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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to _____.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware 04-2746201
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

15 Wayside Road, Suite 400
Burlington, Massachusetts 01803
(Address of principal executive offices) (Zip code)

(781280-4000
(Registrant’s telephone number, including area code)

Not applicable
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per sharePRGSThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer 
Non-accelerated filer 
(Do not check if a smaller reporting company)Smaller reporting company 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  
As of June 29, 2023, there were 43,365,973 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2023
TABLE OF CONTENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
(In thousands, except share data)May 31, 2023November 30, 2022
Assets
Current assets:
Cash and cash equivalents$125,531 $256,277 
Accounts receivable (less allowances of $701 and $859, respectively)
87,183 97,834 
Unbilled receivables32,958 29,158 
Other current assets35,410 42,784 
Total current assets281,082 426,053 
Long-term unbilled receivables38,727 39,936 
Property and equipment, net14,655 14,927 
Intangible assets, net404,515 217,355 
Goodwill825,944 671,037 
Right-of-use lease assets23,396 17,574 
Deferred tax assets4,374 11,765 
Other assets9,192 12,832 
Total assets$1,601,885 $1,411,479 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt, net$9,671 $6,234 
Accounts payable7,162 9,282 
Accrued compensation and related taxes34,258 42,467 
Dividends payable to stockholders8,192 8,115 
Short-term operating lease liabilities10,090 7,471 
Other accrued liabilities26,514 16,765 
Short-term deferred revenue, net227,607 227,670 
Total current liabilities323,494 318,004 
Long-term debt, net422,666 259,220 
Convertible senior notes, net353,696 352,625 
Long-term operating lease liabilities17,654 15,041 
Long-term deferred revenue, net56,030 54,770 
Deferred tax liabilities4,547 4,628 
Other noncurrent liabilities4,983 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, 43,357,557 shares in 2023 and 43,257,008 shares in 2022
436 433 
Additional paid-in capital347,101 331,650 
Retained earnings103,995 101,656 
Accumulated other comprehensive loss(32,717)(35,235)
Total stockholders’ equity418,815 398,504 
Total liabilities and stockholders’ equity$1,601,885 $1,411,479 
See notes to unaudited condensed consolidated financial statements.
3


Condensed Consolidated Statements of Operations
 
 Three Months EndedSix Months Ended
(In thousands, except per share data)May 31, 2023May 31, 2022May 31, 2023May 31, 2022
Revenue:
Software licenses$56,407 $44,814 $113,975 $87,564 
Maintenance and services121,844 103,933 228,502 206,105 
Total revenue178,251 148,747 342,477 293,669 
Costs of revenue:
Cost of software licenses2,814 2,583 5,266 5,192 
Cost of maintenance and services22,970 15,801 40,471 30,946 
Amortization of acquired intangibles7,994 5,573 14,258 11,031 
Total costs of revenue33,778 23,957 59,995 47,169 
Gross profit144,473 124,790 282,482 246,500 
Operating expenses:
Sales and marketing40,147 32,704 73,901 66,173 
Product development34,820 28,643 65,258 57,316 
General and administrative21,469 19,207 40,255 36,198 
Amortization of acquired intangibles17,546 11,892 31,157 23,614 
Cyber incident and vulnerability response expenses, net1,483  4,175  
Restructuring expenses3,990 143 5,387 654 
Acquisition-related expenses1,991 2,736 3,734 3,648 
Gain on sale of assets held for sale (10,770) (10,770)
Total operating expenses121,446 84,555 223,867 176,833 
Income from operations23,027 40,235 58,615 69,667 
Other (expense) income:
Interest expense(8,514)(3,656)(14,362)(7,359)
Interest income and other, net592 155 1,107 744 
Foreign currency loss, net(496)111 (827)(255)
Total other expense, net(8,418)(3,390)(14,082)(6,870)
Income before income taxes14,609 36,845 44,533 62,797 
Provision for income taxes2,519 7,735 8,769 13,233 
Net income$12,090 $29,110 $35,764 $49,564 
Earnings per share:
Basic$0.28 $0.67 $0.83 $1.13 
Diluted$0.27 $0.66 $0.81 $1.11 
Weighted average shares outstanding:
Basic43,343 43,575 43,321 43,778 
Diluted44,470 44,253 44,411 44,480 
Cash dividends declared per common share$0.175 $0.175 $0.350 $0.350 
See notes to unaudited condensed consolidated financial statements.
4


