PROGRESS SOFTWARE CORP /MA 10-Q

Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets (In thousands, except share data) February 29, 2024 November 30, 2023 Assets Current assets: Cash and cash equivalents $ 133,222 $ 126,958 Accounts receivable (less allowances of $ 1,311 and $ 851 , respectively) 88,811 125,825 Unbilled receivables 29,175 29,965 Other current assets 46,048 48,040 Total current assets 297,256 330,788 Long-term unbilled receivables 33,641 28,373 Property and equipment, net 14,081 15,225 Intangible assets, net 328,009 354,278 Goodwill 832,806 832,101 Right-of-use lease assets 15,318 18,711 Deferred tax assets 19,271 15,052 Other assets 7,387 8,255 Total assets $ 1,547,769 $ 1,602,783 Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt, net $ — $ 13,109 Accounts payable 9,921 12,371 Accrued compensation and related taxes 33,421 49,559 Dividends payable to stockholders 8,435 8,376 Short-term operating lease liabilities 9,821 10,114 Other accrued liabilities 18,044 22,499 Short-term deferred revenue, net 232,566 236,090 Total current liabilities 312,208 352,118 Long-term debt, net 335,943 356,111 Convertible senior notes, net 355,319 354,772 Long-term operating lease liabilities 11,208 13,000 Long-term deferred revenue, net 63,567 58,946 Deferred tax liabilities 3,628 3,574 Other noncurrent liabilities 4,153 4,547 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, 43,689,037 shares in 2024 and 43,795,955 shares in 2023 437 438 Additional paid-in capital 372,273 370,579 Retained earnings 123,429 120,858 Accumulated other comprehensive loss ( 34,396 ) ( 32,160 ) Total stockholders’ equity 461,743 459,715 Total liabilities and stockholders’ equity $ 1,547,769 $ 1,602,783 See notes to unaudited condensed consolidated financial statements. 3 Condensed Consolidated Statements of Operations Three Months Ended (In thousands, except per share data) February 29, 2024 February 28, 2023 Revenue: Software licenses $ 64,100 $ 57,568 Maintenance and services 120,585 106,658 Total revenue 184,685 164,226 Costs of revenue: Cost of software licenses 2,731 2,452 Cost of maintenance and services 22,219 17,501 Amortization of acquired intangibles 7,859 6,264 Total costs of revenue 32,809 26,217 Gross profit 151,876 138,009 Operating expenses: Sales and marketing 39,111 33,754 Product development 34,988 30,438 General and administrative 21,344 18,786 Amortization of acquired intangibles 17,389 13,611 Cyber incident and vulnerability response expenses, net 987 2,692 Restructuring expenses 2,349 1,397 Acquisition-related expenses 702 1,743 Total operating expenses 116,870 102,421 Income from operations 35,006 35,588 Other (expense) income: Interest expense ( 7,344 ) ( 5,848 ) Interest income and other, net 624 515 Foreign currency loss, net ( 679 ) ( 331 ) Total other expense, net ( 7,399 ) ( 5,664 ) Income before income taxes 27,607 29,924 Provision for income taxes 4,968 6,250 Net income $ 22,639 $ 23,674 Earnings per share: Basic $ 0.52 $ 0.55 Diluted $ 0.51 $ 0.53 Weighted average shares outstanding: Basic 43,802 43,300 Diluted 44,826 44,353 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 29, 2024 February 28, 2023 Net income $ 22,639 $ 23,674 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments ( 1,546 ) 1,737 Unrealized loss on hedging activity, net of tax benefit of $ 218 and $ 45 for the first quarter of 2024 and 2023, respectively ( 690 ) ( 127 ) Unrealized loss on investments, net of tax provision of $ 4 for the first quarter of 2023 — ( 21 ) Total other comprehensive (loss) income, net of tax ( 2,236 ) 1,589 Comprehensive income $ 20,403 $ 25,263 See notes to unaudited condensed consolidated financial statements. 5 Condensed Consolidated Statements of Stockholders’ Equity Three Months Ended February 29, 2024 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands) Number of Shares Amount Balance, December 1, 2023 43,796 $ 438 $ 370,579 $ 120,858 $ ( 32,160 ) $ 459,715 Issuance of stock under employee stock purchase plan 66 1 2,530 — — 2,531 Exercise of stock options 80 1 3,249 — — 3,250 Vesting of restricted stock units and release of deferred stock units 244 2 ( 2 ) — — — Withholding tax payments related to net issuance of RSUs ( 103 ) ( 1 ) ( 5,889 ) — — ( 5,890 ) Stock-based compensation — — 12,464 — — 12,464 Dividends declared — — — ( 8,230 ) — ( 8,230 ) Treasury stock repurchases and retirements ( 394 ) ( 4 ) ( 10,658 ) ( 11,838 ) — ( 22,500 ) Net income — — — 22,639 — 22,639 Other comprehensive loss — — — — ( 2,236 ) ( 2,236 ) Balance, February 29, 2024 43,689 $ 437 $ 372,273 $ 123,429 $ ( 34,396 ) $ 461,743 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 6 Condensed Consolidated Statements of Cash Flows Three Months Ended (In thousands) February 