UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended November 30 , 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)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip code)
(781 ) 280-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 May 31, 2023 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $2,565,000,000 .
As of January 19, 2024, there were 43,880,206 common shares outstanding.
Documents Incorporated By Reference
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2024 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
PROGRESS SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2023
INDEX
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 1C. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
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CAUTIONARY STATEMENTS
This Form 10-K, and other information provided by us or statements made by our directors, officers or employees from time to time, 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. These forward-looking statements are based upon our present intent, beliefs or expectations, but are not guaranteed to occur and may not occur. Actual future results may differ materially from those contained in or implied by our forward-looking statements due to various factors. Such factors are more fully described in Part I, Item 1A of this Form 10-K under the heading “Risk Factors”. 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.
PART I
Item 1. Business
Overview
Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides enterprise software products for the development, deployment and management of high-impact business applications. 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.
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.
Our Products
With Progress, businesses can automate and optimize the process by which applications are developed, deployed and managed. This makes critical data and content more accessible and secure and technology teams more productive. We have a deep commitment to the developer community, both open source and commercial alike. Described below are some of the products that make up our comprehensive product portfolio.
Progress OpenEdge: An application development platform for running business-critical applications needing high-performance, high availability and flexible deployment options for extensibility, scalability, security and performance.
Progress Chef: DevOps/DevSecOps automation software to achieve secure, continuous delivery of critical applications and infrastructure.
Progress Developer Tools: The comprehensive software development tooling collection including .NET and JavaScript UI components for web, desktop and mobile applications, reporting and report management tools and automated testing and mocking tools.
Progress Kemp LoadMaster: Flexible application delivery and security product offering cloud-native, virtual and hardware load balancers.
Progress MOVEit: Managed File Transfer software for managing and controlling the movement of sensitive files, providing the ability to secure them both at-rest and in-transit, and ensuring strict adherence to compliance requirements.
Progress DataDirect: Secure data connectivity tools for Relational, NoSQL, Big Data and SaaS data sources.
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Progress WhatsUp Gold: Network infrastructure monitoring software providing complete visibility of all network devices, servers, virtual machines, cloud and wireless environments to find and fix network problems.
Progress Sitefinity: Digital Experience Platform foundation, delivering intelligent, ROI-driving tools for marketers and an extensible platform for developers to create engaging, cross-channel digital experiences.
Progress Flowmon: Network security and visibility product with automated response across hybrid cloud ecosystems.
Progress Corticon: Decision automation platform to transform user experiences by streamlining and automating complex business rules—without having to code.
Progress MarkLogic: Data agility platform to securely connect data and metadata, create and interpret meaning, and consume high-quality contextualized data across the enterprise software system.
Progress Semaphore: Semantic AI platform that transforms data into meaningful insights, empowering organizations to manage knowledge models, and to automatically extract and classify meaning from both structured and unstructured data.
Product Development
We believe that the features and performance of our products are competitive with those of other available infrastructure software products and that none of the current versions of our products are approaching obsolescence. However, we have invested, and expect to continue to invest in new product development and enhancements of our current products to maintain our competitive position.
Our primary development offices are located in Burlington, Massachusetts; Morrisville, North Carolina; Alpharetta, Georgia; Madison, Wisconsin; Sofia, Bulgaria; Limerick, Ireland; Brno, Czech Republic; and Bengaluru and Hyderabad, India.
Customers
We sell our products globally through several channels: directly to end users and indirectly through ISVs, OEMs, systems integrators, VARs and distributors. Sales of our products through our direct sales force have historically been to business managers or IT managers in corporations and governmental agencies. We also target developers who create business applications, from individuals to teams, within enterprises of all sizes.
We also sell our products through indirect channels, primarily ISVs. OEMs, and value-added resellers ("VARs"), who embed or add features to our products as part of an integrated solution. We use distributors and resellers, both internationally and domestically, in certain locations where we do not have a direct presence or where it is more economically or contractually feasible for us to do so. More than half of our license revenues are derived from these indirect channels.
Independent Software Vendors
Our ISVs cover a broad range of markets, offer an extensive library of business applications and are a source of recurring revenue. We have kept entry costs, consisting primarily of the initial purchase of development licenses, low to encourage a wide variety of ISVs to build applications. If an ISV succeeds in marketing its applications, we obtain recurring revenue as the ISV licenses our products to allow its application to be installed and used by customers. In recent years, a significantly increasing amount of our revenue from ISVs has been generated from ISVs who have chosen to enable their business applications under a software-as-a-service ("SaaS") platform.
Original Equipment Manufacturers
We enter into arrangements with OEMs in which the OEM embeds our products into its solutions, typically either software or technology devices. OEMs typically license the right to embed our products into their solutions and distribute those solutions for initial terms ranging from one to three years. Historically, most of our OEMs have renewed their agreements upon the expiration of the initial term. However, there is no assurance that they will continue to renew in the future. If any of our largest OEM customers were not to renew their agreements in the future, this could materially impact our DataDirect product line.
Value Added Resellers, Systems Integrators and Distributors
We enter into arrangements with VARs in which the VAR adds features or services to our products, then resells those products as an integrated product or complete "turn-key" solution. Systems Integrators typically have expertise in vertical or functional markets: they may resell our products by bundling them with their broader service offerings or refer sales opportunities to our direct sales force. Distributors resell our products, services and support within their territories.
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No single customer or partner has accounted for more than 10% of our total revenue in any of our last three fiscal years.
Sales and Marketing
We sell our products through our direct sales force and indirect channel partners. Our sales and field marketing groups are organized primarily by geographic region (i.e. North America, EMEA, Latin America, and Asia Pacific). We believe this structure allows us to maintain direct contact with our customers and partners, while supporting their diverse market requirements. Our international operations provide focused local sales, support and marketing efforts and are able to respond directly to changes in local conditions.
Sales personnel are responsible for developing new direct end user accounts, recruiting new indirect channel partners and new independent distributors, managing existing channel partner relationships and servicing existing customers. We use our inside sales teams to enhance our direct sales efforts and to generate new business and follow-on business from existing customers.
Our marketing personnel conduct a variety of marketing engagement programs designed to create demand for our products, enhance the market readiness of our products, raise the general awareness of our company and our products, generate leads for the sales organization and promote our various products. These programs include public relations, industry analyst relations, digital/web marketing, demand generation, participation in trade shows, industry conferences, regional user events, and production of sales and marketing literature.
Our marketing efforts focus on driving traffic to our websites, generating high quality sales leads and building visibility for our corporate and product brands. Our sales efforts then focus on converting these leads into paying customers.
Customer Support
Our customer support staff provides telephone and Web-based support to end users, application developers and OEMs. Customers purchase maintenance services entitling them to software updates, technical support and technical bulletins. Maintenance is generally not required with those products sold under perpetual license agreements and is purchased at the customer's option. We provide support to customers primarily through our main regional customer support centers in Burlington, Massachusetts; Morrisville, North Carolina; Alpharetta, Georgia; Madison, Wisconsin; Limerick, Ireland; Rotterdam, The Netherlands; Brno, Czech Republic; Bengaluru, India; Hyderabad, India; Singapore; and Sofia, Bulgaria. Local technical support for specific products is provided in certain other countries as well.
Professional Services
Our global professional services organization delivers business solutions for customers through a combination of products, consulting and education. Our consulting organization offers project management, implementation services, custom software development, programming and other services. Our consulting organization also provides services to web-enable existing applications or to take advantage of the capabilities of new Progress product releases. Our education organization offers numerous training options, from traditional instructor-led courses to advanced learning modules available via the web or on digital media.
Our services offerings include: application modernization; infrastructure automation; development operations; data management, managed database services; performance enhancements and tuning; and analytics/business intelligence.
Competition
The software industry is intensely competitive. We experience significant competition from a variety of sources with respect to all of our products. We believe that certain competitive factors affect the market for our software products and services, which may include: (i) vendor and product reputation; (ii) product quality, performance and price; (iii) the availability of software products on multiple platforms; (iv) product scalability; (v) product integration with other enterprise applications; (vi) software functionality and features; (vii) software ease of use; (viii) the quality of professional services, customer support services and training; and (ix) the ability to address specific customer business problems. We believe the relative importance of each of these factors depends upon the concerns and needs of each specific customer.
We compete with multiple companies, some that have single or narrow solutions, and some that have a range of enterprise infrastructure solutions. Many companies offer platform-as-a-service, application development, data integration and other tools in conjunction with offerings such as customer relationship management, web services, operating systems, and relational database management systems. We compete with software vendors that offer their products under a proprietary software license model, and various other vendors that offer their solutions in an open-source licensing or freely available distribution model.
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We do not believe that there is a dominant vendor in the infrastructure software markets in which we compete. However, some of our competitors have greater and/or more experienced financial, marketing or technical resources than we have, or may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we are able. Increased competition could make it more difficult for us to maintain our revenue and market presence.
Intellectual Property
We rely on a combination of contractual provisions and copyright, patent, trademark and trade secret laws to protect our proprietary rights in our products. Except as described below with respect to our Chef products, we frequently distribute our products under software license agreements that grant customers a perpetual nonexclusive license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. We also distribute products through various channel partners, including ISVs, OEMs and systems integrators. We also license products under term or subscription arrangements. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with employees, consultants and channel partners. Although we intend to protect our rights vigorously, and do not intend to infringe upon the intellectual property rights of other parties, there is no assurance that our efforts will be successful.
We seek to protect the source code of our products as trade secrets and as unpublished copyrighted works. We hold numerous patents covering portions of our products. We also have several patent applications for product technologies. Where possible, we seek to obtain protection of our product names and service offerings through trademark registration and other similar procedures throughout the world.
Our Chef offerings incorporate software components licensed to the general public under open source licenses. We obtain many components from software developed and released by contributors to independent open source components of our offerings. Open source licenses grant licensees broad permissions to use, copy, modify and redistribute our platform. As a result, open source development and licensing practices can limit the value of our software copyright assets.
We believe that due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are as important in establishing and maintaining a leadership position within the industry as are the various legal protections of our technology. In addition, we believe that the nature of our customers, the importance of our products to them and their need for continuing product support may reduce the risk of unauthorized reproduction, although no assurances can be made in this regard.
Business Segment and Geographical 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 business 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. Refer to Note 14: Revenue Recognition and Note 18: Business Segments and International Operations to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for information by geographic area.
Human Capital
As of November 30, 2023, we had 2,284 employees worldwide, including 739 in sales and marketing, 394 in customer support and services, 886 in product development and 265 in administration.
None of our U.S. employees are subject to a collective bargaining agreement. Employees in certain foreign jurisdictions are represented by local workers’ councils and/or collective bargaining agreements as may be customary or required in those jurisdictions. We have experienced no work stoppages and believe our relations with employees are good.
We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. Therefore, we provide our employees with competitive compensation and benefits, opportunities for equity ownership, and development programs that enable continued learning and growth.
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Employee Engagement, Development and Training
We invest significant resources to develop our in-house talent and deepen our employees’ skill sets, both to strengthen our company and help further our employees’ personal career goals. We empower our employees to drive their career aspirations and set personal development objectives in partnership with their managers. To strengthen these conversations, we train managers across the globe to partner with employees through career conversations and provide career development training for all employees so that they can successfully leverage the many tools in place to support them.
To match the location and learning specifics of our people, we combine various channels for personal and technical development: on-demand videos, webinars, classroom trainings, text-based resources, coaching, and more. We also believe strongly in fostering our employees’ personal growth and offer programs like tuition reimbursement.
Our efforts to recruit and retain a diverse and inclusive workforce include providing competitive compensation and benefit packages worldwide and ensuring we listen to our employees. To that end, we regularly survey our employees to obtain their views and assess employee satisfaction. We use the views expressed in the surveys to influence our people strategy and policies. We also use employee survey information to gain insights into how and where we work.
Flexible Work Approach
The COVID‐19 pandemic significantly changed the way employees think about where and how they work. For most of our employees, productivity is no longer tied to being in an office and collaboration can happen between people anywhere. Our view of our offices has evolved to places for collaboration and in-person interactions rather than the only places where productive work can occur. In 2021, we announced a modern approach to work that gives our employees more flexibility to choose where to work. Depending on their role, this means that employees can choose their office location, as well as continue to work from home some or all the time. We expect this flexible approach will help us recruit and retain employees.
Inclusion and Diversity
As a multicultural company serving a global community, we encourage a wide range of views and celebrate our diverse backgrounds. We are committed to creating a culture of innovation and inspiration, where employees feel a strong sense of community and pride in the company and the successes they have helped to achieve. We have an Inclusion and Diversity Advisory Committee, made up of Progress employees from around the globe with varying backgrounds, skill sets and viewpoints. This committee supports our Chief Inclusion and Diversity Officer in the formation and implementation of enterprise-wide Inclusion and Diversity initiatives and ensuring a clear Inclusion and Diversity vision is established and articulated in a way that is authentic for all Progress employees.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.progress.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the "SEC") at www.sec.gov. The information posted on our website is not incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors
We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. The risks discussed below could materially affect our business, financial condition and future results. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or operating results in the future.
Risks Related to Our Ability to Grow Our Business
Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could be harmed. Ongoing enhancements to our product sets (both organically and through acquisitions) will be required to enable us to maintain our competitive position and the competitive position of our ISVs, distributors/resellers, and OEMs. We may not be successful in developing and marketing enhancements to our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of the marketplace. Overlaying the risks associated with our existing products and enhancements are ongoing technological developments and rapid changes in customer and partner requirements. Our future success will depend upon our ability to develop, acquire and introduce new products in a timely manner that take advantage of technological advances and respond to new customer and partner requirements. We may not be successful in developing or acquiring new products incorporating new technology on a timely basis, and any new products we develop or acquire may not adequately address the changing needs of the marketplace or may not be accepted by the market. Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results.
We are substantially dependent on our OpenEdge products. We derive a significant portion of our revenue from software license and maintenance revenue attributable to our OpenEdge product set, which in fiscal year 2023 accounted for approximately 37% of our aggregate revenue on a consolidated basis. Accordingly, our future results depend on continued market acceptance of OpenEdge. If consumer demand declines, or new technologies emerge that are superior to, or are more responsive to customer requirements than OpenEdge, such that we are unable to maintain OpenEdge’s competitive position within its marketplace, our business, financial condition and operating results may be materially adversely affected.
The segments of the software industry in which we participate are intensely competitive, and our inability to compete effectively could harm our business. We experience significant competition from a variety of sources with respect to the marketing and distribution of our products. Many of our competitors have greater financial, marketing or technical resources than we do and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we can. Increased competition could make it more difficult for us to maintain our market presence or lead to downward pricing pressure. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to deliver products that better address the needs of our prospective customers. Current and potential competitors may also be more successful than we are in having their products or technologies widely accepted. We may be unable to compete successfully against current and future competitors, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and operating results.
The value of our Chef software assets may be limited by open source development and licensing practices. Our Chef offerings incorporate software components licensed to the general public under open source licenses. We obtain many components from software developed and released by contributors to independent open source components of our offerings. One of the characteristics of open source software is that the governing license terms generally allow liberal modifications of the code and distribution to a wide group of companies and/or individuals. As a result, the marketplace for new products is intensely competitive and characterized by low barriers to entry because others could develop new software products or services based upon those open source programs that compete with existing open source software that we support and incorporate into our Chef products. New competitors possessing technological, marketing or other competitive advantages that develop their own open source software or hybrid proprietary and open source software offerings, may reduce the demand for, and putting price pressure on, our products enabling them to rapidly acquire market share, and limit the value of our software assets.
We intend to make additional acquisitions of businesses, products or technologies that involve additional risks, which could disrupt our business or harm our financial condition, results of operations or cash flows. A key element of our strategy includes the acquisition of businesses that offer complementary products, services and technologies, augment our revenues and cash flows, and meet our strict financial and other criteria. We may not be able to identify suitable acquisition opportunities or consummate any such transactions. Even if an acquisition is successful, integration of a new business involves a number of risks that could have a material adverse effect on our business, financial condition, operating results or cash flows, including:
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•difficulties of assimilating the operations and personnel, products or systems of acquired companies;
•our potential inability to realize the value of the acquired assets relative to the price paid;
•distraction of management from our ongoing businesses;
•potential product disruptions associated with the sale of the acquired business's products;
•the potential that an acquisition may not further our business strategy as we expected, may not result in revenue and cash flow growth to the degree we expected or at all, or may not achieve expected synergies;
•the possibility of incurring significant restructuring charges and amortization expense;
•the risk that an acquired company’s cybersecurity may not have been sufficient and could cause a post-acquisition risk once integrated into our systems;
•risks related to the assumption of the acquired business's liabilities or any ongoing lawsuits;
•potential impairment to assets that we recorded as a part of an acquisition, including intangible assets and goodwill; and
•to the extent that we issue stock to pay for an acquisition, dilution to existing stockholders and decreased earnings per share.
Difficulties associated with any acquisitions we may pursue, and their integration may be complicated by factors such as:
•the size of the business or entity acquired;
•geographic and cultural differences;
•lack of experience operating in the industry or markets of the acquired business (e.g., satisfying the requirements of public-sector customers);
•potential loss of key employees and customers;
•the potential for deficiencies in internal controls at the acquired or combined business, including but not limited to with regard to any weaknesses or vulnerabilities in a target company’s cybersecurity controls;
•performance problems with the acquired business’s technology;
•exposure to unanticipated liabilities of the acquired business, including any cybersecurity issues;
•insufficient revenue to offset increased expenses associated with the acquisition; and
•adverse tax consequences.
In addition, if we fail to complete an announced acquisition, our stock price could fall to the extent the price reflects an assumption that such acquisition will be completed, and we may incur significant unrecoverable costs. Further, the failure to consummate an acquisition may result in negative publicity and adversely impact our relationships with our customers, vendors and employees. We may become subject to legal proceedings relating to the acquisition and the integration of acquired businesses may not be successful. Failure to manage and successfully integrate acquired businesses, achieve anticipated levels of profitability of the acquired business, improve margins of the acquired businesses and products, or realize other anticipated benefits of an acquisition could materially harm our business, operating results and margins.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings. We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Factors that may cause a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in industry segments in which we participate. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations.
Integration of artificial intelligence into our product offerings and our use of artificial intelligence in our operations could result in reputational or competitive harm, legal liability, and other adverse effects on our business. We have integrated, and plan to further integrate, AI capabilities into certain components of product offerings, and we expect to use AI in our operations. Such integration and use of AI may become more important in our product offerings and operations over time. These AI-related initiatives, whether successful or not, could cause us to incur substantial costs and could result in delays in our software release cadence. Our competitors or other third parties may incorporate AI into their products or operations more quickly or more successfully than we do, which could impair our ability to compete effectively. Additionally, AI algorithms may be flawed and datasets underlying AI algorithms may be insufficient or contain biased information. If the AI tools integrated into our products or that we use in our operations produce analyses or recommendations that are or are alleged to be deficient, inaccurate, or biased, our reputation, business, financial condition, and results of operations may be adversely affected.
Other companies have experienced cybersecurity incidents that implicate confidential and proprietary company data and/or the personal data of end users of AI applications integrated into their software offerings or used in their operations. If we were to experience a cybersecurity incident, whether related to the integration of AI capabilities into our product offerings or our use of AI
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applications in our operations, our business and results of operations could be adversely affected. AI also presents various emerging legal, regulatory and ethical issues, and the incorporation of AI into our product offerings and our use of AI applications in our operations could require us to expend significant resources in developing, testing and maintaining our product offerings and may cause us to experience brand, reputational, or competitive harm, or incur legal liability. On October 30, 2023, the Biden administration issued an Executive Order to, among other things, establish extensive new standards for AI safety and security. Other jurisdictions may decide to adopt similar or more restrictive legislation that may render the use of such technologies challenging. These restrictions may make it harder for us to conduct our business using AI, lead to regulatory fines or penalties, require us to change our product offerings or business practices, or prevent or limit our use of AI.
