PROGRESS SOFTWARE CORP /MA 10-Q

Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets (In thousands, except share data) August 31, 2023 November 30, 2022 Assets Current assets: Cash and cash equivalents $ 137,999 $ 256,277 Accounts receivable (less allowances of $ 985 and $ 859 , respectively) 99,726 97,834 Unbilled receivables 31,668 29,158 Other current assets 33,447 42,784 Total current assets 302,840 426,053 Long-term unbilled receivables 33,121 39,936 Property and equipment, net 16,166 14,927 Intangible assets, net 378,824 217,355 Goodwill 826,048 671,037 Right-of-use lease assets 20,596 17,574 Deferred tax assets 11,745 11,765 Other assets 8,128 12,832 Total assets $ 1,597,468 $ 1,411,479 Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt, net $ 11,390 $ 6,234 Accounts payable 8,729 9,282 Accrued compensation and related taxes 41,606 42,467 Dividends payable to stockholders 8,354 8,115 Short-term operating lease liabilities 10,088 7,471 Other accrued liabilities 24,935 16,765 Short-term deferred revenue, net 219,601 227,670 Total current liabilities 324,703 318,004 Long-term debt, net 389,388 259,220 Convertible senior notes, net 354,246 352,625 Long-term operating lease liabilities 15,086 15,041 Long-term deferred revenue, net 60,167 54,770 Deferred tax liabilities 4,240 4,628 Other noncurrent liabilities 4,592 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, 43,565,346 shares in 2023 and 43,257,008 shares in 2022 438 433 Additional paid-in capital 361,062 331,650 Retained earnings 115,133 101,656 Accumulated other comprehensive loss ( 31,587 ) ( 35,235 ) Total stockholders’ equity 445,046 398,504 Total liabilities and stockholders’ equity $ 1,597,468 $ 1,411,479 See notes to unaudited condensed consolidated financial statements. 3 Condensed Consolidated Statements of Operations Three Months Ended Nine Months Ended (In thousands, except per share data) August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 Revenue: Software licenses $ 50,544 $ 47,618 $ 164,519 $ 135,182 Maintenance and services 124,448 103,599 352,950 309,704 Total revenue 174,992 151,217 517,469 444,886 Costs of revenue: Cost of software licenses 2,732 2,477 7,998 7,669 Cost of maintenance and services 22,192 15,761 62,663 46,707 Amortization of acquired intangibles 7,995 5,558 22,253 16,589 Total costs of revenue 32,919 23,796 92,914 70,965 Gross profit 142,073 127,421 424,555 373,921 Operating expenses: Sales and marketing 38,612 34,595 112,513 100,768 Product development 33,138 28,650 98,396 85,966 General and administrative 20,791 20,141 61,046 56,339 Amortization of acquired intangibles 17,668 11,716 48,825 35,330 Cyber incident and vulnerability response expenses, net 951 — 5,126 — Restructuring expenses 843 130 6,230 784 Acquisition-related expenses 699 168 4,433 3,816 Gain on sale of assets held for sale — — — ( 10,770 ) Total operating expenses 112,702 95,400 336,569 272,233 Income from operations 29,371 32,021 87,986 101,688 Other (expense) income: Interest expense ( 8,532 ) ( 4,009 ) ( 22,894 ) ( 11,368 ) Interest income and other, net 788 247 1,895 991 Foreign currency loss, net ( 675 ) ( 577 ) ( 1,502 ) ( 832 ) Total other expense, net ( 8,419 ) ( 4,339 ) ( 22,501 ) ( 11,209 ) Income before income taxes 20,952 27,682 65,485 90,479 Provision for income taxes 1,854 5,885 10,623 19,118 Net income $ 19,098 $ 21,797 $ 54,862 $ 71,361 Earnings per share: Basic $ 0.44 $ 0.50 $ 1.27 $ 1.64 Diluted $ 0.42 $ 0.50 $ 1.23 $ 1.61 Weighted average shares outstanding: Basic 43,452 43,211 43,365 43,589 Diluted 44,981 43,935 44,543 44,299 Cash dividends declared per common share $ 0.175 $ 0.175 $ 0.525 $ 0.525 See notes to unaudited condensed consolidated financial statements. 4 Condensed Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended (In thousands) August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 Net income $ 19,098 $ 21,797 $ 54,862 $ 71,361 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 1,667 ( 7,632 ) 5,124 ( 10,955 ) Unrealized (loss) gain on hedging activity, net of tax benefit of $ 170 and $ 465 for the three and nine month periods ended August 31, 2023, respectively and net of tax provision of $ 377 and $ 1,542 for the three and nine month periods ended August 31, 2022, respectively ( 537 ) 1,191 ( 1,476 ) 4,882 Unrealized loss on investments, net of tax benefit of $ 0 for both the three and nine month periods ended August 31, 2023, respectively and net of tax of $ 0 and a tax benefit of $ 4 for the three and nine month periods ended August 31, 2022, respectively — ( 1 ) — ( 13 ) Total other comprehensive income (loss), net of tax 1,130 ( 6,442 ) 3,648 ( 6,086 ) Comprehensive income $ 20,228 $ 15,355 $ 58,510 $ 65,275 See notes to unaudited condensed consolidated financial statements. 