29, 2024 February 28, 2023 Cash flows from operating activities: Net income $ 22,639 $ 23,674 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 1,589 1,671 Amortization of acquired intangibles and other 25,408 19,937 Amortization of debt discount and issuance costs on Notes 547 534 Stock-based compensation 12,464 9,752 Non-cash lease expense 4,259 1,959 Deferred income taxes ( 3,295 ) ( 6,324 ) Credit losses and other sales allowances 363 158 Changes in operating assets and liabilities: Accounts receivable 30,454 25,839 Other assets 1,530 4,483 Inventories — ( 604 ) Accounts payable and accrued liabilities ( 24,897 ) ( 17,649 ) Lease liabilities ( 2,949 ) ( 2,314 ) Income taxes payable ( 461 ) 170 Deferred revenue, net 2,853 ( 14,519 ) Net cash flows from operating activities 70,504 46,767 Cash flows used in investing activities: Purchases of investments — ( 15,262 ) Sales and maturities of investments — 400 Purchases of property and equipment ( 309 ) ( 385 ) Payments for acquisitions, net of cash acquired — ( 355,821 ) Net cash flows used in investing activities ( 309 ) ( 371,068 ) Cash flows (used in) from financing activities: Proceeds from stock-based compensation plans 7,583 9,357 Payments for taxes related to net share settlements of equity awards ( 5,890 ) ( 4,817 ) Repurchases of common stock ( 22,500 ) ( 15,000 ) Dividend payments to stockholders ( 8,171 ) ( 8,023 ) Proceeds from the issuance of debt — 195,000 Repayment of revolving line of credit ( 30,000 ) — Principal payment on term loan ( 3,437 ) ( 1,719 ) Net cash flows (used in) from financing activities ( 62,415 ) 174,798 Effect of exchange rate changes on cash and cash equivalents ( 1,516 ) 1,207 Net increase (decrease) in cash and cash equivalents 6,264 ( 148,296 ) Cash and cash equivalents, beginning of period 126,958 256,277 Cash and cash equivalents, end of period $ 133,222 $ 107,981 7 Condensed Consolidated Statements of Cash Flows, continued Three Months Ended February 29, 2024 February 28, 2023 Supplemental disclosure: Cash paid for income taxes, net of refunds of $ 856 in 2024 and $ 264 in 2023 $ 3,179 $ 3,801 Cash paid for interest $ 5,570 $ 4,060 Non-cash investing and financing activities: Dividends declared and unpaid $ 8,435 $ 8,141 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") 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, 2023, as filed with the SEC on January 26, 2024 (our "2023 Annual Report"). We made no material changes in the application of our significant accounting policies that were disclosed in our 2023 Annual Report. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2023 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 Issued Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 is intended to improve the transparency and decision usefulness of income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for the Company beginning with the annual period ending November 30, 2026, allowing for adoption on a prospective basis or a retrospective option. Early adoption is permitted. The adoption of this standard only impacts disclosures and is not expected to have a material impact on the Company's consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) . The amendments in this update expand segment disclosure requirements, including new segment disclosure requirements for entities with a single reportable segment among other disclosure requirements. This update is effective for the Company in the consolidated financial statements for the year ending November 30, 2025, and interim periods beginning after December 1, 2025. The adoption of this standard only impacts disclosures and is not expected to have a material impact on the Company’s consolidated financial statements . 9 Note 2: Cash and Cash Equivalents A summary of our cash and cash equivalents at February 29, 2024 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 127,872 $ — $ — $ 127,872 Money market funds 5,350 — — 5,350 Total $ 133,222 $ — $ — $ 133,222 A summary of our cash and cash equivalents at November 30, 2023 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 126,958 $ — $ — $ 126,958 There were no debt securities by contractual maturity due after one year as of February 29, 2024. 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 our interest rate swap contract, we receive a floating rate based on the greater of 1-month SOFR 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 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 29, 2024, the fair value of the hedge was a gain of $ 0.6 million, which was included in other current assets on our condensed consolidated balance sheets. The net amount of accumulated other comprehensive loss reclassified to interest expense during the three months ended February 29, 2024 and February 28, 2023 was a decrease of $ 0.9 million and $ 0.7 million, respectively. The following table presents our interest rate swap contract where the notional amount is equal to approximately one-half of the corresponding reduction in the balance of our term loan. 