Risks Related to the Operation of Our Business
Our realignment initiatives may disrupt our operations and we may not achieve the expected benefits from our efforts. We have restructured or made other adjustments to our workforce in response to management changes, product changes, performance issues, changes in strategy, acquisitions and other internal and external considerations; and we may undertake similar restructuring or realignment initiatives in the future. In the past, realignment initiatives have resulted in increased restructuring costs and have temporarily reduced productivity. Future realignment initiatives may be complex and could result in significant costs and expenses, which could negatively impact our reputation, financial condition, operating results and shareholder value. There can be no assurance that we can accomplish or implement all of the desired initiatives, or that the activities under those initiatives will result in the desired synergies or efficiencies. Furthermore, management has dedicated, and will continue to dedicate, significant time and effort to implementing such realignment initiatives. These efforts may divert management’s focus and resources from our core business, other corporate initiatives, or strategic opportunities. We may also experience a loss of continuity, loss of accumulated knowledge, or inefficiency during transitional periods. Additionally, efforts related to the implementation of these initiatives could yield unintended consequences (e.g., adversely affecting our ability to execute on merger and acquisition objectives, confusion or distraction of our management and employees, reduced employee morale and retention, delaying the development and introduction of new products and technologies), which may negatively affect our business, sales, financial condition and results of operations.
Our international operations expose us to additional risks, and changes in global economic and political conditions could adversely affect our international operations, our revenue and our net income. Approximately 41% of our total fiscal 2023 revenue, was generated from sales outside North America. Political and/or financial instability, oil price shocks and armed conflict in various regions of the world, including, but not limited to, Russia's invasion of Ukraine and the Israel-Hamas conflict, can lead to economic uncertainty and may adversely impact our business. Political instability may lead to significant, continuing volatility in global stock markets and currency exchange rate fluctuations. If customers’ buying patterns, decision-making processes, timing of expected deliveries and timing of new projects unfavorably change due to economic or political conditions, there would be a material adverse effect on our business, financial condition and operating results.
Other potential risks inherent in our international business include:
•longer payment cycles;
•credit risk and higher levels of payment fraud;
•greater difficulties in accounts receivable collection;
•varying regulatory and legal requirements;
•compliance with international and local trade, labor and export control laws;
•restrictions on the transfer of funds;
•difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, legal impediments and language and cultural differences;
•reduced or minimal protection of intellectual property rights in some countries;
•laws and business practices that favor local competitors or prohibit foreign ownership of certain businesses;
•changes in U.S. or foreign trade policies or practices that increase costs or restrict the distribution of products;
•seasonal reductions in business activity during the summer months in Europe and certain other parts of the world;
•economic instability in emerging markets; and
•potentially adverse tax consequences.
Any one or more of these factors could have a material adverse effect on our international operations, and, consequently, on our business, financial condition and operating results.
In addition, our business has been, and could in the future be, adversely affected by regional or global health crises. A significant outbreak of contagious diseases and other adverse public health developments, or the fear of such events that results in a widespread health crisis could adversely affect global supply chains and the economies and financial markets of many countries. Any prolonged economic disruption could affect demand for our products and services and adversely impact our results of operations and financial condition.
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If our security measures are breached, our products and services may be perceived as not being secure, customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure. including but not limited to from loss of customer or company data, loss of customers or otherwise. Our products and services involve the storage and transmission of our customers’ proprietary information and may be vulnerable to unauthorized access, computer viruses, cyber-attacks, distributed denial of service attacks and other disruptive problems. As disclosed on December 19, 2022, 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 (the "November 2022 Cyber Incident"). During the investigation, we and our external advisors uncovered evidence of unauthorized access to our corporate network, including evidence that certain company data had been exfiltrated. As demonstrated by the November 2022 Cyber Incident, due to the actions of outside parties, employee error, malfeasance, or otherwise, an unauthorized party may obtain access to our data or our customers’ data, which could result in its theft, destruction, corruption or misappropriation and thus legal and financial exposure. Security risks in recent years have increased significantly given the increased sophistication and activities of hackers, organized crime, including state-sponsored organizations and nation-states, and other outside parties. Cyber threats are continuously evolving, increasing the difficulty of defending against them. Increased risks of such attacks and disruptions also exist due to the Russian invasion of Ukraine beginning in February 2022. While we have implemented security procedures and controls aimed at addressing these threats, our security measures could be compromised, could prove to be inadequate or could fail. Any security breach or unauthorized access could result in significant legal and financial exposure, increased costs to defend litigation, indemnity and other contractual obligations, government fines and penalties, damage to our reputation and our brand, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business and results of operations. Breaches of our network could disrupt our internal systems and business applications, including services provided to our customers. Additionally, data breaches could compromise technical and proprietary information, harming our competitive position. We may need to spend significant capital or allocate significant resources to protect against the threat of security breaches or to address security related concerns. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose customers. In addition, our insurance coverage may not be adequate to cover all costs related to cybersecurity incidents and the disruptions resulting from such events.
If our products contain software defects or security flaws, it could harm our revenues by causing us to lose customers and could increase our liabilities by exposing us to costly governmental investigations or litigation. For example, the exploitation of the zero-day MOVEit Vulnerability in May 2023 has resulted in informal government inquiries, three formal government investigations, and private litigation. Our products, despite extensive testing and quality control, may, and at times do, contain defects, vulnerabilities or security flaws. In the ordinary course of business, we may need to issue corrective releases of our software products to fix any defects, vulnerabilities, or security flaws. Depending upon the severity of any such matters, the detection and correction of such matters can be time consuming and costly. If any such issues are exploited by malicious threat actors, we could experience, among other things, material adverse impact to our revenues due to loss of customers and increased liabilities due to costly governmental investigations or litigation. In addition, any such matters could affect the ability of our products to work with hardware or other software products, delay the development or release of new products or new versions of products (due to a reallocation of our internal resources), and/or adversely affect market acceptance of our products, all of which could have a material adverse effect on our operating results and cash flows. For example, during the third quarter of 2023, we released patches for vulnerabilities affecting WS_FTP, one of our file-transfer products that is deployed on-premise in our customers’ environments. Notwithstanding our efforts to promptly patch such vulnerabilities and encourage customers to deploy the patch as quickly as possible, we do not have telemetry into our WS_FTP customers’ environments or control over their patching activity, and there have been reports of exploitation of these vulnerabilities following the release of our security patches.
As disclosed via a Form 8-K filed on June 5, 2023, on the evening of May 28, 2023 (Eastern Time), our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance. An investigative team was mobilized and, on May 30, 2023, the investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted version of MOVEit Transfer known as MOVEit Cloud). The investigative team determined the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as (ii) for a small group of customers, in customer-dedicated cloud instances that are hosted, separate and apart from the public instances of our MOVEit Cloud platform). We 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.
MOVEit Transfer is a secure file-transfer software that is installed by customers on-premise and does not have any on-going telemetry after installation that allows us to track, among other things, a customer’s product usage, deployed version, file transfer activity (including any data that is transferred by or stored within the customer’s MOVEit Transfer instance), or whether the customer has applied any security patches or bug fixes to their MOVEit Transfer instance. However, a number of MOVEit Transfer customers and others have disclosed that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to their environments and portions of their sensitive customer data.
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We have not seen any evidence that sensitive customer data has been exfiltrated from the public MOVEit Cloud instances. For a small group of customers, we provide dedicated MOVEit Cloud instances that are hosted, for each such customer, separate and apart from the public instances of our MOVEit Cloud platform. Two of our dedicated MOVEit Cloud customers have reported that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to their dedicated MOVEit Cloud environment. As of the date of the filing of this report on Form 10-K, one such customer has confirmed that no sensitive data was compromised and the other has reported that certain personally identifiable information was exfiltrated.
As of the date of the filing of this report on Form 10-K, (i) we have received formal letters from 31 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 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 United States District Court for the District of Massachusetts ("District of Massachusetts"), and (iii) we are party to approximately 118 class action lawsuits filed by individuals who claim to have been impacted by 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 several inquiries from domestic and foreign data privacy regulators; inquiries from several state attorneys general; as well as formal investigations from: (i) a U.S. federal law enforcement agency (as of the date of the filing of this report, the law enforcement investigation that we are cooperating with is not an enforcement action or formal governmental investigation of which we have been told that we are a target), (ii) the SEC (as further described hereafter), and (iii) the Office of the Attorney General for the District of Columbia (as further described hereafter); all of which could have adverse impacts on our business and operations and the results thereof.
On October 2, 2023, we received a subpoena from the SEC seeking various documents and information relating to the MOVEit Vulnerability. As described in the cover letter accompanying the subpoena, at this stage, the SEC investigation is a fact-finding inquiry, the investigation does not mean that Progress or anyone else has violated federal securities laws, and the investigation does not mean that the SEC has a negative opinion of any person, entity, or security. Progress intends to cooperate fully with the SEC in its investigation.
On December 21, 2023, we received a preservation notice from the Federal Trade Commission (the "FTC"), but have not otherwise received a request for information nor is Progress aware of any formal FTC investigation.
On January 18, 2024, we 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 intends to cooperate fully with the Office of the Attorney General for the District of Columbia in its investigation.
Such claims and investigations may have an adverse effect on how we operate our business and our results of operations, and in the future, we may be subject to additional governmental or regulatory investigations, as well as additional litigation or indemnification claims. Following the discovery of the MOVEit Vulnerability and the various remedial actions described here, we have discovered and patched additional vulnerabilities within the MOVEit Transfer and MOVEit Cloud platforms. While we are currently not aware of any evidence that these additional vulnerabilities were exploited by malicious threat actors, we cannot guarantee that we have or will uncover and/or address all vulnerabilities within the MOVEit platform or any of our other products prior to exploitation by threat actors.
Our financial liability arising from any of the foregoing will depend on many factors, including the extent to which governmental entities investigate the matter and limitations contained within our customer contracts; therefore, we are unable at this time to estimate the quantitative impact of any such liability with any reasonable degree of certainty. As our fact-gathering investigation and litigation response continues, we will continue to assess the potential impact of the MOVEit Vulnerability on our business, operations, and financial results. 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.
Our business could be damaged, and we could be subject to liability, in the event of any unauthorized access to our data or our customers’ data, including through privacy and data security breaches, such as or in addition to the MOVEit Vulnerability. The use of certain of our products, including MOVEit Cloud, involves the transmission or storage of third-party data in our environment, some of which may be considered personally identifiable, confidential, or sensitive. In the ordinary course of business, we face security threats from malicious threat actors that could obtain unauthorized access to our systems, infrastructure, products, and networks. We anticipate that these threats will continue to grow in scope and complexity over time.
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For example, once we discovered the MOVEit Vulnerability on May 30, 2023, we (i) promptly took down MOVEit Cloud for investigation, and (ii) 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. While we believe that our actions have, and will continue to, reduce the likelihood of similar vulnerabilities occurring in the future in our MOVEit product line, malicious threat actors might use techniques to exploit other zero-day vulnerabilities or use other means that we are unable to defend against, in order to compromise and infiltrate our systems, infrastructure, networks, and products, including, but not limited to, MOVEit or other products. In addition, MOVEit Transfer is a secure file-transfer software that is installed by customers on-premise and does not have any on-going telemetry after installation that allows us to track, among other things, a customer’s product usage, deployed version, file transfer activity (including any data that is transferred by or stored within the customer’s MOVEit Transfer instance), or whether the customer has applied any security patches or bug fixes to their MOVEit Transfer instance.
While we devote a significant amount of resources to cyber security related matters in the operation of our business, we may fail to detect the existence of a breach and be unable to prevent unauthorized access to user and company content across our systems, infrastructure, products, and networks. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less regulated or remote areas around the world, or from state-sponsored actors. If our security measures are breached, we may suffer reputational damage, our products may be perceived as insecure, and we may lose existing customers, or fail to attract and retain new customers.
In addition to internal resources, we frequently rely on third parties when deploying our cybersecurity related infrastructure, and in doing so, may be exposed to security risks outside of our direct control. In connection therewith, we rely on outside vendors and contractors to perform certain services necessary for the operation and testing of certain of our products, and they may fail to adequately secure our platform or discover vulnerabilities in our products.
While we have implemented security procedures and controls aimed at addressing these threats and patching vulnerabilities, our security measures could be compromised and our attempts to implement security measures and patch vulnerabilities could prove to be inadequate or could fail. Any such failure could result in significant legal and financial exposure, increased costs to defend litigation, indemnity and other contractual obligations, government fines and penalties, damage to our reputation and our brand, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business and results of operations. In addition, our insurance coverage may not be adequate to cover all costs related to cybersecurity incidents or the exploitation of vulnerabilities as well as the disruptions and liabilities resulting from such events.
A failure of our information technology systems, including a cyber incident, could have a material adverse effect on our business. We rely on our technology infrastructure, and the technology infrastructure of third parties, for many functions, including selling our products, supporting our ISVs and other third-party channels, fulfilling orders and billing, and collecting and making payments. This technology infrastructure may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, the outbreak of wars or other armed conflicts, the escalation of hostilities, geopolitical tensions or trade wars, acts of terrorism or “ acts of God,” particularly involving geographies in which we or third parties on whom we depend have operations, computer intrusions or other similar cyber intrusions, vulnerabilities and viruses, software errors, computer denial-of-service attacks and other similar events. A significant number of the systems making up this infrastructure are not redundant, and our disaster recovery planning may not be sufficient for every eventuality. This technology infrastructure may fail or be vulnerable to damage or interruption because of actions by third parties or employee error or malfeasance. In addition, depending upon the severity of any such actions, we may not carry business interruption insurance sufficient to protect us from all losses that may result from interruptions in our services as a result of such technology infrastructure failures or provide us with the ability to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers or partners may cause a reduction in customer or partner satisfaction levels, which in turn could cause additional claims, reduced revenue or loss of customers or partners. Despite any precautions we may take, these problems could result in, among other consequences, a loss, destruction, corruption or misappropriation of company or customer data, loss of confidence in the stability and reliability of our offerings, damage to our reputation, and legal liability, all of which may adversely affect our business, financial condition, operating results and cash flows.
Catastrophic events, including but not limited to cyber events, may disrupt our business. We rely on our network infrastructure and enterprise applications, internal technology systems and website for our development, marketing, operations, support and sales activities. In addition, we rely on third-party hosted services, and we do not control the operation of third-party data center facilities, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics, cyber-attack or other similar interruptions to our business, war, terrorist attack or other catastrophic event that our disaster recovery plans do not adequately address, could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss, destruction, misappropriation or corruption of critical company or customer data. A catastrophic event including a cyber event a war or an act of terrorism that results in the loss, destruction, misappropriation, corruption or disruption of any of our data, our customer’s data or our
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data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected, and the adverse effects of any such catastrophic event would be exacerbated if experienced at the same time as another unexpected and adverse event.
Adverse developments in our relationships with certain third parties or within the business of such third parties could harm our revenues and results of operations. We recognize a substantial portion of our revenue from sales made through third parties, including our ISVs, distributors/resellers, and OEMs, and our future results depend in large part upon our continued successful distribution of our products through these channels. The activities of these third parties are not within our direct control. Our failure to manage our relationships with these third parties effectively could impair the success of our sales, marketing and support activities. A reduction in the sales efforts, technical capabilities or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with a major ISV, distributor/reseller, or OEM could have a negative effect on our sales and financial results. Any adverse effect on any of our ISV's, distributors'/resellers', or OEMs’ businesses related to competition, pricing and other factors could also have a material adverse effect on our business, financial condition and operating results.
Our customers and partners may seek refunds, delay implementation timelines, delay payment, fail to pay us in accordance with the terms of their agreements, or terminate use of our products, all of which can have an adverse effect on us. If customers or partners seek refunds, delay implementation of our products, delay payment, fail to pay us under the terms of our agreements, or terminate use of our products, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts (including litigation related thereto). For example, as of the date of the filing of this report on Form 10-K, 31 customers and others that claim to have been impacted by the MOVEit Vulnerability have indicated that they intend to seek indemnification from us related to the MOVEit Vulnerability and it is possible that, in connection therewith, they may delay payment under the terms of their contracts. Other MOVEit Transfer and MOVEit Cloud customers have sought refunds or delayed implementation timelines. As the scope of the impact of the MOVEit Vulnerability becomes more clear, additional customers may attempt to seek refunds, delay product implementation, withhold payments, or cease using the MOVEit product line entirely.
In addition, in the ordinary course of business, some of our customers and partners may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position and cash flow.
We rely on the experience and expertise of our skilled employees, and must continue to attract and retain qualified technical, marketing and managerial personnel in order to succeed. Our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial, sales and marketing personnel. There is significant competition for such personnel in the software industry. We may not continue to be successful in attracting and retaining the personnel we require to develop new and enhanced products and to continue to grow and operate profitably.
Risks Related to Laws and Regulations
We are subject to risks associated with compliance with laws and regulations globally, which may harm our business. We are a global company subject to varied and complex laws, regulations and customs, both domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, data privacy or related privacy practices, data residency, corporate governance, anti-trust and competition, employee and third-party complaints, anti-corruption, gift policies, conflicts of interest, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict on a domestic or international basis. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. We cannot provide assurance that our employees, contractors, agents and business partners will not take actions in violation of our internal policies or U.S. laws. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation.
In response to the Russian invasion of Ukraine, sanctions have been imposed by the U.S., Canada, the United Kingdom, the European Union, and other countries and companies and organizations against officials, individuals, regions, and industries in Russia and Ukraine. Although we have policies and procedures in place that are designed to comply with applicable sanctions, our employees, contractors, and agents may take actions in violation of such policies and applicable law and ultimately we could be held responsible. If we are held responsible for a violation of U.S. sanctions laws, we may be subject to various penalties, any of which could have a material adverse effect on our business, financial condition or results of operations.
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Our business practices with respect to the collection, use and management of personal information could give rise to operational interruption, liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection. As regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the handling of personal information expand and become more complex, potential risks related to data collection and use within our business will intensify. For example, the regulatory environment applicable to the handling of the European Economic Area ("EEA") residents' personal data, which is governed by the General Data Protection Regulation of 2018 (“GDPR”) and/or respectively the national data protection laws of United Kingdom, Switzerland, and other countries we operate, may cause us to assume additional liabilities, obligations or incur additional costs, and could result in our business, operating results and financial condition being harmed. Additionally, we and our customers may face a risk of enforcement actions by the competent data protection authorities relating to personal data transfers to us and by us from the EEA and other jurisdictions which have country specific data transfer requirements. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition.
In addition, governmental entities in the U.S. and other countries have enacted or are considering enacting legislation or regulations or may in the near future interpret existing legislation or regulations, in a manner that could significantly impact our ability and the ability of our customers and data partners to collect, augment, analyze, use, transfer and share personal and other information that is integral to certain business functions. For example, the California Consumer Privacy Act (as amended by the California Privacy Rights Act) took effect on January 1, 2023 and expanded the consumer`s privacy rights and the obligations to the organizations doing business in California. Other U.S. state legislatures have also implemented varying privacy laws and regulations, or are considering implementing legislation that we expect to become effective in the near term. Moreover, several privacy bills are under congressional review at the U.S. federal level.
Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions that we operate. Regulators globally are also imposing greater monetary fines for privacy violations (e.g., non-compliance with the GDPR may result in monetary penalties of up to 4% of worldwide revenue). Additionally, public perception and standards related to the privacy of personal information can shift rapidly, in ways that may affect our reputation or influence regulators to enact regulations and laws that may limit our ability to provide certain products. Any failure, or perceived failure, by us to comply with U.S. federal, state, or international laws and regulations, including laws and regulations regulating privacy, data security, or consumer protection, or other policies, public perception, standards, self-regulatory requirements or legal obligations, could result in lost or restricted business, proceedings, actions or fines brought against us or levied by governmental entities or others, or could adversely affect our business and harm our reputation.
