financial results, product offerings or other events that have not yet occurred, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but are not guaranteed to occur and may not occur. Actual future results may differ materially from those contained in or implied by our forward-looking statements due to various factors which are more fully described in Part I, Item 1A. Risk Factors in our 2022 Annual ~~Report.~~Report as well as the risk factors described in Part II, Item 1A of this Report on Form 10-Q. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. 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.

~~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 is the trusted provider of the best products to develop, deploy and manage high-impact applications. We enable our customers to develop the applications and experiences they need, deploy where and how they want, and manage it all safely and securely. Progress helps customers drive faster cycles of innovation, fuel momentum and accelerate their path to success.

The key tenets of our strategic plan and operating model are as follows:

Be the Trusted Provider of the Best Products to Develop, Deploy and Manage High Impact Applications. A key element of our strategy is centered on building and maintaining the best products and tools enterprises need to build, deploy, and manage modern, strategic business applications. We offer these products and tools to both new customers and partners, as well as our existing partner and customer ecosystems.

Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success, and a streamlined operating approach to drive predictable and stable recurring revenue and high levels of profitability.

Follow a Total Growth Strategy through Accretive M&A. We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the infrastructure software space, with products that appeal to both IT organizations and individual developers. 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.; in November 2021, we acquired Kemp Technologies; and in February 2023, we acquired MarkLogic. These acquisitions met our strict financial criteria.

In recent years, our total growth strategy, described above, has resulted in the rapid expansion of our product portfolio. As our portfolio evolves, we continuously evaluate our organization for additional synergies and efficiencies. In connection therewith, we are working to realign our go-to-market, product, and operational teams and to increase centralization of shared services and functions across our company. We believe that these changes will improve collaboration among the teams that develop, sell, and support our products; enhance our ability to integrate acquired businesses; and lead to greater system uniformity and increased operating efficiency.

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

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

Critical Accounting Policies

Use of Constant Currency

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

Revenue


		Three Months Ended				% Change					Three Months Ended				% Change
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022		As Reported		Constant Currency		(In thousands)	May 31, 2023		May 31, 2022		As Reported		Constant Currency
Revenue	Revenue	$	164,226	$	144,922	13	%	15	%	Revenue	$	178,251	$	148,747	20	%	20	%


	Six Months Ended				% Change
(In thousands)	May 31, 2023		May 31, 2022		As Reported		Constant Currency
Revenue	$	342,477	$	293,669	17	%	18	%

Total revenue increased as compared to the same ~~period~~periods last year primarily due to ~~increases in our DataDirect product offerings, as well as~~ our acquisition of MarkLogic in February 2023, as well as increases in our OpenEdge, Chef, and Kemp product offerings. In the ~~first~~second fiscal quarter, ~~of fiscal year 2023. These~~these increases were partially offset by ~~decreases~~a decrease in our ~~OpenEdge~~DataDirect product ~~offerings, as well as~~offering. In the first six months of fiscal year 2023, there was also an increase in our DataDirect product offering, offset by the negative impact of foreign exchange on license and maintenance revenue in our EMEA region.

Software License Revenue


		Three Months Ended						% Change					Three Months Ended						% Change
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			As Reported		Constant Currency		(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
Software licenses	Software licenses	$	57,568		$	42,750		35	%	36	%	Software licenses	$	56,407		$	44,814		26	%	26	%
As a percentage of total revenue	As a percentage of total revenue	35		%	29		%					As a percentage of total revenue	32		%	30		%


	Six Months Ended						% Change
(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
Software licenses	$	113,975		$	87,564		30	%	31	%
As a percentage of total revenue	33		%	30		%

Software license revenue increased as compared to the same period last year primarily due to our acquisition of MarkLogic in February 2023, as well as increases in our OpenEdge, Chef, and Kemp product offerings. In the second fiscal quarter, these increases were partially offset by decreases in our DataDirect product offering. In the first six months of fiscal year 2023, there was also an increase in our DataDirect product offerings, as well as our acquisition of MarkLogic in the first quarter of fiscal year 2023. These increases were partially offset by a decrease in our OpenEdge product offerings, as well as the negative impact of foreign exchange in our EMEA region.offering.

Maintenance and Services Revenue


		Three Months Ended						% Change					Three Months Ended						% Change
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			As Reported		Constant Currency		(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
Maintenance	Maintenance	$	92,513		$	89,963		3	%	4	%	Maintenance	$	102,240		$	91,331		12	%	12	%
As a percentage of total revenue	As a percentage of total revenue	56		%	62		%					As a percentage of total revenue	57		%	61		%
Services	Services	14,145			12,209			16	%	17	%	Services	19,604			12,602			56	%	55	%
As a percentage of total revenue	As a percentage of total revenue	9		%	9		%					As a percentage of total revenue	11		%	9		%
Total maintenance and services revenue	Total maintenance and services revenue	$	106,658		$	102,172		4	%	6	%	Total maintenance and services revenue	$	121,844		$	103,933		17	%	17	%
As a percentage of total revenue	As a percentage of total revenue	65		%	71		%					As a percentage of total revenue	68		%	70		%


	Six Months Ended						% Change
(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
Maintenance	$	194,753		$	181,294		7	%	8	%
As a percentage of total revenue	57		%	62		%
Services	33,749			24,811			36	%	36	%
As a percentage of total revenue	10		%	8		%
Total maintenance and services revenue	$	228,502		$	206,105		11	%	12	%
As a percentage of total revenue	67		%	70		%

Maintenance revenue increased as compared to the same ~~period~~periods last year primarily due to our acquisition of MarkLogic in February 2023, as well as increases in our DevTools and ~~increased maintenance revenue from our~~ Chef product offerings.Services revenue increased as compared to the same period last year primarily due to increased services revenue from our acquisition of ~~MarkLogic.~~MarkLogic, as well as increases in our Sitefinity product offerings. The maintenance ~~and services increases were~~increase in the first six months of fiscal year 2023 was partially offset by the negative impact of foreign exchange in our EMEA region.