5 Condensed Consolidated Statements of Stockholders’ Equity Nine Months Ended August 31, 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 212 3 7,766 — — 7,769 Exercise of stock options 400 4 12,157 — — 12,161 Vesting of restricted stock units and release of deferred stock units 378 4 ( 4 ) — — — Withholding tax payments related to net issuance of RSUs ( 147 ) ( 1 ) ( 8,100 ) — — ( 8,101 ) Stock-based compensation — — 30,111 — — 30,111 Dividends declared — — — ( 23,908 ) — ( 23,908 ) Treasury stock repurchases and retirements ( 535 ) ( 5 ) ( 12,518 ) ( 17,477 ) — ( 30,000 ) Net income — — — 54,862 — 54,862 Other comprehensive income — — — — 3,648 3,648 Balance, August 31, 2023 43,565 $ 438 $ 361,062 $ 115,133 $ ( 31,587 ) $ 445,046 Three Months Ended August 31, 2023 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands) Number of Shares Amount Balance, June 1, 2023 43,358 $ 436 $ 347,101 $ 103,995 $ ( 32,717 ) $ 418,815 Issuance of stock under employee stock purchase plan 67 1 2,498 — — 2,499 Exercise of stock options 140 1 1,391 — — 1,392 Stock-based compensation — — 10,072 — — 10,072 Dividends declared — — — ( 7,960 ) — ( 7,960 ) Net income — — — 19,098 — 19,098 Other comprehensive loss — — — — 1,130 1,130 Balance, August 31, 2023 43,565 $ 438 $ 361,062 $ 115,133 $ ( 31,587 ) $ 445,046 6 Nine Months Ended August 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 246 2 7,235 — — 7,237 Exercise of stock options 78 1 2,878 — — 2,879 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 — — 26,110 — — 26,110 Dividends declared — — — ( 23,525 ) — ( 23,525 ) Treasury stock repurchases and retirements ( 1,660 ) ( 16 ) ( 19,036 ) ( 56,472 ) — ( 75,524 ) Net income — — — 71,361 — 71,361 Other comprehensive income — — — — ( 6,086 ) ( 6,086 ) Balance, August 31, 2022 42,998 $ 430 $ 318,559 $ 86,513 $ ( 38,529 ) $ 366,973 Three Months Ended August 31, 2022 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands) Number of Shares Amount Balance, June 1, 2022 43,454 $ 435 $ 309,913 $ 93,885 $ ( 32,087 ) $ 372,146 Issuance of stock under employee stock purchase plan 68 — 2,024 — — 2,024 Exercise of stock options 18 — 643 — — 643 Stock-based compensation — — 8,639 — — 8,639 Dividends declared — — — ( 7,783 ) — ( 7,783 ) Treasury stock repurchases and retirements ( 542 ) ( 5 ) ( 2,660 ) ( 21,386 ) — ( 24,051 ) Net income — — — 21,797 — 21,797 Other comprehensive loss — — — — ( 6,442 ) ( 6,442 ) Balance, August 31, 2022 42,998 $ 430 $ 318,559 $ 86,513 $ ( 38,529 ) $ 366,973 7 Condensed Consolidated Statements of Cash Flows Nine Months Ended (In thousands) August 31, 2023 August 31, 2022 Cash flows from operating activities: Net income $ 54,862 $ 71,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 4,690 3,682 Amortization of acquired intangibles and other 71,121 52,545 Amortization of debt discount and issuance costs on Notes 1,621 1,595 Stock-based compensation 30,111 26,110 Non-cash lease expense 6,958 5,919 Gain on sale of assets held for sale — ( 10,770 ) Deferred income taxes ( 18,521 ) ( 286 ) Credit losses and other sales allowances 472 710 Changes in operating assets and liabilities: Accounts receivable 31,478 2,858 Other assets 14,294 11,174 Inventories 2,209 ( 1,264 ) Accounts payable and accrued liabilities ( 14,027 ) ( 10,055 ) Lease liabilities ( 7,860 ) ( 6,481 ) Income taxes payable 2,362 ( 748 ) Deferred revenue, net ( 39,011 ) 5,673 Net cash flows from operating activities 140,759 152,023 Cash flows (used in) from investing activities: Purchases of investments ( 15,262 ) — Sales and maturities of investments 15,700 1,200 Purchases of property and equipment ( 3,181 ) ( 3,086 ) Payments for acquisitions, net of cash acquired ( 355,250 ) — Proceeds from sale of long-lived assets, net — 25,998 Other investing activities — 134 Net cash flows (used in) from investing activities ( 357,993 ) 24,246 Cash flows from (used in) financing activities: Proceeds from stock-based compensation plans 20,373 10,384 Payments for taxes related to net share settlements of equity awards ( 8,101 ) ( 5,405 ) Repurchases of common stock ( 30,000 ) ( 75,524 ) Dividend payments to stockholders ( 23,669 ) ( 23,351 ) Proceeds from the issuance of debt 195,000 7,474 Repayment of revolving line