PROGRESS SOFTWARE CORP /MA 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements This Form 10-Q may contain information that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended; Section 21E of the Securities Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act of 1995. Whenever we use words such as "believe," "may," "could," "would," "might," "should," "expect," "intend," "plan," "estimate," "target," "anticipate" and negatives and derivatives of these or similar expressions, or when we make statements concerning future financial results, product offerings or other events that have not yet occurred, we are making forward-looking statements. Actual future results may differ materially from those contained in or implied by our forward-looking statements due to various factors which are more fully described in Part I, Item 1A. Risk Factors in our 2023 Annual Report as well as the risk factors described in Part II, Item 1A of this Report on Form 10-Q. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues that we might face. We undertake no obligation to update any forward-looking statements that we make. Overview Progress provides enterprise software products for the development, deployment and management of responsible, AI-powered applications and experiences. Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates. The most significant estimates relate to revenue recognition, loss contingencies and the MOVEit Vulnerability, and business combinations. For further information regarding the application of these and other accounting policies, see Note 1: Basis of Presentation to our Consolidated Financial Statements in Item 8 of our 2023 Annual Report. There have been no significant changes to our critical accounting policies and estimates since our 2023 Annual Report. Use of Constant Currency Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S. dollars are positively impacted. As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. 24 Results of Operations Revenue Three Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Revenue $ 175,077 $ 178,251 (2) % (2) % Six Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Revenue $ 359,762 $ 342,477 5 % 5 % Total revenue was relatively flat across all of our product offerings in the second quarter of fiscal year 2024 as compared to the same period last year. Compared to prior year, total revenue increased in the first six months of fiscal year 2024 due to MarkLogic as the current period includes activity for the full six months to date, whereas the prior period only included revenue from the acquisition in February 2023. These increases were partially offset by a decrease in our DataDirect product offering as a result of the timing of renewals on multiyear subscription contracts. Software License Revenue Three Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Software licenses $ 53,979 $ 56,407 (4) % (4) % As a percentage of total revenue 31 % 32 % Six Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Software licenses $ 118,079 $ 113,975 4 % 3 % As a percentage of total revenue 33 % 33 % Software license revenue was relatively flat across all of our product offerings in the second quarter and first six months of fiscal year 2024 as compared to the same periods last year. MarkLogic revenue is reflected in our results for the first six months of fiscal year 2024, whereas the prior period only includes revenue from the date of acquisition. 25 Maintenance and Services Revenue Three Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Maintenance $ 102,503 $ 102,240 — % — % As a percentage of total revenue 59 % 57 % Services 18,595 19,604 (5) % (5) % As a percentage of total revenue 11 % 11 % Total maintenance and services revenue $ 121,098 $ 121,844 (1) % (1) % As a percentage of total revenue 69 % 68 % Six Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency Maintenance $ 204,528 $ 194,753 5 % 5 % As a percentage of total revenue 57 % 57 % Services 37,155 33,749 10 % 10 % As a percentage of total revenue 10 % 10 % Total maintenance and services revenue $ 241,683 $ 228,502 6 % 5 % As a percentage of total revenue 67 % 67 % Maintenance and services revenue remained relatively flat in the second quarter of fiscal year 2024 as compared to the same period last year. Maintenance and services revenue increased in the first six months of fiscal year 2024 as compared to the same period last year primarily due to our acquisition of MarkLogic. 