Revenue by Region


		Three Months Ended						% Change					Three Months Ended						% Change
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			As Reported		Constant Currency		(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
North America	North America	$	98,828		$	78,093		27	%	27	%	North America	$	105,732		$	85,394		24	%	24	%
As a percentage of total revenue	As a percentage of total revenue	60		%	54		%					As a percentage of total revenue	59		%	58		%
Europe, the Middle East and Africa ("EMEA")	Europe, the Middle East and Africa ("EMEA")	$	53,405		$	53,702		(1)	%	4	%	Europe, the Middle East and Africa ("EMEA")	$	56,185		$	49,634		13	%	13	%
As a percentage of total revenue	As a percentage of total revenue	32		%	37		%					As a percentage of total revenue	32		%	33		%
Latin America	Latin America	$	4,189		$	3,883		8	%	5	%	Latin America	$	4,790		$	4,678		2	%	5	%
As a percentage of total revenue	As a percentage of total revenue	3		%	3		%					As a percentage of total revenue	3		%	3		%
Asia Pacific	Asia Pacific	$	7,804		$	9,244		(16)	%	(15)	%	Asia Pacific	$	11,544		$	9,041		28	%	30	%
As a percentage of total revenue	As a percentage of total revenue	5		%	6		%					As a percentage of total revenue	6		%	6		%


	Six Months Ended						% Change
(In thousands)	May 31, 2023			May 31, 2022			As Reported		Constant Currency
North America	$	204,560		$	163,487		25	%	25	%
As a percentage of total revenue	60		%	56		%
Europe, the Middle East and Africa ("EMEA")	$	109,590		$	103,336		6	%	8	%
As a percentage of total revenue	32		%	35		%
Latin America	$	8,979		$	8,561		5	%	5	%
As a percentage of total revenue	3		%	3		%
Asia Pacific	$	19,348		$	18,285		6	%	8	%
As a percentage of total revenue	5		%	6		%

Total revenue generated in North America increased ~~$20.7~~$20.3 million ~~as compared to~~and $41.1 million in the ~~same period last year.~~ second quarter and first six months of fiscal year 2023, respectively. The increase was primarily due to ~~increases from our DataDirect product offerings and~~ our acquisition of MarkLogic. The ~~decrease~~increases in revenue over both periods generated in EMEA was primarily due to ~~a negative impact of foreign exchange, partially offset by~~ our acquisition of MarkLogic and increased revenue from our Chef product offerings. The increase in the first six months of fiscal year 2023 was partially offset by the negative impact of foreign exchange in our EMEA region. The increases in both periods in revenue in Latin America was primarily due to increases in our OpenEdge product offerings. The ~~decreases~~increases in revenue generated in Asia Pacific in both periods was due to ~~decreases~~increases in our ~~OpenEdge~~Chef product offerings.

In the first ~~three~~six months of fiscal year 2023 revenue generated in markets outside North America represented 40% of total revenue compared to ~~42%~~41% of total revenue on a constant currency basis. In the first ~~three~~six months of fiscal year 2022 revenue generated in markets outside North America represented ~~46%~~44% of total revenue compared to ~~47%~~45% of total revenue on a constant currency basis.

Cost of Software Licenses


		Three Months Ended										Three Months Ended							Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			Change					(In thousands)	May 31, 2023		May 31, 2022			Change					May 31, 2023		May 31, 2022			Change
Cost of software licenses	Cost of software licenses	$	2,452		$	2,609		$	(157)	(6)	%				Cost of software licenses	$	2,814		$	2,583		$	231	9	%	$	5,266		$	5,192		$	74	1	%
As a percentage of software license revenue	As a percentage of software license revenue	4		%	6		%								As a percentage of software license revenue	5		%	6		%					5		%	6		%
As a percentage of total revenue	As a percentage of total revenue	1		%	2		%								As a percentage of total revenue	2		%	2		%					2		%	2		%

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.

Cost of Maintenance and Services


		Three Months Ended										Three Months Ended							Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			Change					(In thousands)	May 31, 2023		May 31, 2022			Change					May 31, 2023		May 31, 2022			Change
Cost of maintenance and services	Cost of maintenance and services	$	17,501		$	15,145		$	2,356	16	%				Cost of maintenance and services	$	22,970		$	15,801		$	7,169	45	%	$	40,471		$	30,946		$	9,525	31	%
As a percentage of maintenance and services revenue	As a percentage of maintenance and services revenue	16		%	15		%								As a percentage of maintenance and services revenue	19		%	15		%					18		%	15		%
As a percentage of total revenue	As a percentage of total revenue	11		%	10		%								As a percentage of total revenue	13		%	10		%					12		%	10		%
Components of cost of maintenance and services:	Components of cost of maintenance and services:														Components of cost of maintenance and services:
Personnel related costs	Personnel related costs	$	13,143		$	10,804		$	2,339	22	%				Personnel related costs	$	16,646		$	11,034		$	5,612	51	%	$	29,789		$	21,838		$	7,951	36	%
Contractors and outside services	Contractors and outside services	2,700			2,968			(268)		(9)	%				Contractors and outside services	4,117			3,254			863		27	%	6,817			6,222			595		10	%
Hosting and other	Hosting and other	1,658			1,373			285		21	%				Hosting and other	2,207			1,513			694		46	%	3,865			2,886			979		34	%
Total cost of maintenance and services	Total cost of maintenance and services	$	17,501		$	15,145		$	2,356	16	%				Total cost of maintenance and services	$	22,970		$	15,801		$	7,169	45	%	$	40,471		$	30,946		$	9,525	31	%

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

Amortization of Intangibles


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Amortization of intangibles	Amortization of intangibles	$	6,264		$	5,458		15	%		Amortization of intangibles	$	7,994		$	5,573		43	%	$	14,258		$	11,031		29	%
As a percentage of total revenue	As a percentage of total revenue	4		%	4		%				As a percentage of total revenue	4		%	4		%			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 ~~increase year over year is~~increases in all periods are due to the acquisition of MarkLogic.

