PROGRESS SOFTWARE CORP /MA 10-Q

Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets (In thousands, except share data) February 28, 2023 November 30, 2022 Assets Current assets: Cash and cash equivalents $ 107,981 $ 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 Unbilled receivables 33,596 29,158 Other current assets 42,833 42,784 Total current assets 292,701 426,053 Long-term unbilled receivables 47,922 39,936 Property and equipment, net 14,981 14,927 Intangible assets, net 440,942 217,355 Goodwill 811,859 671,037 Right-of-use lease assets 21,768 17,574 Deferred tax assets 1,400 11,765 Other assets 12,034 12,832 Total assets $ 1,643,607 $ 1,411,479 Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt, net $ 7,953 $ 6,234 Accounts payable 10,464 9,282 Accrued compensation and related taxes 33,291 42,467 Dividends payable to stockholders 8,141 8,115 Short-term operating lease liabilities 9,321 7,471 Other accrued liabilities 23,254 16,765 Short-term deferred revenue, net 244,733 227,670 Total current liabilities 337,157 318,004 Long-term debt, net 450,943 259,220 Convertible senior notes, net 353,159 352,625 Long-term operating lease liabilities 17,341 15,041 Long-term deferred revenue, net 57,114 54,770 Deferred tax liabilities 5,546 4,628 Other noncurrent liabilities 8,904 8,687 Commitments and contingencies Stockholders’ equity: 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 Additional paid-in capital 338,370 331,650 Retained earnings 108,286 101,656 Accumulated other comprehensive loss ( 33,646 ) ( 35,235 ) Total stockholders’ equity 413,443 398,504 Total liabilities and stockholders’ equity $ 1,643,607 $ 1,411,479 See notes to unaudited condensed consolidated financial statements. 3 Condensed Consolidated Statements of Operations Three Months Ended (In thousands, except per share data) February 28, 2023 February 28, 2022 Revenue: Software licenses $ 57,568 $ 42,750 Maintenance and services 106,658 102,172 Total revenue 164,226 144,922 Costs of revenue: Cost of software licenses 2,452 2,609 Cost of maintenance and services 17,501 15,145 Amortization of acquired intangibles 6,264 5,458 Total costs of revenue 26,217 23,212 Gross profit 138,009 121,710 Operating expenses: Sales and marketing 33,754 33,469 Product development 30,438 28,673 General and administrative 18,786 16,991 Amortization of acquired intangibles 13,611 11,722 Cyber incident 2,692 — Restructuring expenses 1,397 511 Acquisition-related expenses 1,743 912 Total operating expenses 102,421 92,278 Income from operations 35,588 29,432 Other (expense) income: Interest expense ( 5,848 ) ( 3,703 ) Interest income and other, net 515 589 Foreign currency loss, net ( 331 ) ( 366 ) Total other expense, net ( 5,664 ) ( 3,480 ) Income before income taxes 29,924 25,952 Provision for income taxes 6,250 5,498 Net income $ 23,674 $ 20,454 Earnings per share: Basic $ 0.55 $ 0.47 Diluted $ 0.53 $ 0.46 Weighted average shares outstanding: Basic 43,300 43,981 Diluted 44,353 44,708 Cash dividends declared per common share $ 0.175 $ 0.175 See notes to unaudited condensed consolidated financial statements. 4 Condensed Consolidated Statements of Comprehensive Income Three Months Ended (In thousands) February 28, 2023 February 28, 2022 Net income $ 23,674 $ 20,454 Other comprehensive income, net of tax: Foreign currency translation adjustments 1,737 1,781 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 ) Total other comprehensive income, net of tax 1,589 3,427 Comprehensive income $ 25,263 $ 23,881 See notes to unaudited condensed consolidated financial statements. 5 Condensed Consolidated Statements of Stockholders’ Equity Three Months Ended February 28, 2023 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands) Number of Shares Amount Balance, December 1, 2022 43,257 $ 433 $ 331,650 $ 101,656 $ ( 35,235 ) $ 398,504 Issuance of stock under employee stock purchase plan 50 1 1,786 — — 1,787 Exercise of stock options 141 1 6,002 — — 6,003 Vesting of restricted stock units and release of deferred stock units 215 2 ( 2 ) — — — Withholding tax payments related to net issuance of RSUs ( 90 ) ( 1 ) ( 4,816 ) — — ( 4,817 ) Stock-based compensation — — 9,752 — — 9,752 Dividends declared — — — ( 8,049 ) — ( 8,049 ) Treasury stock repurchases and retirements ( 266 ) ( 3 ) ( 6,002 ) ( 8,995 ) — ( 