Condensed Consolidated Statements of Comprehensive Income
Three Months EndedSix Months Ended
(In thousands)May 31, 2023May 31, 2022May 31, 2023May 31, 2022
Net income$12,090 $29,110 $35,764 $49,564 
Other comprehensive income, net of tax:
Foreign currency translation adjustments1,720 (5,104)3,457 (3,323)
Unrealized gain on hedging activity, net of tax benefit of $250 and $295 for the second quarter and first six months of 2023, respectively and net of tax provision of $643 and $1,165 for the second quarter and first six months of 2022, respectively
(812)2,038 (939)3,691 
Unrealized loss on investments, net of tax benefit of $4 and $0 for the second quarter and first six months of 2023, respectively and net of a tax benefit of $1 and $4 for the second quarter and first six months of 2022, respectively
21 (5) (12)
Total other comprehensive income, net of tax929 (3,071)2,518 356 
Comprehensive income$13,019 $26,039 $38,282 $49,920 

See notes to unaudited condensed consolidated financial statements.

5


Condensed Consolidated Statements of Stockholders’ Equity
 
Six Months Ended May 31, 2023
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, December 1, 202243,257 $433 $331,650 $101,656 $(35,235)$398,504 
Issuance of stock under employee stock purchase plan145 2 5,268 — — 5,270 
Exercise of stock options260 3 10,766 — — 10,769 
Vesting of restricted stock units and release of deferred stock units378 4 (4)— —  
Withholding tax payments related to net issuance of RSUs(147)(1)(8,100)— — (8,101)
Stock-based compensation— — 20,039 — — 20,039 
Dividends declared— — — (15,948)— (15,948)
Treasury stock repurchases and retirements(535)(5)(12,518)(17,477)— (30,000)
Net income— — — 35,764 — 35,764 
Other comprehensive income— — — — 2,518 2,518 
Balance, May 31, 202343,358 $436 $347,101 $103,995 $(32,717)$418,815 

Three Months Ended May 31, 2023
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, March 1, 202343,307 $433 $338,370 $108,286 $(33,646)$413,443 
Issuance of stock under employee stock purchase plan95 1 3,482 — — 3,483 
Exercise of stock options119 2 4,764 — — 4,766 
Vesting of restricted stock units and release of deferred stock units163 2 (2)— —  
Withholding tax payments related to net issuance of RSUs(57)— (3,284)— — (3,284)
Stock-based compensation— — 10,287 — — 10,287 
Dividends declared— — — (7,899)— (7,899)
Treasury stock repurchases and retirements(269)(2)(6,516)(8,482)— (15,000)
Net income— — — 12,090 — 12,090 
Other comprehensive income— — — — 929 929 
Balance, May 31, 202343,358 $436 $347,101 $103,995 $(32,717)$418,815 

6


Six Months Ended May 31, 2022
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, December 1, 202144,146 $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 plan178 2 5,211 — — 5,213 
Exercise of stock options60 1 2,235 — — 2,236 
Vesting of restricted stock units and release of deferred stock units188 2 (2)— —  
Withholding tax payments related to net issuance of RSUs— — (5,405)— — (5,405)
Stock-based compensation— — 17,471 — — 17,471 
Dividends declared— — — (15,742)— (15,742)
Treasury stock repurchases and retirements(1,118)(11)(16,376)(35,086)— (51,473)
Net income— — — 49,564 — 49,564 
Other comprehensive income— — — — 356 356 
Balance, May 31, 202243,454 $435 $309,913 $93,885 $(32,087)$372,146 