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 payment schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in thousands): February 29, 2024 November 30, 2023 Notional Value Fair Value Notional Value Fair Value Interest rate swap contracts designated as cash flow hedges $ 98,438 $ 587 $ 103,125 $ 1,495 10 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 in other current assets, other assets, other accrued liabilities, or other noncurrent liabilities on the condensed 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 29, 2024 $ 2.8 million was recorded in other accrued liabilities on our condensed consolidated balance sheets. At November 30, 2023, $ 2.5 million was recorded in other accrued liabilities on our condensed consolidated balance sheets. In the three months ended February 29, 2024, realized and unrealized losses of $ 0.6 million from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three months ended February 28, 2023, realized and unrealized gains of $ 0.5 million from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized gains and losses in the offsetting positions. The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands): February 29, 2024 November 30, 2023 Notional Value Fair Value Notional Value Fair Value Forward contracts to sell U.S. dollars $ 81,499 $ ( 2,781 ) $ 102,229 $ ( 2,526 ) Forward contracts to purchase U.S. dollars — — 844 ( 4 ) Total $ 81,499 $ ( 2,781 ) $ 103,073 $ ( 2,530 ) 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 29, 2024 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 5,350 $ 5,350 $ — $ — Interest rate swap 587 — 587 — Liabilities Foreign exchange derivatives $ ( 2,781 ) $ — $ ( 2,781 ) $ — The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2023 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Interest rate swap $ 1,495 $ — $ 1,495 $ — Liabilities Foreign exchange derivatives $ ( 2,530 ) $ — $ ( 2,530 ) $ — 11 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 $ 355.3 million and $ 354.8 million, was $ 378.0 million and $ 377.1 million as of February 29, 2024 and November 30, 2023, 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 2 in the fair value hierarchy. 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): February 29, 2024 November 30, 2023 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Purchased technology $ 280,000 $ ( 188,904 ) $ 91,096 $ 280,000 $ ( 181,045 ) $ 98,955 Customer-related 458,608 ( 238,217 ) 220,391 458,608 ( 221,362 ) 237,246 Trademarks and trade names 50,111 ( 33,589 ) 16,522 50,111 ( 32,034 ) 18,077 Total $ 788,719 $ ( 460,710 ) $ 328,009 $ 788,719 $ ( 434,441 ) $ 354,278 In the first quarter of fiscal years 2024 and 2023, amortization expense related to intangible assets was $ 25.2 million and $ 19.9 million, respectively. Future amortization expense for intangible assets as of February 29, 2024, is as follows (in thousands): Remainder of 2024 $ 63,887 2025 78,759 2026 68,677 2027 44,740 2028 33,157 Thereafter 38,789 Total $ 328,009 12 Goodwill Changes in the carrying amount of goodwill in the three months ended February 29, 2024 are as follows (in thousands): Balance, December 1, 2023 $ 832,101 Additions (1) 700 Translation adjustments 5 Balance, February 29, 2024 $ 832,806 (1) The additions to goodwill during fiscal year 2024 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 allocated to MarkLogic’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The excess of total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill. During the quarter ended February 29, 2024, the measurement period adjustments were completed, which resulted in a $ 0.7 million increase in goodwill. The purchase price allocation is now complete. The allocation of the purchase price is as follows (in thousands): Purchase Price Allocation Life Net working capital $ 46,335 Property, plant and equipment 723 Purchased technology 67,300 7 years Trade name 12,500 7 years Customer relationships 152,300 7 years Other assets, including long-term unbilled receivables 4,477 Deferred taxes ( 24,478 ) Deferred revenue ( 32,418 ) Goodwill 161,770 Net assets acquired $ 388,509 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. Tangible assets acquired and assumed liabilities were recorded at fair value. We determined the acquisition date deferred revenue balances based on our assessment of the individual contracts acquired. A significant portion of the deferred revenue was 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 $ 161.8 million of goodwill, which is not deductible for tax purposes. 