15,000 ) Net income — — — 23,674 — 23,674 Other comprehensive income — — — — 1,589 1,589 Balance, February 28, 2023 43,307 $ 433 $ 338,370 $ 108,286 $ ( 33,646 ) $ 413,443 Three Months Ended February 28, 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 63 1 1,826 — — 1,827 Exercise of stock options 19 — 635 — — 635 Vesting of restricted stock units and release of deferred stock units 90 1 ( 1 ) — — — Withholding tax payments related to net issuance of RSUs — — ( 3,139 ) — — ( 3,139 ) Stock-based compensation — — 8,114 — — 8,114 Dividends declared — — — ( 7,921 ) — ( 7,921 ) Treasury stock repurchases and retirements ( 552 ) ( 5 ) ( 10,974 ) ( 14,021 ) — ( 25,000 ) Net income — — — 20,454 — 20,454 Other comprehensive income — — — — 3,427 3,427 Balance, February 28, 2022 43,766 $ 438 $ 303,240 $ 93,661 $ ( 29,016 ) $ 368,323 6 Condensed Consolidated Statements of Cash Flows Three Months Ended (In thousands) February 28, 2023 February 28, 2022 Cash flows from operating activities: Net income $ 23,674 $ 20,454 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 1,671 1,207 Amortization of acquired intangibles and other 19,937 17,486 Amortization of debt discount and issuance costs on Notes 534 525 Stock-based compensation 9,752 8,114 Non-cash lease expense 1,959 2,075 Loss on disposal of long-lived assets, net — 4 Deferred income taxes ( 6,324 ) 2,218 Allowances for bad debt and sales credits 158 145 Changes in operating assets and liabilities: Accounts receivable 25,839 13,192 Other assets 4,483 ( 1,081 ) Inventories ( 604 ) 418 Accounts payable and accrued liabilities ( 17,649 ) ( 27,448 ) Lease liabilities ( 2,314 ) ( 2,146 ) Income taxes payable 170 3 Deferred revenue, net ( 14,519 ) 8,927 Net cash flows from operating activities 46,767 44,093 Cash flows (used in) from investing activities: Purchases of investments ( 15,262 ) — Sales and maturities of investments 400 300 Purchases of property and equipment ( 385 ) ( 831 ) Payments for acquisitions, net of cash acquired ( 355,821 ) — Net cash flows used in investing activities ( 371,068 ) ( 531 ) Cash flows from (used in) financing activities: Proceeds from stock-based compensation plans 9,357 4,094 Payments for taxes related to net share settlements of equity awards ( 4,817 ) ( 3,139 ) Repurchases of common stock ( 15,000 ) ( 25,000 ) Dividend payments to stockholders ( 8,023 ) ( 7,784 ) Proceeds from the issuance of debt 195,000 7,474 Payment of principal on long-term debt ( 1,719 ) ( 1,719 ) Payment of debt issuance costs — ( 1,957 ) Net cash flows from (used in) financing activities 174,798 ( 28,031 ) Effect of exchange rate changes on cash 1,207 729 Net (decrease) increase in cash and cash equivalents ( 148,296 ) 16,260 Cash and cash equivalents, beginning of period 256,277 155,406 Cash and cash equivalents, end of period $ 107,981 $ 171,666 7 Condensed Consolidated Statements of Cash Flows, continued Three Months Ended February 28, 2023 February 28, 2022 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 interest $ 4,060 $ 1,432 Non-cash investing and financing activities: Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested $ 11,535 $ 7,346 Dividends declared $ 8,141 $ 8,062 See notes to unaudited condensed consolidated financial statements. 8 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. 9 Recent Accounting Pronouncements Recently Issued 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 of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2024, as amended by ASU 2022-06. As of February 28, 2023, we have not adopted any expedients and exceptions under ASU 2020-04. We will continue to evaluate the impact of ASU 2020-04 on our consolidated financial statements. Note 2: Cash, Cash Equivalents and Investments A summary of our cash, cash equivalents and available-for-sale investments at February 28, 2023 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 106,462 $ — $ — $ 106,462 Money market funds 119 — — 119 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 $ 122,942 $ — $ ( 17 ) $ 122,925 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 debt securities have a remaining contractual maturity of one year or less as of February 28, 2023. 