PROGRESS SOFTWARE CORPORATION
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
results of operations and financial condition of Progress Software Corporation .
MD&A is provided as a supplement to, and should be read in conjunction with, our
consolidated financial statements and the accompanying Notes to Financial
Statements (Part II, Item 8 of this Form 10-K). This section generally discusses
the results of our operations for the year ended November 30, 2022 compared to
the year ended November 30, 2021 . For a discussion of the year ended
November 30, 2021 compared to the year ended November 30, 2020 , please refer to
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our Annual Report on Form 10-K for the year ended
November 30, 2021 , as amended.
21
--------------------------------------------------------------------------------Forward-Looking Statements
Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K.
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 inU.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. OverviewProgress Software Corporation ("Progress," the "Company," "we," "us," or "our") is the trusted provider of the best products to develop, deploy and manage high-impact business 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 providing the platform and tools enterprises need to build, deploy, and manage modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems.
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 in order to more efficiently 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. InApril 2019 , we acquiredIpswitch, Inc. ; inOctober 2020 , we acquiredChef Software, Inc. ; and inNovember 2021 , we acquired Kemp Technologies. These acquisitions met our strict financial criteria. In addition, onJanuary 3, 2023 , we announced our entry into a definitive agreement withVector Maven Holdings, Inc. andVector Maven Holdings, L.P. to acquireMarkLogic , a leader in managing complex data and metadata (subject to the satisfaction of the terms and conditions set forth in the definitive agreement). 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. Therefore, 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.
In fiscal year 2022, we repurchased and retired 1.7 million shares of our common
stock for
22
--------------------------------------------------------------------------------
our Board of Directors increased our total share repurchase authorization by
$150.0 million , to an aggregate authorization of $228.0 million . The timing and
amount of any shares repurchased will be determined by management based on its
evaluation of market conditions and other factors, and the Board of Directors
may choose to suspend, expand or discontinue the repurchase program at any time.
We began paying quarterly cash dividends of $0.125 per share of common stock to
Progress stockholders in December 2016 and increased the quarterly cash dividend
annually in fiscal years 2017, 2018 and 2019. On September 22, 2020 , our Board
of Directors approved an additional increase of 6% to our quarterly cash
dividend from $0.165 to $0.175 and declared a quarterly dividend of $0.175 per
share of common stock. Future declarations of dividends and the establishment of
future record and payment dates are subject to the final determination of our
Board of Directors.
As described above, we expect to continue to pursue acquisitions meeting our
financial criteria and designed to expand our business and drive significant
stockholder returns. As a result, our expected uses of cash could change, our
cash position could be reduced, and we may incur additional debt obligations to
the extent we complete additional acquisitions. However, we believe that
existing cash balances, together with funds generated from operations and
amounts available under our credit facility, will be sufficient to finance our
operations and meet our foreseeable cash requirements, including quarterly cash
dividends and stock repurchases to Progress stockholders, as applicable, through
at least the next twelve months.
We derive a significant portion of our revenue from international operations,
which are primarily conducted in foreign currencies. As a result, changes in the
value of these foreign currencies relative to the U.S. dollar have significantly
impacted our results of operations and may impact our future results of
operations. Since approximately one-third of our revenue is denominated in
foreign currency, and given the recent volatility in the global economy, our
revenue results in fiscal year 2021 and 2022 were impacted by fluctuations in
foreign currency exchange rates.
Results of Operations
Fiscal Year 2022 Compared to Fiscal Year 2021
Revenue
Fiscal Year Ended Percentage Change
Constant
(In thousands) November 30, 2022 November 30, 2021 As Reported Currency
Revenue $ 602,013 $ 531,313 13 % 16 %
The increase in revenue in fiscal year 2022 was driven by the acquisition of
Kemp, which closed during the fourth quarter of fiscal year 2021, and increases
in our OpenEdge, DevTools, Sitefinity, and Corticon product offerings. These
increases were partially offset by the negative impact of foreign exchange on
license and maintenance revenue in our EMEA region. Changes in prices from
fiscal year 2021 to 2022 did not have a significant impact on our revenue.