26 Revenue by Region Three Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency North America $ 102,902 $ 105,732 (3) % (3) % As a percentage of total revenue 59 % 59 % Europe, the Middle East and Africa ("EMEA") $ 57,538 $ 56,185 2 % 2 % As a percentage of total revenue 33 % 32 % Latin America $ 4,599 $ 4,790 (4) % (4) % As a percentage of total revenue 3 % 3 % Asia Pacific $ 10,038 $ 11,544 (13) % (12) % As a percentage of total revenue 5 % 6 % Six Months Ended % Change (in thousands) May 31, 2024 May 31, 2023 As Reported Constant Currency North America $ 210,184 $ 204,560 3 % 3 % As a percentage of total revenue 58 % 60 % Europe, the Middle East and Africa ("EMEA") $ 120,625 $ 109,590 10 % 9 % As a percentage of total revenue 34 % 32 % Latin America $ 9,267 $ 8,979 3 % 2 % As a percentage of total revenue 3 % 3 % Asia Pacific $ 19,686 $ 19,348 2 % 3 % As a percentage of total revenue 5 % 5 % Total revenue generated in North America decreased $2.8 million and increased $5.6 million in the second quarter and first six months of fiscal year 2 024, respectively. The increase in the first six months of fiscal year 2024 in North America was primarily due to the timing of our acquisition of MarkLogic, as described above. Total revenue generated in EMEA increased $1.4 million and $11.0 million in the second quarter and first six months of fiscal year 2024, respectively. These increases were primarily due to an increase in our DataDirect product offering as a result of the timing of renewals on multiyear subscription contracts. Total revenue in Latin America and Asia Pacific remained relatively flat in all periods presented. In the first six months of fiscal year 2024 revenue generated in markets outside North America represented 42% of total revenue compared to 41% of total revenue on a constant currency basis. In the first six months of fiscal year 2023 revenue generated in markets outside North America represented 40% of total revenue compared to 41% of total revenue on a constant currency basis. Cost of Software Licenses Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Change May 31, 2024 May 31, 2023 Change Cost of software licenses $ 2,497 $ 2,814 $ (317) (11) % $ 5,228 $ 5,266 $ (38) (1) % As a percentage of software license revenue 5 % 5 % 4 % 5 % Cost of software licenses consists primarily of costs of inventories, royalties, electronic software distribution, duplication, and packaging. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix . 27 Cost of Maintenance and Services Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Change May 31, 2024 May 31, 2023 Change Cost of maintenance and services $ 22,176 $ 22,970 $ (794) (3) % $ 44,395 $ 40,471 $ 3,924 10 % As a percentage of maintenance and services revenue 18 % 19 % 18 % 18 % Components of cost of maintenance and services: Personnel related costs $ 16,770 $ 16,646 $ 124 1 % $ 33,814 $ 29,789 $ 4,025 14 % Contractors and outside services 3,502 4,117 (615) (15) % 6,911 6,817 94 1 % Hosting and other 1,904 2,207 (303) (14) % 3,670 3,865 (195) (5) % Total cost of maintenance and services $ 22,176 $ 22,970 $ (794) (3) % $ 44,395 $ 40,471 $ 3,924 10 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. The decrease in the second quarter of fiscal year 2024 was primarily due to decreased contractor and outside services costs and decreased hosting costs. The increase in first six months of fiscal year 2024 is due to increased personnel related costs resulting from our acquisition of MarkLogic. Amortization of Intangibles Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Amortization of intangibles $ 7,398 $ 7,994 (7) % $ 15,257 $ 14,258 7 % As a percentage of total revenue 4 % 4 % 4 % 4 % Amortization of intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. The decrease in the second quarter of fiscal year 2024 is due to certain intangible assets becoming fully amortized in the period. The year over year increase in the first six months of fiscal year 2024 is due to the acquisition of MarkLogic. Gross Profit Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Gross profit $ 143,006 $ 144,473 (1) % $ 294,882 $ 282,482 4 % As a percentage of total revenue 82 % 81 % 82 % 82 % Our gross profit decreased slightly in the second quarter of fiscal year 2024 as compared to the same period last year due to the decreases in revenue, offset by the decreases in costs of software licenses, costs of maintenance and services and the amortization of intangibles, each as described above. Our gross profit increased in the first six months of fiscal year 2024 as compared to the same period last year due to the increases in revenue, offset by the increases in costs of maintenance and services and the amortization of intangibles, each as described above. 