10 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. We have designated the interes t 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, 2023 , the fair value of the hedge was a gain of $ 4.2 million, which was included in other assets on our condensed consolidated balance sheets. The net amount of accumulated other comprehensive loss reclassified to interest expense during the three months ended February 28, 2023 and February 28, 2022 was a decrease of $ 0.7 million and an increase of $ 0.6 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 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, 2023, $ 0.1 million and $ 3.0 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 months ended February 28, 2023 and February 28, 2022, realized and unrealized gains of $ 0.5 million and $ 0.3 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains were substantially offset by realized and unrealized 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 Notional Value Fair Value Notional Value Fair Value Forward contracts to sell U.S. dollars $ 70,436 $ ( 3,180 ) $ 74,578 $ ( 2,995 ) Forward contracts to purchase U.S. dollars 489 8 544 ( 5 ) Total $ 70,925 $ ( 3,172 ) $ 75,122 $ ( 3,000 ) 11 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, 2023 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 119 $ 119 $ — $ — 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 4,235 — 4,235 — Liabilities Foreign exchange derivatives $ ( 3,172 ) $ — $ ( 3,172 ) $ — 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 million and $ 352.6 million, was $ 394.7 million and $ 376.0 million as of February 28, 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. 12 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 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Purchased technology $ 280,300 $ ( 157,141 ) $ 123,159 $ 212,700 $ ( 150,877 ) $ 61,823 Customer-related 468,508 ( 173,532 ) 294,976 306,308 ( 162,341 ) 143,967 Trademarks and trade names 50,111 ( 27,304 ) 22,807 37,611 ( 26,046 ) 11,565 Non-compete agreement 2,000 ( 2,000 ) — 2,000 ( 2,000 ) — Total $ 800,919 $ ( 359,977 ) $ 440,942 $ 558,619 $ ( 341,264 ) $ 217,355 In the first quarter of fiscal years 2023 and 2022, amortization expense related to intangible assets was $ 19.9 million and $ 17.2 million, respectively. Future amortization expense for intangible assets as of February 28, 2023, is as follows (in thousands): Remainder of 2023 $ 77,748 2024 90,534 2025 80,024 2026 71,147 2027 46,198 Thereafter 75,291 Total $ 440,942 Goodwill Changes in the carrying amount of goodwill in the three months ended February 28, 2023 are as follows (in thousands): Balance, November 30, 2022 $ 671,037 Additions (1) 140,964 Translation adjustments ( 142 ) Balance, February 28, 2023 $ 811,859 (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. 13 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 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 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 months ended February 28, 2023, we incurred approximately $ 1.5 million of acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations. The amount of MarkLogic revenue and related earnings included in the consolidated statements of operations in the period subsequent to acquisition is not material. 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 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. 14 (in thousands, except per share data) Pro Forma Three Months Ended February 28, 2023 Pro Forma Three Months Ended February 28, 2022 Revenue $ 203,076 $ 165,822 Net income $ 32,705 $ 10,492 Net income per basic share $ 0.76 $ 0.24 Net income per diluted share $ 0.74 $ 0.23 Note 7: Debt As of February 28, 2023, future maturities of the Company's long-term debt were as follows: (In thousands) 2026 Notes Revolving Line of Credit Term Loan Total Remainder of 2023 $ — $ — $ 5,156 $ 5,156 2024 — — 13,750 13,750 2025 — — 20,625 20,625 2026 360,000 — 20,625 380,625 2027 — 195,000 206,250 401,250 Total face value of long-term debt 360,000 195,000 266,406 821,406 Unamortized discount and issuance costs ( 6,841 ) — ( 2,510 ) ( 9,351 ) Less current portion of long-term debt, net — — ( 7,953 ) ( 7,953 ) Long-term debt $ 353,159 $ 195,000 $ 255,943 $ 804,102 The revolving line of credit may be borrowed, repaid, and reborrowed until January 25, 2027, at which time all amounts outstanding must be repaid. As of February 28, 2023, there was $ 195.0 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 million. In the three months ended February 28, 2023 and February 28, 2022, we repurchased and retired 0.3 million shares for $ 15.0 million and 0.6 million shares for $ 25.0 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of February 28, 2023, there was $ 213.0 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. 