Gross Profit


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Gross profit	Gross profit	$	138,009		$	121,710		13	%		Gross profit	$	144,473		$	124,790		16	%	$	282,482		$	246,500		15	%
As a percentage of total revenue	As a percentage of total revenue	84		%	84		%				As a percentage of total revenue	81		%	84		%			82		%	84		%

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

Sales and Marketing


		Three Months Ended										Three Months Ended							Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			Change					(In thousands)	May 31, 2023		May 31, 2022			Change					May 31, 2023		May 31, 2022			Change
Sales and marketing	Sales and marketing	$	33,754		$	33,469		$	285	1	%				Sales and marketing	$	40,147		$	32,704		$	7,443	23	%	$	73,901		$	66,173		$	7,728	12	%
As a percentage of total revenue	As a percentage of total revenue	21		%	23		%								As a percentage of total revenue	23		%	22		%					22		%	23		%
Components of sales and marketing:	Components of sales and marketing:														Components of sales and marketing:
Personnel related costs	Personnel related costs	$	29,994		$	28,395		$	1,599	6	%				Personnel related costs	$	34,329		$	27,755		$	6,574	24	%	$	64,324		$	56,151		$	8,173	15	%
Contractors and outside services	Contractors and outside services	695			820			(125)		(15)	%				Contractors and outside services	1,510			759			751		99	%	2,206			1,579			627		40	%
Marketing programs and other	Marketing programs and other	3,065			4,254			(1,189)		(28)	%				Marketing programs and other	4,308			4,190			118		3	%	7,371			8,443			(1,072)		(13)	%
Total sales and marketing	Total sales and marketing	$	33,754		$	33,469		$	285	1	%				Total sales and marketing	$	40,147		$	32,704		$	7,443	23	%	$	73,901		$	66,173		$	7,728	12	%

Sales and marketing expenses increased in all periods primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as increases in contractors and outside services costs. These increases were partially offset by decreases in marketing and sales events costs ~~and contractors and outside services costs.~~in the first six months of fiscal year 2023.

Product Development


		Three Months Ended										Three Months Ended							Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			Change					(In thousands)	May 31, 2023		May 31, 2022			Change					May 31, 2023		May 31, 2022			Change
Product development costs	Product development costs	$	30,438		$	28,673		$	1,765	6	%				Product development costs	$	34,820		$	28,643		$	6,177	22	%	$	65,258		$	57,316		$	7,942	14	%
As a percentage of total revenue	As a percentage of total revenue	19		%	20		%								As a percentage of total revenue	20		%	19		%					19		%	20		%
Components of product development costs:	Components of product development costs:														Components of product development costs:
Personnel related costs	Personnel related costs	$	29,603		$	27,479		$	2,124	8	%				Personnel related costs	$	33,516		$	27,754		$	5,762	21	%	$	63,119		$	55,233		$	7,886	14	%
Contractors and outside services	Contractors and outside services	673			1,018			(345)		(34)	%				Contractors and outside services	1,118			696			422		61	%	1,791			1,714			77		4	%
Other product development costs	Other product development costs	162			176			(14)		(8)	%				Other product development costs	186			193			(7)		(4)	%	348			369			(21)		(6)	%
Total product development costs	Total product development costs	$	30,438		$	28,673		$	1,765	6	%				Total product development costs	$	34,820		$	28,643		$	6,177	22	%	$	65,258		$	57,316		$	7,942	14	%

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

2326

General and Administrative


		Three Months Ended										Three Months Ended							Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			Change					(In thousands)	May 31, 2023		May 31, 2022			Change					May 31, 2023		May 31, 2022			Change
General and administrative	General and administrative	$	18,786		$	16,991		$	1,795	11	%				General and administrative	$	21,469		$	19,207		$	2,262	12	%	$	40,255		$	36,198		$	4,057	11	%
As a percentage of total revenue	As a percentage of total revenue	11		%	12		%								As a percentage of total revenue	12		%	13		%					12		%	12		%
Components of general and administrative:	Components of general and administrative:														Components of general and administrative:
Personnel related costs	Personnel related costs	$	16,135		$	14,051		$	2,084	15	%				Personnel related costs	$	17,142		$	15,751		$	1,391	9	%	$	33,276		$	29,803		$	3,473	12	%
Contractors and outside services	Contractors and outside services	2,387			2,067			320		15	%				Contractors and outside services	3,292			2,262			1,030		46	%	5,679			4,329			1,350		31	%
Other general and administrative costs	Other general and administrative costs	264			873			(609)		(70)	%				Other general and administrative costs	1,035			1,194			(159)		(13)	%	1,300			2,066			(766)		(37)	%
Total cost of general and administrative	Total cost of general and administrative	$	18,786		$	16,991		$	1,795	11	%				Total cost of general and administrative	$	21,469		$	19,207		$	2,262	12	%	$	40,255		$	36,198		$	4,057	11	%

General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in all periods primarily due to higher personnel costs associated with our acquisition of MarkLogic, as well as an increase in contractors and outside services costs, partially offset by a decrease in other general and administrative costs.

Amortization of Intangibles


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Amortization of intangibles	Amortization of intangibles	$	13,611		$	11,722		16	%		Amortization of intangibles	$	17,546		$	11,892		48	%	$	31,157		$	23,614		32	%
As a percentage of total revenue	As a percentage of total revenue	8		%	8		%				As a percentage of total revenue	10		%	8		%			9		%	8		%

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 MarkLogic intangible assets, as discussed above.

Cyber Incident and Vulnerability Response Expenses, Net


	~~Three Months Ended~~
~~(In thousands)~~	~~February 28, 2023~~			~~February 28, 2022~~			~~% Change~~
~~Cyber incident~~	$	~~2,692~~		$	—		*
~~As a percentage of total revenue~~	2		%	—		%


	Three Months Ended							Six Months Ended
(In thousands)	May 31, 2023			May 31, 2022			% Change	May 31, 2023			May 31, 2022			% Change
Cyber incident and vulnerability response expenses, net	$	1,483		$	—		*	$	4,175		$	—		*
As a percentage of total revenue	1		%	—		%		1		%	—		%

*not meaningful

As previously disclosed on December 19, 2022, following the detection of irregular activity on certain portions of our corporate network, we engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the cyber incident. Cyber incident costs relate to the engagement of external cybersecurity experts and other incident response ~~professionals.~~professionals and are net of received and expected insurance recoveries.