Software License Revenue
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2022 2021 As Reported Currency
License $ 188,336 $ 156,590 20 % 24 %
As a percentage of total revenue 31 % 29 %
Software license revenue increased in fiscal year 2022 primarily due to the acquisition of Kemp, as well as increases in license sales in ourDataDirect and Corticon product offerings, which was partially offset by the negative impact of foreign exchange. 23 --------------------------------------------------------------------------------
Maintenance and Services Revenue
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2022 2021 As Reported Currency
Maintenance $ 362,335 $ 325,863 11 % 14 %
As a percentage of total revenue 60 % 61 %
Professional services $ 51,342 $ 48,860 5 % 7 %
As a percentage of total revenue 9 % 10 %
Total maintenance and services revenue $ 413,677 $ 374,723 10 % 13 %
As a percentage of total revenue 69 % 71 %
Maintenance revenue increased in fiscal year 2022 primarily due to the
acquisition of Kemp, as well as an increase in maintenance revenue from our
Chef, Ipswitch and DevTools product offerings, partially offset by the negative
impact of foreign exchange in our EMEA region. Professional services revenue
increased primarily due to increased services revenue from our Sitefinity,
Ipswitch, and DevTools product offerings.
Revenue by Region
Fiscal Year Ended Percentage Change
November 30, November 30, Constant
(In thousands) 2022 2021 As Reported Currency
North America $ 341,154 $ 317,814 7 % 7 %
As a percentage of total revenue 57 % 60 %
EMEA $ 207,707 $ 169,335 23 % 32 %
As a percentage of total revenue 35 % 32 %
Latin America $ 18,053 $ 17,036 6 % 4 %
As a percentage of total revenue 3 % 3 %
Asia Pacific $ 35,099 $ 27,128 29 % 33 %
As a percentage of total revenue 5 % 5 %
Total revenue generated inNorth America increased$23.3 million , and total revenue generated outsideNorth America increased$47.4 million , in fiscal year 2022. The increases inNorth America and EMEA were primarily due to the acquisition of Kemp and increases in license revenue from ourDataDirect product offerings and maintenance revenue from our Ipswitch product offerings. Revenue fromLatin America increased due to the acquisition of Kemp, and an increase in Sitefinity license and maintenance revenue. Revenue fromAsia Pacific increased due to the acquisition of Kemp as well as increases in our OpenEdge, DevTools, and Sitefinity product offerings. Total revenue generated in markets outsideNorth America represented 43% of total revenue in fiscal year 2022 compared to 40% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2022 as compared to the exchange rates in effect in fiscal year 2021, total revenue generated in markets outsideNorth America would have been 45% of total revenue. Cost of Software Licenses Fiscal Year Ended (In thousands) November 30, 2022 November 30, 2021 Change Cost of software licenses $ 10,243 $ 5,271$ 4,972 94 % As a percentage of software license revenue 5 % 3 % As a percentage of total revenue 2 % 1 % Cost of software licenses consists primarily of costs of inventories, royalties, electronic software distribution, duplication, and packaging. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix. The year over year increase is due to our acquisition of Kemp in the fourth quarter of fiscal year 2021. 24 --------------------------------------------------------------------------------
Cost of Maintenance and Services
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 Change
Cost of maintenance and services $ 62,177 $ 58,242 $ 3,935 7 %
As a percentage of maintenance and services
revenue 15 % 16 %
As a percentage of total revenue 10 % 11 %
Components of cost of maintenance and
services:
Personnel Related Costs $ 44,049 $ 40,015 $ 4,034 10 %
Contractors and Outside Services 12,286 13,087 (801) (6) %
Hosting and Other 5,842 5,140 702 14 %
Total cost of maintenance and services $ 62,177 $
58,242 $ 3,935 7 %
Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. Cost of maintenance and services
increased primarily due to higher personnel and hosting related costs resulting
from the acquisition of Kemp, offset by decreased contractors and outside
services costs.
