Progress(PRGS) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This item presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, acquisitions, debt, and other financial matters Condensed Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, as of May 31, 2024, and November 30, 2023 Balance Sheet Highlights (in thousands) | Metric | May 31, 2024 | Nov 30, 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Total Assets | $1,586,375 | $1,602,783 | (1)% | | Cash and cash equivalents | $190,420 | $126,958 | 50% | | Accounts receivable | $82,354 | $125,825 | (35)% | | Intangible assets, net | $304,644 | $354,278 | (14)% | | Goodwill | $832,783 | $832,101 | 0% | | Total Current Liabilities | $307,221 | $352,118 | (13)% | | Convertible senior notes, net | $794,277 | $354,772 | 124% | | Long-term debt, net | $— | $356,111 | (100)% | | Total Stockholders' Equity | $401,667 | $459,715 | (13)% | Condensed Consolidated Statements of Operations This section details the company's financial performance over specific periods, including revenue, gross profit, operating income, and net income Statements of Operations Highlights (Six Months Ended May 31, in thousands, except per share data) | Metric | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Total revenue | $359,762 | $342,477 | 5% | | Gross profit | $294,882 | $282,482 | 4% | | Income from operations | $62,154 | $58,615 | 6% | | Net income | $38,827 | $35,764 | 9% | | Basic EPS | $0.89 | $0.83 | 7% | | Diluted EPS | $0.87 | $0.81 | 7% | Statements of Operations Highlights (Three Months Ended May 31, in thousands, except per share data) | Metric | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Total revenue | $175,077 | $178,251 | (2)% | | Gross profit | $143,006 | $144,473 | (1)% | | Income from operations | $27,148 | $23,027 | 18% | | Net income | $16,188 | $12,090 | 34% | | Basic EPS | $0.37 | $0.28 | 32% | | Diluted EPS | $0.37 | $0.27 | 37% | Condensed Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income/loss components, for the specified periods Comprehensive Income (Six Months Ended May 31, in thousands) | Metric | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Net income | $38,827 | $35,764 | 9% | | Foreign currency translation adjustments | $(1,441) | $3,457 | (142)% | | Unrealized loss on hedging activity, net of tax | $(1,135) | $(939) | 21% | | Total other comprehensive (loss) income, net of tax | $(2,576) | $2,518 | (202)% | | Comprehensive income | $36,251 | $38,282 | (5)% | Comprehensive Income (Three Months Ended May 31, in thousands) | Metric | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Net income | $16,188 | $12,090 | 34% | | Foreign currency translation adjustments | $105 | $1,720 | (94)% | | Unrealized loss on hedging activity, net of tax | $(445) | $(812) | (45)% | | Total other comprehensive (loss) income, net of tax | $(340) | $929 | (137)% | | Comprehensive income | $15,848 | $13,019 | 22% | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including net income, stock issuances, repurchases, and dividends, for the six months ended May 31, 2024 Changes in Stockholders' Equity (Six Months Ended May 31, 2024, in thousands) | Item | Amount | | :----------------------------------- | :----------- | | Balance, December 1, 2023 | $459,715 | | Issuance of stock under employee stock purchase plan | $6,920 | | Exercise of stock options | $5,546 | | Withholding tax payments related to net issuance of RSUs | $(10,592) | | Stock-based compensation | $24,453 | | Purchase of capped calls, net of tax | $(32,080) | | Dividends declared | $(16,097) | | Treasury stock repurchases and retirements | $(72,449) | | Net income | $38,827 | | Other comprehensive loss | $(2,576) | | Balance, May 31, 2024 | $401,667 | Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended May 31, 2024 and 2023 Cash Flow Summary (Six Months Ended May 31, in thousands) | Metric | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Net cash flows from operating activities | $134,185 | $94,718 | 42% | | Net cash flows used in investing activities | $(1,264) | $(357,627) | (100)% | | Net cash flows (used in) from financing activities | $(67,798) | $128,956 | (153)% | | Net increase (decrease) in cash and cash equivalents | $63,462 | $(130,746) | (148)% | | Cash and cash equivalents, end of period | $190,420 | $125,531 | 52% | Key Financing Activities (Six Months Ended May 31, 2024, in thousands) | Item | Amount | | :----------------------------------- | :----------- | | Proceeds from issuance of senior convertible notes, net | $438,750 | | Purchase of capped calls | $(42,210) | | Repayment of revolving line of credit | $(110,000) | | Principal payment on term loan | $(261,250) | | Repurchases of common stock | $(72,449) | | Dividend payments to stockholders | $(16,122) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding the company's accounting policies, significant estimates, and various financial statement line items - The financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, and should be read in conjunction with the 2023 Annual Report[77] - Management's significant estimates relate to revenue recognition, loss contingencies (including the MOVEit Vulnerability), and business combinations[78] Note 1: Basis of Presentation This note describes the company's business, operational structure, and the impact of recent accounting pronouncements on its financial statements - Progress Software Corporation provides enterprise software products for the development, deployment and management of responsible, AI-powered applications