13 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. The amount of revenue of MarkLogic included in our condensed consolidated statement of operations during the three months ended February 29, 2024 was approximately $ 31.7 million. The amount of revenue of MarkLogic included in our condensed consolidated statement of operations during the three months ended February 28, 2023 was not material. We determined that disclosing the amount of MarkLogic related earnings included in the condensed consolidated statements 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 $ 232.1 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 February 28, 2023 Revenue $ 203,076 Net income $ 32,888 Net income per basic share $ 0.76 Net income per diluted share $ 0.74 Note 7: Debt In March of 2024, the Company refinanced its debt by issuing 2030 Convertible Senior Notes (described below) and used the proceeds to pay off the outstanding balance of the term loan and revolving line of credit under our previous credit agreement. We also entered into an amended and restated credit facility. Accordingly, we classified the balance of the term loan on the balance sheet as long-term as of February 29, 2024. Notes Payable 2030 Convertible Senior Notes On March 1, 2024, the Company issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $ 450 million, due March 1, 2030 (the “2030 Convertible Notes”), unless earlier repurchased, redeemed or converted. The proceeds from the 2030 Convertible Notes were used in part to enter into the 2024 Capped Call Transactions (described below), working capital, and other general corporate purposes, including paying off the existing term loan and revolving line of credit. There are no required principal payments prior to the maturity of the 2030 Convertible Notes. The 2030 Convertible Notes bear interest at an annual rate of 3.5 %, payable semi-annually in arrears on September 1 and March 1 of each year, beginning on September 1, 2024. The Company incurred approximately $ 12.2 million in issuance costs for the issuance of the 2030 Convertible Notes. Conversion Rights Before November 1, 2029, Noteholders may convert their 2030 Convertible Notes in the following circumstances: • During any fiscal quarter commencing after the fiscal quarter ending on May 31, 2024, if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least twenty trading 14 days (whether or not consecutive) during the thirty consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter; or • During the five consecutive business days immediately after any ten consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of Company’s common stock on such trading day and the conversion rate on such trading day; or • Upon the occurrence of distributions on the Company’s common stock, which distribution per share of common stock has a value exceeding 10 % of the last reported sale price per share on the trading day immediately before the date such distribution is announced; or • Upon the occurrence of certain corporate events or if the Company calls such Notes for redemption, then the Noteholder of any Note may convert such Note. From and after November 1, 2029, Noteholders may convert their 2030 Convertible Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will satisfy its conversion obligations by paying cash up to the aggregate principal amount of 2030 Convertible Notes to be converted, by issuing shares of its common stock or a combination of cash and shares of its common stock, at its election. The initial conversion rate is 14.7622 shares of common stock per $1,000 principal amount of the 2030 Convertible Notes, representing an initial conversion price of approximately $ 67.74 per share of common stock. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, make-whole fundamental change and certain stockholder distributions. Repurchase Rights On or after March 5, 2027, and on or before the 60th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the 2030 Convertible Notes, subject to partial redemption limitation, at a repurchase price equal to the principal amount, plus accrued and unpaid interest, if the last reported sale price per share of the Company’s common stock exceeded 130 % of the conversion price on (1) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice and (2) the trading day immediately before the date the Company sends such notice. Pursuant to the partial redemption limitation, the Company may not elect to redeem less than all of the outstanding 2030 Convertible Notes unless at least $ 100.0 million aggregate principal amount of 2030 Convertible Notes are outstanding and not subject