28 Sales and Marketing Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Change May 31, 2024 May 31, 2023 Change Sales and marketing $ 37,889 $ 40,147 $ (2,258) (6) % $ 77,000 $ 73,901 $ 3,099 4 % As a percentage of total revenue 22 % 23 % 21 % 22 % Components of sales and marketing: Personnel related costs $ 33,241 $ 34,329 $ (1,088) (3) % $ 66,334 $ 64,324 $ 2,010 3 % Contractors and outside services 837 1,510 (673) (45) % 1,430 2,206 (776) (35) % Marketing programs and other 3,811 4,308 (497) (12) % 9,236 7,371 1,865 25 % Total sales and marketing $ 37,889 $ 40,147 $ (2,258) (6) % $ 77,000 $ 73,901 $ 3,099 4 % Sales and marketing expenses decreased in the second quarter of fiscal year 2024 due to decreased personnel related costs, contractors and outside services costs, and marketing and sales events costs. Sales and marketing expenses increased in the first six months of fiscal year 2024 primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as increases in marketing and sales events costs, partially offset by decreases in contractors and outside services costs. Product Development Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Change May 31, 2024 May 31, 2023 Change Product development costs $ 35,435 $ 34,820 $ 615 2 % $ 70,423 $ 65,258 $ 5,165 8 % As a percentage of total revenue 20 % 20 % 20 % 19 % Components of product development costs: Personnel related costs $ 34,151 $ 33,516 $ 635 2 % $ 67,747 $ 63,119 $ 4,628 7 % Contractors and outside services 1,161 1,118 43 4 % 2,243 1,791 452 25 % Other product development costs 123 186 (63) (34) % 433 348 85 24 % Total product development costs $ 35,435 $ 34,820 $ 615 2 % $ 70,423 $ 65,258 $ 5,165 8 % Product development expenses increased in the second quarter of fiscal year 2024 as compared to the same period in the prior year primarily due to increased personnel related costs. Product development expenses increased in the first six months of fiscal year 2024 primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as an increase in contractors and outside services costs. 29 General and Administrative Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Change May 31, 2024 May 31, 2023 Change General and administrative $ 21,983 $ 21,469 $ 514 2 % $ 43,327 $ 40,255 $ 3,072 8 % As a percentage of total revenue 13 % 12 % 12 % 12 % Components of general and administrative: Personnel related costs $ 17,963 $ 17,142 $ 821 5 % $ 35,926 $ 33,276 $ 2,650 8 % Contractors and outside services 2,602 3,292 (690) (21) % 5,177 5,679 (502) (9) % Other general and administrative costs 1,418 1,035 383 37 % 2,224 1,300 924 71 % Total cost of general and administrative $ 21,983 $ 21,469 $ 514 2 % $ 43,327 $ 40,255 $ 3,072 8 % General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in all periods primarily due to higher personnel costs and other general and administrative costs. These increases were offset by decreases in contractors and outside services costs in all periods. Amortization of Intangibles Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Amortization of intangibles $ 16,316 $ 17,546 (7) % $ 33,705 $ 31,157 8 % As a percentage of total revenue 9 % 10 % 9 % 9 % Amortization of intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. The decrease in the second quarter of fiscal year 2024 is due to certain intangible assets becoming fully amortized in the period. Amortization of intangibles increased in the first six months of fiscal year 2024 due to the addition of MarkLogic intangible assets, as discussed above. Cyber Incident and Vulnerability Response Expenses, Net Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Cyber incident and vulnerability response expenses, net $ 3,036 $ 1,483 105 % $ 4,023 $ 4,175 (4) % As a percentage of total revenue 2 % 1 % 1 % 1 % As previously disclosed, following (i) the detection of irregular activity on certain portions of our corporate network that was disclosed on December 19, 2022, and (ii) the discovery of the MOVEit Vulnerability that was disclosed on June 5, 2023, in each instance, we engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of these matters. Cyber incident and MOVEit Vulnerability costs relate to the engagement of external cybersecurity experts and other incident response professionals and are net of received and expected insurance recoveries. 30 Restructuring Expenses Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Restructuring expenses $ 651 $ 3,990 (84) % $ 3,000 $ 5,387 (44) % As a percentage of total revenue — % 2 % 1 % 2 % Restructuring expenses recorded in the first six months of fiscal year 2024 primarily relate to a facility closure in connection with the restructuring action from the first fiscal quarter of 2023, related to the MarkLogic acquisition. Restructuring expenses recorded in the first six months of fiscal year 2023 relate to headcount reduction from the same action. Acquisition-Related Expenses Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Acquisition-related expenses $ 548 $ 1,991 (72) % $ 1,250 $ 3,734 (67) % As a percentage of total revenue — % 1 % — % 1 % Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs consist of