2427

Restructuring Expenses


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change	May 31, 2023			May 31, 2022			% Change
Restructuring expenses	Restructuring expenses	$	1,397		$	511		173	%		Restructuring expenses	$	3,990		$	143		*	$	5,387		$	654		724	%
As a percentage of total revenue	As a percentage of total revenue	1		%	—		%				As a percentage of total revenue	2		%	—		%		2		%	—		%

*not meaningful

Restructuring expenses recorded in the ~~first~~second fiscal quarter and six month period of fiscal year 2023 relate to the restructuring activities that occurred in the first and fourth quarters of fiscal years 2023 and 2020, respectively, resulting from the acquisitions of MarkLogic and Chef, respectively. Restructuring expenses recorded in the ~~first~~second quarter of fiscal year 2022 are comprised mostly of costs related to the acquisition of Kemp and the Chef restructuring action of 2020. See the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Acquisition-Related Expenses


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Acquisition-related expenses	Acquisition-related expenses	$	1,743		$	912		91	%		Acquisition-related expenses	$	1,991		$	2,736		(27)	%	$	3,734		$	3,648		2	%
As a percentage of total revenue	As a percentage of total revenue	1		%	1		%				As a percentage of total revenue	1		%	2		%			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 increased due to our acquisition of MarkLogic, as well as our pursuit of other acquisition opportunities. Acquisition-related expenses in the same periods of fiscal year 2022 were primarily related to ~~the acquisition of Kemp as well as~~ our pursuit of other acquisition ~~opportunities.~~opportunities, as well as the acquisition of Kemp.

Gain on Sale of Assets Held for Sale


	Three Months Ended								Six Months Ended
(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Gain on sale of assets held for sale	$	—		$	(10,770)		(100)	%	$	—		$	(10,770)		(100)	%
As a percentage of total revenue	—		%	7		%			—		%	4		%

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

Income from Operations


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Income from operations	Income from operations	$	35,588		$	29,432		21	%		Income from operations	$	23,027		$	40,235		(43)	%	$	58,615		$	69,667		(16)	%
As a percentage of total revenue	As a percentage of total revenue	22		%	20		%				As a percentage of total revenue	13		%	27		%			17		%	24		%

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

Other (Expense) Income, Net


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Interest expense	Interest expense	$	(5,848)		$	(3,703)		58	%		Interest expense	$	(8,514)		$	(3,656)		133	%	$	(14,362)		$	(7,359)		95	%
Interest income and other, net	Interest income and other, net	515			589			(13)	%		Interest income and other, net	592			155			282	%	1,107			744			49	%
Foreign currency loss, net	Foreign currency loss, net	(331)			(366)			(10)	%		Foreign currency loss, net	(496)			111			(547)	%	(827)			(255)			224	%
Total other expense, net	Total other expense, net	$	(5,664)		$	(3,480)		63	%		Total other expense, net	$	(8,418)		$	(3,390)		148	%	$	(14,082)		$	(6,870)		105	%
As a percentage of total revenue	As a percentage of total revenue	3		%	2		%				As a percentage of total revenue	(5)		%	(2)		%			(4)		%	(2)		%

Other expense, net, increased in ~~the first quarter of fiscal year 2023 as compared to the same period last year~~both periods shown primarily due to increased interest expense on our term loan and our revolving line of credit, which we drew on to fund part of our acquisition of MarkLogic. Interest income and other, net ~~decreased slightly~~increased due to the ~~timing~~our acquisition of ~~grant income recognition.~~MarkLogic. Foreign currency loss ~~decreased~~increased in ~~the first quarter of fiscal year 2023.~~

all periods shown.

Provision for Income Taxes


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Provision for income taxes	Provision for income taxes	$	6,250		$	5,498		14	%		Provision for income taxes	$	2,519		$	7,735		(67)	%	$	8,769		$	13,233		(34)	%
As a percentage of income before income taxes	As a percentage of income before income taxes	21		%	21		%				As a percentage of income before income taxes	17		%	21		%			20		%	21		%

Our effective tax rate was 17% and 21% for the three months ended May 31, 2023 and 2022 respectively. The primary reason for the decrease in the ~~first~~effective rate was due to discrete tax benefits related to stock-based compensation and an audit settlement in the second fiscal quarter of ~~both 2023 and 2022.~~2023. There were no significant discrete tax items in the ~~first~~second fiscal quarter of ~~either~~2022.

Our effective tax rate was 20% and 21% for the six months ended May 31, 2023 orand 2022 respectively. The primary reason for the decrease in the effective rate was due to discrete tax benefits related to stock-based compensation and an audit settlement in the second fiscal quarter of 2023. There were no significant discrete tax items in the six months ended May 31, 2022.

Net Income


		Three Months Ended								Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023			February 28, 2022			% Change			(In thousands)	May 31, 2023			May 31, 2022			% Change		May 31, 2023			May 31, 2022			% Change
Net income	Net income	$	23,674		$	20,454		16	%		Net income	$	12,090		$	29,110		(58)	%	$	35,764		$	49,564		(28)	%
As a percentage of total revenue	As a percentage of total revenue	14		%	14		%				As a percentage of total revenue	7		%	20		%			10		%	17		%

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.

Annual Recurring Revenue (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, both public and dedicated cloud instances and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. ARR is not calculated in accordance with GAAP. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of 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.

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

Our ARR was $569.0 million and ~~$472.0~~$479.0 million as of ~~February 28,~~May 31, 2023 and 2022, respectively, which is an increase of ~~20%~~19% year-over-year. The growth in our ARR is primarily driven by the acquisition of MarkLogic.

Net Retention Rate

We calculate net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end ("Prior Period ARR"). We then calculate the ARR from these same customers as of the current period end ("Current Period ARR"). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net retention rate. Net retention rate is not calculated in accordance with GAAP.

Our net retention rates have generally ranged between 101% and 102% for all periods presented. Our high net retention rates illustrate our predictable and durable top line performance.