of credit ( 55,000 ) — Principal payment on term loan ( 5,157 ) ( 5,154 ) Payment of debt issuance costs — ( 1,957 ) Net cash flows from (used in) financing activities 93,446 ( 93,533 ) Effect of exchange rate changes on cash and cash equivalents 5,510 ( 14,027 ) Net (decrease) increase in cash and cash equivalents ( 118,278 ) 68,709 Cash and cash equivalents, beginning of period 256,277 155,406 Cash and cash equivalents, end of period $ 137,999 $ 224,115 8 Condensed Consolidated Statements of Cash Flows, continued Nine Months Ended August 31, 2023 August 31, 2022 Supplemental disclosure: Cash paid for income taxes, net of refunds of $ 924 in 2023 and $ 920 in 2022 $ 14,640 $ 8,954 Cash paid for interest $ 17,630 $ 5,470 Non-cash investing and financing activities: Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested $ 23,077 $ 18,204 Dividends declared and unpaid $ 8,354 $ 8,099 See notes to unaudited condensed consolidated financial statements. 9 Notes to Condensed Consolidated Financial Statements Note 1: Basis of Presentation Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides enterprise software products for the development, deployment and management of high-impact applications. 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, original equipment manufacturers, distributors and value-added resellers. Independent software vendors develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. Original equipment manufacturers 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. Actual results could differ from those estimates. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements 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. 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 interest rate swaps and presentation consistent with past presentation and did not have a material impact on our consolidated financial statements. 10 Note 2: Cash and Cash Equivalents A summary of our cash and cash equivalents at August 31, 2023 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 137,889 $ — $ — $ 137,889 Money market funds 110 — — 110 Total $ 137,999 $ — $ — $ 137,999 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 There were no debt securities by contractual maturity due after one year as of August 31, 2023. 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 . 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 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 August 31, 2023, the fair value of the hedge was a gain of $ 2.5 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 nine months ended August 31, 2023 and August 31, 2022 was a decrease of $ 2.6 million and an increase of $ 1.1 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): August 31, 2023 November 30, 2022 Notional Value Fair Value Notional Value Fair Value Interest rate swap contracts designated as cash flow hedges $ 107,813 $ 2,466 $ 120,000 $ 4,407 11 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 August 31, 2023, $ 2.4 million and $ 0.2 million was recorded in other accrued liabilities and other current assets, 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 nine months ended August 31, 2023, realized and unrealized gains of $ 1.1 million and $ 2.7 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three and nine months ended August 31, 2022, realized and unrealized losses of $ 5.4 million and $ 9.0 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): August 31, 2023 November 30, 2022 Notional Value Fair Value Notional Value Fair Value Forward contracts to sell U.S. dollars $ 87,349 $ ( 2,254 ) $ 74,578 $ ( 2,995 ) Forward contracts to purchase U.S. dollars 1,243 ( 2 ) 544 ( 5 ) Total $ 88,592 $ ( 2,256 ) $ 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 August 31, 2023 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 110 $ 110 $ — $ — Interest rate swap 2,466 — 2,466 — Liabilities Foreign exchange derivatives $ ( 2,256 ) $ — $ ( 2,256 ) $ — 12 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 $ 354.2 million and $ 352.6 million, was $ 411.8 million and $ 376.0 million as of August 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, unbilled 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): August 31, 2023 November 30, 2022 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Purchased technology $ 280,000 $ ( 173,129 ) $ 106,871 $ 212,700 $ ( 150,877 ) $ 61,823 Customer-related 457,608 ( 205,298 ) 252,310 306,308 ( 162,341 ) 143,967 Trademarks and trade names 50,111 ( 30,468 ) 19,643 37,611 ( 