to redemption as of the time it sends the related redemption notice. If certain corporate events that constitute a “fundamental change” (as described below) occur at any time, holders may, subject to certain exceptions, require the Company to purchase their 2030 Convertible Notes in whole or in part for cash at a price equal to the principal amount of the 2030 Convertible Notes to be repurchased, plus accrued and unpaid interest, to, but excluding, the fundamental change repurchase date. A fundamental change relates to events such as business combination transactions involving the Company, shareholder approval of liquidation or dissolution of the Company, and certain de-listing events with respect to the Company’s common stock. 2024 Capped Call Transactions On February 27, 2024, in connection with the pricing of the 2030 Convertible Notes, the Company entered into privately negotiated capped call transactions (“2024 Capped Call Transactions”). The 2024 Capped Call Transactions cover approximately 6.6 million shares (representing the number of shares of common stock initially underlying the Notes) of the Company’s common stock. The 2024 Capped Call Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of 2030 Convertible Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the 2024 Capped Call Transactions will initially be $ 92.98 per share of common stock, which represents a premium of 75 % over the last reported sale price of the common stock of $ 53.13 per share on February 27, 2024, and is subject to certain adjustments under the terms of the 2024 Capped Call Transactions. The cost of the purchased capped calls of $ 42.2 million was recorded as a reduction to additional paid-in-capital upon settlement in March 2024. Credit Facility On March 7, 2024, the Company entered into an amended and restated credit agreement (the "Credit Agreement") with certain lenders, which provides a $ 900.0 million secured revolving credit facility. The revolving credit facility may be made available in U.S. Dollars and certain other currencies and may be increased, and new term loan commitments may be entered into, by up to an additional $ 260.0 million if the existing or additional lenders are willing to make such increased commitments. The 15 revolving credit facility has sublimits for swing line loans up to $ 25.0 million and for the issuance of standby letters of credit in a face amount up to $ 25.0 million. We expect to use the revolving credit facility for general corporate purposes. Interest rates for the revolving credit facility are determined by reference to a Term Benchmark Rate or a base rate at our option and would range from 1.50 % to 3.00 % above the Term Benchmark Rate for Term Benchmark-based borrowings or from 0.50 % to 2.00 % above the defined base rate for base rate borrowings, in each case based upon our consolidated total net leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective Term Benchmark Rates for those currencies, based on our consolidated total net leverage ratio. A quarterly commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.150 % to 0.400 % per annum, based upon our consolidated total net leverage ratio. The credit facility matures on March 7, 2029. The revolving credit facility does not require amortization of principal. Revolving loans may be borrowed, repaid and reborrowed until the maturity date, at which time all amounts outstanding must be repaid. Accrued interest on the loans is payable quarterly in arrears. Costs incurred to obtain our long-term debt of $ 6.0 million, along with $ 0.9 million of unamortized debt issuance costs related to the previous credit agreement, will be recorded as debt issuance costs and amortized over the term of the debt agreement using the effective interest method. Further, unamortized debt issuance costs related to the repaid term loan will be expensed in accordance with the accounting for a debt extinguishment. We are the sole borrower under the credit facility and our obligations under the Credit Agreement are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and each of our material domestic subsidiaries. The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, 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, a consolidated senior secured net leverage ratio and a consolidated total net leverage ratio. 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 29, 2024 and February 28, 2023, we repurchased and retired 0.4 million shares for $ 22.5 million and 0.3 million shares for $ 15.0 million, respectively. As of February 29, 2024, there was $ 171.5 million remaining under the current authorization. On March 1, 2024, the Company repurchased and retired 0.4 million shares for $ 25.0 million. Note 9: Stock-Based Compensation Stock-based compensation expense reflects the fair value of stock-based awards 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 either the current market price of the stock, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. 