Liquidity and Capital Resources

Cash and Cash Equivalents ~~and Short-Term Investments~~


(In thousands)	(In thousands)	February 28, 2023		November 30, 2022		(In thousands)	May 31, 2023		November 30, 2022
Cash and cash equivalents	Cash and cash equivalents	$	107,981	$	256,277	Cash and cash equivalents	$	125,531	$	256,277
Short-term investments		14,944		—
Total cash, cash equivalents and short-term investments		$	122,925	$	256,277

The decrease in cash and cash equivalents ~~and short-term investments~~ of ~~$133.4~~$130.7 million from the end of fiscal year 2022 was due to cash outflows of ~~$355.8~~$356.1 million for cash paid for acquisitions, net of cash acquired, repurchases of common stock of ~~$15.0~~$30.0 million, repayment of the revolving line of credit of $25.0 million, dividend payments of ~~$8.0~~$15.9 million, payments of debt obligations of ~~$1.7~~$3.4 million, and purchases of property and equipment of ~~$0.4~~$2.0 million. These cash outflows were offset by proceeds from the issuance of debt of $195.0 million, cash inflows from operations of ~~$46.8~~$94.7 million, ~~$4.5~~$8.3 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of ~~$1.2~~$3.2 million. Except as described below, there are no limitations on our ability to access our cash and cash ~~equivalents and short-term investments.~~equivalents.

As of ~~February 28,~~May 31, 2023, ~~$75.5~~$77.1 million of our cash and 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 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~~six months ended ~~February 28,~~May 31, 2023 and ~~February 28,~~May 31, 2022, we repurchased and retired ~~0.3~~0.5 million shares for ~~$15.0~~$30.0 million and ~~0.6~~1.1 million shares for ~~$25.0~~$51.5 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of ~~February 28,~~May 31, 2023, there was ~~$213.0~~$198.0 million remaining under the current authorization.

Dividends

On ~~March 17,~~June 21, 2023, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock, which will be paid on ~~June~~September 15, 2023 to stockholders of record as of the close of business on ~~June~~September 1, 2023. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

Restructuring Activities

See Note 12 to the condensed consolidated financial statements.

Long-term Debt and Credit Facility

See Note 7 to the condensed consolidated financial statements.

Cash Flows From Operating Activities


		Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022		(In thousands)	May 31, 2023		May 31, 2022
Net income	Net income	$	23,674	$	20,454	Net income	$	35,764	$	49,564
Non-cash reconciling items included in net income	Non-cash reconciling items included in net income	27,687		31,774		Non-cash reconciling items included in net income	63,423		51,413
Changes in operating assets and liabilities	Changes in operating assets and liabilities	(4,594)		(8,135)		Changes in operating assets and liabilities	(4,469)		11,376
Net cash flows from operating activities	Net cash flows from operating activities	$	46,767	$	44,093	Net cash flows from operating activities	$	94,718	$	112,353

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

~~February 28,~~ May 31, 2023, ~~increased~~decreased by ~~$4.5~~$10.8 million from the end of fiscal year 2022 and our days sales outstanding (DSO) in accounts receivable ~~decreased~~increased to 4244 days from 5239 days in the ~~first~~second fiscal quarter of 2022 due to the timing of billings and collections.

Cash Flows (Used in) From Investing Activities


		Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022		(In thousands)	May 31, 2023		May 31, 2022
Net investment activity	Net investment activity	$	(14,862)	$	300	Net investment activity	$	438	$	900
Purchases of property and equipment	Purchases of property and equipment	(385)		(831)		Purchases of property and equipment	(1,969)		(1,979)
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	(355,821)		—		Payments for acquisitions, net of cash acquired	(356,096)		—
Net cash flows from investing activities		$	(371,068)	$	(531)
Proceeds from sale of long-lived assets, net						Proceeds from sale of long-lived assets, net	—		25,998
Net cash flows (used in) from investing activities						Net cash flows (used in) from investing activities	$	(357,627)	$	24,919

Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities. In the ~~first~~second quarter of fiscal year 2023 had payments for acquisitions net of cash acquired of ~~$355.8~~$356.1 million. We also purchased ~~$0.4~~$2.0 million of property and equipment in the first ~~three~~six months of fiscal year 2023, as compared to ~~$0.8~~$2.0 million in the first ~~three~~six months of fiscal year 2022. In the second quarter of fiscal year 2022 we received $26.0 million net proceeds from the sale of long-lived assets.

Cash Flows From (Used in) Financing Activities


		Three Months Ended					Six Months Ended
(In thousands)	(In thousands)	February 28, 2023		February 28, 2022		(In thousands)	May 31, 2023		May 31, 2022
Proceeds from stock-based compensation plans	Proceeds from stock-based compensation plans	$	9,357	$	4,094	Proceeds from stock-based compensation plans	$	16,365	$	7,771
Repurchases of common stock	Repurchases of common stock	(15,000)		(25,000)		Repurchases of common stock	(30,000)		(51,473)
Proceeds from the issuance of debt	Proceeds from the issuance of debt	195,000		7,474		Proceeds from the issuance of debt	195,000		7,474
Payment of debt issuance costs	Payment of debt issuance costs	—		(1,957)		Payment of debt issuance costs	—		(1,957)
Payment of principal on long-term debt		(1,719)		(1,719)
Principal payment on term loan						Principal payment on term loan	(28,437)		(3,435)
Dividend payments to stockholders	Dividend payments to stockholders	(8,023)		(7,784)		Dividend payments to stockholders	(15,871)		(15,573)
Other financing activities	Other financing activities	(4,817)		(3,139)		Other financing activities	(8,101)		(5,405)
Net cash flows from (used in) financing activities	Net cash flows from (used in) financing activities	$	174,798	$	(28,031)	Net cash flows from (used in) financing activities	$	128,956	$	(62,598)

During the first ~~three~~six months of fiscal year 2023, we received $195.0 million in net proceeds from the issuance of debt. During the first ~~three~~six months of fiscal year 2022, we received $7.5 million in net proceeds from the issuance of debt in connection with our amended term loan. We received ~~$9.4~~$16.4 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to ~~$4.1~~$7.8 million in the first ~~three~~six months of fiscal year 2022. Further, we repurchased ~~$15.0~~$30.0 million of our common stock under our share repurchase plan compared to ~~$25.0~~$51.5 million in the same period of the prior year. We also made payments on our long-term debt of ~~$1.7~~$28.4 million (including a $25.0 million repayment on the revolving line of credit) in the first six months of fiscal year 2023 and $3.4 million in the ~~first three months of both fiscal year 2023 and~~same period in 2022. Finally, we made dividend payments of ~~$8.0~~$15.9 million to our stockholders during the first ~~three~~six months of fiscal year 2023 and ~~$7.8~~$15.6 million in the first ~~three~~six months of fiscal year 2022.