and experiences. Products are sold as perpetual licenses, term licenses, and subscription-based cloud models[31][55] - The company operates in North America, Latin America, EMEA, and Asia Pacific through local subsidiaries and independent distributors[32] - ASU 2023-09 (Income Taxes) is effective for the company in the annual period ending November 30, 2026, and is not expected to materially impact financial statements[58] - ASU 2023-07 (Segment Reporting) is effective for the year ending November 30, 2025, and is not expected to materially impact financial statements[79] - SEC Release No. 33-11275 (Climate-Related Disclosures) will apply to the fiscal year beginning December 1, 2025, and the company is evaluating its impact[80] Note 2: Cash and Cash Equivalents This note provides a breakdown of the company's cash and cash equivalents, including cash and money market funds, as of May 31, 2024, and November 30, 2023 Cash and Cash Equivalents (May 31, 2024, in thousands) | Type | Amortized Cost Basis | Fair Value | | :------------------- | :------------------- | :----------- | | Cash | $119,254 | $119,254 | | Money market funds | $71,166 | $71,166 | | Total | $190,420 | $190,420 | Cash and Cash Equivalents (November 30, 2023, in thousands) | Type | Amortized Cost Basis | Fair Value | | :------------------- | :------------------- | :----------- | | Cash | $126,958 | $126,958 | | Total | $126,958 | $126,958 | Note 3: Derivative Instruments This note details the company's use of derivative instruments, including interest rate swaps and foreign currency forward contracts, for hedging purposes - An interest rate swap contract with an initial notional amount of $150.0 million matured on April 30, 2024. It was designated as a cash flow hedge[83] - Upon repayment of variable rate debt on March 1, 2024, an unrealized gain of $0.6 million was reclassified from accumulated other comprehensive loss to interest expense[84] - The company uses forward contracts to hedge foreign currency variability on intercompany accounts receivable and loans, recognizing realized and unrealized losses of $0.1 million (three months) and $0.7 million (six months) in foreign currency loss, net, for the period ended May 31, 2024[86][87] Outstanding Forward Contracts (May 31, 2024, in thousands) | Type | Notional Value | Fair Value | | :----------------------------------- | :------------------- | :----------- | | Forward contracts to sell U.S. dollars | $81,758 | $(476) | | Total | $81,758 | $(476) | Note 4: Fair Value Measurements This note provides information on the fair value hierarchy of financial assets and liabilities, including money market funds and foreign exchange derivatives, and the fair value of convertible senior notes Fair Value Hierarchy (May 31, 2024, in thousands) | Item | Total Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :------------------- | :----------- | :----------- | :----------- | | Money market funds (Assets) | $71,166 | $71,166 | $— | $— | | Foreign exchange derivatives (Liabilities) | $(476) | $— | $(476) | $— | Fair Value of Convertible Senior Notes (May 31, 2024, in thousands) | Notes | Carrying Value | Fair Value | | :----------------------------------- | :------------------- | :----------- | | Convertible senior notes due 2026 | $355,861 | $361,113 | | Convertible senior notes due 2030 | $438,416 | $438,128 | | Total | $794,277 | $799,241 | Note 5: Intangible Assets and Goodwill This note details the company's intangible assets, including purchased technology, customer-related assets, and trademarks, along with changes in goodwill Intangible Assets (in thousands) | Type | May 31, 2024 Net Book Value | Nov 30, 2023 Net Book Value | Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :----- | | Purchased technology | $83,698 | $98,955 | (15)% | | Customer-related | $205,836 | $237,246 | (13)% | | Trademarks and trade names | $15,110 | $18,077 | (16)% | | Total | $304,644 | $354,278 | (14)% | - Amortization expense for intangible assets was $23.7 million (three months) and $49.0 million (six months) for the period ended May 31, 2024[92] - Goodwill increased by $0.7 million to $832,783 thousand as of May 31, 2024, due to measurement period adjustments for the MarkLogic acquisition[93][95] Note 6: Business Combinations This note provides details on the acquisition of MarkLogic, including the purchase price, recognized goodwill, and the allocation of the purchase price to acquired assets and liabilities - The acquisition of MarkLogic was completed on February 7, 2023[70] - The acquisition was for a base purchase price of $355.0 million in cash[70] - Goodwill of $161.8 million was recognized, which is not deductible for tax purposes[97] Purchase Price Allocation (in thousands) | Item | Amount | Life | | :----------------------------------- | :----------- | :----------- | | Net working capital | $46,335 | | | Property, plant and equipment | $723 | | | Purchased technology | $67,300 | 7 years | | Trade name | $12,500 | 7 years | | Customer relationships | $152,300 | 7 years | | Other assets, including long-term unbilled receivables | $4,477 | | | Deferred taxes | $(24,478) | | | Deferred revenue | $(32,418) | | | Goodwill | $161,770 | | | Net assets acquired | $388,509 | | Note 7: Debt This note outlines the company's debt structure, including the issuance of convertible senior notes, the refinancing of existing debt, and the establishment of a new revolving credit facility - In March 2024, the company refinanced its debt by issuing $450 million in 3.50% Convertible Senior Notes due