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 4 or 5 years for options and 3 or 4 years for restricted stock units, and adjust the expense each period for actual forfeitures. We recognize stock-based compensation expense related to performance stock units and our employee stock purchase plan using an accelerated attribution. In 2022, 2023 and 2024, 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 2022, 2023 and 2024 plans are based on the following: (i) 75 % is based on achievement of a three-year cumulative operating income, and (ii) 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. The vesting of LTIP awards is also subject to continued employment of the grantees through the performance period, except in the event of a qualifying termination. 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, less the present value of expected dividends when applicable, for the portion related to the performance condition. 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 February 29, 2024 February 28, 2023 Cost of maintenance and services $ 986 $ 620 Sales and marketing 2,312 1,495 Product development 3,665 2,998 General and administrative 5,501 4,639 Total stock-based compensation $ 12,464 $ 9,752 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 29, 2024 (in thousands): Foreign Currency Translation Adjustment Unrealized Losses on Investments Unrealized Gain (Losses) on Hedging Activity Accumulated Other Comprehensive Loss Balance, December 1, 2023 $ ( 33,234 ) $ ( 61 ) $ 1,135 $ ( 32,160 ) Other comprehensive loss before reclassifications, net of tax ( 1,546 ) — ( 690 ) ( 2,236 ) Balance, February 29, 2024 $ ( 34,780 ) $ ( 61 ) $ 445 $ ( 34,396 ) The tax effect on accumulated unrealized gains (losses) on hedging activity and unrealized losses on investments was a tax provision of $ 0.2 million and $ 0.4 million as of February 29, 2024 and November 30, 2023, 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 (In thousands) February 29, 2024 February 28, 2023 Performance obligations transferred at a point in time: Software licenses $ 64,100 $ 57,568 Performance obligations transferred over time: Maintenance 102,025 92,513 Services 18,560 14,145 Total revenue $ 184,685 $ 164,226 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 (In thousands) February 29, 2024 February 28, 2023 North America $ 107,282 $ 98,828 EMEA 63,087 53,405 Latin America 4,668 4,189 Asia Pacific 9,648 7,804 Total revenue $ 184,685 $ 164,226 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 29, 2024 and February 28, 2023. Contract Balances Unbilled Receivables and Contract Assets As of February 29, 2024, billing of our long-term unbilled receivables is expected to occur as follows (in thousands): 2025 $ 18,209 2026 13,538 2027 1,894 Total $ 33,641 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 29, 2024 or November 30, 2023. 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 condensed consolidated balance sheets. Our deferred revenue balance is primarily made up of deferred maintenance. As of February 29, 2024, the changes in net deferred revenue were as follows (in thousands): Balance, December 1, 2023 $ 295,036 Billings and other 185,782 Revenue recognized ( 184,685 ) Balance, February 29, 2024 $ 296,133 As of February 29, 2024, transaction price allocated to remaining performance obligations was $ 348 million. We expect to recognize approximately 75 % 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 $ 7.0 million and $ 7.6 million as of February 29, 2024 and November 30, 2023, 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, 2023 $ 3,297 $ 1,890 $ 5,187 Costs incurred 2,187 162 2,349 Cash disbursements ( 629 ) ( 1,380 ) ( 2,009 ) Translation and other adjustments — ( 4 ) ( 4 ) Balance, February 29, 2024 $ 4,855 $ 668 $ 5,523 In the three months ended February 29, 2024, costs incurred primarily related to a facility closure in connection with the restructuring action from the first fiscal quarter of 2023. We do not expect to incur additional material expenses as part of this action. 