Amortization of Acquired Intangibles
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change Amortization of acquired intangibles $ 22,076 $ 14,936
48 %
As a percentage of total revenue 4 % 3 %
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. The year over year increase was due to the addition of Kemp acquired intangibles.
Gross Profit
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Gross profit $ 507,517 $ 452,864 12 %
As a percentage of total revenue 84 % 85 %
Our gross profit increased primarily due to the increase in revenue, offset by
the increases of costs of licenses, costs of maintenance and services, and the
amortization of intangibles, each as described above.
Sales and Marketing
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 Change
Sales and marketing $ 140,760 $ 125,890 $ 14,870 12 %
As a percentage of total revenue 23 % 24 %
Components of sales and marketing:
Personnel related costs $ 119,350 $ 107,335 $ 12,015 11 %
Contractors and outside services 3,156 3,079 77 3 %
Marketing programs and other 18,254 15,476 2,778 18 %
Total sales and marketing $ 140,760 $ 125,890 $ 14,870 12 %
Sales and marketing expenses increased in fiscal year 2022 primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as increases in marketing and sales events costs.
25
--------------------------------------------------------------------------------
Product Development
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 Change
Product development $ 114,568 $ 103,338 $ 11,230 11 %
As a percentage of total revenue 19 % 19 %
Components of product development costs:
Personnel related costs $ 111,009 $ 98,747 $ 12,262 12 %
Contractors and outside services 2,699 3,504 (805) (23) %
Other product development costs 860 1,087 (227) (21) %
Total product developments costs $ 114,568 $ 103,338 $ 11,230 11 %
Product development expenses increased in fiscal year 2022 primarily due to increased personnel related costs associated with our acquisition of Kemp, partially offset by decreased contractors and outside services costs and other product development costs.
General and Administrative
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 Change
General and administrative $ 77,876 $ 65,128 $ 12,748 20 %
As a percentage of total revenue 13 % 12 %
Components of general and administrative:
Personnel Related Costs $ 61,330 $ 51,601 $ 9,729 19 %
Contractors and Outside Services 9,763 9,299 464 5 %
Other general and administrative costs 6,783 4,228 2,555 60 %
Total cost of general and administrative $ 77,876 $ 65,128 $ 12,748 20 %
General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses increased in fiscal year 2022 primarily due to
higher personnel related costs associated with our acquisition of Kemp, as well
as increases in contractors and outside services and other general and
administrative costs.
Amortization of Intangibles
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Amortization of intangibles $ 46,868 $ 31,996 46 %
As a percentage of total revenue 8 % 6 %
Amortization of intangibles included in operating expenses primarily represents
the amortization of value assigned to intangible assets obtained in business
combinations other than assets identified as purchased technology. Amortization
of acquired intangibles increased in fiscal year 2022 due to the addition of
Kemp acquired intangibles, as discussed above.
Restructuring Expenses
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Restructuring expenses $ 879 $ 6,308 (86) %
As a percentage of total revenue - % 1 %
Restructuring expenses recorded in fiscal year 2022 primarily relate to the
restructuring activities that occurred in fiscal years 2021 and 2020. See Note
16: Restructuring to our Consolidated Financial Statements in Part II, Item 8 of
this Form 10-K for additional details, including types of expenses incurred and
the timing of future expenses and cash payments.
26
--------------------------------------------------------------------------------
Acquisition-Related Expenses
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Acquisition-related expenses $ 4,603 $ 4,102 12 %
As a percentage of total revenue 1 % 1 %
Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs primarily consist of
professional services fees, including third-party legal and valuation-related
fees, as well as retention fees. Acquisition-related expenses in fiscal year
2022 were primarily related to our pursuit of other acquisition opportunities.
Acquisition-related expenses in fiscal year 2021 were primarily related to the
acquisition of Kemp, as well as our pursuit of other acquisition opportunities.