We could incur substantial cost in protecting our proprietary software technology and if we fail to protect our technology, we could incur material harm to our business. We rely principally on a combination of contract provisions and copyright, trademark, patent and trade secret laws to protect our proprietary technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources, whether or not we ultimately prevail on the merits. The steps we take to protect our proprietary rights may be inadequate to prevent misappropriation of our technology; moreover, others could independently develop similar technology.
We could be subject to claims that we infringe intellectual property rights of others, which could harm our business, financial condition, results of operations or cash flows. Third parties could assert infringement claims in the future with respect to our products and technology, and such claims might be successful. Litigation relating to any such claims could result in substantial costs and diversion of resources, whether or not we ultimately prevail on the merits. Any such litigation could also result in our being prohibited from selling one or more of our products, unanticipated royalty payments, reluctance by potential customers to purchase our products, or liability to our customers and could have a material adverse effect on our business, financial condition, operating results and cash flows.
Changes in accounting principles and guidance, or their interpretation or implementation, may materially adversely affect our reported results of operations or financial position. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results, as well as our processes and related controls.
We may have exposure to additional tax liabilities. As a multinational corporation, we are subject to income taxes in the U.S. and various foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our income tax returns are routinely subject to audits by tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine our tax estimates, a final determination of tax
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audits that is inconsistent with such assessments or tax disputes could have an adverse effect on our financial condition, results of operations and cash flows.
We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes in the U.S. and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income taxes and may have exposure to additional non-income tax liabilities, which could have an adverse effect on our results of operations, financial condition and cash flows.
In addition, our future effective tax rates could be favorably or unfavorably affected by changes in tax rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or their interpretation. Such changes could have a material adverse impact on our financial results.
Contracting with government entities exposes us to additional risks inherent in the government procurement process. We provide products and services, directly and indirectly, to a variety of government entities, both domestically and internationally. Risks associated with licensing and selling products and services to government entities include more extended sales and collection cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific and contractual requirements, including with respect to ongoing compliance. We may be subject to audits and investigations relating to our government contracts and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contracts for default or for the convenience of the government, payment of fines, and suspension or debarment from future government business, as well as harm to our reputation and financial results.
Risks Related to Financial Performance or General Economic Conditions
Weakness in the U.S. and international economies may result in fewer sales of our products and may otherwise harm our business. We are subject to risks arising from adverse changes in global economic conditions, especially those in the U.S., Europe and Latin America. If global economic conditions weaken, credit markets tighten and/or financial markets become unstable, customers may delay, reduce or forego technology purchases, both directly and through our ISVs, resellers/distributors and OEMs. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. Further, deteriorating economic conditions could adversely affect our customers and their ability to pay amounts owed to us (see Our customers and partners may seek refunds, delay implementation timelines, delay payment, fail to pay us in accordance with the terms of their agreements, or terminate use of our products, all of which can have an adverse effect on us). The U.S. and other international economies continue to experience inflationary pressures, which may increase our expenses (including the cost of labor), negatively affect credit and securities markets generally, and further impact customer demand for our products and their ability to make payments. Any of these events would likely harm our business, results of operations, financial condition or cash flows.
We are currently operating in a period of economic uncertainty and capital markets disruption due to various geopolitical and macro-economic factors, which may materially adversely affect our business, financial condition, and results of operations. U.S. and global markets are continuing to experience volatility and disruption following among other things the escalation of geopolitical tensions in February 2022 with Russia’s invasion of Ukraine and the recent Israel-Hamas conflict. The overall macro global economy, including the ongoing military conflict in Ukraine and the Middle East, is highly unpredictable and has already led to market disruptions, including volatile capital markets, higher interest rates and debt capital costs, diminished liquidity and credit availability, declines in consumer confidence and discretionary spending, as well as supply chain disruptions and increases in costs of certain raw materials and transportation, which have in turn contributed to global inflationary pressures. These and related actions, responses, and consequences may contribute to world-wide economic downturns. In addition, prolonged unrest, military activities, or broad-based sanctions could have a material adverse effect on our operations and business outlook. Given our meaningful reliance on revenue generated outside of North America (which constituted 41% of our total revenue in fiscal 2023) and our reliance on revenue generated in EMEA (which constituted 32% of our total revenue in fiscal 2023), disruption of commercial activities in these regions may materially adversely affect our financial condition and results of operations. Although we cannot predict what the impacts may be, our global operations and reliance on interconnected technology increase the risk to our operations. The extent and duration of the conflict in Ukraine and the Middle East, geopolitical tensions, inflationary pressures and resulting market disruptions are impossible to predict but could be substantial.
Fluctuations in foreign currency exchange rates or interest rates have had, and could continue to have, an adverse impact on our financial condition and results of operations. Changes in the value of foreign currencies relative to the U.S. dollar and related changes in interest rates have adversely affected our results of operations and financial position and could continue to do so. In recent periods, as the value of the U.S. dollar has strengthened in comparison to certain foreign currencies (particularly in EMEA), our reported international revenue has been reduced because foreign currencies translate into fewer U.S. dollars. As approximately one-third of our revenue is denominated in foreign currencies, these exchange rate fluctuations have impacted, and we expect will continue to impact, our revenue results. Please see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 for additional information. We seek to reduce our exposure to fluctuations in exchange rates by entering into foreign exchange forward contracts to hedge certain actual and forecasted transactions of selected currencies (mainly in Europe, Brazil, India
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and Australia); however, our currency hedging transactions may not be effective in reducing the adverse impact of fluctuations in foreign currency exchange rates. Further, as geopolitical volatility around the world increases, there is increasing risk of the imposition of exchange or price controls, or other restrictions on the conversion of foreign currencies, which could have a material adverse effect on our business.
Revenue forecasting is uncertain, and the failure to meet our forecasts could result in a decline in our stock price. Our revenues, particularly new software license revenues or economic impacts from M&A activities, are difficult to forecast. We use a pipeline system to forecast revenues and trends in our business. Our pipeline estimates may prove to be unreliable either in a particular quarter or over a longer period of time, in part because the conversion rate of the pipeline into contracts can be difficult to estimate and requires management judgment. A variation in the conversion rate could cause us to plan or budget incorrectly and result in a material adverse impact on our business or our planned results of operations. Furthermore, most of our expenses are relatively fixed, including costs of personnel and facilities. Thus, an unexpected reduction in our revenue, or failure to achieve the anticipated rate of growth or realize synergies from M&A activity, would have a material adverse effect on our profitability. If our operating results do not meet our publicly stated guidance or the expectations of investors or analysts, our stock price may decline.
Our revenue and quarterly results may fluctuate, which could adversely affect our stock price. We have experienced, and may in the future experience, significant fluctuations in our quarterly operating results that may be caused by many factors. These factors include:
•changes in demand for our products;
•introduction, enhancement or announcement of products by us or our competitors;
•market acceptance of our new products, including acquired products;
•the growth rates of certain market segments in which we compete;
•size and timing of significant orders;
•a high percentage of our revenue is generated in the third month of each fiscal quarter and any failure to receive, complete or process orders at the end of any quarter could cause us to fall short of our revenue targets;
•budgeting cycles of customers;
•mix of distribution channels;
•mix of products and services sold;
•mix of international and North American revenues;
•fluctuations in currency exchange rates;
•changes in the level of operating expenses, including unforeseen expenses incurred in connection with items such as cyber security instances;
•changes in management;
•restructuring programs;
•changes in our sales force;
•completion or announcement of acquisitions by us or our competitors;
•integration of acquired businesses or inability to realize expected synergies;
•customer order deferrals in anticipation of new products announced by us or our competitors;
•general economic conditions in regions in which we conduct business; and
•other factors such as political or social unrest, terrorist attacks, other hostilities, natural disasters, cyber-attacks, and potential public health crises, such as pandemics.
Our common stock price may continue to be volatile, which could result in losses for investors. The market price of our common stock, like that of other technology companies, is volatile and is subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance. As a result, purchasers of our common stock may be unable at any given time to sell their shares at or above the price they paid for them.
Risks Related to our Indebtedness and Convertible Senior Notes
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations. As of November 30, 2023, we had approximately $724 million of consolidated indebtedness. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing;
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•requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our business;
•diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of our Convertible Senior Notes with an aggregate principal amount of $360 million, due April 15, 2026 (the "Notes"); and
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our current or future indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our current or future indebtedness, including the Notes, and our cash needs may increase in the future. In addition, our credit facility contains, and any future indebtedness that we may incur may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We are required to comply with certain financial and operating covenants under our Credit Facility and to make scheduled debt payments as they become due; any failure to comply with those covenants or to make scheduled payments could cause amounts borrowed under the facility to become immediately due and payable or prevent us from borrowing under the facility. In January 2022, we entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement"), which provides for a $275.0 million term loan and a $300.0 million revolving credit facility (which may be increased by an additional $260.0 million if the existing or additional lenders are willing to make such increased commitments) (the "Credit Facility"). This Credit Facility matures in January 2027, at which time any amounts outstanding will be due and payable in full. We may wish to borrow additional amounts under the facility in the future to support our operations, including for strategic acquisitions and share repurchases.
We are required to comply with specified financial and operating covenants and to make scheduled repayments of our term loan, which may limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any payment obligations under the facility could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants at the time we wish to borrow funds, we will be unable to borrow funds.
We may be required to repay the Credit Agreement prior to the stated maturity date, if the springing maturity feature is triggered. The Credit Agreement has a stated maturity date of January 25, 2027, but includes a springing maturity feature that will cause the stated maturity date to spring ahead to the date that is 181 days prior to the maturity date of our Notes subject to certain conditions as set forth in the Credit Agreement, including the repayment of the Notes, the refinancing of the Notes including a maturity date that is at least 181 days after January 25, 2027 and compliance with a liquidity test when all amounts outstanding will be due and payable in full. If such springing maturity feature is triggered, we will be required to pay all amounts outstanding under the Credit Facility sooner than they would otherwise be due, we may not have sufficient funds available to pay such amounts at that time, and we may not be able to raise additional funds to pay such amounts on a timely basis, on terms we find acceptable, or at all.
The capped call transactions may affect the value of our common stock. In connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions (“option counterparties”). The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are 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. From time to time, the option counterparties that are parties to the capped call transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results. Noteholders may require us to repurchase their Notes following a fundamental change at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition all conversions of Notes will be settled partially or entirely in cash. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness may restrict our ability to repurchase the Notes or pay the cash amounts due upon conversion. Our failure to repurchase Notes or to pay the cash amounts due upon conversion when required will constitute a default under the indenture governing the terms of the Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately
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payable in full. If the repayment of such other indebtedness were to be accelerated after any applicable notice or grace periods, then we may not have sufficient funds to repay that indebtedness and repurchase the Notes or make cash payments upon their conversion.
We are subject to counterparty risk with respect to the capped call transactions, and the capped call may not operate as planned. The option counterparties are financial institutions, and we are subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price subject to the cap and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Provisions in the indenture could delay or prevent an otherwise beneficial takeover of us. Certain provisions in the Notes and the indenture could make a third party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a fundamental change, then Noteholders will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that Noteholders or holders of our common stock may view as favorable.
Conversion of the Notes may dilute the ownership interest of existing stockholders. The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
Item 1B. Unresolved Staff Comments
As of the date of this report, we do not have any open comments from the SEC related to our financial statements or periodic filings.
Item 1C. Cybersecurity
Not applicable.
Item 2. Properties
We lease our headquarters facility, which includes administrative, sales, support, marketing, product development and distribution functions, in one building totaling approximately 33,000 square feet in Burlington, Massachusetts.
We also maintain offices for administrative, sales, support, marketing, product development and/or distribution purposes in leased facilities in various other locations in North America, including Morrisville, North Carolina, and Alpharetta, Georgia, Redwood City, California, Vienna, Virginia and outside North America, including Sofia, Bulgaria, Limerick, Ireland, Brno, Czech Republic, Bengaluru and Hyderabad, India, Singapore, Singapore and Rotterdam, the Netherlands. The terms of our leases generally range from one to fifteen years.
At the end of fiscal year 2021, we adopted an approach to work that gives our employees more flexibility to choose where to work. Depending on their role, this means that employees can choose their office location, as well as continue to work from home some or all the time. As of November 30, 2023, we have not terminated any significant lease arrangements. We believe our facilities are adequate for the conduct of our business.
Item 3. Legal Proceedings
Please see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 - Recent Developments: MOVEit Vulnerability for a discussion of legal proceedings related to the MOVEit Vulnerability.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Stockholders
Our common stock trades on the NASDAQ Global Select Market under the symbol "PRGS".
As of December 31, 2023, our common stock was held by approximately 121 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Unregistered Sales of Equity Securities and Use of Proceeds
All issuances of unregistered securities during fiscal year 2023, if any, have previously been disclosed in filings with the SEC.
Recent Sales of Unregistered Equity Securities
All issuances of unregistered securities during fiscal year 2023, if any, have previously been disclosed in filings with the SEC.
Stock Repurchases and Dividends
Repurchases of our common stock by month in the fourth quarter of fiscal year 2023 were as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| September 2023 | — | $ | — | — | $ | 197,959 | ||||||||||||||||||||
| October 2023 | — | — | — | 197,959 | ||||||||||||||||||||||
| November 2023 | 76,373 | 51.86 | 76,373 | 193,998 | ||||||||||||||||||||||
| Total | 76,373 | $ | 51.86 | 76,373 | $ | 193,998 | ||||||||||||||||||||
On January 10, 2023, our Board of Directors increased our share repurchase authorization by $150.0 million, to an aggregate authorization of $228.0 million. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand or discontinue the repurchase program at any time.
We have declared aggregate per share quarterly cash dividends totaling $0.70 for each of the years ended November 30, 2023, 2022 and 2021. We paid aggregate cash dividends totaling $31.6 million, $31.1 million and $31.6 million for the years ended November 30, 2023, 2022 and 2021, respectively. Our Board of Directors may choose to suspend, decrease, or discontinue utilizing dividends as part of our capital allocation strategy at any time, particularly, if doing so, may advance our accretive M&A strategy.
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Stock Performance Graph and Cumulative Total Return
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Computer Index for each of the last five fiscal years ended November 30, 2023, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends.
Comparison of 5 Year Cumulative Total Return(1)
Among Progress Software Corporation, the NASDAQ Composite Index and the
NASDAQ Computer Index
(1) $100 invested on November 30, 2018 in stock or index, including reinvestment of dividends.
| November 30, | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||||||||||||||||||
| Progress Software Corporation | $ | 100.00 | $ | 116.98 | $ | 114.05 | $ | 137.80 | $ | 151.65 | $ | 153.19 | ||||||||||||||||||||||||||
| NASDAQ Composite | 100.00 | 116.88 | 166.41 | 211.96 | 156.44 | 194.07 | ||||||||||||||||||||||||||||||||
| NASDAQ Computer | 100.00 | 129.83 | 196.65 | 280.00 | 201.30 | 291.72 | ||||||||||||||||||||||||||||||||
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of Progress Software Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended November 30, 2023 compared to the year ended November 30, 2022. For a discussion of the year ended November 30, 2022 compared to the year ended November 30, 2021, please refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended November 30, 2022.
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Forward-Looking Statements
Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
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.
Overview
Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides enterprise software products for the development, deployment and management of high-impact business applications.
The key tenets of our strategic plan and operating model are as follows:
Be a Trusted Provider of Products to Develop, Deploy and Manage High Impact Applications. A key element of our strategy is centered on the goal of building and maintaining leading products and tools enterprises need to build, deploy, and manage modern, strategic business applications. We offer our products and tools to both new customers and partners, as well as our existing partner and customer ecosystems.
Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success, and a streamlined operating approach to drive predictable and stable recurring revenue and high levels of profitability.
Follow a Total Growth Strategy through Accretive M&A. We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the infrastructure software space, with products that appeal to both IT organizations and individual developers. In April 2019, we acquired Ipswitch, Inc.; in October 2020, we acquired Chef Software, Inc.; in November 2021, we acquired Kemp Technologies; and in February 2023, we acquired MarkLogic.
Employ a Multi-Faceted Capital Allocation Strategy. Our capital allocation policy emphasizes accretive M&A, which allows us to expand our business and drive significant stockholder returns. We also utilize dividends and share repurchases to return capital to stockholders. We currently intend to continue to repurchase our shares in sufficient quantities to offset dilution from our equity plans and to continue to return a portion of our annual cash flows from operations to stockholders in the form of dividends.
We expect to continue to pursue acquisitions meeting our financial criteria that are designed to expand our business and drive significant stockholder returns. As a result, our expected uses of cash could change, our cash position could be reduced, and we may incur additional debt obligations to the extent we complete additional acquisitions. However, we currently believe that existing cash balances, together with funds generated from operations and amounts available under our Credit Facility, will be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through at least the next twelve months.
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Results of Operations
Fiscal Year 2023 Compared to Fiscal Year 2022
Revenue
| Fiscal Year Ended | Percentage Change | ||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | As Reported | Constant Currency | |||||||||||||||||||
| Revenue | $ | 694,439 | $ | 602,013 | 15 | % | 15 | % | |||||||||||||||
The increase in revenue in fiscal year 2023 was driven by the acquisition of MarkLogic, which closed during the first quarter of fiscal year 2023, as well as increases in our OpenEdge, Kemp LoadMaster, Sitefinity, Ipswitch, DevTools, Corticon, and Chef product offerings. Changes in prices from fiscal year 2022 to 2023 did not have a significant impact on our revenue.
Software License Revenue
| Fiscal Year Ended | Percentage Change | ||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | As Reported | Constant Currency | |||||||||||||||||||
| License | $ | 220,789 | $ | 188,336 | 17 | % | 17 | % | |||||||||||||||
| As a percentage of total revenue | 32 | % | 31 | % | |||||||||||||||||||
Software license revenue increased in fiscal year 2023 primarily due to the acquisition of MarkLogic, as well as increases in license sales in Kemp LoadMaster and OpenEdge.
Maintenance and Services Revenue
| Fiscal Year Ended | Percentage Change | ||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | As Reported | Constant Currency | |||||||||||||||||||
| Maintenance | $ | 401,501 | $ | 362,335 | 11 | % | 10 | % | |||||||||||||||
| As a percentage of total revenue | 58 | % | 60 | % | |||||||||||||||||||
| Professional services | $ | 72,149 | $ | 51,342 | 41 | % | 40 | % | |||||||||||||||
| As a percentage of total revenue | 10 | % | 9 | % | |||||||||||||||||||
| Total maintenance and services revenue | $ | 473,650 | $ | 413,677 | 14 | % | 14 | % | |||||||||||||||
| As a percentage of total revenue | 68 | % | 69 | % | |||||||||||||||||||
Maintenance revenue increased in fiscal year 2023 primarily due to the acquisition of MarkLogic, as well as an increase in maintenance revenue from our OpenEdge, Chef, and DevTools product offerings. The increase in maintenance revenue was partially offset by a decrease in Kemp LoadMaster maintenance revenue. Professional services revenue increased primarily due to our acquisition of MarkLogic, as well as an increase in professional services revenue from our Sitefinity product offerings. The increase in professional services revenue was partially offset by a decrease in professional services revenue of Chef.
Revenue by Region
| Fiscal Year Ended | Percentage Change | ||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | As Reported | Constant Currency | |||||||||||||||||||
| North America | $ | 411,670 | $ | 341,154 | 21 | % | 21 | % | |||||||||||||||
| As a percentage of total revenue | 59 | % | 57 | % | |||||||||||||||||||
| EMEA | $ | 222,862 | $ | 207,707 | 7 | % | 6 | % | |||||||||||||||
| As a percentage of total revenue | 32 | % | 35 | % | |||||||||||||||||||
| Latin America | $ | 21,112 | $ | 18,053 | 17 | % | 14 | % | |||||||||||||||
| As a percentage of total revenue | 3 | % | 3 | % | |||||||||||||||||||
| Asia Pacific | $ | 38,795 | $ | 35,099 | 11 | % | 12 | % | |||||||||||||||
| As a percentage of total revenue | 6 | % | 5 | % | |||||||||||||||||||
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Total revenue generated in North America increased $70.5 million, and total revenue generated outside North America increased $21.9 million, in fiscal year 2023. The increases in North America and EMEA were primarily due to the acquisition of MarkLogic and increases in license revenue from OpenEdge and Kemp LoadMaster. Revenue from Latin America increased due to an increase in OpenEdge license and maintenance revenue. Revenue from Asia Pacific increased due to the acquisition of MarkLogic, as well as increases in our Chef product offerings.