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 February 29, 2024 February 28, 2023 Net income $ 22,639 $ 23,674 Weighted average shares outstanding 43,802 43,300 Basic earnings per common share $ 0.52 $ 0.55 Diluted earnings per common share: Net income $ 22,639 $ 23,674 Weighted average shares outstanding 43,802 43,300 Effect of dilution from common stock equivalents 1,024 1,053 Diluted weighted average shares outstanding 44,826 44,353 Diluted earnings per share $ 0.51 $ 0.53 We excluded stock awards representing approximately 714,000 and 340,000 shares of common stock from the calculation of diluted earnings per share in the three months ended February 29, 2024 and February 28, 2023, 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 29, 2024, we did 19 not include the Notes in our diluted earnings per share calculation because the conversion feature in the Notes was out of the money. 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 incident. We do not expect to incur additional costs related to this incident as the investigation is closed. We incurred expenses of $ 2.7 million related this incident during the three months ended February 28, 2023. 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). A "zero-day vulnerability" is a vulnerability that has been publicly disclosed (e.g., by an independent researcher or threat actor) before the software vendor has an opportunity to patch it. 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 three months ended February 29, 2024. Litigation and Governmental Investigations As of the date of the issuance of the financial statements, (i) we have received formal letters from 35 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), which has resulted in the filing of a lawsuit in the District of Massachusetts, and (iii) we are party to approximately 127 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, which the Judicial Panel on Multidistrict Litigation transferred to the District of Massachusetts for coordinated and consolidated proceedings. We have also been cooperating with; (i) several inquiries from domestic and foreign data privacy regulators (as further described hereafter); (ii) several inquiries and two formal investigations from state attorneys general (as further described hereafter); (iii) a formal investigation from 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 governmental investigation of which we have been told that we are a target); and (iv) a formal investigation from 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 is cooperating fully with the SEC in its investigation. 20 On December 21, 2023, Progress received a preservation notice from the Federal Trade Commission (the "FTC"), but has not otherwise received a request for information nor is Progress aware of any formal FTC investigation. On January 18, 2024, Progress received a subpoena from the Office of the Attorney General for the District of Columbia seeking various documents and information relating to the MOVEit Vulnerability. At this stage, the investigation is a fact-finding inquiry, and the investigation does not mean that Progress or anyone else has violated applicable laws. Progress is cooperating fully with the Office of the Attorney General for the District of Columbia in its investigation. On February 9, 2024, Progress received a subpoena from the Office of the Attorney General for the State of New Jersey seeking various documents and information relating to the MOVEit Vulnerability. At this stage, the investigation is a fact-finding inquiry, and the investigation does not mean that Progress or anyone else has violated applicable laws. Progress is cooperating fully with the Office of the Attorney General for the State of New Jersey in its investigation. On November 3, 2023, the United Kingdom’s Information Commissioner’s Office informed Progress that based upon the information provided, the Commissioner’s Office determined that regulatory action against Progress was not required in relation to the MOVEit Vulnerability. Additionally, on March 14, 2024, the Office of the Australian Information Commissioner’s Office informed Progress that it has closed its file investigating the MOVEit Vulnerability. Expenses Incurred and Future Costs For the three months ended February 29, 2024, 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 $ 0.8 million. 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 insurance recoveries. While a loss from these matters is reasonably 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 February 29, 2024. In addition, we may accelerate or make additional investments in our information technology systems, infrastructure, software products or networks following the MOVEit Vulnerability, however, we currently do not expect such amounts to be material to any fiscal period. 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 February 29, 2024, we have recorded approximately $ 7.0 million in insurance recoveries, of which $ 2.5 million was related to the November 2022 cyber incident and $ 4.5 million was related to the May 2023 MOVEit Vulnerability, providing us with $ 8.0 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.