Cyber Incident
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Cyber incident $ 602 $ - *
As a percentage of total revenue - % - %
*Not meaningful
As previously disclosed on
Gain on Sale of Assets Held for Sale
Fiscal Year Ended
November 30,
(In thousands) 2022 November 30, 2021 % Change
Gain on sale of assets held for sale $ (10,770) $ - *
As a percentage of total revenue 2 % - %
*Not meaningful
In the second quarter of fiscal year 2022, we sold corporate land and building
assets previously reported as assets held for sale on our consolidated balance
sheet. As the sale price less cost to sell was greater than the carrying value
of these assets we recognized a net gain on the sale of approximately $10.8
million in the second quarter of fiscal year 2022.
Income from Operations
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Income from operations $ 132,131 $ 116,102 14 %
As a percentage of total revenue 22 % 22 %
Income from operations increased year over year due to an increase in revenue, offset by increases in costs of revenue and operating expenses as shown above.
27
--------------------------------------------------------------------------------
Other (Expense) Income
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Interest expense $ (15,790) $ (20,045) (21) %
Interest income and other, net 1,414 777 82 %
Foreign currency loss, net (500) (1,300) (62) %
Total other expense, net $ (14,876) $ (20,568) (28) %
As a percentage of total revenue (2) % (4) %
Total other expense, net, decreased in fiscal year 2022 due to decreased
interest expense on our convertible senior notes resulting from the adoption of
ASU 2020-06. Refer to Note 1, Basis of Presentation for further details on the
impact of adoption. The decrease in interest expense on our convertible senior
notes was partially offset by increased interest expense on our term loan, which
was amended in the first quarter of fiscal year 2022. Refer to Note 9: Debt, for
further details on the impact of the amendment. Interest income and other, net,
was higher in fiscal year 2022, resulting from the recognition of grant income
during the first quarter of the year. Foreign currency loss decreased year over
year.
Provision for Income Taxes
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Provision for income taxes $ 22,186 $ 17,114 30 %
As a percentage of total revenue 4 % 3 %
Our effective income tax rate was 19% and 18% for fiscal years 2022 and 2021
respectively. The primary reason for the increase in the effective rate was due
to the jurisdictional mix of profits.
Net Income
Fiscal Year Ended
(In thousands) November 30, 2022 November 30, 2021 % Change
Net income $ 95,069 $ 78,420 21 %
As a percentage of total revenue 16 % 15 %
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, public cloud and on-premises subscription-based transactions and managed
services. ARR mitigates fluctuations due to seasonality, contract term and the
sales mix of subscriptions for term-based licenses and SaaS. ARR 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.
28
--------------------------------------------------------------------------------
Our ARR was $497.0 million and $480.0 million as of November 30, 2022 and 2021,
respectively, which is an increase of 3.5% year-over-year. The growth in ARR was
driven by multiple products including OpenEdge, DataDirect , Sitefinity, Chef,
DevTools and FileTransfer.
Net Dollar Retention Rate
We calculate net dollar retention rate as of a period end by starting with the
ARR from the cohort of all customers as of 12 months prior to such period end
("Prior Period ARR"). We then calculate the ARR from these same customers as of
the current period end ("Current Period ARR"). Current Period ARR includes any
expansion and is net of contraction or attrition over the last 12 months but
excludes ARR from new customers in the current period. We then divide the total
Current Period ARR by the total Prior Period ARR to arrive at the net dollar
retention rate. Net dollar retention rate is not calculated in accordance with
GAAP.
Our net dollar retention rates have generally ranged between 98% and 101% for all periods presented. Our high net dollar retention rates illustrate our predictable and durable top line performance.