Total revenue generated in markets outside North America represented 41% of total revenue in fiscal year 2023 compared to 43% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2023 as compared to the exchange rates in effect in fiscal year 2022, total revenue generated in markets outside North America would have been 41% of total revenue.
Cost of Software Licenses
| Fiscal Year Ended | |||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | Change | ||||||||||||||||||||
| Cost of software licenses | $ | 11,153 | $ | 10,243 | $ | 910 | 9 | % | |||||||||||||||
| As a percentage of software license revenue | 5 | % | 5 | % | |||||||||||||||||||
| As a percentage of total revenue | 2 | % | 2 | % | |||||||||||||||||||
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.
Cost of Maintenance and Services
| Fiscal Year Ended | |||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | Change | ||||||||||||||||||||
| Cost of maintenance and services | $ | 85,255 | $ | 62,177 | $ | 23,078 | 37 | % | |||||||||||||||
| As a percentage of maintenance and services revenue | 18 | % | 15 | % | |||||||||||||||||||
| As a percentage of total revenue | 12 | % | 10 | % | |||||||||||||||||||
| Components of cost of maintenance and services: | |||||||||||||||||||||||
| Personnel Related Costs | $ | 63,471 | $ | 44,049 | $ | 19,422 | 44 | % | |||||||||||||||
| Contractors and Outside Services | 13,969 | 12,286 | 1,683 | 14 | % | ||||||||||||||||||
| Hosting and Other | 7,815 | 5,842 | 1,973 | 34 | % | ||||||||||||||||||
| Total cost of maintenance and services | $ | 85,255 | $ | 62,177 | $ | 23,078 | 37 | % | |||||||||||||||
Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. Cost of maintenance and services increased primarily due to higher personnel related costs, contractors and outside services costs, and hosting related costs resulting from the acquisition of MarkLogic.
Amortization of Acquired Intangibles
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Amortization of acquired intangibles | $ | 30,169 | $ | 22,076 | 37 | % | |||||||||||
| As a percentage of total revenue | 4 | % | 4 | % | |||||||||||||
Amortization of acquired intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. The year over year increase was due to the addition of MarkLogic acquired intangibles.
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Gross Profit
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Gross profit | $ | 567,862 | $ | 507,517 | 12 | % | |||||||||||
| As a percentage of total revenue | 82 | % | 84 | % | |||||||||||||
Our gross profit increased primarily due to the increase in revenue, partially offset by the increases of costs of licenses, costs of maintenance and services, and the amortization of intangibles, each as described above. As a percentage of total revenue, gross profit decreased due to higher costs of maintenance and services, as described above.
Sales and Marketing
| Fiscal Year Ended | |||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | Change | ||||||||||||||||||||
| Sales and marketing | $ | 156,076 | $ | 140,760 | $ | 15,316 | 11 | % | |||||||||||||||
| As a percentage of total revenue | 22 | % | 23 | % | |||||||||||||||||||
| Components of sales and marketing: | |||||||||||||||||||||||
| Personnel related costs | $ | 134,820 | $ | 119,350 | $ | 15,470 | 13 | % | |||||||||||||||
| Contractors and outside services | 3,890 | 3,156 | 734 | 23 | % | ||||||||||||||||||
| Marketing programs and other | 17,366 | 18,254 | (888) | (5) | % | ||||||||||||||||||
| Total sales and marketing | $ | 156,076 | $ | 140,760 | $ | 15,316 | 11 | % | |||||||||||||||
Sales and marketing expenses increased in fiscal year 2023 primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as increases in contractors and outside services costs, partially offset by a decrease in marketing programs.
Product Development
| Fiscal Year Ended | |||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | Change | ||||||||||||||||||||
| Product development | $ | 132,401 | $ | 114,568 | $ | 17,833 | 16 | % | |||||||||||||||
| As a percentage of total revenue | 19 | % | 19 | % | |||||||||||||||||||
| Components of product development costs: | |||||||||||||||||||||||
| Personnel related costs | $ | 126,680 | $ | 111,009 | $ | 15,671 | 14 | % | |||||||||||||||
| Contractors and outside services | 4,743 | 2,699 | 2,044 | 76 | % | ||||||||||||||||||
| Other product development costs | 978 | 860 | 118 | 14 | % | ||||||||||||||||||
| Total product developments costs | $ | 132,401 | $ | 114,568 | $ | 17,833 | 16 | % | |||||||||||||||
Product development expenses increased in fiscal year 2023 primarily due to increased personnel related costs associated with our acquisition of MarkLogic and increased contractors and outside services costs.
General and Administrative
| Fiscal Year Ended | |||||||||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | Change | ||||||||||||||||||||
| General and administrative | $ | 83,157 | $ | 77,876 | $ | 5,281 | 7 | % | |||||||||||||||
| As a percentage of total revenue | 12 | % | 13 | % | |||||||||||||||||||
| Components of general and administrative: | |||||||||||||||||||||||
| Personnel Related Costs | $ | 65,858 | $ | 61,330 | $ | 4,528 | 7 | % | |||||||||||||||
| Contractors and Outside Services | 12,888 | 9,763 | 3,125 | 32 | % | ||||||||||||||||||
| Other general and administrative costs | 4,411 | 6,783 | (2,372) | (35) | % | ||||||||||||||||||
| Total cost of general and administrative | $ | 83,157 | $ | 77,876 | $ | 5,281 | 7 | % | |||||||||||||||
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General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in fiscal year 2023 primarily due to higher personnel related costs associated with our acquisition of MarkLogic, as well as increases in contractors and outside services, partially offset by a decrease in other general and administrative costs.
Amortization of Intangibles
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Amortization of intangibles | $ | 66,430 | $ | 46,868 | 42 | % | |||||||||||
| As a percentage of total revenue | 10 | % | 8 | % | |||||||||||||
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. Amortization of acquired intangibles increased in fiscal year 2023 due to the addition of MarkLogic acquired intangibles, as discussed above.
Restructuring Expenses
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Restructuring expenses | $ | 8,407 | $ | 879 | 856 | % | |||||||||||
| As a percentage of total revenue | 1 | % | — | % | |||||||||||||
Restructuring expenses recorded in fiscal year 2023 primarily relate to the restructuring activities that occurred in fiscal years 2023 and 2020. See Note 15: Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional details, including types of expenses incurred and the timing of future expenses and cash payments.
Acquisition-Related Expenses
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Acquisition-related expenses | $ | 4,704 | $ | 4,603 | 2 | % | |||||||||||
| 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 primarily consist of professional services fees, including third-party legal and valuation-related fees, as well as retention fees. Acquisition-related expenses in fiscal year 2023 were primarily related to the acquisition of MarkLogic, as well as our pursuit of other acquisition opportunities. Acquisition-related expenses in fiscal year 2022 were primarily related to our pursuit of other acquisition opportunities.
Cyber Incident and Vulnerability Response Expenses, Net
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Cyber incident and vulnerability responses expenses, net | $ | 6,164 | $ | 602 | * | ||||||||||||
| As a percentage of total revenue | 1 | % | — | % | |||||||||||||
*Not meaningful
Expenses include costs to investigate and remediate the November 2022 Cyber Incident and MOVEit Vulnerability, as well as legal and other professional services related thereto. Expenses related to such cyber matters are provided net of insurance recoveries, although the timing of recognizing insurance recoveries may differ from the timing of recognizing the associated expenses. Costs associated with the enhancement of our cybersecurity program are not included within this adjustment. We incurred expenses of $1.5 million, net of approximately $3.7 million of insurance recoveries, and $4.7 million, net of insurance recoveries of $2.5 million, during fiscal year 2023 related to the MOVEit Vulnerability and the November 2022 Cyber Incident, respectively. During fiscal year 2022, we incurred expenses of $0.6 million related to the November 2022 Cyber Incident. See Note 19: Cyber Related Matters for further discussion.
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Gain on Sale of Assets Held for Sale
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Gain on sale of assets held for sale | $ | — | $ | (10,770) | * | ||||||||||||
| As a percentage of total revenue | — | % | 2 | % | |||||||||||||
*Not meaningful
In the second quarter of fiscal year 2022, we sold corporate land and building assets previously reported as assets held for sale on our consolidated balance sheet. As the sale price less cost to sell was greater than the carrying value of these assets we recognized a net gain on the sale of approximately $10.8 million in the second quarter of fiscal year 2022.
Income from Operations
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Income from operations | $ | 110,523 | $ | 132,131 | (16) | % | |||||||||||
| As a percentage of total revenue | 16 | % | 22 | % | |||||||||||||
Income from operations decreased year over year due to an increase in costs of revenue and operating expenses, offset by an increase in revenue, as shown above.
Other (Expense) Income
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Interest expense | $ | (30,780) | $ | (15,790) | 95 | % | |||||||||||
| Interest income and other, net | 2,538 | 1,414 | 79 | % | |||||||||||||
| Foreign currency loss, net | (2,624) | (500) | 425 | % | |||||||||||||
| Total other expense, net | $ | (30,866) | $ | (14,876) | 107 | % | |||||||||||
| As a percentage of total revenue | (4) | % | (2) | % | |||||||||||||
Total other expense, net, increased in fiscal year 2023 due to increased interest expense on our term loan, due to higher interest costs, and the interest costs associated with drawing on our revolving line of credit to acquire MarkLogic. Refer to Note 8: Debt, for further details on the impact of the amendment. Interest income and other, net, was higher in fiscal year 2023, resulting from higher interest rates worldwide. Foreign currency loss increased year over year due to rate volatility and timing of intercompany and hedge settlement activities.
Provision for Income Taxes
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Provision for income taxes | $ | 9,460 | $ | 22,186 | (57) | % | |||||||||||
| As a percentage of income before income taxes | 12 | % | 19 | % | |||||||||||||
Our effective income tax rate was 12% and 19% for fiscal years 2023 and 2022 respectively. The primary reason for the decrease in the effective rate was due to more favorable tax benefits related to stock-based compensation during 2023 compared to 2022.
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Net Income
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | % Change | ||||||||||||||
| Net income | $ | 70,197 | $ | 95,069 | (26) | % | |||||||||||
| As a percentage of total revenue | 10 | % | 16 | % | |||||||||||||
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.
Annual Recurring Revenue (ARR)
We are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years. ARR represents the annualized contract value for all active and contractually binding term-based contracts at the end of a period. ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. ARR is not calculated in accordance with GAAP. 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.
We define ARR as the annual recurring revenue of term-based contracts from all customers at a point in time. We calculate ARR by taking monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions. The calculation is done at constant currency using the current year budgeted exchange rates for all periods presented.
Our ARR was $574.0 million and $490.0 million as of November 30, 2023 and 2022, respectively, which is an increase of 17.1% year-over-year. The growth in ARR was primarily driven by the acquisition of MarkLogic.
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 calculated in accordance with GAAP.
Our net retention rates have generally ranged between 100% and 102% for all periods presented. We believe net retention rates can be a helpful indicator of the durability of top line performance.
Liquidity and Capital Resources
Cash and Cash Equivalents
| (In thousands) | November 30, 2023 | November 30, 2022 | |||||||||
| Cash and cash equivalents | $ | 126,958 | $ | 256,277 | |||||||
The decrease in cash and cash equivalents of $129.3 million from the end of fiscal year 2022 was primarily due to cash outflows of $355.3 million for cash paid for acquisitions, net of cash acquired, repayment of the revolving line of credit of $85.0 million, repurchases of common stock of $34.0 million, dividend payments of $31.6 million, payments of debt obligations of $6.9 million, and purchases of property and equipment of $5.6 million. These cash outflows were offset by proceeds from the issuance of debt of $195.0 million to partially fund the acquisition of MarkLogic, cash inflows from operations of $173.9 million, $13.6 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $6.0 million. Except as described below, there are no limitations on our ability to access our cash and cash equivalents.
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Cash and cash equivalents held by our foreign subsidiaries were $61.1 million at November 30, 2023. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S. As such, they are not deemed 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 the repatriation of earnings would have a material adverse impact on our liquidity.
Share Repurchases
In fiscal years 2023 and 2022, we repurchased and retired 0.6 million shares of our common stock for $34.0 million and 1.7 million shares of our common stock for $77.0 million, respectively. In fiscal year 2021, we repurchased and retired 0.8 million shares of our common stock for $35.0 million. On January 10, 2023, our Board of Directors increased our share repurchase authorization by $150.0 million, to an aggregate authorization of $228.0 million. As of November 30, 2023, there was $194.0 million remaining under the current share repurchase authorization. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand, or discontinue the repurchase program at any time.
Dividends
We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and have paid quarterly dividends since that time. On September 20, 2023, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on December 15, 2023 to stockholders of record as of the close of business on December 1, 2023. On January 9, 2024, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on March 15, 2024 to shareholders of record as of the close of business on March 1, 2024. We have paid aggregate cash dividends totaling $31.6 million, $31.1 million and $31.6 million for the years ended November 30, 2023, 2022, and 2021, respectively. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.
Credit Facility
On January 25, 2022, we entered into the Credit Agreement providing for a $275.0 million secured term loan and a $300.0 million secured revolving Credit Facility. The Credit Agreement matures on the earlier of (i) January 25, 2027 and (ii) the date that is 181 days prior to the maturity date of our Notes (defined below) subject to certain conditions. The Credit Facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ending February 28, 2022. The first eight payments were in the principal amount of $1.7 million each, the following four payments are in the principal amount of $3.4 million each, the following eight payments are in the principal amount of $5.2 million each and the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium.
Revolving loans may be borrowed, repaid, and reborrowed until January 25, 2027, at which time all amounts outstanding must be repaid. As of November 30, 2023, there was $110.0 million outstanding amounts under the revolving line of credit and $2.5 million of letters of credit.
The Credit Agreement contains customary affirmative and negative covenants, 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 and a consolidated total net leverage ratio. Additionally, the Credit Agreement includes customary events of default, that in event of, could result in the acceleration of the obligations under the Credit Agreement. We are in compliance with all financial covenants as of November 30, 2023. See Note 8: Debt for further discussion.
Convertible Senior Notes
In April 2021, we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. There are no required principal payments prior to the maturity of the Notes. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 million of additional Notes were purchased for total proceeds of $360 million. The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021. See Note 8: Debt for further discussion.
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Cash Flows from Operating Activities
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Net income | $ | 70,197 | $ | 95,069 | $ | 78,420 | |||||||||||
| Non-cash reconciling items included in net income | 127,063 | 104,121 | 100,666 | ||||||||||||||
| Changes in operating assets and liabilities | (23,340) | (7,030) | (556) | ||||||||||||||
| Net cash flows from operating activities | $ | 173,920 | $ | 192,160 | $ | 178,530 | |||||||||||
The decrease in cash generated from operations in fiscal year 2023 as compared to fiscal year 2022 was primarily due to higher interest expense on debt and an increase in cash paid for income taxes, partially offset by higher billings and collections. The increase in non-cash reconciling items included in net income primarily relates to the increase in amortization of intangibles due to the recent acquisition of MarkLogic.
Our gross accounts receivable as of November 30, 2023 increased by $27.9 million from the end of fiscal year 2022. Days sales outstanding ("DSO") in accounts receivable remained flat at 62 days in fiscal year 2023 as compared to fiscal year 2022. In addition, our net deferred revenue as of November 30, 2023 increased by $12.6 million from the end of fiscal year 2022.
Cash Flows (used in) from Investing Activities
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Net investment activity | $ | 438 | $ | 1,950 | $ | 5,950 | |||||||||||
| Purchases of property and equipment | (5,570) | (6,090) | (4,654) | ||||||||||||||
| Proceeds from sale of long-lived assets, net | — | 25,998 | — | ||||||||||||||
| Other investing activities | — | 134 | 2,330 | ||||||||||||||
| Payments for acquisitions, net of cash acquired | (355,250) | — | (253,961) | ||||||||||||||
| Net cash flows from (used in) investing activities | $ | (360,382) | $ | 21,992 | $ | (250,335) | |||||||||||
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, as well as the timing of acquisitions and divestitures. Cash used in investing activities was impacted by the acquisition of MarkLogic for a net cash amount of $355.3 million, and Kemp for a net cash amount of $254.0 million, in fiscal years 2023 and 2021, respectively. In fiscal year 2022 we received $26.0 million net proceeds from the sale of long-lived assets.
Cash Flows from (used in) Financing Activities
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Proceeds from stock-based compensation plans | $ | 25,956 | $ | 16,165 | $ | 15,033 | |||||||||||
| Repurchases of common stock | (33,962) | (77,041) | (35,000) | ||||||||||||||
| Dividend payment to stockholders | (31,554) | (31,063) | (31,561) | ||||||||||||||
| Proceeds from issuance of convertible senior notes, net of issuance costs of $9.9 million | — | — | 350,100 | ||||||||||||||
| Purchase of capped calls | — | — | (43,056) | ||||||||||||||
| Proceeds from the issuance of debt, net of payments of long term debt and debt issuance costs | 103,125 | (1,660) | (118,217) | ||||||||||||||
| Other financing activities | (12,377) | (7,824) | (5,186) | ||||||||||||||
| Net cash flows (used in) from financing activities | $ | 51,188 | $ | (101,423) | $ | 132,113 | |||||||||||
During fiscal year 2023, we received $26.0 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $16.2 million in fiscal year 2022, and $15.0 million in fiscal year 2021. Most significantly, in the second quarter of fiscal year 2021, we received $350.1 million in net proceeds from the issuance of convertible senior notes and paid $43.1 million to purchase capped calls in connection with the convertible note offering. We received proceeds from the issuance of
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debt of $195.0 million in fiscal year 2023 and $7.5 million in fiscal year 2022. The debt proceeds were offset by payments on our long-term debt of $91.9 million in fiscal year 2023 (including a $85.0 million repayment on the revolving line of credit), compared to $6.9 million in fiscal year 2022, and $117.3 million in fiscal year 2021 (including a $98.5 million repayment on the revolving line of credit). In addition, we repurchased $34.0 million of our common stock under our share repurchase plan in fiscal year 2023, compared to $77.0 million in fiscal year 2022, and $35.0 million in fiscal year 2021.
Indemnification Obligations
We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial. For indemnification claims related to the MOVEit Vulnerability. Please see Recent Developments: MOVEit Vulnerability below for further details.
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 titled “Risk Factors” which may lead to disruption and volatility in capital markets and credit markets that could adversely affect our liquidity and capital resources. However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our 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.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations are based on 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 we believe are reasonable under the circumstances.
These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
We have identified the following critical accounting estimates that require the use of significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
Our contracts with customers typically include promises to license one or more products and services to a customer. Determining whether products and services are distinct performance obligations that should be accounted for separately requires significant judgment. Significant judgment is also required to determine the stand-alone selling price ("SSP") of each distinct performance obligation. Our licenses are sold as perpetual or term licenses, and the arrangements typically contain various combinations of maintenance and services, which are generally accounted for as separate performance obligations. We use the residual approach to allocate the transaction price to our software license performance obligations because, due to the pricing of our licenses being highly variable, they do not have an observable SSP.
Maintenance revenue is recognized ratably over the contract period. The SSP of maintenance services is a percentage of the net selling price of the related software license. Professional services revenue is generally recognized as the services are delivered to the customer. The SSP of services is based upon observable prices in similar transactions using the hourly rates sold in stand-alone services transactions. Services are either sold on a time and materials basis or prepaid upfront. Revenue related to software-as-a-service ("SaaS") offerings is recognized ratably over the contract period. The SSP of SaaS performance obligations is determined based upon observable prices in stand-alone SaaS transactions.