Liquidity Outlook

Cash from operations in fiscal year 2023 could be affected by various risks and uncertainties, including, but not limited to, the effects of various risks detailed in Part I, Item 1A. Risk Factors in our 2022 Annual Report which have led to increased disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources in the future. However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our Credit Facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S. Our foreseeable cash needs include capital expenditures, acquisitions, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations.

Legal and Other Regulatory Matters

See discussion below in Part I, Item 2, regarding Recent Developments: MOVEit Vulnerability, as well as legal and other regulatory matters in Part II, Item 1. Legal Proceedings.

Recent Accounting Pronouncements

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

Recent Developments: MOVEit Vulnerability

Description of Event

As disclosed via a Form 8-K filed on June 5, 2023, on the evening of May 28, 2023 (Eastern Time), our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance. An investigative team was mobilized and, on May 30, 2023, the investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted version of MOVEit Transfer known as MOVEit Cloud). The investigative team determined the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (the cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as, (ii) for a small group of customers, in a customer-dedicated cloud instance that is managed separately from the public-cloud). We promptly took down

MOVEit Cloud for further investigation and notified all then-known MOVEit Transfer and MOVEit Cloud customers in order to apprise them of the MOVEit Vulnerability and alert them to immediate remedial actions. In parallel, our team developed a patch for all supported versions of MOVEit Transfer and MOVEit Cloud, which was released on May 31, 2023, and allowed for the restoration of MOVEit Cloud that same day.

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

Furthermore, while we continue to investigate this vulnerability in MOVEit Cloud, we currently have not seen any evidence that sensitive customer data has been exfiltrated from the public MOVEit Cloud instances. For a small group of customers, we provide a dedicated MOVEit Cloud instance which is hosted, for each such customer, separate and apart from the public instances of our MOVEit Cloud platform. Two of our dedicated MOVEit Cloud customers have reported that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to its environment. As of the date of the filing of this report on Form 10-Q, one such customer has confirmed that no sensitive data was compromised and another has not revealed the nature of the data that may have been accessed.

Since our disclosures regarding the MOVEit Vulnerability, various third-parties have been actively scrutinizing MOVEit Transfer and MOVEit Cloud, leading to the discovery and our prompt patching of additional vulnerabilities. We are not aware of any evidence that these additional vulnerabilities were exploited by malicious threat actors prior to creating patches to address them and making those patches available to our MOVEit Transfer customers and applying those patches to the MOVEit Cloud environments – both the public and dedicated cloud instances.

Progress has remained fully operational at all times before and after the discovery of the MOVEit Vulnerability and, as of the time of the filing of this report on Form 10-Q, has not uncovered evidence of unauthorized activity or impact to products beyond MOVEit Transfer and MOVEit Cloud. MOVEit Transfer and MOVEit Cloud represented approximately 4% in aggregate of the Company’s revenue for the six months ended May 31, 2023.

Progress has engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the MOVEit Vulnerability. While Progress’ investigation remains ongoing, the Company (i) has and is continuing to implement a series of additional security and related measures aimed at addressing the MOVEit Vulnerability and subsequently discovered vulnerabilities and further strengthening the overall security of our MOVEit applications, (ii) has engaged outside legal counsel to conduct a thorough independent investigation of the MOVEit Vulnerability, and (iii) has engaged with federal law enforcement and other federal agencies with respect to the MOVEit Vulnerability. As the investigation remains ongoing, Progress will continue to assess the potential impact on its business, operations and financial results.

Expenses Incurred and Amounts Accrued

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

Future Costs

We expect to incur investigation, legal and professional services expenses associated with the MOVEit Vulnerability in future periods. We will recognize these expenses as services are received, net of received and expected insurance recoveries. Our financial liability arising from any of the foregoing will depend on many factors, including limitations contained within our customer contracts, the amount of private litigation, and whether governmental entities launch formal investigations into the matter, and it is not possible at this time to estimate the quantitative impact of any such liability with any reasonable degree of certainty.

Insurance Coverage

We maintain cybersecurity insurance and other types of insurance coverage for up to $15.0 million in losses, which are expected to reduce our exposure to liabilities arising from the MOVEit Vulnerability. We will pursue recoveries to the maximum extent available under the policies. As of May 31, 2023, we have recorded approximately $3.0 million in insurance recoveries, all of which was related to the November 2022 cyber incident, providing us with $12.0 million of additional coverage (which is subject to a $0.5 million per claim deductible).

Future Capital Investments

In addition, we may accelerate or make additional investments in our information technology systems, but we are unable to estimate such investments because the nature and scope has not yet been determined. We currently do not expect such amounts to be material to any fiscal period.

Effect on Sales and Customer Loyalty

The MOVEit Vulnerability may adversely affect our future performance and financial results. Customer confidence in Progress may also be impacted by the MOVEit Vulnerability. Through our response speed and transparent communications, we are committed to, and actively engaged in, activities to restore any loss in customer confidence. We currently cannot predict the length or extent of any ongoing impact to sales.

Litigation and Governmental Investigations

As of the date of the filing of this report on Form 10-Q, (i) four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability, and (ii) there have been eleven class action lawsuits filed by individuals who claim to have been impacted by exfiltration of data from the environments of our MOVEit Transfer customers. We have also been cooperating with several inquiries and one formal investigation from domestic and foreign law enforcement agencies and data privacy regulators. As of the date of the filing of this report, the law enforcement investigation that we are cooperating with is not an enforcement action or formal governmental investigation of which we have been told that we are a target.