15 The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): Three Months Ended February 28, 2023 February 28, 2022 Cost of maintenance and services $ 620 $ 411 Sales and marketing 1,495 1,402 Product development 2,998 2,222 General and administrative 4,639 4,079 Total stock-based compensation $ 9,752 $ 8,114 Note 10: Accumulated Other Comprehensive Loss The following table summarizes the changes in accumulated balances of other comprehensive loss during the three months ended February 28, 2023 (in thousands): Foreign Currency Translation Adjustment Unrealized Losses on Investments Unrealized Gain (Losses) on Hedging Activity Accumulated Other Comprehensive Loss Balance, December 1, 2022 $ ( 38,523 ) $ ( 61 ) $ 3,349 $ ( 35,235 ) Other comprehensive income (loss) before reclassifications, net of tax 1,737 ( 21 ) ( 127 ) 1,589 Balance, February 28, 2023 $ ( 36,786 ) $ ( 82 ) $ 3,222 $ ( 33,646 ) The tax effect on accumulated unrealized gains (losses) on hedging activity and unrealized losses on investments was a tax provision of $ 1.1 million as of February 28, 2023 and November 30, 2022. 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 (In thousands) February 28, 2023 February 28, 2022 Performance obligations transferred at a point in time: Software licenses $ 57,568 $ 42,750 Performance obligations transferred over time: Maintenance 92,513 89,963 Services 14,145 12,209 Total revenue $ 164,226 $ 144,922 16 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 (In thousands) February 28, 2023 February 28, 2022 North America $ 98,828 $ 78,093 EMEA 53,405 53,702 Latin America 4,189 3,883 Asia Pacific 7,804 9,244 Total revenue $ 164,226 $ 144,922 No single customer, partner, or country outside the U.S. has accounted for more than 10% of our total revenue for the three months ended February 28, 2023 and February 28, 2022. Contract Balances Unbilled Receivables and Contract Assets As of February 28, 2023, billing of our long-term unbilled receivables is expected to occur as follows (in thousands): 2024 $ 19,453 2025 15,607 2026 12,862 Total $ 47,922 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, 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, 2023, the changes in net deferred revenue were as follows (in thousands): Balance, December 1, 2022 $ 282,440 Billings and other 183,633 Revenue recognized ( 164,226 ) Balance, February 28, 2023 $ 301,847 As of February 28, 2023, transaction price allocated to remaining performance obligations was $ 309 million. We expect to recognize approximately 81 % of the revenue within the next year and the remainder thereafter. 17 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 million and $ 8.8 million as of February 28, 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 Balance, December 1, 2022 $ 3,870 $ 30 $ 3,900 Costs incurred 180 1,217 1,397 Cash disbursements ( 345 ) ( 144 ) ( 489 ) Balance, February 28, 2023 $ 3,705 $ 1,103 $ 4,808 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 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. 18 Note 14: 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 February 28, 2023 February 28, 2022 Net income $ 23,674 $ 20,454 Weighted average shares outstanding 43,300 43,981 Basic earnings per common share $ 0.55 $ 0.47 Diluted earnings per common share: Net income $ 23,674 $ 20,454 Weighted average shares outstanding 43,300 43,981 Effect of dilution from common stock equivalents 1,053 727 Diluted weighted average shares outstanding 44,353 44,708 Diluted earnings per share $ 0.53 $ 0.46 We excluded stock awards representing approximately 340,000 and 1,536,000 shares of common stock from the calculation of diluted earnings per share in the three months ended February 28, 2023 and February 28, 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 months ended February 28, 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: 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.