26,046 ) 11,565 Non-compete agreement — — — 2,000 ( 2,000 ) — Total $ 787,719 $ ( 408,895 ) $ 378,824 $ 558,619 $ ( 341,264 ) $ 217,355 13 In the three and nine months ended August 31, 2023, amortization expense related to intangible assets was $ 25.7 million and $ 71.1 million, respectively. In the three and nine months ended August 31, 2022, amortization expense related to intangible assets was $ 17.3 million and $ 51.9 million, respectively. Future amortization expense for intangible assets as of August 31, 2023, is as follows (in thousands): Remainder of 2023 $ 25,391 2024 88,934 2025 78,424 2026 69,368 2027 44,598 Thereafter 72,109 Total $ 378,824 Goodwill Changes in the carrying amount of goodwill in the nine months ended August 31, 2023 are as follows (in thousands): Balance, December 1, 2022 $ 671,037 Additions (1) 155,014 Translation adjustments ( 3 ) Balance, August 31, 2023 $ 826,048 (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 allocation of the purchase price is as follows (in thousands): Initial Purchase Price Allocation Measurement Period Adjustments Adjusted Purchase Price Allocation Life Net working capital $ 49,477 $ ( 1,063 ) $ 48,414 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 ( 1,401 ) 4,771 Deferred taxes ( 17,441 ) ( 957 ) ( 18,398 ) Deferred revenue ( 33,116 ) — ( 33,116 ) Goodwill 140,964 14,050 155,014 Net assets acquired $ 389,079 $ ( 571 ) $ 388,508 14 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 $ 155.0 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 and nine months ended August 31, 2023, we incurred approximately $ 0.6 million and $ 4.1 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 included in our consolidated statement of operations during the three and nine months ended August 31, 2023, was approximately $ 20.4 million and $ 50.7 million, respectively. We determined that disclosing the amount of MarkLogic related earnings included in the consolidated statement of operations is impracticable, as certain operations of MarkLogic were integrated into the 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 $ 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 August 31, 2022 Revenue $ 174,676 Net income $ 16,141 Net income per basic share $ 0.37 Net income per diluted share $ 0.37 (in thousands, except per share data) Pro Forma Nine Months Ended August 31, 2023 Pro Forma Nine Months Ended August 31, 2022 Revenue $ 556,319 $ 511,609 Net income $ 64,094 $ 48,516 Net income per basic share $ 1.48 $ 1.11 Net income per diluted share $ 1.44 $ 1.10 15 Note 7: Debt As of August 31, 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 $ — $ — $ 1,719 $ 1,719 2024 — — 13,750 13,750 2025 — — 20,625 20,625 2026 360,000 — 20,625 380,625 2027 — 140,000 206,250 346,250 Total face value of long-term debt 360,000 140,000 262,969 762,969 Unamortized discount and issuance costs ( 5,754 ) — ( 2,191 ) ( 7,945 ) Less current portion of long-term debt, net — — ( 11,390 ) ( 11,390 ) Long-term debt $ 354,246 $ 140,000 $ 249,388 $ 743,634 The revolving line of credit has a term that ends on January 25, 2027, at which time all amounts outstanding must be repaid. 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 August 31, 2023, we did no t repurchase and retire any shares of our common stock. In the three months ended August 31, 2022, we repurchased and retired 0.5 million shares for $ 24.1 million. In the nine months ended August 31, 2023 and August 31, 2022, we repurchased and retired 0.5 million shares for $ 30.0 million and 1.7 million shares for $ 75.5 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of August 31, 2023, there was $ 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. 16 The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): Three Months Ended Nine Months Ended August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 Cost of maintenance and services $ 797 $ 527 $ 2,146 $ 1,410 Sales and marketing 1,763 1,331 5,027 3,423 Product development 3,065 2,586 9,112 7,548 General and administrative 4,447 4,195 13,826 13,729 Total stock-based compensation $ 10,072 $ 8,639 $ 30,111 $ 26,110 Note 10: Accumulated Other Comprehensive Loss The following table summarizes the changes in accumulated balances of other comprehensive loss during the nine months ended August 31, 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 5,124 — ( 1,476 ) 3,648 Balance, August 31, 2023 $ ( 33,399 ) $ ( 61 ) $ 1,873 $ ( 31,587 ) The tax effect on accumulated unrealized gains (losses) on hedging