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments (In thousands) November 30, 2022 November 30, 2021 Cash and cash equivalents $ 256,277 $ 155,406 Short-term investments - 1,967
Total cash, cash equivalents and short-term investments $ 256,277 $ 157,373
The increase in cash, cash equivalents and short-term investments of$98.9 million from the end of fiscal year 2021 was primarily due to cash inflows from operations of$192.2 million , proceeds from the sale of long-lived assets of$26.0 million ,$8.3 million in cash received from the issuance of common stock, and proceeds from the issuance of debt of$7.5 million . These cash inflows were offset by repurchases of common stock of$77.0 million , dividend payments of$31.1 million , the effect of exchange rates on cash of$11.9 million , payments of debt obligations of$6.9 million , purchases of property and equipment of$6.1 million , and payments of issuance costs for long-term debt of$2.3 million . Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments held by our foreign subsidiaries were$51.8 million and$36.8 million atNovember 30, 2022 and 2021, respectively. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of theU.S. As such, they are 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 toU.S. income tax. However, we do not anticipate that the repatriation of earnings would have a material adverse impact on our liquidity.
Share Repurchases
In fiscal years 2022 and 2021, we repurchased and retired 1.7 million shares of our common stock for$77.0 million and 0.8 million shares of our common stock for$35.0 million , respectively. In fiscal year 2020, we repurchased and retired 1.4 million shares of our common stock for$60.0 million . As ofNovember 30, 2022 , there was$78.0 million remaining under the current share repurchase authorization. OnJanuary 10, 2023 , our Board of Directors increased our share repurchase authorization by$150.0 million , to an aggregate authorization of$228.0 million . The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand, or discontinue the repurchase program at any time.
Dividends
We began paying quarterly cash dividends of$0.125 per share of common stock to Progress stockholders inDecember 2016 and have paid quarterly dividends since that time. OnSeptember 23, 2022 , our Board of Directors declared a quarterly dividend of$0.175 per share of common stock that was paid onDecember 15, 2022 to stockholders of record as of the close of business onDecember 1, 2022 . OnJanuary 10, 2023 , our Board of Directors declared a quarterly dividend of$0.175 per share of common stock that will be paid onMarch 15, 2023 to shareholders of record as of the close of business onMarch 1, 2023 . We have paid aggregate cash dividends totaling$31.1 million ,$31.6 million and$29.9 million for the years endedNovember 30, 2022 ,November 30, 2021 andNovember 30, 2020 , respectively. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. 29 --------------------------------------------------------------------------------
Restructuring Activities
During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. For the fiscal years endedNovember 30, 2022 , 2021, and 2020, we incurred expenses of$0.4 million ,$4.1 million and$3.9 million , respectively, relating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. We expect to incur additional expenses as part of this action related to facility closures as we consolidate offices in various locations during fiscal year 2023, but we do not expect these costs to be material. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2027. Accordingly, the balance of the restructuring reserve of$3.9 million is included in short-term and long-term lease liabilities on the consolidated balance sheet atNovember 30, 2022 . During the fourth quarter of fiscal year 2021, we restructured our operations in connection with the acquisition of Kemp. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Kemp. For the fiscal years endedNovember 30, 2022 and 2021, we incurred expenses of$0.5 million and$2.0 million , respectively, relating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. We expect to incur additional expenses as part of this action related to employee costs, but we do not expect these costs to be material. Minimal cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2023. Accordingly, the minimal balance of the restructuring reserve is included in other accrued liabilities on the consolidated balance sheet atNovember 30, 2022 .
Credit Facility
OnJanuary 25, 2022 , we entered into the Credit Agreement providing for a$275.0 million secured term loan and a$300.0 million secured revolving credit facility. The Credit Agreement matures on the earlier of (i)January 25, 2027 and (ii) the date that is 181 days prior to the maturity date of our Notes (defined below) subject to certain conditions. The revolving credit facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter endingFebruary 28, 2022 . The first eight payments are in the principal amount of$1.7 million each, the following four payments are in the principal amount of$3.4 million each, the following eight payments are in the principal amount of$5.2 million each and the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. Revolving loans may be borrowed, repaid, and reborrowed untilJanuary 25, 2027 , at which time all amounts outstanding must be repaid. As ofNovember 30, 2022 , there were no outstanding amounts under the revolving line of credit and$2.3 million of letters of credit. The Credit Agreement contains customary affirmative and negative covenants, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated interest charge coverage ratio and a consolidated total net leverage ratio. Additionally, the Credit Agreement includes customary events of default, that in event of, could result in the acceleration of the obligations under the Credit Agreement. We are in compliance with all financial covenants as ofNovember 30, 2022 . See Note 9: Debt for further discussion.