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We also consider whether an arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations, although we do not have a history of offering these elements. We do not have any material revenue arrangements that include estimates for variable consideration.
Loss Contingencies and the MOVEit Vulnerability
The Company recognizes a liability for loss contingencies for which it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount is reasonably estimable. The Company has not incurred any significant litigation costs or entered into large settlements in recent history.
As more fully discussed in Note 19: Cyber Related Matters to the consolidated financial statements, in May 2023, the Company discovered a zero-day vulnerability in its MOVEit Transfer and MOVEit Cloud software product offerings (the MOVEit Vulnerability). As of the date of this filing on Form 10-K, the Company has received formal letters from 31 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 the Company related to the MOVEit Vulnerability. Additionally, the MOVEit Vulnerability has resulted in informal government inquiries, three formal government investigations, and private litigation, which may result in adverse judgments, settlements, fines, penalties, or other resolutions, the amount, scope and timing of which could be material, but which the Company is currently unable to predict.
There is complexity in applying this accounting framework for the potential losses arising from the MOVEit Vulnerability and in determining whether a loss is probable and estimable as these claims and proceedings are subject to inherent uncertainties and unascertainable damages. Further, the outcome of these matters may not be known for prolonged periods of time. Because 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, we are currently unable to develop an estimate of the losses or range of losses incurred (if any). Therefore, we have not recorded a loss contingency liability for the MOVEit Vulnerability as of November 30, 2023. The Company could incur judgments or enter into settlements regarding the outcome of these claims and proceedings, which could have a material effect on the estimated amount of the liability in the period in which the effect becomes probable and reasonably estimable.
We have incurred expenses related to our efforts to investigate and remediate the MOVEit Vulnerability, as well as legal and other professional services related thereto. Expenses are recognized as the expenses are incurred and are provided net of expected insurance recoveries, although the timing of recognizing insurance recoveries may differ from the timing of recognizing the associated expenses. We incurred expenses of $1.5 million, net, related to the MOVEit Vulnerability for the fiscal year ended November 30, 2023.
During the period when 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 November 30, 2023, we have recorded approximately $3.7 million in insurance recoveries, and we have $8.8 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.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from the management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If management made different estimates or judgments, material differences in the fair values of the net assets acquired may result.
Recent Accounting Pronouncements
Refer to Note 1: Nature of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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Recent Developments: MOVEit Vulnerability
Description of Event
As disclosed via a Form 8-K filed on June 5, 2023, on the evening of May 28, 2023 (Eastern Time), our MOVEit technical support team received an initial customer support call indicating unusual activity within their MOVEit Transfer instance. An investigative team was mobilized and, on May 30, 2023, the investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted version of MOVEit Transfer known as MOVEit Cloud). The investigative team determined the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as, (ii) for a small group of customers, in customer-dedicated cloud instances that are hosted, separate and apart from the public instances of our MOVEit Cloud platform). We 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.
MOVEit Transfer is a secure file-transfer software that is installed by customers on-premise and does not have any on-going telemetry after installation that allows us to track, among other things, a customer’s product usage, deployed version, file transfer activity (including any data that is transferred by or stored within the customer’s MOVEit Transfer instance), or whether the customer has applied any security patches or bug fixes to their MOVEit Transfer instance. However, a number of MOVEit Transfer customers and others have disclosed that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to their environments and portions of their sensitive customer data.
Furthermore, we have not seen any evidence that sensitive customer data has been exfiltrated from the public MOVEit Cloud instances. For a small group of customers, we provide dedicated MOVEit Cloud instances that are hosted, for each such customer, separate and apart from the public instances of our MOVEit Cloud platform. Two of our dedicated MOVEit Cloud customers have reported that malicious threat actors have exploited the MOVEit Vulnerability to obtain access to their dedicated MOVEit Cloud environment. As of the date of the filing of this report on Form 10-K, one such customer has confirmed that no sensitive data was compromised and the other has reported that certain personally identifiable information was exfiltrated.
Since our disclosures regarding the MOVEit Vulnerability, various third-parties have been actively scrutinizing MOVEit Transfer and MOVEit Cloud, leading to the discovery and our prompt patching of additional vulnerabilities. We are currently not aware of any evidence that these additional vulnerabilities were exploited by malicious threat actors prior to creating patches to address them and making those patches available to our MOVEit Transfer customers and applying those patches to the MOVEit Cloud environments – both the public and dedicated cloud instances.
Progress has remained fully operational at all times before and after the discovery of the MOVEit Vulnerability and, as of the time of the filing of this report on Form 10-K, has not uncovered evidence of unauthorized activity in Progress' corporate environment or impact to products beyond MOVEit Transfer and MOVEit Cloud related to this attack. MOVEit Transfer and MOVEit Cloud represented less than 4% in aggregate of the Company’s revenue for the fiscal year ended November 30, 2023.
Progress engaged outside cybersecurity experts and other incident response professionals to conduct a forensic investigation and assess the extent and scope of the MOVEit Vulnerability. The Company (i) has and is continuing to implement a series of additional security and related measures aimed at addressing the MOVEit Vulnerability and subsequently discovered vulnerabilities and further strengthening the overall security of our MOVEit applications, (ii) has engaged outside legal counsel to conduct a thorough independent investigation of the MOVEit Vulnerability, and (iii) has engaged with federal law enforcement and other federal agencies with respect to the MOVEit Vulnerability. As our fact-gathering investigation and litigation response continues, we will continue to assess the potential impact of the MOVEit Vulnerability on our business, operations, and financial results.
Expenses Incurred and Amounts Accrued
For the fiscal year ended November 30, 2023, we incurred $1.5 million of costs related to the MOVEit Vulnerability. Costs are provided net of received and expected insurance recoveries of approximately $3.7 million, which was recognized during the third and fourth quarters of fiscal year 2023. The timing of recognizing insurance recoveries may differ from the timing of recognizing the associated expenses.
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Future Costs
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. Our financial liability arising from any of the foregoing will depend on many factors, including limitations contained within our customer contracts, the amount of private litigation, and the number and extent of formal government investigations into the matter, therefore it is not possible at this time to estimate the quantitative impact of any such liability with any reasonable degree of certainty.
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 November 30, 2023, we have recorded approximately $6.2 million in insurance recoveries, of which, $2.5 million was related to the November 2022 Cyber Incident and $3.7 million was related to the MOVEit Vulnerability, providing us with $8.8 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.
Future Capital Investments
In addition, we may accelerate or make additional investments in our information technology systems, but we are unable to estimate such investments because the nature and scope has not yet been determined. We currently do not expect such amounts to be material to any fiscal period.
Effect on Sales and Customer Loyalty
The MOVEit Vulnerability may adversely affect our future performance and financial results. Customer confidence in Progress may also be impacted by the MOVEit Vulnerability. Through our response speed and transparent communications, we are committed to, and actively engaged in, activities to restore any loss in customer confidence. However, we currently cannot predict the length or extent of any ongoing impact to sales.
Litigation and Governmental Investigations
As of the date of the filing of this report on Form 10-K, (i) we have received formal letters from 31 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 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 118 class action lawsuits filed by individuals who claim to have been impacted by 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 several inquiries from domestic and foreign data privacy regulators; inquiries from several state attorneys general; as well as formal investigations from: (i) a U.S. federal law enforcement agency (as of the date of the filing of this report, the law enforcement investigation that we are cooperating with is not an enforcement action or formal governmental investigation of which we have been told that we are a target), (ii) the SEC (as further described hereafter), and (iii) the Office of the Attorney General for the District of Columbia (as further described hereafter). On October 2, 2023, Progress received a subpoena from the SEC seeking various documents and information relating to the MOVEit Vulnerability. As described in the cover letter accompanying the subpoena, at this stage, the SEC investigation is a fact-finding inquiry, the investigation does not mean that Progress or anyone else has violated federal securities laws, and the investigation does not mean that the SEC has a negative opinion of any person, entity, or security. Progress intends to cooperate fully with the SEC in its investigation.
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 intends to cooperate fully with the Office of the Attorney General for the District of Columbia in its investigation.
Such claims and investigations may have an adverse effect on how we operate our business and our results of operations, and in the future, we may be subject to additional governmental or regulatory investigations, as well as additional litigation or indemnification
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claims. While a loss from these matters is possible, we cannot reasonably estimate a range of possible losses at this time, particularly while the foregoing matters are pending and our fact-gathering 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. 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. As such, we have not recorded a loss contingency liability for litigation, claims and governmental investigations. See Note 19: Cyber Related Matters to Consolidated Financial Statements included in Item 8, Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest rates affecting the return on our invested cash and borrowing activities and foreign currency fluctuations. We have established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
Exposure to interest rate risk is related to changing interest rates under our Credit Agreement, which are variable and determined by reference to a term benchmark rate or a base rate at our option. The rates range from 1.00% to 2.00% above the term benchmark rate or from 0.00% to 1.00% above the defined base rate for base rate borrowings, in each case based upon our 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. The outstanding balance of the term loan as of November 30, 2023 was $261.3 million.
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. In June 2023, the interest rate swap agreement was amended to implement certain changes in the reference rate from LIBOR to SOFR. Under the agreement, 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 were previously exposed to market risk due to variable interest rates based on LIBOR and are now exposed to market risk due to variable interest rates based on SOFR.
| November 30, 2023 | November 30, 2022 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Interest rate swap contracts designated as cash flow hedges | $ | 103,125 | $ | 1,495 | $ | 120,000 | $ | 4,407 | |||||||||||||||
Foreign Currency Risk
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 consolidated balance sheets at the end of each reporting period and expire between 30 days and 2 years from the date the contract was entered. In fiscal year 2023, realized and unrealized gains of $2.3 million from our forward contracts were recognized in foreign currency loss, net on the consolidated statements of operations. These losses were substantially offset by realized and unrealized gains and losses on the offsetting positions.
Based on a hypothetical 10% adverse movement in all foreign currency exchange rates, our revenue would be adversely affected by approximately 3%, or $18 million, and our net income would be adversely affected by approximately 11%, or $8 million (excluding any offsetting positive impact from our ongoing hedging programs), although the actual effects may differ materially from the hypothetical analysis.
The table below details outstanding foreign currency forward contracts at November 30, 2023 and 2022 where the notional amount is determined using contract exchange rates (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Forward contracts to sell U.S. dollars | $ | 102,229 | $ | (2,526) | $ | 74,578 | $ | (2,995) | |||||||||||||||
| Forward contracts to purchase U.S. dollars | 844 | (4) | 544 | (5) | |||||||||||||||||||
| Total | $ | 103,073 | $ | (2,530) | $ | 75,122 | $ | (3,000) | |||||||||||||||
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Progress Software Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Progress Software Corporation and subsidiaries (the "Company") as of November 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended November 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of November 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 26, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 8 to the financial statements, the Company changed its method of accounting for convertible debt effective December 1, 2021, due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, using the modified retrospective adoption method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition - Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company derives revenue from multiple sources, including software licenses, maintenance, and services. Frequently, the customer arrangements provide software licenses combined with maintenance resulting in multiple performance obligations under ASC 606, Revenue from Contracts with Customer. The identification of distinct performance obligations, particularly for more complex customer arrangements, requires a detailed analysis of the contractual terms and application of more complex accounting guidance. In addition, the allocation of the arrangement consideration to each performance obligation within an arrangement (license, maintenance, and services) requires the application of management judgment. Revenue arrangements with higher contract values frequently require more complex management judgments.
Given the accounting complexity and the management judgment necessary to identify performance obligations and determine the timing and allocation of revenue in arrangements with multiple performance obligations, auditing revenues required a high degree of auditor judgment and an increased extent of effort.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the recognition of revenue from arrangements with multiple performance obligations included the following, among others:
•We tested the effectiveness of controls over revenue recognition, including those over the identification of distinct performance obligations and the allocation of arrangement consideration.
•We evaluated the Company’s accounting policies in the context of the applicable accounting standards.
•We evaluated the appropriateness and consistency of the methods and assumptions used by management to determine the standalone selling price of distinct performance obligations.
•We selected a sample of revenue arrangements and performed the following procedures:
–We obtained and read the contracts and related contract documentation.
–We evaluated whether management properly identified the contract terms and tested management’s application of the Company’s policies, including the identification of the performance obligations and allocation of the arrangement consideration.
–We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.
MOVEit Vulnerability – Refer to Note 19 to the Financial Statements
Critical Audit Matter Description
In May 2023, the Company identified a zero-day vulnerability in its MOVEit Transfer and MOVEit Cloud software product offerings (the MOVEit Vulnerability). A number of customers and others have disclosed that they have been impacted by the MOVEit Vulnerability and certain customers have sent formal letters to the Company, some of which have indicated that they intend to seek indemnification from the Company. Additionally, the Company has received several inquiries from data privacy regulators, state attorneys general, regulatory agencies, and a law enforcement agency seeking various documents and information relating to the MOVEit Vulnerability, which may result in adverse judgments, settlements, fines, penalties and other resolutions if enforcement actions are brought against the Company. These claims and proceedings are subject to inherent uncertainties and unascertainable damages. Further, the outcome of these matters may not be known for prolonged periods of time. Given the uncertainty and inability to develop a reasonable estimate of the potential loss or range of loss incurred related to this matter, the Company has not recognized a loss accrual in respect of the MOVEit Vulnerability. The Company could incur judgments or enter into settlements regarding the outcome of these claims and proceedings, which could have a material effect on the estimated amount of the liability in the period in which the effect becomes probable and reasonably estimable.
The Company recognizes a liability for loss contingencies for which it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount is reasonably estimable. There is complexity in applying this accounting framework for the potential losses arising from the MOVEit Vulnerability and in determining whether a loss is probable and estimable. Performing audit procedures to evaluate the appropriateness of the Company’s application of the accounting framework required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the potential losses and related disclosures related to the MOVEit Vulnerability, include the following procedures, among others:
•We tested the effectiveness of controls over the Company’s accounting for the loss contingencies and related disclosures related to the MOVEit Vulnerability.
•With the assistance of professionals in our firm having subject matter expertise in accounting for loss contingencies, we evaluated the Company’s accounting and disclosures related to the MOVEit Vulnerability for compliance with ASC 450, Contingencies.
•We inquired of the Company’s internal and external legal counsel to understand the legal merits and the basis for the Company’s conclusions specific to the likelihood of loss and the inability to estimate a potential loss or range of loss.
•We requested and received written responses from internal and external legal counsel.
•We made inquiries of management and read the letters and pleadings on a sample basis to evaluate and corroborate our understanding obtained through inquiries of internal legal counsel.
•We inspected Board of Directors meeting minutes and performed inquiries with executive management and the audit committee regarding the information discussed and presented to the Board of Directors during the relevant committee meetings.
•We performed public domain searches using relevant and reliable sources for evidence contrary to management’s analysis.
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•We evaluated any events subsequent to November 30, 2023 that might impact our evaluation of loss contingencies, including any related accrual or disclosure.
•We obtained written representations from executives of the Company.
•We read the Company’s related disclosures and evaluated the disclosures for consistency with our testing.
/s/ Deloitte & Touche LLP
January 26, 2024
We have served as the Company's auditor since 1990.
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PROGRESS SOFTWARE CORPORATION
Consolidated Balance Sheets
| (In thousands, except share data) | November 30, 2023 | November 30, 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (less allowances of $ | |||||||||||
| Unbilled receivables | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term unbilled receivables | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Right-of-use lease assets | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt, net | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and related taxes | |||||||||||
| Dividends payable to stockholders | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| Short-term deferred revenue, net | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Convertible senior notes, net | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term deferred revenue, net | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Commitments and contingencies (Note 10 and note 19) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Consolidated Statements of Operations
| Fiscal Year Ended | |||||||||||||||||
| (In thousands, except per share data) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Revenue: | |||||||||||||||||
| Software licenses | $ | $ | $ | ||||||||||||||
| Maintenance and services | |||||||||||||||||
| Total revenue | |||||||||||||||||
| Costs of revenue: | |||||||||||||||||
| Cost of software licenses | |||||||||||||||||
| Cost of maintenance and services | |||||||||||||||||
| Amortization of acquired intangibles | |||||||||||||||||
| Total costs of revenue | |||||||||||||||||
| Gross profit | |||||||||||||||||
| Operating expenses: | |||||||||||||||||
| Sales and marketing | |||||||||||||||||
| Product development | |||||||||||||||||
| General and administrative | |||||||||||||||||
| Amortization of acquired intangibles | |||||||||||||||||
| Restructuring expenses | |||||||||||||||||
| Acquisition-related expenses | |||||||||||||||||
| Cyber incident and vulnerability response expenses, net | |||||||||||||||||
| Gain on sale of assets held for sale | ( | ||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Income from operations | |||||||||||||||||
| Other (expense) income: | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Interest income and other, net | |||||||||||||||||
| Foreign currency loss, net | ( | ( | ( | ||||||||||||||
| Total other expense, net | ( | ( | ( | ||||||||||||||
| Income before income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Earnings per share: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
| Cash dividends declared per common share | $ | $ | $ | ||||||||||||||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Consolidated Statements of Comprehensive Income
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||
Unrealized (loss) gain on hedging activity, net of tax benefit of $ | ( | ||||||||||||||||
Unrealized loss on investments, net of tax benefit of $ | ( | ( | |||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||||||||
| Comprehensive income | $ | $ | $ | ||||||||||||||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Consolidated Statements of Stockholders’ Equity
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| (in thousands) | Number of Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, November 30, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of restricted stock units | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Equity component of Notes, net of issuance costs and tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase of capped calls, net of tax | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, November 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of restricted stock units | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, November 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of restricted stock units | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, November 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Consolidated Statements of Cash Flows
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization of property and equipment | |||||||||||||||||
| Amortization of acquired intangibles and other | |||||||||||||||||
| Amortization of debt discount and issuance costs on Notes | |||||||||||||||||
| Stock-based compensation | |||||||||||||||||
| Non-cash lease expense | |||||||||||||||||
| Loss on disposal of long-lived assets, net | |||||||||||||||||
| Gain on sale of assets held for sale | ( | ||||||||||||||||
| Deferred income taxes | ( | ( | ( | ||||||||||||||
| Credit losses and other sales allowances | ( | ||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | ( | ( | |||||||||||||||
| Other assets | ( | ( | ( | ||||||||||||||
| Inventories | ( | ||||||||||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||||||||
| Lease liabilities | ( | ( | ( | ||||||||||||||
| Income taxes payable | ( | ( | ( | ||||||||||||||
| Deferred revenue, net | ( | ||||||||||||||||
| Net cash flows from operating activities | |||||||||||||||||
| Cash flows (used in) from investing activities: | |||||||||||||||||
| Purchases of investments | ( | ||||||||||||||||
| Sales and maturities of investments | |||||||||||||||||
| Purchases of property and equipment | ( | ( | ( | ||||||||||||||
| Payments for acquisitions, net of cash acquired | ( | ( | |||||||||||||||
| Proceeds from sale of long-lived assets, net | |||||||||||||||||
| Other investing activities | |||||||||||||||||
| Net cash flows (used in) from investing activities | ( | ( | |||||||||||||||
| Cash flows from (used in) financing activities: | |||||||||||||||||
| Proceeds from equity plans | |||||||||||||||||
| Payments for taxes related to net share settlements of equity awards | ( | ( | ( | ||||||||||||||
| Repurchases of common stock | ( | ( | ( | ||||||||||||||
Proceeds from issuance of senior convertible notes, net of issuance costs of $ | |||||||||||||||||
| Purchase of capped calls | ( | ||||||||||||||||
| Dividend payments to stockholders | ( | ( | ( | ||||||||||||||
| Proceeds from the issuance of debt | |||||||||||||||||
| Repayment of revolving line of credit | ( | ||||||||||||||||
| Principal payment on term loan | ( | ( | ( | ||||||||||||||
| Payment of debt issuance costs | ( | ( | |||||||||||||||
| Net cash flows from (used in) financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents, beginning of year | |||||||||||||||||
| Cash and cash equivalents, end of year | $ | $ | $ | ||||||||||||||
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| Supplemental disclosure: | |||||||||||||||||
Cash paid for income taxes, net of refunds of $ | $ | $ | $ | ||||||||||||||
| Cash paid for interest | $ | $ | $ | ||||||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Dividends declared and unpaid | $ | $ | $ | ||||||||||||||
See notes to consolidated financial statements.