Such claims and investigations may have an adverse effect on how we operate our business and our results of operations, and in the future, we may be subject to additional governmental or regulatory investigations, as well as additional litigation or indemnification claims. While a loss from these matters is possible, we cannot reasonably estimate a range of possible losses at this time and our investigation into the matter is ongoing. Furthermore, with respect to the litigation, the proceedings remain in the early stages, alleged damages have not been specified, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved. As such, we have not recorded a loss contingency liability for litigation, claims and governmental investigations in the second quarter. See Note 15 to Consolidated Financial Statements included in Item 1, Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the first ~~quarter~~six months of fiscal year 2023, with the exception of drawing down on our revolving line of credit as described in Note 7, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our 2022 Annual Report, for a more complete discussion of the market risks we encounter.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our management maintains disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized and reported within the requisite time periods and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

The Company acquired MarkLogic on February 7, 2023. Management excluded MarkLogic from its assessment of the effectiveness of the Company’s disclosure controls as of ~~February 28,~~May 31, 2023. MarkLogic represented, in aggregate, approximately 4%

15% of the Company’s total consolidated assets (excluding goodwill and intangibles) and approximately 3%14% of total consolidated revenues, as of and for the three months ended ~~February 28,~~May 31, 2023.

(b) Changes in internal control over financial reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the fiscal quarter ended February 28, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, thereThere were no changes in our internal control over financial reporting during the fiscal quarter ended ~~February 28,~~May 31, 2023 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

2935

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management currently does not believe that the outcome of any of these legal matters will have a material effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. In addition to the ~~information~~updated risk factors provided ~~in this report,~~below, please refer to Part I, Item 1A. Risk Factors in our 2022 Annual Report for a more complete discussion regarding certain factors that could materially affect our business, financial condition or future results.

If our products contain software defects or security flaws, it could harm our revenues by causing us to lose customers and could increase our liabilities by exposing us to costly governmental investigations or litigation. For example, the exploitation of the zero-day MOVEit Vulnerability in May 2023 has resulted in government inquiries, a formal law enforcement investigation, and private litigation. Our products, despite extensive testing and quality control, may contain defects, vulnerabilities or security flaws. In the ordinary course of business, we may need to issue corrective releases of our software products to fix any defects, vulnerabilities, or security flaws. Depending upon the severity of any such matters, the detection and correction of such matters can be time consuming and costly. If any such issues are exploited by malicious threat actors, we could experience, among other things, material adverse impact to our revenues due to loss of customers and increased liabilities due to costly governmental investigations or litigation. In addition, any such matters could affect the ability of our products to work with hardware or other software products, delay the development or release of new products or new versions of products (due to a reallocation of our internal resources), and/or adversely affect market acceptance of our products, all of which could have a material adverse effect on our overall performance.

On the evening of May 28, 2023 (Eastern Time), our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance. An investigative team was mobilized and, on May 30, 2023, the investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted versions of MOVEit Transfer, known as MOVEit Cloud). The investigative team determined that the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as (ii) for a small group of customers, in a customer-dedicated cloud instance which is managed separately from the public-cloud). We promptly took down MOVEit Cloud for further investigation and notified all then-known MOVEit Transfer and MOVEit Cloud customers in order to apprise them of the MOVEit Vulnerability and alert them to immediate remedial actions. In parallel, our team developed a patch for all supported versions of MOVEit Transfer and MOVEit Cloud, which was released on May 31, 2023 and allowed for the restoration of MOVEit Cloud the same day.

As of the date of the filing of this report on Form 10-Q, these events have led to several domestic and foreign government inquiries, one formal investigation from a law enforcement agency, and private litigation, all of which could have adverse impacts on our business and operations and the results thereof. More specifically, as of the date of the filing of this report on Form 10-Q, (i) four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability, and (ii) there have been eleven class action lawsuits filed by

individuals who claim to have been impacted by exfiltration of data from the environments of our MOVEit Transfer customers. We have also been cooperating with inquiries from several domestic and foreign law enforcement agencies and data privacy regulators, as well as one formal investigation from a law enforcement agency. Such claims and investigations may have an adverse effect on how we operate our business and our results of operations, and in the future, we may be subject to additional governmental or regulatory investigations, as well as additional litigation or indemnification claims. Following the discovery of the MOVEit Vulnerability and the various remedial actions described here, we have discovered and patched additional vulnerabilities within the MOVEit Transfer and MOVEit Cloud platforms. While we are not aware of any evidence that these additional vulnerabilities were exploited by malicious threat actors prior to creating patches to address them and making those patches available to our MOVEit Transfer customers and applying those patches to the MOVEit Cloud environments (both the public and dedicated cloud instances) we cannot guarantee that we have or will uncover and/or address all vulnerabilities within the MOVEit platform or any of our other products prior to exploitation.

Our financial liability arising from any of the foregoing will depend on many factors, including the extent to which governmental entities investigate the matter and limitations contained within our customer contracts; therefore, we are unable at this time to estimate the quantitative impact of any such liability with any reasonable degree of certainty. As the investigation remains ongoing, we will continue to assess the potential impact of the MOVEit Vulnerability on our business, operations, and financial results.

Our customers and partners may seek refunds, delay implementation timelines, delay payment, fail to pay us in accordance with the terms of their agreements, or terminate use of our products, all of which can have an adverse affect on us.If customers or partners seek refunds, delay implementation of our products, delay payment, fail to pay us under the terms of our agreements, or terminate use of our products, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts (including litigation related thereto). For example, as of the date of the filing of this report on Form 10-Q, four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability and it is possible that, in connection therewith, they may delay payment under the terms of their contracts. Other MOVEit Transfer and MOVEit Cloud customers have sought refunds or delayed implementation timelines. As the scope of the impact of the MOVEit Vulnerability becomes more clear, additional customers may attempt to seek refunds, delay product implementation, withhold payments, or cease using the MOVEit product line entirely.