Convertible Senior Notes
InApril 2021 , we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of$325 million , dueApril 15, 2026 , unless earlier repurchased, redeemed or converted (the "Notes"). There are no required principal payments prior to the maturity of the Notes. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional$50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including,April 13, 2021 , of which$35 million of additional Notes were purchased for total proceeds of$360 million . The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears onApril 15 andOctober 15 of each year, beginning onOctober 15, 2021 . See Note 9: Debt for further discussion. 30 --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2022 2021 2020
Net income $ 95,069 $ 78,420 $ 79,722
Non-cash reconciling items included in net income 104,121 100,666 64,534
Changes in operating assets and liabilities (7,030) (556) 591
Net cash flows from operating activities $ 192,160 The increase in cash generated from operations in fiscal year 2022 as compared to fiscal year 2021 was primarily due to increased collections resulting from the acquisition of Kemp, as well as particularly strong collections generated from the rest of the business, partially offset by higher compensation related payments as compared to the same period in 2021. The increase in non-cash reconciling items included in net income primarily relates to the increase in amortization of intangibles due to the recent acquisition of Kemp. Our gross accounts receivable as ofNovember 30, 2022 decreased by$1.8 million from the end of fiscal year 2021. Days sales outstanding ("DSO") in accounts receivable increased to 62 days at the end of fiscal year 2022 compared to 60 days at the end of fiscal year 2021, due to the timing of billings and collections. In addition, our net deferred revenue as ofNovember 30, 2022 increased by$30.1 million from the end of fiscal year 2021. The significant changes in operating assets and liabilities in fiscal year 2021 as compared to fiscal year 2020 were primarily due to a decrease in accounts receivable and unbilled receivables. There weren't any significant non-cash reconciling items included in net income in fiscal year 2021 or 2020. In addition, our gross accounts receivable as ofNovember 30, 2021 increased by$15.1 million from the end of fiscal year 2020, which was primarily due to the acquisition of Kemp. DSO in accounts receivable increased to 60 days at the end of fiscal year 2021 compared to 54 days at the end of fiscal year 2020.
Cash Flows from (used in) Investing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2022 2021 2020
Net investment activity $ 1,950 $ 5,950 $ 11,392
Purchases of property and equipment (6,090) (4,654) (6,517)
Proceeds from sale of long-lived assets, net 25,998 - 889
Decrease in escrow receivable and other 134 2,330 -
Payments for acquisitions, net of cash acquired - (253,961) (213,057)
Net cash flows from (used in) investing activities $ 21,992 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, as well as the timing of acquisitions and divestitures. In fiscal year 2022 we received$26.0 million net proceeds from the sale of long-lived assets. Cash used in investing activities was impacted by the acquisition of Kemp for a net cash amount of$254.0 million , and Chef for a net cash amount of$213.1 million , in fiscal years 2021 and 2020, respectively. In addition, we purchased$6.1 million of property and equipment in fiscal year 2022, as compared to$4.7 million in fiscal year 2021, and$6.5 million in fiscal year 2020. We also sold$0.9 million of intangible assets in the fourth quarter of fiscal year 2020. 31 --------------------------------------------------------------------------------
Cash Flows (used in) from Financing Activities
Fiscal Year Ended
November 30, November 30, November 30,
(In thousands) 2022 2021 2020
Proceeds from stock-based compensation plans $ 16,165 $ 15,033 $ 11,099
Repurchases of common stock (77,041) (35,000) (60,000)
Dividend payment to stockholders (31,063) (31,561) (29,900)
Proceeds from issuance of convertible senior notes, net of
issuance costs of
- 350,100 -
Purchase of capped calls - (43,056) -
Proceeds from the issuance of debt, net of payments of principal and debt issuance costs
(1,660) (118,217) 87,212
Other financing activities (7,824) (5,186) (5,331)