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PROGRESS SOFTWARE CORPORATION
Notes to Consolidated Financial Statements
Note 1: Nature of Business and Summary of Significant Accounting Policies
The Company
Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides enterprise software products for the development, deployment and management of high-impact business 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 ("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.
Accounting Principles
We prepare our consolidated financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America ("GAAP").
Basis of Consolidation
The consolidated financial statements include our accounts and those of our subsidiaries (all of which are wholly owned). We eliminate all intercompany balances and transactions.
Use of Estimates
The preparation of consolidated 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. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of most of our foreign subsidiaries is the local currency in which the subsidiary operates. For foreign operations where the local currency is considered to be the functional currency, we translate assets and liabilities into U.S. dollars at the exchange rate on the balance sheet date. We translate income and expense items at average rates of exchange prevailing during each period. We accumulate translation adjustments in accumulated other comprehensive loss, a component of stockholders’ equity.
For foreign operations where the U.S. dollar is considered to be the functional currency, we remeasure monetary assets and liabilities into U.S. dollars at the exchange rate on the balance sheet date and non-monetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. We translate income and expense items at average rates of exchange prevailing during each period. We recognize remeasurement adjustments currently as a component of foreign currency loss, net in the statements of operations.
Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in foreign currency loss, net in the statements of operations as incurred.
Cash Equivalents
Cash equivalents include short-term, highly liquid investments purchased with remaining maturities of three months or less. As of November 30, 2023, all of our cash equivalents were invested in money market funds.
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Allowances for Doubtful Accounts and Sales Credit Memos
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We establish this allowance using estimates that we make based on factors such as the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, changes to customer creditworthiness and current economic trends.
We also record an allowance for estimates of potential sales credit memos. This allowance is determined based on an analysis of historical credit memos issued and current economic trends, and is recorded as a reduction of revenue.
A summary of activity in the allowance for doubtful accounts is as follows (in thousands):
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Beginning balance | $ | $ | $ | ||||||||||||||
| Charge to costs and expenses | |||||||||||||||||
| Write-offs and other | ( | ( | ( | ||||||||||||||
| Translation adjustments | ( | ||||||||||||||||
| Ending balance | $ | $ | $ | ||||||||||||||
Concentrations of Credit Risk
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
•Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments
include money market funds.
•Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all
significant inputs are observable in the market or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a
present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and
forward and spot prices for currencies. Our Level 2 derivative assets and liabilities include certain over-the-counter forward
and swap contracts.
•Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. We do not have any Level 3 fair value measurements.
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.
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Derivative Instruments
We record all derivatives on the consolidated balance sheets at fair value. We use derivative instruments to manage exposures to fluctuations in the value of foreign currencies, which exist as part of our ongoing business operations.
Cash Flow Hedge
We entered into an interest rate swap contract in July 2019 to manage the variability of cash flows associated with approximately one-half of our variable rate debt. We have designated the interest rate swap as a cash flow hedge and we assessed the hedge's 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 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.
Forward Contracts
Certain assets and forecasted transactions are exposed to foreign currency risk. Our objective for holding derivatives is to eliminate or reduce the impact of these exposures. We periodically monitor our foreign currency exposures to enhance the overall economic effectiveness of our foreign currency hedge positions. Principal currencies hedged include the euro, British pound, Brazilian real, Indian rupee, and Australian dollar. We do not enter into derivative instruments for speculative purposes, nor do we hold or issue any derivative instruments for trading purposes.
Property and Equipment
We record property and equipment at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the useful lives of the assets. Useful lives by major asset class are as follows: computer equipment and software, 3 to 7 years and furniture and fixtures, 5 to 7 years. Repairs and maintenance costs are expensed as incurred.
Goodwill, Intangible Assets, and Long-Lived Assets
Goodwill
Intangible Assets and Long-Lived Assets
Intangible assets are comprised of purchased technology, customer-related assets, and trademarks and trade names acquired through business combinations. All of our intangible assets are amortized using the straight-line method over their estimated useful life. Refer to Note 7: Business Combinations for further information.
We periodically review long-lived assets (primarily property and equipment) and intangible assets with finite lives for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. We base each impairment test on a comparison of the undiscounted cash flows to the carrying value of the asset or asset group. If impairment is indicated, we write down the asset to its estimated fair value.
We did no
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Comprehensive (Loss) Income
The components of comprehensive loss include, in addition to net income, foreign currency translation adjustments and unrealized gains and losses on investments and hedging activity.
Accumulated other comprehensive loss by components, net of tax (in thousands):
| Foreign Currency Translation Adjustment | Unrealized Losses on Investments | Unrealized (Losses) Gains on Hedging Activity | Total | ||||||||||||||||||||
| Balance, December 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||
| Balance, December 1, 2022 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance, November 30, 2023 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
The tax effect on accumulated unrealized (losses) gains on hedging activity and unrealized losses on investments was a tax provision of $0.4 million and $1.1 million as of November 30, 2023 and November 30, 2022, respectively, and a tax benefit of $0.7 million as of November 30, 2021.
Revenue Recognition
Revenue Policy
We derive our revenue primarily from software licenses and maintenance and services. Our license arrangements generally contain multiple performance obligations, including software maintenance services. Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. When an arrangement contains multiple performance obligations, we account for individual performance obligations separately if they are distinct. We recognize revenue through the application of the following steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to performance obligations in the contract; and (v) recognition of revenue when or as we satisfy the performance obligations. Sales taxes collected from customers and remitted to government authorities are excluded from revenue and we do not license our software with a right of return.
Software Licenses
Software licenses are on-premise or cloud-based and fully functional when made available to the customer. As the customer can use and benefit from the license on its own, on-premise software licenses represent distinct performance obligations. Revenue is recognized upfront at the point in time when control is transferred, which is defined as the point in time when the client can use and benefit from the license. Our licenses are sold as perpetual or term licenses, and the arrangements typically contain various combinations of maintenance and services, which are generally accounted for as separate performance obligations. We use the residual approach to allocate the transaction price to our software license performance obligations because, due to the pricing of our licenses being highly variable, they do not have an observable stand-alone selling price ("SSP"). As required, we evaluate the residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its SSP.
Perpetual licenses are generally invoiced upon execution of the contract and payable within 30 days. Term licenses are generally invoiced in advance on an annual basis over the term of the arrangement, which is typically to three years . Any difference between the revenue recognized and the amount invoiced to the customer is recognized on our consolidated balance sheets as unbilled receivables until the customer is invoiced, at which point the amount is reclassified to accounts receivable.
Maintenance
Maintenance revenue is made up of technical support, bug fixes, and when-and-if available unspecified software upgrades. As these maintenance services are considered to be a series of distinct services that are substantially the same and have the same duration and measure of progress, we have concluded that they represent one combined performance obligation. Revenue is recognized ratably over the contract period. The SSP of maintenance services is a percentage of the net selling price of the related software license, which has remained within a tight range and is consistent with the stand-alone pricing of subsequent maintenance renewals.
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Maintenance services are generally invoiced in advance on an annual basis over the term of the arrangement, which is typically to three years .
Services
Services revenue primarily includes consulting and customer education services. In general, services are distinct performance obligations. Services revenue is generally recognized as the services are delivered to the customer. We apply the practical expedient of recognizing revenue upon invoicing for time and materials-based arrangements as the invoiced amount corresponds to the value of the services provided. The SSP of services is based upon observable prices in similar transactions using the hourly rates sold in stand-alone services transactions. Services are either sold on a time and materials basis or prepaid upfront.
We also offer products via a software-as-a-service ("SaaS") model, which is a subscription-based model. Our customers can use hosted software over the contract period without taking possession of it and the cloud services are available to them throughout the entire term, even if they do not use the service. Revenue related to SaaS offerings is recognized ratably over the contract period. The SSP of SaaS performance obligations is determined based upon observable prices in stand-alone SaaS transactions. SaaS arrangements are generally invoiced in advance on a monthly, quarterly, or annual basis over the term of the arrangement, which is typically to three years .
Arrangements with Multiple Performance Obligations
When an arrangement contains multiple performance obligations, we account for individual performance obligations separately if they are distinct. We allocate the transaction price to each performance obligation in a contract based on its relative SSP. Although we do not have a history of offering these elements, prior to allocating the transaction price to each performance obligation, we consider whether the arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations. Determining whether products and services are distinct performance obligations and the determination of the SSP may require significant judgment.
Advertising Costs
Warranty Costs
We make periodic provisions for expected warranty costs. Historically, warranty costs have been insignificant.
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.
Acquisition-Related Costs
Restructuring Charges
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million, and $6.3 million of restructuring related costs, which are included in restructuring expenses in our consolidated statement of operations, for the fiscal years ended November 30, 2023, 2022, and 2021, respectively.
Income Taxes
We provide for deferred income taxes resulting from temporary differences between financial and taxable income. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized.
We recognize and measure uncertain tax positions taken or expected to be taken in a tax return utilizing a two-step approach. We first determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is that we measure the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes on our consolidated statements of operations.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (“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.
Recently Issued Accounting Pronouncements Not Yet Adopted
Segment Reporting
In November 2023, the FASB issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective beginning with the Company’s 2025 fiscal year annual reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and disclosures.
Note 2: Cash and Cash Equivalents
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 | $ | $ | — | $ | — | $ | |||||||||||||||||
A summary of our cash and cash equivalents at November 30, 2022 is as follows (in thousands):
| Amortized Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | |||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| Total | $ | $ | — | $ | — | $ | |||||||||||||||||
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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. In June 2023, the interest rate swap agreement was amended to implement certain changes in the reference rate from LIBOR to SOFR. 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 interest rate swap as a cash flow hedge and assessed 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 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 November 30, 2023 and 2022, the fair value of the hedge was a gain of $1.5 million and $4.4 million, respectively, and was included in other assets on our consolidated balance sheets. The net amount of accumulated other comprehensive loss was reclassified to interest expense during fiscal years 2023, 2022, and 2021 and resulted in income of $3.6 million, and expense of $0.7 million, and $2.5 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):
| November 30, 2023 | November 30, 2022 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Interest rate swap contracts designated as cash flow hedges | $ | $ | $ | $ | |||||||||||||||||||
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 expire between 30 days and 2 years from the date the contract was entered. At November 30, 2023, $2.5 million was recorded in other accrued liabilities on the 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 the consolidated balance sheets.
In fiscal year 2023, realized and unrealized gains of $2.3 million from our forward contracts were recognized in foreign currency loss, net on the consolidated statements of operations. In fiscal year 2022 and 2021, realized and unrealized losses of $7.7 million and $2.1 million, respectively, from our forward contracts were recognized in foreign currency loss, net on the consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized losses and gains on the offsetting positions.
The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Forward contracts to sell U.S. dollars | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Forward contracts to purchase U.S. dollars | ( | ( | |||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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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 November 30, 2023 (in thousands):
| Fair Value Measurements Using | |||||||||||||||||||||||
| Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Foreign exchange derivatives | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2022 (in thousands):
| Fair Value Measurements Using | |||||||||||||||||||||||
| Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swap | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Foreign exchange derivatives | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Assets and Liabilities Not Carried at Fair Value
Fair Value of the Convertible Senior Notes
The fair value of our Convertible Senior Notes, with a carrying value of $354.8 million and $352.6 million, was $377.1 million and $376.0 million as of November 30, 2023 and November 30, 2022, respectively. The fair value was determined based on the quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 1 in the fair value hierarchy.
Fair Value of Other 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.
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Note 5: Property and Equipment
Property and equipment consists of the following (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||
| Computer equipment and software | $ | $ | |||||||||
| Buildings and leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Capitalized software development costs | |||||||||||
| Property and equipment, gross | |||||||||||
| Less accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Note 6: Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of the following significant classes (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Purchased technology | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Customer-related | ( | ( | |||||||||||||||||||||||||||||||||
| Trademarks and trade names | ( | ( | |||||||||||||||||||||||||||||||||
| Non-compete agreement | ( | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
We amortize intangible assets assuming no expected residual value. Amortization expense related to these intangible assets was $96.6 million, $68.9 million, and $46.9 million in fiscal years 2023, 2022, and 2021, respectively.
Future amortization expense for intangible assets as of November 30, 2023 is as follows (in thousands):
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
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Goodwill
Changes in the carrying amount of goodwill for fiscal years 2023 and 2022 are as follows (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||
| Balance, beginning of year | $ | $ | |||||||||
Additions(1) | |||||||||||
Measurement period adjustments(2) | ( | ||||||||||
| Translation adjustments | ( | ( | |||||||||
| Balance, end of year | $ | $ | |||||||||
(1) The addition to goodwill during fiscal year 2023 is related to the acquisition of MarkLogic. Refer to Note 7: Business Combinations for further information.
(2) Represents final measurement period adjustments related to Kemp during fiscal year 2022. Refer to Note 7: Business Combinations for further information.
During fiscal year 2023, we performed a quantitative assessment as of October 31, 2023 and concluded that there was no impairment since it was not more likely than not that the fair value of our reporting unit was less than its carrying value. We did no
Note 7: 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. We funded the acquisition through a combination of existing cash resources and by drawing down $195.0 million from our then-existing revolving credit facility. Refer to Note 8: Debt for further information.
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):
| Preliminary Purchase Price Allocation | Life | ||||||||||||||||||||||
| Net working capital | $ | ||||||||||||||||||||||
| Property, plant and equipment | |||||||||||||||||||||||
| Purchased technology | |||||||||||||||||||||||
| Trade name | |||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||
| Other assets, including long-term unbilled receivables | |||||||||||||||||||||||
| Deferred taxes | ( | ||||||||||||||||||||||
| Deferred revenue | ( | ||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Net assets acquired | $ | ||||||||||||||||||||||
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 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 $161.1 million of goodwill, which is not deductible for tax purposes.
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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 fiscal year ended November 30, 2023, we incurred approximately $4.3 million 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 fiscal year ended November 30, 2023, was approximately $72.5 million. We determined that disclosing the amount of MarkLogic related earnings included in the consolidated statement of operations is impracticable, as certain operations of MarkLogic were integrated into the operations of the Company from the date of acquisition.
Pro Forma Information
The following pro forma financial information presents the combined results of operations of Progress and MarkLogic as if the acquisition had occurred on December 1, 2021, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the MarkLogic acquisition and factually supportable. These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense relating to the $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 Fiscal Year Ended November 30, 2023 | Pro Forma Fiscal Year Ended November 30, 2022 | |||||||||
| Revenue | $ | $ | |||||||||
| Net income | $ | $ | |||||||||
| Net income per basic share | $ | $ | |||||||||
| Net income per diluted share | $ | $ | |||||||||
Kemp Acquisition
On November 1, 2021, we completed the acquisition of the parent company of Kemp Technologies, Inc. (“Kemp”). The acquisition was completed for a base purchase price of $258.0 million (subject to certain customary adjustments) in cash.
The acquisition consideration for Kemp has been allocated to Kemp’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.
We recorded measurement period adjustments based on our valuation and purchase price allocation procedures. The measurement period adjustments were completed during the fourth quarter of fiscal year 2022.
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The allocation of the purchase price is as follows (in thousands):
| Final Purchase Price Allocation | Life | ||||||||||||||||||||||
| Net working capital | $ | ||||||||||||||||||||||
| Property, plant and equipment | |||||||||||||||||||||||
| Purchased technology | |||||||||||||||||||||||
| Trade name | |||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||
| Other assets | |||||||||||||||||||||||
| Other noncurrent liabilities | ( | ||||||||||||||||||||||
| Deferred taxes | ( | ||||||||||||||||||||||
| Deferred revenue | ( | ||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Net assets acquired | $ | ||||||||||||||||||||||
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 balance 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 $179.4 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.
Pro Forma Information
The following pro forma financial information presents the combined results of operations of Progress and Kemp as if the acquisition had occurred on December 1, 2019, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Kemp acquisition and factually supportable. These pro forma adjustments include: (i) an increase in revenue from Kemp as a result of the application of Topic 606 to recognize and measure contract assets and contract liabilities in the business combination, (ii) a net increase in amortization expense to record amortization expense relating to the $122.1 million of acquired identifiable intangible assets, (iii) a decrease in interest expense to remove the interest expense associated with Kemp’s debt obligations, and (iv) 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, 2019. These results are prepared in accordance with ASC 606.
| (In thousands, except per share data) | Pro Forma Fiscal Year Ended November 30, 2021 | ||||||||||
| Revenue | $ | ||||||||||
| Net income | $ | ||||||||||
| Net income per basic share | $ | ||||||||||
| Net income per diluted share | $ | ||||||||||
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Note 8: Debt
As of November 30, 2023, future maturities of the Company's long-term debt were as follows:
| (In thousands) | 2026 Notes | Revolving Line of Credit | Term Loan | Total | |||||||||||||||||||
| 2024 | $ | $ | $ | $ | |||||||||||||||||||
| 2025 | |||||||||||||||||||||||
| 2026 | |||||||||||||||||||||||
| 2027 | |||||||||||||||||||||||
| Total face value of long-term debt | |||||||||||||||||||||||
| Unamortized discount and issuance costs | ( | ( | ( | ||||||||||||||||||||
| Less current portion of long-term debt, net | ( | ( | |||||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | |||||||||||||||||||
During February 2023, we partially funded our acquisition of MarkLogic by drawing down $195.0 million under the revolving line of credit. As of November 30, 2023, there was $110.0 million outstanding under the revolving line of credit.
Notes Payable
Convertible Senior Notes
In April 2021, the Company issued, in a private placement, Convertible Senior Notes (the "Notes") with an aggregate principal amount of $360 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. There are no required principal payments prior to the maturity of the Notes. The Notes bear interest at an annual rate of 1 %, payable semi-annually in arrears on April 15 and October 15 of each year. The Company incurred approximately $10.8 million in issuance costs for the issuance of the Convertible Notes.
Conversion Rights
Before January 15, 2026, Noteholders may convert their Notes in the following circumstances:
•During any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ending on May 31, 2021, 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 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;
•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 certain corporate events or distributions on the Company’s common stock, or if the Company calls such Notes for redemption, then the Noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date.
From and after January 15, 2026, Noteholders may convert their 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 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 17.4525 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $57.30 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.
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Repurchase Rights
On or after April 20, 2024, and on or before the 50th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, subject to the partial redemption limitation, at a repurchase price equal to 100 % of 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 Notes unless at least $100.0 million aggregate principal amount of Notes are outstanding and not subject to redemption as of the time it sends the related redemption notice.
Capped Call Transactions
On April 8, 2021, in connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, approximately 6.3 million shares (representing the number of shares of common stock initially underlying the Notes) of the Company’s common stock. The Capped Call Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of 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 Capped Call Transactions will initially be $89.88 per share of common stock, which represents a premium of 100 % over the last reported sale price of the common stock of $44.94 per share on April 8, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. The cost of the purchased capped calls of $43.1 million was recorded as a reduction to additional paid-in-capital.
We elected to integrate the capped call options with the applicable Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the $43.1 million gross cost of the purchased capped calls will be deductible for income tax purposes as original discount interest over the term of the Notes.
Accounting for the Notes
The Company adopted ASU 2020-06 using the modified retrospective approach on December 1, 2021. Under ASU 2020-06, we no longer separate the Notes into liability and equity components. We recognized the cumulative effect of applying this new standard as of December 1, 2021.
In accounting for the transaction, prior to the adoption of ASU 2020-06, the Notes were separated into liability and equity components.