activity and unrealized losses on investments was a tax provision of $ 0.7 million and $ 1.1 million as of August 31, 2023 and November 30, 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 Nine Months Ended (In thousands) August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 Performance obligations transferred at a point in time: Software licenses $ 50,544 $ 47,618 $ 164,519 $ 135,182 Performance obligations transferred over time: Maintenance 105,164 91,043 299,917 272,337 Services 19,284 12,556 53,033 37,367 Total revenue $ 174,992 $ 151,217 $ 517,469 $ 444,886 17 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 Nine Months Ended (In thousands) August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 North America $ 101,923 $ 84,826 $ 306,483 $ 248,313 EMEA 56,779 52,670 166,369 156,006 Latin America 6,318 4,577 15,297 13,138 Asia Pacific 9,972 9,144 29,320 27,429 Total revenue $ 174,992 $ 151,217 $ 517,469 $ 444,886 No single customer, partner, or country outside the U.S. has accounted for more than 10% of our total revenue for the three and nine months ended August 31, 2023 and August 31, 2022. Contract Balances Unbilled Receivables and Contract Assets As of August 31, 2023, billing of our long-term unbilled receivables is expected to occur as follows (in thousands): 2024 $ 7,491 2025 16,058 2026 9,569 2027 3 Total $ 33,121 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 August 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 August 31, 2023, the changes in net deferred revenue were as follows (in thousands): Balance, December 1, 2022 $ 282,440 Billings and other 514,797 Revenue recognized ( 517,469 ) Balance, August 31, 2023 $ 279,768 As of August 31, 2023, transaction price allocated to remaining performance obligations was $ 288 million. We expect to recognize approximately 77 % of the revenue within the next year and the remainder thereafter. 18 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 $ 8.0 million and $ 8.8 million as of August 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 (in thousands): Excess Facilities and Other Costs Employee Severance and Related Benefits Total Balance, December 1, 2022 $ 3,870 $ 30 $ 3,900 Costs incurred 644 5,586 6,230 Cash disbursements ( 1,146 ) ( 3,836 ) ( 4,982 ) Translation and other adjustments — 19 19 Balance, August 31, 2023 $ 3,368 $ 1,799 $ 5,167 During fiscal year 2023, we restructured our operations in connection with the acquisition and subsequent integration 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 these actions related to employee costs and facility closures during fiscal year 2024, but we do not expect these costs to be material. Note 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 Nine Months Ended August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 Net income $ 19,098 $ 21,797 $ 54,862 $ 71,361 Weighted average shares outstanding 43,452 43,211 43,365 43,589 Basic earnings per common share $ 0.44 $ 0.50 $ 1.27 $ 1.64 Diluted earnings per common share: Net income $ 19,098 $ 21,797 $ 54,862 $ 71,361 Weighted average shares outstanding 43,452 43,211 43,365 43,589 Effect of dilution from common stock equivalents 1,353 724 1,178 710 Effect of dilution from if-converted Convertible Senior Notes 176 — — — Diluted weighted average shares outstanding 44,981 43,935 44,543 44,299 Diluted earnings per share $ 0.42 $ 0.50 $ 1.23 $ 1.61 We excluded stock awards representing approximately 252,000 and 286,000 shares of common stock from the calculation of diluted earnings per share in the three and nine months ended August 31, 2023, respectively, as these awards were anti-dilutive. We excluded stock awards representing approximately 1,777,000 and 1,739,000 shares of common stock from the calculation 19 of diluted earnings per share in the three and nine months ended August 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. For the three months ended August 31, 2023, the average daily closing price of the Company's common stock was greater than the conversion price for the Notes outstanding as of August 31, 2023. Therefore, for this period, the Company applied the if-converted method for calculating diluted earnings per common share. During the nine months ended August 31, 2023, the average daily closing price of the Company's common stock was less than the conversion price for the Notes. Therefore, for this period, the Notes had no impact on the computation of diluted earnings per common share. Note 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. Costs for this cyber incident were primarily related to the engagement of external cybersecurity experts and other incident response professionals. We did not incur any meaningful costs related to this cyber incident for the three months ended August 31, 2023. For the nine months ended August 31, 2023, we incurred $ 4.2 million of costs related to this cyber incident. 