Three Months Ended May 31, 2022
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, March 1, 202243,766 $438 $303,240 $93,661 $(29,016)$368,323 
Issuance of stock under employee stock purchase plan115 1 3,385 — — 3,386 
Exercise of stock options41 1 1,600 — — 1,601 
Vesting of restricted stock units and release of deferred stock units98 1 (1)— —  
Withholding tax payments related to net issuance of RSUs— — (2,266)— — (2,266)
Stock-based compensation— — 9,357 — — 9,357 
Dividends declared— — — (7,821)— (7,821)
Treasury stock repurchases and retirements(566)(6)(5,402)(21,065)— (26,473)
Net income— — — 29,110 — 29,110 
Other comprehensive loss— — — — (3,071)(3,071)
Balance, May 31, 202243,454 $435 $309,913 $93,885 $(32,087)$372,146 


7


Condensed Consolidated Statements of Cash Flows
 
 Six Months Ended
(In thousands)May 31, 2023May 31, 2022
Cash flows from operating activities:
Net income$35,764 $49,564 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment3,171 2,432 
Amortization of acquired intangibles and other45,298 35,111 
Amortization of debt discount and issuance costs on Notes1,071 1,054 
Stock-based compensation20,039 17,471 
Non-cash lease expense4,707 4,033 
Loss on disposal of long-lived assets, net 8 
Gain on sale of assets held for sale (10,770)
Deferred income taxes(11,036)1,735 
Allowances for bad debt and sales credits173 339 
Changes in operating assets and liabilities:
Accounts receivable36,685 19,894 
Other assets13,066 6,833 
Inventories1,496 738 
Accounts payable and accrued liabilities(18,822)(20,330)
Lease liabilities(5,138)(4,337)
Income taxes payable2,177 (200)
Deferred revenue, net(33,933)8,778 
Net cash flows from operating activities94,718 112,353 
Cash flows (used in) from investing activities:
Purchases of investments(15,262) 
Sales and maturities of investments15,700 900 
Purchases of property and equipment(1,969)(1,979)
Payments for acquisitions, net of cash acquired(356,096) 
Proceeds from sale of long-lived assets, net 25,998 
Net cash flows (used in) from investing activities(357,627)24,919 
Cash flows from (used in) financing activities:
Proceeds from stock-based compensation plans16,365 7,771 
Payments for taxes related to net share settlements of equity awards(8,101)(5,405)
Repurchases of common stock(30,000)(51,473)
Dividend payments to stockholders(15,871)(15,573)
Proceeds from the issuance of debt195,000 7,474 
Repayment of revolving line of credit(25,000) 
Principal payment on term loan(3,437)(3,435)
Payment of debt issuance costs (1,957)
Net cash flows from (used in) financing activities128,956 (62,598)
Effect of exchange rate changes on cash and cash equivalents3,207 (5,217)
Net (decrease) increase in cash and cash equivalents(130,746)69,457 
Cash and cash equivalents, beginning of period256,277 155,406 
Cash and cash equivalents, end of period$125,531 $224,863 
8


Condensed Consolidated Statements of Cash Flows, continued
Six Months Ended
May 31, 2023May 31, 2022
Supplemental disclosure:
Cash paid for income taxes, net of refunds of $841 in 2023 and $364 in 2022
$5,953 $4,982 
Cash paid for interest$10,796 $3,291 
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$8,192 $8,094 
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") is dedicated to propelling business forward in a technology-driven world. Progress helps customers drive faster cycles of innovation, fuel momentum and accelerate their path to success. As the trusted provider of products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences they need, deploy where and how they want and manage it all safely and securely.

Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally independent software vendors ("ISVs"), original equipment manufacturers ("OEMs"), distributors and value-added resellers. ISVs develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices. Value-added resellers are companies that add features or services to our product, then resell it as an integrated product or complete "turn-key" solution.

We operate in North America, Latin America, Europe, the Middle East and Africa ("EMEA"), and Asia and Australia ("Asia Pacific"), through local subsidiaries as well as independent distributors.

Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2022, as filed with the SEC on January 27, 2023 (our "2022 Annual Report").

We made no material changes in the application of our significant accounting policies that were disclosed in our 2022 Annual Report. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2022 Annual Report, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to revenue recognition and business combinations. Actual results could differ from those estimates.

10


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.