The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The amount initially recognized for the equity component totaled $64.8 million. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, referred to as the debt discount, was amortized as interest expense over the Notes’ contractual term. The equity component, which represented the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and was not remeasured.
Upon adoption of ASU 2020-06 on December 1, 2021, using the modified retrospective method, the Company reversed the separation of the debt and equity components and accounted for the Notes wholly as debt. The Company also reversed the amortization of the debt discount that was due to the equity component, with a cumulative adjustment to retained earnings on the adoption date. Further, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 1.63 % with a cumulative adjustment to retained earnings on the adoption date.
We recognized the cumulative effect of initially applying this new standard as of December 1, 2021 as an adjustment to the December 1, 2021 opening balance of retained earnings. The conversion option that was previously accounted for in equity under the cash conversion model was recombined into the convertible debt outstanding, and as a result, additional paid in capital and the related unamortized debt discount on the convertible senior notes were reduced. The removal of the remaining debt discount recorded for this previous separation has the effect of increasing our net debt balance. We recorded a $47.5 million decrease to additional paid-in capital, a $56.0 million decrease to debt discount, a $4.9 million increase to retained earnings, and a $13.4 million decrease to long-term deferred tax liabilities.
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As a result of the adoption of ASU 2020-06, non-cash interest expense decreased by approximately $11.5
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
Contractual interest expense ( | $ | $ | $ | ||||||||||||||
Amortization of debt discount and issuance costs(1) | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
(1)After the adoption of ASU 2020-06, the effective interest rate for the Notes was | |||||||||||||||||
Credit Facility
On January 25, 2022, the Company entered into the Credit Agreement, which provides for a $275.0 million secured term loan and a $300.0 million secured revolving line of credit. The revolving line of credit 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.
Interest rates for the Credit Agreement are determined by reference to a term benchmark rate or a base rate at our option and would range from 1.00 % to 2.00 % above the term benchmark rate or would range from 0.00 % to 1.00 % above the defined base rate for base rate borrowings, in each case based upon our 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 leverage ratio. We will incur a quarterly commitment fee on the undrawn portion of the revolving credit facility, ranging from 0.125 % to 0.275 % per annum, based on our leverage ratio. The average interest rate of the credit facility during the fiscal year ended November 30, 2023 was 6.68 %, and the interest rate as of November 30, 2023 was 7.20 %.
The credit facility matures on the earlier of (i) January 25, 2027, and (ii) the date that is 181 days prior to the maturity date of our Notes subject to certain conditions as set forth in the Credit Agreement, including the repayment of the Notes, the refinancing of the Notes including a maturity date that is at least 181 days after January 25, 2027 and compliance with a liquidity test when all amounts outstanding will be due and payable in full. The revolving line of credit does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended February 28, 2022. The principal repayment amounts are in accordance with the following schedule: (i) eight payments of $1.7 million each, (ii) four payments of $3.4 million each, (iii) eight payments of $5.2 million each, and (iv) the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium.
Costs incurred to obtain our long-term debt of $3.2 million, including $1.1 million of unamortized debt issuance costs related to the previous credit agreement, are recorded as debt issuance costs as a direct deduction from the carrying value of the long-term debt liability on our consolidated balance sheets as of November 30, 2023. These costs are being amortized over the term of the Credit Agreement using the effective interest rate method. Amortization expense related to the debt issuance costs was $0.6
Revolving loans may be borrowed, repaid, and reborrowed until January 25, 2027, at which time all amounts outstanding must be repaid. As of November 30, 2023, there was $110.0 million outstanding amounts under the revolving line of credit and $2.5 million of letters of credit.
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 such material domestic subsidiaries, as well as 100 % of the capital stock of our domestic subsidiaries and 65 % of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions as described in the Credit Agreement. Future material domestic subsidiaries will be required to guaranty our obligations under the Credit Agreement, and to grant security interests in substantially all of their assets to secure such obligations. The Credit Agreement generally prohibits, with certain exceptions, any other liens on our assets and the assets of our subsidiaries, subject to certain exceptions as described in the Credit Agreement.
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Note 9: Leases
The Company has operating leases for facilities, vehicles, and equipment under various non-cancelable lease agreements. The Company’s leases have remaining lease terms ranging from 1 year to 7 years. The Company’s lease terms may include options to extend or terminate the lease. The Company considers several economic factors when making the determination as to whether the Company will exercise options to extend or terminate the lease, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Consideration in the contract is comprised of any fixed payments and variable payments that depend on an index or rate. Payments in the Company's operating lease arrangements primarily consist of base office rent. The Company makes variable payments on certain of its leases related to taxes, insurance, common area maintenance, and utilities, among other things. We sublease certain facilities to third parties, which have remaining lease terms of up to three years .
The components of net operating lease cost for the years ended November 30, 2023, 2022 and 2021 were as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Lease costs under long-term operating leases | $ | $ | $ | ||||||||||||||
| Lease costs under short-term operating leases | |||||||||||||||||
Variable lease cost under short-term and long-term operating leases(1) | |||||||||||||||||
| Operating lease right-of-use asset impairment | |||||||||||||||||
| Sublease income | ( | ||||||||||||||||
| Total net operating lease cost | $ | $ | $ | ||||||||||||||
(1) Lease costs that are not fixed at lease commencement.
The table below presents supplemental cash flow information related to leases during the years ended November 30, 2023, 2022 and 2021 (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Cash paid for leases | $ | $ | $ | ||||||||||||||
| Right-of-use assets recognized for new leases and amendments (non-cash) | $ | $ | $ | ||||||||||||||
Weighted average remaining lease term in years and weighted average discount rate are as follows:
| November 30, 2023 | November 30, 2022 | ||||||||||
| Weighted average remaining lease term in years | |||||||||||
| Weighted average discount rate | % | % | |||||||||
Future payments under non-cancellable leases at November 30, 2023 are as follows (in thousands):
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ||||
| Present value of lease liabilities | $ | ||||
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Note 10: Commitments and Contingencies
Guarantees and Indemnification Obligations
We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.
Legal Proceedings
Please see Note 19: Cyber Related Matters for a discussion of legal proceedings related to the MOVEit Vulnerability.
We also are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material effect on our financial position, results of operations or cash flows.
Note 11: Stockholders’ Equity
Preferred Stock
Our Board of Directors is authorized to establish one or more series of preferred stock and to fix and determine the number and conditions of preferred shares, including dividend rates, redemption and/or conversion provisions, if any, preferences and voting rights. As of November 30, 2023, there was no
Common Stock
We have 200,000,000 shares of authorized common stock, $0.01 par value per share, of which 43,795,955
There were 324,470 deferred stock units ("DSUs") outstanding at November 30, 2023. Each DSU represents one share of our common stock and all DSU grants have been made to non-employee members of our Board of Directors. DSUs do not have voting rights and can only be converted into common stock when the recipient ceases to be a member of the Board of Directors or a change in control of the Company occurs.
Common Stock Repurchases
On January 10, 2023, our Board of Directors increased our share repurchase authorization by $150.0 million, to an aggregate authorization of $228.0 million. In fiscal years 2023, 2022, and 2021, we repurchased and retired 0.6 million, 1.7 million and 0.8 million shares of our common stock for $34.0 million, $77.0 million and $35.0 million, respectively. As of November 30, 2023, there was $194.0 million remaining under the current authorization.
Note 12: Stock-Based Compensation
We currently have one stockholder-approved stock plan from which we can issue stock-based awards, which was approved by our stockholders in fiscal year 2008 and most recently amended and approved by stockholders in May 2021 ("2008 Plan"). The 2008 Plan permits the granting of stock awards to officers, members of the Board of Directors, employees and consultants. Awards under the 2008 Plan may include nonqualified stock options, incentive stock options, grants of conditioned or restricted stock, unrestricted grants of stock, grants of stock contingent upon the attainment of performance goals, deferred stock units and stock appreciation rights. A total of 2,985,048 shares were available for issuance as of November 30, 2023.
We have previously adopted two stock plans for which the approval of stockholders was not required: the 2002 Nonqualified Stock Plan ("2002 Plan") and the 2004 Inducement Stock Plan ("2004 Plan"). The 2002 Plan permits the granting of stock awards to non-executive officer employees and consultants. Executive officers and members of the Board of Directors are not eligible for awards under the 2002 Plan. Awards under the 2002 Plan may include nonqualified stock options, grants of conditioned or restricted stock, unrestricted grants of stock, grants of stock contingent upon the attainment of performance goals and stock appreciation rights. A total
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of 93,064 shares were available for issuance under the 2002 Plan as of November 30, 2023. Additional shares cannot be added to the 2002 Plan without stockholder approval.
The 2004 Plan is reserved for persons to whom we may issue securities as an inducement to become employed by us pursuant to the rules and regulations of the NASDAQ Stock Market. Awards under the 2004 Plan may include nonqualified stock options, grants of conditioned or restricted stock, unrestricted grants of stock, grants of stock contingent upon the attainment of performance goals and stock appreciation rights. A total of 466,716 shares were available for issuance under the 2004 Plan as of November 30, 2023. Additional shares cannot be added to the 2002 Plan without stockholder approval.
Under all of our plans, the awards granted generally begin to vest within one year of the grant.
A summary of stock option activity under all the plans is as follows:
| Shares | Weighted Average | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| (in thousands) | Exercise Price | (in years) | (in thousands) | ||||||||||||||||||||
| Options outstanding, December 1, 2022 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Canceled | ( | ||||||||||||||||||||||
| Options outstanding, November 30, 2023 | $ | $ | |||||||||||||||||||||
| Exercisable, November 30, 2023 | $ | $ | |||||||||||||||||||||
| Vested or expected to vest, November 30, 2023 | $ | $ | |||||||||||||||||||||
A summary of restricted stock units' activity is as follows (in thousands, except per share data):
| Number of Shares | Weighted Average Fair Value | ||||||||||
| Restricted stock units outstanding, December 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Issued | ( | ||||||||||
| Canceled | ( | ||||||||||
| Restricted stock units outstanding, November 30, 2023 | $ | ||||||||||
Each restricted stock unit represents one share of common stock. The restricted stock units generally vest semi-annually over a three-year period. Performance-based restricted stock units are subject to multi-year performance criteria aligned with our business plan and are earned only to the extent the performance criteria are achieved.
The fair value of stock awards, restricted stock units and DSUs is equal to the closing price of our common stock on the date of grant, less the present value of expected dividends when applicable. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on our common stock.
During the first quarter of fiscal years 2021, 2022, and 2023, we granted performance-based restricted stock units that include two three years 75 three-year 25 three-year
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The 1991 Employee Stock Purchase Plan was most recently amended and approved by stockholders in May 2021 ("ESPP") and permits eligible employees to purchase up to an aggregate of 10,250,000 shares of our common stock through accumulated payroll deductions. The ESPP has a 27 -month offering period comprised of nine three-month purchase periods. The purchase price of the stock is equal to 85 % of the lesser of the market value of such shares at the beginning of a 27 -month offering period or the end of each three-month segment within such offering period. If the market price at any of the nine purchase periods is less than the market price on the first date of the 27 -month offering period, subsequent to the purchase, the offering period is canceled and the employee is entered into a new 27 -month offering period with the then current market price as the new base price. We issued 279,000 shares, 301,000 shares, and 277,000 shares with weighted average purchase prices of $36.88 , $30.59 , and $28.20 per share, respectively, in fiscal years 2023, 2022, and 2021, respectively. At November 30, 2023, approximately 107,000 shares were available and reserved for issuance under the ESPP.
We estimated the fair value of stock options and ESPP awards granted in fiscal years 2023, 2022, and 2021 on the measurement dates using the Black-Scholes option valuation model, and LTIP awards using the Monte Carlo Simulation valuation model, with the following weighted average assumptions:
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Stock options: | |||||||||||||||||
| Expected volatility | % | % | % | ||||||||||||||
| Risk-free interest rate | % | % | % | ||||||||||||||
| Expected life (in years) | |||||||||||||||||
| Expected dividend yield | % | % | % | ||||||||||||||
| Employee stock purchase plan: | |||||||||||||||||
| Expected volatility | % | % | % | ||||||||||||||
| Risk-free interest rate | % | % | % | ||||||||||||||
| Expected life (in years) | |||||||||||||||||
| Expected dividend yield | % | % | % | ||||||||||||||
| Long-term incentive plan: | |||||||||||||||||
| Expected volatility | % | % | % | ||||||||||||||
| Risk-free interest rate | % | % | % | ||||||||||||||
| Expected life (in years) | |||||||||||||||||
| Expected dividend yield | % | % | % | ||||||||||||||
For each stock option award, the expected life in years is based on historical exercise patterns and post-vesting termination behavior. Expected volatility is based on historical volatility of our stock, and the risk-free interest rate is based on the U.S. Treasury yield curve for the period that is commensurate with the expected life at the time of grant. The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period. For each ESPP award, the expected life in years is based on the period of time between the beginning of the offering period and the date of purchase, plus an additional holding period of three months .
Based on the above assumptions, the weighted average estimated fair value of stock options granted in fiscal years 2023, 2022, and 2021 was $14.40 , $10.95 , and $9.46 per share, respectively. We amortize the estimated fair value of stock options to expense over the vesting period using the straight-line method. The weighted average estimated fair value for shares issued under our ESPP in fiscal years 2023, 2022, and 2021 was $13.56 , $11.01 , and $11.59 per share, respectively. We amortize the estimated fair value of shares issued under the ESPP to expense over the vesting period using a graded vesting model.
Total unrecognized stock-based compensation expense, net of expected forfeitures, related to unvested stock options and unvested restricted stock awards amounted to $57.6 million at November 30, 2023. These costs are expected to be recognized over a weighted average period of two years .
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The following additional activity occurred under our plans (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Total intrinsic value of stock options on date exercised | $ | $ | $ | ||||||||||||||
| Total fair value of deferred stock units on date vested | |||||||||||||||||
| Total fair value of restricted stock units on date vested | |||||||||||||||||
The following table provides the classification of stock-based compensation as reflected in our consolidated statements of operations (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Cost of maintenance and services | $ | $ | $ | ||||||||||||||
| Sales and marketing | |||||||||||||||||
| Product development | |||||||||||||||||
| General and administrative | |||||||||||||||||
| Total stock-based compensation | $ | $ | $ | ||||||||||||||
| Income tax benefit included in the provision for income taxes | $ | $ | $ | ||||||||||||||
Note 13: Retirement Plan
We maintain a retirement plan covering all U.S. employees under Section 401(k) of the Internal Revenue Code. Company contributions to the plan are at the discretion of the Board of Directors and totaled approximately $3.8 million, $3.3 million and $4.0 million for fiscal years 2023, 2022 and 2021, respectively.
Note 14: 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:
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| Performance obligations transferred at a point in time: | |||||||||||||||||
| Software licenses | $ | $ | $ | ||||||||||||||
| Performance obligations transferred over time: | |||||||||||||||||
| Maintenance | |||||||||||||||||
| Services | |||||||||||||||||
| Total revenue | $ | $ | $ | ||||||||||||||
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Geographic Revenue
In the following table, revenue attributed to the United States includes sales to customers in the U.S. and sales to certain multinational organizations. Revenue from Canada, 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:
| Fiscal Year Ended | |||||||||||||||||
| (In thousands) | November 30, 2023 | November 30, 2022 | November 30, 2021 | ||||||||||||||
| United States | $ | $ | $ | ||||||||||||||
| Canada | |||||||||||||||||
| EMEA | |||||||||||||||||
| Latin America | |||||||||||||||||
| Asia Pacific | |||||||||||||||||
| Total revenue | $ | $ | $ | ||||||||||||||
No single customer, partner, or country outside of the U.S. has accounted for more than 10% of our consolidated revenue in any year presented.
Contract Balances
Unbilled Receivables and Contract Assets
The timing of revenue recognition may differ from the timing of customer billing. When revenue is recognized prior to billing and the right to the amount due from customers is conditioned only on the passage of time, we record an unbilled receivable on our consolidated balance sheets. Our multi-year term license arrangements, which are typically billed annually, result in revenue recognition in advance of billing and the recognition of unbilled receivables.
As of November 30, 2023, billing of our long-term unbilled receivables is expected to occur as follows (in thousands):
| 2025 | $ | ||||
| 2026 | |||||
| 2027 | |||||
| Total | $ | ||||
Contract assets arise when revenue is recognized in excess of billings and the right to the amount due from customers is conditioned on something other than the passage of time, such as the completion of a related performance obligation. 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
Deferred Revenue
Deferred revenue is recorded when revenue is recognized subsequent to customer invoicing. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. 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 net deferred revenue balance is primarily made up of deferred maintenance.
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As of November 30, 2023, the changes in net deferred revenue were as follows (in thousands):
| Balance, December 1, 2021 | $ | ||||
| Billings and other | |||||
| Revenue recognized | ( | ||||
| Balance, November 30, 2022 | $ | ||||
| Billings and other | |||||
| Acquired from business combinations | |||||
| Revenue recognized | ( | ||||
| Balance, November 30, 2023 | $ | ||||
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of November 30, 2023, transaction price allocated to remaining performance obligations was $296.0 million. We expect to recognize approximately 80 % of the revenue within the next year and the remainder thereafter.
Deferred Contract Costs
Deferred contract costs, which include certain sales incentive programs, are incremental and recoverable costs of obtaining a contract with a customer. Incremental costs of obtaining a contract with a customer are recognized as an asset if the expected benefit of those costs is longer than one year. We have applied the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include a large majority of our sales incentive programs as we have determined that annual compensation is commensurate with annual sales activities.
Certain of our sales incentive programs do 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 to five years ; or (ii) the term of the related revenue contract. We determined that a 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 $7.6 million, $8.8 million, and $7.9 million as of November 30, 2023, 2022, and 2021, respectively, and are included in other current assets and other assets on our consolidated balance sheets. Amortization of deferred contract costs is included in sales and marketing expense on our consolidated statement of operations and was minimal in all periods presented.
Note 15: Restructuring
The following table provides a summary of activity for all of the restructuring actions, with material actions detailed further below (in thousands):
| Excess Facilities and Other Costs | Employee Severance and Related Benefits | Total | |||||||||||||||
| Balance, December 1, 2020 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Translation adjustments and other | ( | ||||||||||||||||
| Balance, November 30, 2021 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Translation adjustments and other | ( | ( | |||||||||||||||
| Balance, November 30, 2022 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Translation adjustments and other | ( | ( | |||||||||||||||
| Balance, November 30, 2023 | $ | $ | $ | ||||||||||||||
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2023 Restructurings
During the fourth quarter of fiscal year 2023, we restructured our operations to realign our business and strategic priorities. In connection with this restructuring, we reduced our global workforce by 2 %. These workforce reductions occurred within all functions and across most geographies in which we operate. Restructuring expenses are related to employee costs, including severance, health benefits and outplacement services (but excluding stock-based compensation). For the fiscal year ended November 30, 2023, we incurred expenses of $1.7 million, which are recorded as restructuring expenses in the consolidated statements of operations.
Cash disbursements for expenses incurred to date under this restructuring are expected to be made through the fourth quarter of fiscal year 2024. The restructuring reserve is included in other accrued liabilities on the consolidated balance sheets as of November 30, 2023. We do not expect to incur additional material expenses in connection with this restructuring.
A summary of activity for this restructuring action is as follows (in thousands):
| Excess Facilities and Other Costs | Employee Severance and Related Benefits | Total | |||||||||||||||
| Balance, December 1, 2022 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | |||||||||||||||
| Translation adjustments and other | |||||||||||||||||
| Balance, November 30, 2023 | $ | $ | $ | ||||||||||||||
During the first quarter of fiscal year 2023, we restructured our operations in connection with the acquisition of MarkLogic. Refer to Note 7: Business Combinations for further discussion. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of MarkLogic. For the fiscal year ended November 30, 2023, we incurred expenses of $5.7 million, which are recorded as restructuring expenses in the consolidated statements of operations.
Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2024. The restructuring reserve is included in other accrued liabilities on the consolidated balance sheets as of November 30, 2023. We expect to incur additional expenses as part of this action related to facility closures as we consolidate offices during fiscal year 2024.
A summary of activity for this restructuring action is as follows (in thousands):
| Excess Facilities and Other Costs | Employee Severance and Related Benefits | Total | |||||||||||||||
| Balance, December 1, 2022 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Translation adjustments and other | ( | ( | |||||||||||||||
| Balance, November 30, 2023 | $ | $ | $ | ||||||||||||||
2020 Restructurings
During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef. This restructuring resulted in a reduction in redundant positions, primarily within the administrative functions of Chef . For the fiscal years ended November 30, 2023, 2022 and 2021, we incurred expenses of $0.9 million, $0.4 million and $4.1 million, respectively, which are recorded as restructuring expenses in the consolidated statements of operations.
Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2027. Accordingly, the balance of the restructuring reserve is included in short-term and long-term operating lease liabilities on the consolidated balance sheets at November 30, 2023. We expect to incur additional expenses as part of this action related to facility closures as we consolidate offices in various locations during fiscal year 2024, but we do not expect these costs to be material.
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A summary of activity for this restructuring action is as follows (in thousands):
| Excess Facilities and Other Costs | Employee Severance and Related Benefits | Total | |||||||||||||||
| Balance, December 1, 2020 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Translation adjustments and other | |||||||||||||||||
| Balance, November 30, 2021 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | ( | ||||||||||||||
| Balance, November 30, 2022 | $ | $ | $ | ||||||||||||||
| Costs incurred | |||||||||||||||||
| Cash disbursements | ( | ( | |||||||||||||||
| Balance, November 30, 2023 | $ | $ | $ | ||||||||||||||
Note 16: Income Taxes
The components of income before income taxes are as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| U.S. | $ | $ | $ | ||||||||||||||
| Foreign | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
The provision for income taxes is comprised of the following (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| Total current | |||||||||||||||||
| Deferred | |||||||||||||||||
| Federal | ( | ( | |||||||||||||||
| State | ( | ( | ( | ||||||||||||||
| Foreign | ( | ( | ( | ||||||||||||||
| Total deferred | ( | ( | ( | ||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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A reconciliation of the income taxes incurred at the U.S. Federal statutory rate compared to the effective tax rate is as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Tax at U.S. Federal statutory rate | $ | $ | $ | ||||||||||||||
| Foreign rate differences | ( | ||||||||||||||||
| Effects of foreign operations included in U.S. Federal provision | ( | ||||||||||||||||
| State income taxes, net | |||||||||||||||||
| Research credits | ( | ( | ( | ||||||||||||||
| Nondeductible stock-based compensation | |||||||||||||||||
| Meals and entertainment | |||||||||||||||||
| Compensation subject to 162(m) | |||||||||||||||||
| Uncertain tax positions and tax settlements | ( | ( | |||||||||||||||
| Net excess tax benefit from stock-based compensation plans | ( | ( | ( | ||||||||||||||
| Global intangible low tax inclusion | |||||||||||||||||
| Foreign derived intangible deduction | ( | ( | ( | ||||||||||||||
| Other | ( | ( | ( | ||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
The components of deferred tax assets and liabilities are as follows (in thousands):
| November 30, 2023 | November 30, 2022 | ||||||||||
| Deferred tax assets: | |||||||||||
| Accounts receivable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Accrued liabilities and other | |||||||||||
| Deferred revenue | |||||||||||
| Stock-based compensation | |||||||||||
| Original issue discount | |||||||||||
| Tax credit and loss carryforwards | |||||||||||
| Operating lease liabilities | |||||||||||
| Capitalized research and development | |||||||||||
| Gross deferred tax assets | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total deferred tax assets | |||||||||||
| Deferred tax liabilities: | |||||||||||
| Goodwill | ( | ( | |||||||||
| Right-of-use lease assets | ( | ( | |||||||||
| Depreciation and amortization | ( | ( | |||||||||
| Prepaid expenses | ( | ( | |||||||||
| Total deferred tax liabilities | ( | ( | |||||||||
| Total | $ | $ | |||||||||
Under provisions of the Tax Cuts and Jobs Act pursuant to Internal Revenue Code Section 174, beginning in fiscal year 2023 specific research and experimental (“R&E”) expenditures are now required to be capitalized and amortized over five years for U.S. R&E and fifteen years for foreign R&E.
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The valuation allowance primarily applies to net operating loss carryforwards in foreign jurisdictions under conditions where realization is not more likely than not. The $4 million decrease in the valuation allowance during fiscal year 2023 primarily relates to losses in a foreign subsidiary that have expired prior to utilization.
At November 30, 2023, we have federal and foreign net operating loss carryforwards of $92.0 million expiring on various dates through 2097 and $27.0 million that do not expire. In addition, we have state net operating loss carryforwards of $69.0 million expiring on various dates through 2043 and a minimal amount that does not expire. At November 30, 2023, we have state tax credit carryforwards of approximately $2.3 million expiring on various dates through 2038 and $2.9 million that may be carried forward indefinitely. In addition, we have federal tax credit carryforwards of approximately $7.1 million expiring on various dates through 2039.
It is our intention to indefinitely reinvest the earnings of our non-U.S. subsidiaries. Provisions have not been made for non-U.S. withholding taxes or other applicable taxes on $105.6 million of undistributed earnings as of November 30, 2023, as these earnings have been indefinitely reinvested. It is not practicable to determine the amount of the unrecognized deferred tax liability if the undistributed earnings were to be repatriated due to the complexity of the income tax laws and regulations. These earnings could be subject to non-U.S. withholding taxes and other federal, state and/or foreign taxes if they were remitted to the U.S.
As of November 30, 2023, the total amount of unrecognized tax benefits was $5.2 million, of which $0.8 million was recorded in other noncurrent liabilities on the consolidated balance sheet and $4.4 million as a reduction of deferred tax assets, principally related to U.S net operating loss carry-forwards and federal and state research and development tax credits.
A reconciliation of the balance of our unrecognized tax benefits is as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Balance, beginning of year | $ | $ | $ | ||||||||||||||
| Tax positions related to current period | |||||||||||||||||
| Tax positions related to a prior period | ( | ||||||||||||||||
| Tax positions acquired | |||||||||||||||||
| Settlements with tax authorities | ( | ( | ( | ||||||||||||||
| Lapses due to expiration of the statute of limitations | ( | ( | ( | ||||||||||||||
| Balance, end of year | $ | $ | $ | ||||||||||||||
If recognized, all amounts of unrecognized tax benefits would affect the effective tax rate.
We recognize interest and penalties related to uncertain tax positions as a component of our provision for income taxes. In fiscal year 2023 a net benefit of $0.8 million was recorded to the provision for income taxes related to interest and penalties. In fiscal year 2022 there was a minimal amount of estimated interest and penalties recorded in the provision for income taxes. In fiscal year 2021 a net expense of $0.8 million was recorded to the provision for income taxes related to estimated interest and penalties. We have accrued $0.5 million and $1.3 million of estimated interest and penalties at November 30, 2023 and 2022, respectively. We do not expect any significant changes to the amount of unrecognized tax benefits in the next twelve months.
Our federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2020. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2019, and we are no longer subject to audit for those periods.
Tax authorities for certain non-U.S. jurisdictions are also examining tax returns for various years dating back to 2016 and the Company does not expect the results of these examinations to be material to our consolidated balance sheets, cash flows or statements of income. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2018.
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Note 17: 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 from continuing operations (in thousands, expect per share data):
| Fiscal Year Ended | |||||||||||||||||
| November 30, 2023 | November 30, 2022 | November 30, 2021 | |||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||
| Basic earnings per common share | $ | $ | $ | ||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||
| Effect of dilution from common stock equivalents | |||||||||||||||||
| Effect of dilution from if-converted Convertible Senior Notes | |||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||
| Diluted earnings per share | $ | $ | $ | ||||||||||||||
We excluded stock awards representing approximately 297,000 shares, 1,751,000 shares, and 1,232,000 shares of common stock from the calculation of diluted earnings per share in the fiscal years ended November 30, 2023, 2022 and 2021, respectively, because these awards were anti-dilutive.
As a result of our adoption of ASU 2020-06 on December 1, 2021, 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 fiscal year ended November 30, 2023, we included the Notes in our diluted earnings per share calculation. During the fiscal year ended November 30, 2022, 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. For periods prior to our December 1, 2021 adoption of ASU 2020-06, we applied the treasury stock method to account for the dilutive impact of the Notes for diluted earnings per share purposes.
Note 18: Business Segments and International Operations
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.
Long-lived assets, comprised of our property and equipment, totaled $8.2 million, $7.6 million and $22.1 million in the U.S. and $7.0 million, $7.3 million and $7.5 million outside of the U.S. at the end of fiscal years 2023, 2022, and 2021, respectively. During the fiscal year ended November 30, 2023, India accounted for more than 10% of our consolidated long-lived assets. During the fiscal year ended November 30, 2022, India and Bulgaria accounted for more than 10% of our consolidated long-lived assets. No individual country outside of the U.S. accounted for more than 10% of our consolidated long-lived assets in 2021.
Note 19: 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. Costs for this incident were primarily related to the engagement of external cybersecurity experts and other incident response professionals. For
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the fiscal year ended November 30, 2023, we incurred $4.7 million of costs related to this incident. Costs are provided net of insurance recoveries of $2.5 million. We do not expect to incur additional costs related to this incident as the investigation is closed.
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 investigative team discovered a zero-day vulnerability in MOVEit Transfer (including our cloud-hosted version of MOVEit Transfer known as MOVEit Cloud). The investigative team determined the zero-day vulnerability (the “MOVEit Vulnerability”) could provide for unauthorized escalated privileges and access to the customer’s underlying environment in both MOVEit Transfer (the on-premise version) and MOVEit Cloud (a cloud-hosted version of MOVEit Transfer that we deploy in both (i) a public cloud format, as well as (ii) for a small group of customers, in customer-dedicated cloud instances that are hosted, separate and apart from the public instances of our MOVEit Cloud platform).
We will continue to assess the potential impact of the MOVEit Vulnerability on our business, operations, and financial results. MOVEit Transfer and MOVEit Cloud represented less than 4 % in aggregate of our revenue for the fiscal year ended November 30, 2023.
Litigation and Governmental Investigations
As of the date of the filing of this report on Form 10-K, (i) we have received formal letters from 31 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 118 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 several inquiries from domestic and foreign data privacy regulators; inquiries from several state attorneys general; as well as formal investigations from: (i) a U.S. federal law enforcement agency (as of the date of the filing of this report, the law enforcement investigation that we are cooperating with is not an enforcement action or formal governmental investigation of which we have been told that we are a target), (ii) the SEC (as further described hereafter), and (iii) the Office of the Attorney General for the District of Columbia (as further described hereafter). On October 2, 2023, Progress received a subpoena from the SEC seeking various documents and information relating to the MOVEit Vulnerability. As described in the cover letter accompanying the subpoena, at this stage, the SEC investigation is a fact-finding inquiry, the investigation does not mean that Progress or anyone else has violated federal securities laws, and the investigation does not mean that the SEC has a negative opinion of any person, entity, or security. Progress intends to cooperate fully with the SEC in its investigation.
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 intends to cooperate fully with the Office of the Attorney General for the District of Columbia in its investigation.
Expenses Incurred and Future Costs
For the fiscal year ended November 30, 2023, we incurred $1.5 million of costs related to the MOVEit Vulnerability. The costs recognized are net of received and expected insurance recoveries of approximately $3.7 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 November 30, 2023.
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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 November 30, 2023, we have recorded approximately $6.2 million in insurance recoveries, of which $2.5 million was related to the November 2022 Cyber Incident and $3.7 million was related to the May 2023 MOVEit Vulnerability, providing us with $8.8 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.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
Our management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized and reported within the requisite time periods and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of November 30, 2023. Our assessment was based on the framework in the updated Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment we believe that as of November 30, 2023, our internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, our independent registered public accounting firm, which audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting, which is included in this Item 9A below.
(c) Changes in Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the fiscal quarter ended November 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no changes in our internal control over financial reporting during the fiscal quarter ended November 30, 2023 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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(d) Report of independent registered public accounting firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Progress Software Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Progress Software Corporation and subsidiaries (the “Company”) as of November 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended November 30, 2023, of the Company and our report dated January 26, 2024, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 26, 2024
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Item 9B. Other Information
(b) Insider Adoption or Termination of Trading Arrangements
During the fourth quarter of fiscal year 2023, none of our directors or officers informed us of the adoption or termination
| Name and Title | Character of Trading Arrangement1 | Date Adopted | Duration2 | Aggregate Number of Shares of Common Stock to be Sold Pursuant to Trading Arrangement | ||||||||||||||||||||||
Trading Arrangement | June 10, 2024 | Up to | ||||||||||||||||||||||||
1. Except as indicated by footnote, each trading arrangement marked as a "Rule 10b5-1 Trading Arrangement" is intended to satisfy the affirmative defense of Rule 10b5-1(c), as amended (the "Rule").
2. Except as indicated by footnote, each trading arrangement permits transactions through and including the earlier to occur of (a) the completion of all sales or (b) the date listed in the table. Each trading arrangement marked as a “Rule 10b5-1 Trading Arrangement” only permits transactions upon expiration of the applicable mandatory cooling-off period under the Rule.
3. Includes: (i) 3,767 shares of our common stock; (ii) up to 7,500 shares of common stock, net of shares withheld to cover tax withholding obligations, to be issued upon the anticipated vesting of Performance Stock Units; and 7,500 employee stock options expected to be exercised via same-day sale.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
This information will be contained in our definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation
This information will be contained in our definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information will be contained in our definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
This information will be contained in our definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
This information will be contained in our definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents Filed as Part of this Annual Report on Form 10-K
1. Financial Statements (included in Part II, Item 8 of this Annual Report on Form 10-K):
•Consolidated Statements of Stockholders’ Equity for the years ended November 30, 2023, 2022 and 2021
2. Financial Statement Schedules
Financial statement schedules are omitted as they are either not required or the information is otherwise included in the consolidated financial statements.
(b) Exhibits
Documents listed below, except for documents followed by parenthetical numbers, are being filed as exhibits. Documents followed by parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the SEC under the Exchange Act, reference is made to such documents as previously filed as exhibits with the SEC. Our file number under the Exchange Act is 0-19417.
| 2.1* | |||||
| 2.2* | |||||
| 2.3 | |||||
| 2.4 | |||||
| 2.5 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 3.2.1 | |||||
| 3.3 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 4.4 | |||||
| 10.1** | |||||
| 10.2** | |||||
| 10.3** | |||||
| 10.4** | |||||
| 10.5** | |||||
| 10.6** | |||||
| 10.7** | |||||
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| 10.8** | |||||
| 10.9** | |||||
| 10.10** | |||||
| 10.11** | |||||
| 10.12** | |||||
| 10.13** | |||||
| 10.14** | |||||
| 10.15** | |||||
| 10.16** | |||||
| 10.17** | |||||
| 10.18 | |||||
| 10.19* | Third Amended and Restated Credit Agreement, dated as of January 25, 2022, by and among Progress Software Corporation, each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo Bank, N.A. and Citizens Bank, N.A., as Syndication Agents, and Bank of America, N.A., Citibank, N.A., PNC Bank, National Association, Silicon Valley Bank and TD Bank, N.A., as Documentation Agents, and JPMorgan Chase Bank, N.A., as Sole Bookrunner and Sole Lead Arranger (29) | ||||
| 21.1 | |||||
| 23.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 97 | |||||
| 101*** | The following materials from Progress Software Corporation’s Annual Report on Form 10-K for the year ended November 30, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of November 30, 2023 and 2022, (ii) Consolidated Statements of Income for the years ended November 30, 2023, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the years ended November 30, 2023, 2022 and 2021, (iv) Consolidated Statements of Stockholders’ Equity for the years ended November 30, 2023, 2022 and 2021, and (v) Consolidated Statements of Cash Flows for the years ended November 30, 2023, 2022 and 2021. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
(1)Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on April 1, 2019.
(2)Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on September 9, 2020.
(3)Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed of September 27, 2021.
(4)Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on January 3, 2023.
(5)Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on May 14, 2015.
(6)Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 14, 2015.
(7)Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on May 14, 2015.
(8)Incorporated by reference to Exhibit 3.2.1 to our Annual Report on Form 10-K for the year ended November 30, 2015.
(9)Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2019.
(10)Incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended November 30, 2011.
(11)Incorporated by reference to Exhibit 4.2 to our Annual Report on Form 10-K for the year ended November 30, 2019.
(12)Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on April 13, 2021.
(13)Incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K for the year ended November 30, 2015.
(14)Incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year ended November 30, 2015.
(15)Incorporated by reference to Appendix B to our definitive Proxy Statement filed April 14, 2021.
(16)Incorporated by reference to Appendix A to our definitive Proxy Statement filed April 14, 2021.
(17)Incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K for the year ended November 30, 2013.
(18)Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended November 30, 2012.
(19)Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the year ended November 30, 2013.
(20)Incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K for the year ended November 30, 2013.
(21)Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the year ended November 30, 2013.
(22)Incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the year ended November 30, 2014.
(23)Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 14, 2016.
(24)Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 14, 2016.
(25)Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 17, 2020.
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(26)Incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the year ended November 30, 2019.
(27)Incorporated by reference to Exhibit 10.22 to our Annual Report on Form 10-K for the year ended November 30, 2019.
(28)Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 13, 2021.
(29)Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 27, 2022.
| * | Certain schedules and exhibits have been omitted from this Exhibit pursuant to Item 601(a)(5) of Regulation S-K. Progress Software Corporation will furnish a copy of any omitted schedule or exhibit to the U.S. Securities and Exchange Commission or its staff upon request. | ||||
| ** | Management contract or compensatory plan or arrangement in which an executive officer or director of Progress Software Corporation participates. | ||||
| *** | Pursuant to Rule 406T of Regulations S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. | ||||
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes hereto.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of January 2024.
| PROGRESS SOFTWARE CORPORATION | |||||
| By: | /s/ YOGESH K. GUPTA | ||||
| Yogesh K. Gupta | |||||
| President and Chief Executive Officer | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ YOGESH K. GUPTA | President and Chief Executive Officer | January 26, 2024 | ||||||||||||
| Yogesh K. Gupta | (Principal Executive Officer) | |||||||||||||
| /s/ ANTHONY FOLGER | Executive Vice President and Chief Financial Officer | January 26, 2024 | ||||||||||||
| Anthony Folger | (Principal Financial Officer) | |||||||||||||
| /s/ DOMENIC LOCOCO | Chief Accounting Officer | January 26, 2024 | ||||||||||||
| Domenic LoCoco | (Principal Accounting Officer) | |||||||||||||
| /s/ JOHN R. EGAN | Non-Executive Chairman | January 26, 2024 | ||||||||||||
| John R. Egan | ||||||||||||||
| /s/ PAUL T. DACIER | Director | January 26, 2024 | ||||||||||||
| Paul T. Dacier | ||||||||||||||
| /s/ RAINER GAWLICK | Director | January 26, 2024 | ||||||||||||
| Rainer Gawlick | ||||||||||||||
| /s/ CHARLES F. KANE | Director | January 26, 2024 | ||||||||||||
| Charles F. Kane | ||||||||||||||
| /s/ SAMSKRITI KING | Director | January 26, 2024 | ||||||||||||
| Samskriti King | ||||||||||||||
| /s/ DAVID A. KRALL | Director | January 26, 2024 | ||||||||||||
| David A. Krall | ||||||||||||||
| /s/ ANGELA TUCCI | Director | January 26, 2024 | ||||||||||||
| Angela Tucci | ||||||||||||||
| /s/ VIVIAN VITALE | Director | January 26, 2024 | ||||||||||||
| Vivian Vitale | ||||||||||||||
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