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 As previously reported, 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 customer-dedicated cloud instances that are hosted, separate and apart from the public instances of our MOVEit Cloud platform). We will continue to assess the potential impact of the MOVEit Vulnerability on our business, operations, and financial results. MOVEit Transfer and MOVEit Cloud represented less than 4 % in aggregate of our revenue for the nine months ended August 31, 2023. Litigation and Governmental Investigations As of the date of the issuance of the financial statements, (i) we have received formal letters from 23 customers and others that claim to have been impacted by the MOVEit Vulnerability, some of which have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability, (ii) we have received a letter from an insurer providing for notice of a subrogation claim (where the insurer is seeking recovery for all expenses incurred in connection with the MOVEit Vulnerability), and (iii) we are party to 58 class action lawsuits filed by individuals who claim to have been impacted by the exfiltration of data from the environments of our MOVEit Transfer customers (on October 4, 2023, the Judicial Panel on Multidistrict Litigation issued an order consolidating litigation relating to the MOVEit Vulnerability where we are a party in the United States District Court, District of Massachusetts). We have also been cooperating with several inquiries from domestic and foreign data privacy regulators, inquiries from several state attorneys general, as well as formal investigations from: (i) a U.S. federal law enforcement agency (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 20 governmental investigation of which we have been told that we are a target), and (ii) the SEC (as further described hereafter). On October 2, 2023, Progress received a subpoena from the SEC seeking various documents and information relating to the MOVEit Vulnerability. As described in the cover letter accompanying the subpoena, at this stage, the SEC investigation is a fact-finding inquiry, the investigation does not mean that Progress or anyone else has violated federal securities laws, and the investigation does not mean that the SEC has a negative opinion of any person, entity, or security. Progress intends to cooperate fully with the SEC in its investigation. Expenses Incurred and Future Costs For the three and nine months ended August 31, 2023, we incurred $ 1.0 million of costs related to the MOVEit Vulnerability. The costs recognized are net of received and expected insurance recoveries of approximately $ 1.9 million, which was recognized during the third quarter of fiscal year 2023. The timing of recognizing insurance recoveries may differ from the timing of recognizing the associated expenses. 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, particularly while the foregoing matters remain 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. Also, each of the governmental inquiries and investigations mentioned above could result in adverse judgements, settlements, fines, penalties, or other resolutions, the amount, scope and timing of which could be material, but which we are currently unable to predict. Therefore, we have not recorded a loss contingency liability for the MOVEit Vulnerability as of August 31, 2023. Insurance Coverage During the period when the November 2022 cyber incident and the MOVEit Vulnerability occurred, we maintained $ 15.0 million of cybersecurity insurance coverage, which is expected to reduce our exposure to expenses and liabilities arising from these events. As of August 31, 2023, we have recorded approximately $ 4.9 million in insurance recoveries, of which $ 3.0 million was related to the November 2022 cyber incident and $ 1.9 million was related to the May 2023 MOVEit Vulnerability, providing us with $ 10.1 million of additional cybersecurity insurance coverage (which is subject to a $ 0.5 million retention per claim). We will pursue recoveries to the maximum extent available under our insurance policies.