professional service fees, including third-party legal and valuation-related fees. Acquisition-related expenses in the first six months of fiscal year 2024 were primarily related to our pursuit of other acquisition opportunities. Acquisition-related expenses in the same periods of fiscal year 2023 were primarily related to our acquisition of MarkLogic. Income from Operations Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Income from operations $ 27,148 $ 23,027 18 % $ 62,154 $ 58,615 6 % As a percentage of total revenue 16 % 13 % 17 % 17 % Income from operations increased in the second quarter of fiscal year 2024 due to a decrease in costs of revenue and operating expenses, offset by decreased revenue, as shown above. Income from operations increased in the first six months of fiscal year 2024 due to an increase in revenue, partially offset by an increase in costs of revenue and operating expenses, as shown above. Other (Expense) Income Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Interest expense $ (7,007) $ (8,514) (18) % $ (14,351) $ (14,362) — % Interest income and other, net 928 592 57 % 1,552 1,107 40 % Foreign currency loss, net (941) (496) 90 % (1,620) (827) 96 % Total other expense, net $ (7,020) $ (8,418) (17) % $ (14,419) $ (14,082) 2 % As a percentage of total revenue (4) % (5) % (4) % (4) % Other expense, net, decreased in the second quarter of fiscal year 2024 due to lower interest rates as a result of our debt refinancing, in which we issued the 2030 Notes and entered into an amended and restated credit facility. Please refer to Note 7: Debt for further discussion. Interest income and other, net, was higher in fiscal year 2024, resulting from higher interest rates on our invested cash balance. We expect interest income to continue growing during fiscal year 2024. Foreign currency loss increased year over year due to rate volatility and timing of intercompany and hedge settlement activitie s. 31 Provision for Income Taxes Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Provision for income taxes $ 3,940 $ 2,519 56 % $ 8,908 $ 8,769 2 % As a percentage of income before income taxes 20 % 17 % 19 % 20 % Our effective tax rate was 20% and 17% in the second fiscal quarter of 2024 and 2023, respectively. The primary reason for the increase in the effective rate was due to discrete tax benefits related to stock-based compensation and the reversal of an uncertain tax position due to an audit settlement in the second fiscal quarter of 2023. There were no significant discrete tax items in the second fiscal quarter of 2024. Net Income Three Months Ended Six Months Ended (in thousands) May 31, 2024 May 31, 2023 % Change May 31, 2024 May 31, 2023 % Change Net income $ 16,188 $ 12,090 34 % $ 38,827 $ 35,764 9 % As a percentage of total revenue 9 % 7 % 11 % 10 % Select Performance Metrics: Management evaluates our financial performance using a number of financial and operating metrics. These metrics are periodically reviewed and revised to reflect changes in our business. Annualized Recurring Revenue ("ARR") We disclose ARR as a performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources currently represents the substantial majority of our revenues and is expected to continue in the future. We define ARR as the annualized revenue of all active and contractually binding term-based contracts from all customers at a point in time. ARR includes revenue from maintenance, software upgrade rights, public cloud, and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations in revenue due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. Management uses ARR to understand customer trends and the overall health of the Company’s business, helping it to formulate strategic business decisions. We calculate the annualized value of annual and multi-year contracts, and contracts with terms less than one year, by dividing the total contract value of each contract by the number of months in the term and then multiplying by 12. Annualizing contracts with terms less than one-year results in amounts being included in our ARR that are in excess of the total contract value for those contracts at the end of the reporting period. We generally do not sell contracts with a term of less than one year unless a customer is purchasing additional licenses under an existing annual or multi-year contract. The expectation is that at the time of renewal, contracts with a term less than one year will renew with the same term as the existing contracts being renewed, such that both contracts are co-termed. Historically contracts with a term of less than one year renew at rates equal to or better than annual or multi-year contracts. Revenue from term-based license and on-premises subscription arrangements include a portion of the arrangement consideration that is allocated to the software license that is recognized up-front at the point in time control is transferred under ASC 606 revenue recognition principles. ARR for these arrangements is calculated as described above. The expectation is that the total contract value, inclusive of revenue recognized as software license, will be renewed at the end of the contract term. The calculation is done at constant currency using the current year budgeted exchange rates for all periods presented. ARR is not defined in GAAP and is not derived from a GAAP measure. Rather, ARR generally aligns to billings (as opposed to GAAP revenue which aligns to the transfer of control of each performance obligation). ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. 32 Our ARR was $579.0 million and $574.0 million as of May 31, 2024 and May 31, 2023, respectively, which is an increase of 1% year-over-year. Net Retention Rate We calculate net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end ("Prior Period ARR"). We then calculate the ARR from these same customers as of the current period end ("Current Period ARR"). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net retention rate. Net retention rate is not defined in accordance with GAAP. Our net retention rates have generally ranged between 99% and 102% for all periods presented. Our high net retention rates illustrate our predictable and durable top line performance. Liquidity and Capital Resources Cash and Cash Equivalents (in thousands) May 31, 2024 November 30, 2023 Cash and cash equivalents $ 190,420 $ 126,958 The increase in cash and cash equivalents of $63.5 million from the end of fiscal year 2023 was due to proceeds from the issuance of convertible senior notes of $396.5 million (net of purchases of capped calls in connection with the convertible notes offering of $42.2 million and issuance costs of $11.2 million), cash inflows from operations of $134.2 million, and $2.3 million in cash received from the issuance of common stock. We refinanced our debt by issuing the convertible senior notes and used the proceeds to pay off the outstanding balance of the term loan and revolving line of credit under our previous credit agreement. As such, the cash inflows described above were offset by cash outflows of $261.3 million to pay off the balance of the term loan, $110.0 million to pay off the revolving line of credit, repurchases of common stock of $72.5 million, dividend payments of $16.1 million, payment of debt issuance costs of $6.8 million, the effect of exchange rates on cash of $1.7 million, and purchases of property and equipment of $1.3 million. Except as described below, there are no limitations on our ability to access our cash and cash equivalents. As of May 31, 2024, $76.0 million of our cash and cash equivalents was held by our foreign subsidiaries. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S. As such, the foreign cash is not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject to U.S. income tax. However, we do not anticipate that this would have a material adverse impact on our liquidity. Share Repurchase Program In January 2023, our Board of Directors increased our share repurchase authorization by $150 million, to an aggregate authorization of $228.0 million. In the three months ended May 31, 2024 and May 31, 2023, we repurchased and retired 1.0 million shares for $49.9 million and 0.3 million shares for $15.0 million, respectively. In the six months ended May 31, 2024 and May 31, 2023, we repurchased and retired 1.4 million shares for $72.4 million and 0.5 million shares for $30.0 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of May 31, 2024, there was $121.5 million remaining under the current authorization. Dividends On June 17, 2024, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock, which will be paid on September 16, 2024 to stockholders of record as of the close of business on September 2, 2024. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. Restructuring Activities See Note 12: Restructuring Charges to the condensed consolidated financial statements. 