Note 2: Cash and Cash Equivalents

A summary of our cash and cash equivalents at May 31, 2023 is as follows (in thousands):
 
Amortized Cost BasisUnrealized GainsUnrealized LossesFair Value
Cash$125,422 $— $— $125,422 
Money market funds109 — — 109 
Total$125,531 $ $ $125,531 

A summary of our cash and cash equivalents at November 30, 2022 is as follows (in thousands):
 
Amortized Cost BasisUnrealized GainsUnrealized LossesFair Value
Cash$229,023 $— $— $229,023 
Money market funds27,254 — — 27,254 
Total$256,277 $ $ $256,277 

There were no debt securities by contractual maturity due after one year as of May 31, 2023.

11


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 interest 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 May 31, 2023, the fair value of the hedge was a gain of $3.2 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 six months ended May 31, 2023 and May 31, 2022 was a decrease of $1.6 million and an increase of $1.0 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):
 May 31, 2023November 30, 2022
 Notional ValueFair ValueNotional ValueFair Value
Interest rate swap contracts designated as cash flow hedges$112,500 $3,173 $120,000 $4,407 

Forward Contracts

We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries.

All forward contracts are recorded at fair value on the consolidated balance sheets at the end of each reporting period and generally expire between 30 days and 2 years from the date the contract was entered. At May 31, 2023, $2.9 million was recorded in other accrued liabilities 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 six months ended May 31, 2023, realized and unrealized gains of $1.1 million and $1.6 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three and six months ended May 31, 2022, realized and unrealized losses of $3.9 million and $3.6 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.

12


The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 May 31, 2023November 30, 2022
 Notional ValueFair ValueNotional ValueFair Value
Forward contracts to sell U.S. dollars$78,643 $(2,919)$74,578 $(2,995)
Forward contracts to purchase U.S. dollars478 4 544 (5)
Total$79,121 $(2,915)$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 May 31, 2023 (in thousands):
 
  Fair Value Measurements Using
 Total Fair ValueLevel 1Level 2Level 3
Assets
Money market funds$109 $109 $ $ 
Interest rate swap3,173  3,173  
Liabilities
Foreign exchange derivatives$(2,915)$ $(2,915)$ 

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 ValueLevel 1Level 2Level 3
Assets
Money market funds$27,254 $27,254 $ $ 
Interest rate swap4,407  4,407  
Liabilities
Foreign exchange derivatives$(3,000)$ $(3,000)$ 

When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates.

Assets and Liabilities Not Carried at Fair Value

Fair Value of the Convertible Senior Notes

The fair value of our Convertible Senior Notes, with a carrying value of $353.7 million and $352.6 million, was $404.1 million and $376.0 million as of May 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.

13


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, 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):
 
May 31, 2023November 30, 2022
 Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Purchased technology$280,000 $(165,135)$114,865 $212,700 $(150,877)$61,823 
Customer-related457,608 (189,183)268,425 306,308 (162,341)143,967 
Trademarks and trade names50,111 (28,886)21,225 37,611 (26,046)11,565 
Non-compete agreement   2,000 (2,000) 
Total$787,719 $(383,204)$404,515 $558,619 $(341,264)$217,355 

In the three and six months ended May 31, 2023, amortization expense related to intangible assets was $25.5 million and $45.4 million, respectively. In the three and six months ended May 31, 2022, amortization expense related to intangible assets was $17.5 million and $34.6 million, respectively.

Future amortization expense for intangible assets as of May 31, 2023, is as follows (in thousands):
 
Remainder of 2023$50,970 
202488,934 
202578,424 
202669,453 
202744,598 
Thereafter72,136 
Total$404,515 

Goodwill

Changes in the carrying amount of goodwill in the six months ended May 31, 2023 are as follows (in thousands):

Balance, November 30, 2022$671,037 
Additions(1)
154,899 
Translation adjustments8 
Balance, May 31, 2023$825,944 
(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.