Net cash flows (used in) from financing activities $ (101,423) During fiscal year 2022, we received$16.2 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to$15.0 million in fiscal year 2021 and$11.1 million in fiscal year 2020. In addition, we made dividend payments of$31.1 million to our stockholders in fiscal year 2022, as compared to dividend payments of$31.6 million and$29.9 million in fiscal years 2021 and 2020, respectively. Most significantly, in the second quarter of fiscal year 2021, we received$349.2 million in net proceeds from the issuance of convertible senior notes and paid$43.1 million to purchase capped calls in connection with the convertible note offering. We received proceeds from the issuance of debt of$7.5 million in fiscal year 2022 and$98.5 million in fiscal year 2020. The debt proceeds were offset by payments on our long-term debt of$6.9 million in fiscal year 2022 compared to$117.3 million in fiscal year 2021 (including a$98.5 million repayment on the revolving line of credit), and$11.3 million in fiscal year 2020. In addition, we repurchased$77.0 million of our common stock under our share repurchase plan in fiscal year 2022, compared to$35.0 million in fiscal year 2021, and$60.0 million in fiscal year 2020.
Indemnification Obligations
We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.
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 titled "Risk Factors" which have led to increased disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources. 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 theU.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. OnJanuary 3, 2023 , we entered into a definitive agreement to acquireMarkLogic for approximately$355 million , subject to certain working capital and other adjustments. We expect to fund the acquisition through a combination of approximately$155.0 million of existing cash resources and by drawing down approximately$200.0 million from our existing revolving credit facility. The acquisition is currently expected to close in early 2023, subject to obtaining regulatory approvals and satisfaction of other customary closing conditions set forth in the definitive agreement. See Item 8, Note 20: Subsequent Events for further discussion. 32 --------------------------------------------------------------------------------
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations are based on 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 we believe are reasonable under the circumstances. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of filing of this Annual Report on Form 10-K with theSEC . These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
We have identified the following critical accounting estimates that require the use of significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
Our contracts with customers typically include promises to license one or more
products and services to a customer. Determining whether products and services
are distinct performance obligations that should be accounted for separately
requires significant judgment. Significant judgment is also required to
determine the stand-alone selling price ("SSP") of each distinct performance
obligation. Our licenses are sold as perpetual or term licenses, and the
arrangements typically contain various combinations of maintenance and services,
which are generally accounted for as separate performance obligations. We use
the residual approach to allocate the transaction price to our software license
performance obligations because, due to the pricing of our licenses being highly
variable, they do not have an observable SSP.
Maintenance revenue is recognized ratably over the contract period. The SSP of
maintenance services is a percentage of the net selling price of the related
software license. Professional services revenue is generally recognized as the
services are delivered to the customer. We apply the practical expedient of
recognizing revenue upon invoicing for time and materials-based arrangements.
The SSP of services is based upon observable prices in similar transactions
using the hourly rates sold in stand-alone services transactions. Services are
either sold on a time and materials basis or prepaid upfront. Revenue related to
software-as-a-service ("SaaS") offerings is recognized ratably over the contract
period. The SSP of SaaS performance obligations is determined based upon
observable prices in stand-alone SaaS transactions.
We also consider whether an arrangement has any discounts, material rights, or
specified future upgrades that may represent additional performance obligations,
although we do not have a history of offering these elements.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from the management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If management made different estimates or judgments, material differences in the fair values of the net assets acquired may result.
Recent Accounting Pronouncements
Refer to Note 1: Nature of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
33--------------------------------------------------------------------------------
© Edgar Online, source