33 Long-term Debt and Credit Facility See Note 7: Debt to the condensed consolidated financial statements. Cash Flows From Operating Activities Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Net income $ 38,827 $ 35,764 Non-cash reconciling items included in net income 80,041 63,423 Changes in operating assets and liabilities 15,317 (4,469) Net cash flows from operating activities $ 134,185 $ 94,718 In the first six months of fiscal year 2024, operating cash flows increased due to higher billings and collections. Our gross accounts receivable as of May 31, 2024, decreased by $43.4 million from the end of fiscal year 2023. Our days sales outstanding (DSO) in accounts receivable decreased to 41 days from 44 days in the second fiscal quarter of 2023 due to the timing of billings. Cash Flows Used in Investing Activities Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Net investment activity $ — $ 438 Purchases of property and equipment (1,264) (1,969) Payments for acquisitions, net of cash acquired — (356,096) Net cash flows used in investing activities $ (1,264) $ (357,627) Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities. In the first six months of fiscal year 2024, we purchased $1.3 million of property and equipment. In the first six months of fiscal year 2023 we had payments for acquisitions net of cash acquired of $356.1 million, and $2.0 million of purchases of property and equipment. Cash Flows (Used in) From Financing Activities Six Months Ended (in thousands) May 31, 2024 May 31, 2023 Proceeds from stock-based compensation plans $ 12,896 $ 16,365 Repurchases of common stock (72,449) (30,000) Proceeds from issuance of senior convertible notes, net of issuance costs of $11,200 438,750 — Purchase of capped calls (42,210) — Proceeds from the issuance of debt — 195,000 Repayment of revolving line of credit (110,000) (25,000) Principal payment on term loan (261,250) (3,437) Dividend payments to stockholders (16,122) (15,871) Other financing activities (10,592) (8,101) Payment of credit facility debt issuance costs (6,821) — Net cash flows (used in) from financing activities $ (67,798) $ 128,956 We received $12.9 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $16.4 million in the first six months of fiscal year 2023. During the second quarter of fiscal year 2024, we received net proceeds from the issuance of debt of $51.9 million (we refinanced our debt by issuing the convertible senior notes and used the proceeds to pay off the outstanding balance of the term loan and revolving line of credit under our previous credit 34 agreement, each as described above). In the first quarter of fiscal year 2024 we made payments on our long-term debt of $33.4 million (including a $30.0 million repayment on the revolving line of credit). In the first six months of fiscal year 2023 we received $195.0 million in net proceeds from the issuance of debt to partially fund the acquisition of MarkLogic and we also made payments on our long-term debt of $28.4 million (including a $25.0 million repayment on the revolving line of credit). Further, we repurchased $72.5 million of our common stock under our share repurchase plan compared to $30.0 million in the same period of the prior year. Finally, we made dividend payments of $16.1 million to our stockholders during the first six months of fiscal year 2024 and $15.9 million in the first six months of fiscal year 2023. Liquidity Outlook Cash from operations in fiscal year 2024 could be affected by various risks and uncertainties, including, but not limited to, the effects of various risks detailed in Part I, Item 1A. Risk Factors in our 2023 Annual Report, including increased disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources in the future. However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S. Our foreseeable cash needs include capital expenditures, acquisitions, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations. Legal and Other Regulatory Matters 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 and/or exploited (e.g., by an independent researcher or threat actor) before the software vendor has an opportunity to patch it. The investigative team determined that the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as (ii) for a small group of customers, in customer-dedicated cloud instances that are hosted, separate and apart from the public instances of our MOVEit Cloud platform). We promptly took down MOVEit Cloud for further investigation and notified all then-known current and former MOVEit Transfer and MOVEit Cloud customers in order to apprise them of the MOVEit Vulnerability and alert them to immediate remedial actions. In parallel, our team developed a patch for all supported versions of MOVEit Transfer and MOVEit Cloud, which was released on May 31, 2023, and allowed for the restoration of MOVEit Cloud that same day. We are subject to litigation and governmental investigations related to the MOVEit Vulnerability, for which we have incurred expenses and will incur future costs. We expect our exposure to such expenses and liabilities to be reduced by insurance. Please refer to Note 15: Cyber Related Matters to the Consolidated Financial Statements included in Item 1, Financial Statements for additional details and updates regarding the MOVEit Vulnerability. Recent Accounting Pronouncements Refer to Note 1: Basis of Presentation (Part I, Item 1 of this Form 10-Q) for further discussion.