14


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 AllocationMeasurement Period AdjustmentsAdjusted Purchase Price AllocationLife
Net working capital$49,477 $(799)$48,678 
Property, plant and equipment723 — 723 
Purchased technology67,600 (300)67,300 7 years
Trade name12,500 — 12,500 7 years
Customer relationships162,200 (10,900)151,300 7 years
Other assets, including long-term unbilled receivables6,172 (704)5,468 
Deferred taxes(17,441)(957)(18,398)
Deferred revenue(33,116)— (33,116)
Goodwill140,964 13,935 154,899 
Net assets acquired$389,079 $275 $389,354 

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 $154.9 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 six months ended May 31, 2023, we incurred approximately $2.1 million and $3.5 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 six months ended May 31, 2023, was approximately $25.3 million and $30.3 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.

15


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 May 31, 2022
Revenue$171,111 
Net income$21,580 
Net income per basic share$0.50 
Net income per diluted share$0.49 

(in thousands, except per share data)Pro Forma Six Months Ended May 31, 2023Pro Forma Six Months Ended May 31, 2022
Revenue$381,327 $336,933 
Net income$44,996 $32,375 
Net income per basic share$1.04 $0.74 
Net income per diluted share$1.01 $0.73 

Note 7: Debt

As of May 31, 2023, future maturities of the Company's long-term debt were as follows:

(In thousands)2026 NotesRevolving Line of CreditTerm LoanTotal
Remainder of 2023$ $ $3,438 $3,438 
2024  13,750 13,750 
2025  20,625 20,625 
2026360,000  20,625 380,625 
2027 170,000 206,250 376,250 
Total face value of long-term debt360,000 170,000 264,688 794,688 
Unamortized discount and issuance costs(6,304) (2,351)(8,655)
Less current portion of long-term debt, net  (9,671)(9,671)
Long-term debt$353,696 $170,000 $252,666 $776,362 

The revolving line of credit has a term that ends on January 25, 2027, at which time all amounts outstanding must be repaid. During February 2023, we partially funded our acquisition of MarkLogic by drawing down $195.0 million under the revolving line of credit. As of May 31, 2023, there was $170.0 million outstanding under the revolving line of credit.

16


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 May 31, 2023 and May 31, 2022, we repurchased and retired 0.3 million shares for $15.0 million and 0.6 million shares for $26.5 million, respectively. In the six months ended May 31, 2023 and May 31, 2022, we repurchased and retired 0.5 million shares for $30.0 million and 1.1 million shares for $51.5 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of May 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.

The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): 
 Three Months EndedSix Months Ended
 May 31, 2023May 31, 2022May 31, 2023May 31, 2022
Cost of maintenance and services$729 $472 $1,349 $883 
Sales and marketing1,769 690 3,264 2,092 
Product development3,049 2,740 6,047 4,962 
General and administrative4,740 5,455 9,379 9,534 
Total stock-based compensation$10,287 $9,357 $20,039 $17,471 

Note 10: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the six months ended May 31, 2023 (in thousands):
Foreign Currency Translation AdjustmentUnrealized Losses on InvestmentsUnrealized Gain (Losses) on Hedging ActivityAccumulated Other Comprehensive Loss
Balance, December 1, 2022$(38,523)$(61)$3,349 $(35,235)
Other comprehensive income (loss) before reclassifications, net of tax3,457  (939)2,518 
Balance, May 31, 2023$(35,066)$(61)$2,410 $(32,717)

The tax effect on accumulated unrealized gains (losses) on hedging activity and unrealized losses on investments was a tax provision of $0.8 million and $1.1 million as of May 31, 2023 and November 30, 2022, respectively.

17


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 EndedSix Months Ended
(In thousands)May 31, 2023May 31, 2022May 31, 2023May 31, 2022
Performance obligations transferred at a point in time:
Software licenses$56,407 $44,814 $113,975 $87,564 
Performance obligations transferred over time:
Maintenance102,240 91,331 194,753 181,294 
Services19,604 12,602 33,749 24,811 
Total revenue$178,251 $148,747 $342,477 $293,669 

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 EndedSix Months Ended
(In thousands)May 31, 2023May 31, 2022May 31, 2023May 31, 2022
North America$105,732 $85,394 $204,560 $163,487 
EMEA56,185 49,634 109,590 103,336 
Latin America4,790 4,678 8,979 8,561 
Asia Pacific11,544 9,041 19,348 18,285 
Total revenue$178,251 $148,747 $342,477 $293,669 

No single customer, partner, or country outside the U.S. has accounted for more than 10% of our total revenue for the three and six months ended May 31, 2023 and May 31, 2022.