In addition, in the ordinary course of business, some of our customers and partners may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position and cash flow.

Our business could be damaged, and we could be subject to liability, in the event of any unauthorized access to our data or our customers’ data, including through privacy and data security breaches, such as or in addition to the MOVEit Vulnerability. The use of certain of our products, including MOVEit Cloud, involves the transmission or storage of third-party data in our environment, some of which may be considered personally identifiable, confidential, or sensitive. In the ordinary course of business, we face security threats from malicious threat actors that could obtain unauthorized access to our systems, infrastructure, products, and networks. We anticipate that these threats will continue to grow in scope and complexity over time.

For example, once we discovered the MOVEit Vulnerability on May 30, 2023, we (i) promptly took down MOVEit Cloud for investigation, and (ii) notified all then-known MOVEit Transfer and MOVEit Cloud customers in order to apprise them of the MOVEit Vulnerability and alert them to immediate remedial actions. In parallel, the MOVEit engineering team worked to develop a patch for all supported versions of MOVEit Transfer (and MOVEit Cloud), which was released on May 31, 2023 and allowed for the restoration of MOVEit Cloud that same day. While we believe that our actions have, and will continue to, reduce the likelihood of similar vulnerabilities occurring in the future in our MOVEit product line, malicious threat actors might use techniques to exploit other zero-day vulnerabilities or use other means that we are unable to defend against, in order to compromise and infiltrate our systems, infrastructure, networks, and products, including, but not limited to, MOVEit or other products. In addition, MOVEit Transfer is a secure file-transfer software that is installed by customers on-premise and does not have any on-going telemetry after installation that allows us to track, among other things, whether the customer has applied any security patches or bug fixes to their MOVEit Transfer instance.

While we devote a significant amount of resources to cyber security related matters in the operation of our business, we may fail to detect the existence of a breach and be unable to prevent unauthorized access to user and company content across our systems, infrastructure, products, and networks. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less regulated or remote areas around the world, or from state-sponsored actors. If our security measures are breached, we may suffer reputational damage, our products may be perceived as insecure, and we may lose existing customers, or fail to attract and retain new customers.

In addition to internal resources, we frequently rely on third parties when deploying our cybersecurity related infrastructure, and in doing so, may be exposed to security risks outside of our direct control. In connection therewith, we rely on outside vendors and contractors to perform certain services necessary for the operation and testing of certain of our products, and they may fail to adequately secure our platform or discover vulnerabilities in our products.

While we have implemented security procedures and controls aimed at addressing these threats and patching vulnerabilities, our security measures could be compromised and our attempts to implement security measures and patch vulnerabilities could prove to be inadequate or could fail. Any such failure could result in significant legal and financial exposure, increased costs to defend litigation, indemnity and other contractual obligations, government fines and penalties, damage to our reputation and our brand, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business and results of operations. In addition, our insurance coverage may not be adequate to cover all costs related to cybersecurity incidents or the exploitation of vulnerabilities as well as the disruptions resulting from such events.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and 2(b) are not applicable.

Information related to the repurchases of our common stock by month in the ~~first~~second quarter of fiscal year 2023 is as follows (in thousands, except per share and share data):

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)
December 2022 — $ — — $ 77,959
January 2023 — — — 227,959
February 2023 265,840 56.40 265,840 212,959
Total 265,840 $ 56.40 265,840 $ 212,959


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)
March 2023	—	$	—	—	$	212,959
April 2023	268,931	55.76		268,931	197,959
May 2023	—	—		—	197,959
Total	268,931	$	55.76	268,931	$	197,959

(1)On January 10, 2023, our Board of Directors increased the share repurchase authorization by 150.0 million, to an aggregate authorization of $228.0 million. As of ~~February 28,~~May 31, 2023, there was ~~$213.0~~$198.0 million remaining under this authorization.

Item 5. Other Information

As previously reported in our Current Report on Form 8-K filed with the SEC on May 12, 2023, at the 2023 Annual Meeting of Stockholders of Progress Software Corporation (the "Company"), the Company’s stockholders indicated, on an advisory basis, that their preferred frequency for future stockholder votes regarding compensation awarded to the Company’s named executive officers (“frequency of say-on-pay”), was as follows: 36,344,690 votes for one year; 12,952 votes for two years; 1,095,160 votes for three years; 23,544 abstentions; and 2,449,061 broker non-votes. In light of these results, we have decided to continue including a shareholder vote on the compensation of the Company's named executive officers in our proxy materials every year until the next required vote on the frequency of shareholder votes on the compensation of executives.

Item 6. Exhibits

The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:


Exhibit No.						Description

~~10.1*†~~						~~2023 Fiscal Year Compensation Plan for Non-Employee Directors~~

31.1*						Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act – Yogesh K. Gupta

31.2*						Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act – Anthony Folger

32.1**						Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

101*						The following materials from Progress Software Corporation’s Quarterly Report on Form 10-Q for the three and six months ended ~~February 28,~~May 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of ~~February 28,~~May 31, 2023 and November 30, 2022; (ii) Condensed Consolidated Statements of Income for the three and six months ended ~~February 28,~~May 31, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~February 28,~~May 31, 2023 and 2022; (iv) Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended ~~February 28,~~May 31, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows for the three and six months ended ~~February 28,~~May 31, 2023 and 2022; and (vi) Notes to Condensed Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			Filed herewith
**			Furnished herewith
†			~~Indicates management compensatory plan, contract or arrangement~~

3139

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROGRESS SOFTWARE CORPORATION

(Registrant)


Dated:	~~April~~July 7, 2023	/s/ YOGESH K. GUPTA
		Yogesh K. Gupta
		President and Chief Executive Officer
		(Principal Executive Officer)

Dated:	~~April~~July 7, 2023	/s/ ANTHONY FOLGER
		Anthony Folger
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

Dated:	~~April~~July 7, 2023	/s/ DOMENIC LOCOCO
		Domenic LoCoco
		Senior Vice President and Chief Accounting Officer
		(Principal Accounting Officer)

3240