Contract Balances

Unbilled Receivables and Contract Assets

As of May 31, 2023, billing of our long-term unbilled receivables is expected to occur as follows (in thousands):
2024$12,880 
202515,502 
20269,859 
2027486 
Total$38,727 

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 May 31, 2023 or November 30, 2022.

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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 May 31, 2023, the changes in net deferred revenue were as follows (in thousands):
Balance, December 1, 2022$282,440 
Billings and other343,674 
Revenue recognized(342,477)
Balance, May 31, 2023$283,637 

As of May 31, 2023, transaction price allocated to remaining performance obligations was $288 million. We expect to recognize approximately 80% of the revenue within the next year and the remainder thereafter.

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 $7.7 million and $8.8 million as of May 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 CostsEmployee Severance and Related BenefitsTotal
Balance, December 1, 2022$3,870 $30 $3,900 
Costs incurred448 4,939 5,387 
Cash disbursements(781)(1,381)(2,162)
Translation adjustments and other (11)(11)
Balance, May 31, 2023$3,537 $3,577 $7,114 

During fiscal year 2023, we restructured our operations in connection with the acquisition of MarkLogic, which resulted in a reduction in redundant positions, primarily within administrative functions.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2023.

We expect to incur additional expenses as part of these actions related to employee costs and facility closures during fiscal year 2023, but we do not expect these costs to be material.

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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 EndedSix Months Ended
 May 31, 2023May 31, 2022May 31, 2023May 31, 2022
Net income$12,090 $29,110 $35,764 $49,564 
Weighted average shares outstanding43,343 43,575 43,321 43,778 
Basic earnings per common share$0.28 $0.67 $0.83 $1.13 
Diluted earnings per common share:
Net income$12,090 $29,110 $35,764 $49,564 
Weighted average shares outstanding43,343 43,575 43,321 43,778 
Effect of dilution from common stock equivalents1,127 678 1,090 702 
Diluted weighted average shares outstanding44,470 44,253 44,411 44,480 
Diluted earnings per share$0.27 $0.66 $0.81 $1.11 

We excluded stock awards representing approximately 268,000 and 304,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2023, respectively, as these awards were anti-dilutive. We excluded stock awards representing approximately 1,904,000 and 1,720,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 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. 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 and six months ended May 31, 2023, we did not include the Notes in our diluted earnings per share calculation because the conversion feature in the Notes was out of the money.

Note 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. Cyber incident costs relate to the engagement of external cybersecurity experts and other incident response professionals. We incurred $1.5 million and $4.2 million of cyber incident costs for the three and six month periods ended May 31, 2023, respectively. 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

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
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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 a customer-dedicated cloud instance which is managed separately from the public-cloud).

The Company has engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the MOVEit Vulnerability. As the investigation remains ongoing, the Company will continue to assess the potential impact on its business, operations and financial results. MOVEit Transfer and MOVEit Cloud represented approximately 4% in aggregate of the Company’s revenue for the six months ended May 31, 2023.

Litigation and Governmental Investigations

As of the date of the filing of this report on Form 10-Q, (i) four customers that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from the Company related to the MOVEit Vulnerability, and (ii) there have been eleven class action lawsuits filed by individuals who claim to have been impacted by exfiltration of data from the environments of our MOVEit Transfer customers. The Company has also been cooperating with several inquiries and one formal investigation from domestic and foreign law enforcement agencies and data privacy regulators.

Expenses Incurred and Future Costs

Given that the MOVEit Vulnerability occurred near the end of the current quarter, we incurred minimal costs during the second quarter of fiscal year 2023. 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 and our investigation into the matter is 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. Therefore, we have not recorded a loss contingency liability for the MOVEit Vulnerability as of May 31, 2023.

Insurance Coverage

We maintain cybersecurity insurance and other types of insurance coverage for up to $15.0 million in losses, which are expected to reduce our exposure to liabilities arising from the November 2022 cyber incident and the MOVEit Vulnerability. We will pursue recoveries to