March 1, 2030[128][129] - Proceeds from the 2030 Notes were used to pay off outstanding term loan and revolving line of credit, enter into capped call transactions, and for general corporate purposes[129] - Noteholders can convert under specific conditions, including stock price exceeding 130% of conversion price, low trading price, or certain corporate events. The initial conversion rate is 14.7622 shares per $1,000 principal amount[76][101][102][130] - The company entered into 2024 Capped Call Transactions covering approximately 6.6 million shares to reduce potential dilution, with a cap price of $92.98 per share. The cost of $42.2 million was recorded as a reduction to additional paid-in-capital[105][132] - A $900.0 million secured revolving credit facility was established, maturing on March 7, 2029, and was undrawn as of May 31, 2024[108][109] Note 8: Common Stock Repurchases This note details the company's common stock repurchase program, including the authorization amount and shares repurchased during the period - The share repurchase authorization was increased by $150.0 million to an aggregate of $228.0 million in January 2023[6] Shares Repurchased (Six Months Ended May 31) | Period | Shares Repurchased (millions) | Cost (millions) | | :----------------------------------- | :---------------------------- | :-------------- | | 2024 | 1.4 | $72.4 | | 2023 | 0.5 | $30.0 | - As of May 31, 2024, $121.5 million remained under the current authorization[6] Note 9: Stock-Based Compensation This note describes the company's stock-based compensation plans, including the valuation methodologies and the allocation of compensation expense across various categories - Fair value of stock-based awards is estimated using current market price, Black-Scholes, or Monte Carlo Simulation models[112] - Performance-based restricted stock units under the Long-Term Incentive Plan (LTIP) have a three-year performance measurement period, with vesting based on cumulative operating income (75%) and relative TSR targets (25%)[138] Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended May 31, 2024 | Six Months Ended May 31, 2024 | | :----------------------------------- | :------------------------------ | :---------------------------- | | Cost of maintenance and services | $912 | $1,898 | | Sales and marketing | $2,458 | $4,770 | | Product development | $3,391 | $7,056 | | General and administrative | $5,228 | $10,729 | | Total stock-based compensation | $11,989 | $24,453 | Note 10: Accumulated Other Comprehensive Loss This note details the components of accumulated other comprehensive loss, including foreign currency translation adjustments and unrealized hedging gains/losses Accumulated Other Comprehensive Loss (in thousands) | Item | Foreign Currency Translation Adjustment | Unrealized Hedging Gains (Losses) on Activity | Accumulated Other Comprehensive Loss | | :----------------------------------- | :------------------------------------ | :-------------------------------------------- | :----------------------------------- | | Balance, December 1, 2023 | $(33,295) | $1,135 | $(32,160) | | Other comprehensive loss before reclassifications, net of tax | $(1,441) | $(689) | $(2,130) | | Amount of gain reclassified from accumulated other comprehensive loss into net income, net of tax | $— | $(446) | $(446) | | Balance, May 31, 2024 | $(34,736) | $— | $(34,736) | Note 11: Revenue Recognition This note provides a breakdown of revenue by type and geographic area, along with information on remaining performance obligations Revenue by Type (Six Months Ended May 31, in thousands) | Revenue Type | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Software licenses | $118,079 | $113,975 | 4% | | Maintenance | $204,528 | $194,753 | 5% | | Services | $37,155 | $33,749 | 10% | | Total revenue | $359,762 | $342,477 | 5% | Revenue by Geographic Area (Six Months Ended May 31, in thousands) | Region | 2024 | 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | North America | $210,184 | $204,560 | 3% | | EMEA | $120,625 | $109,590 | 10% | | Latin America | $9,267 | $8,979 | 3% | | Asia Pacific | $19,686 | $19,348 | 2% | | Total revenue | $359,762 | $342,477 | 5% | - As of May 31, 2024, transaction price allocated to remaining performance obligations was $344 million, with approximately 75% expected to be recognized within the next year[143] Note 12: Restructuring Charges This note details the restructuring costs incurred, primarily related to a facility closure in connection with a restructuring action from the first fiscal quarter of 2023 Restructuring Costs (Six Months Ended May 31, 2024, in thousands) | Category | Amount | | :----------------------------------- | :----------- | | Facilities Excess and Other Costs | $2,574 | | Employee Severance and Benefits | $426 | | Total Costs Incurred | $3,000 | - Costs incurred are primarily related to a facility closure in connection with the restructuring action from the first fiscal quarter of 2023[121] Note 13: Earnings per share This note provides the calculation of basic and diluted earnings per share, including the impact of common stock equivalents and convertible senior notes EPS Calculation (Six Months Ended May 31, in thousands, except per share data) | Metric | 2024 | 2023 | | :----------------------------------- | :----------- | :----------- | | Net income | $38,827 | $35,764 | | Weighted average shares outstanding (Basic) | 43,508 | 43,321 | | Basic earnings per common share | $0.89 | $0.83 | | Effect of dilution from common stock equivalents | 887 | 1,090 | | Diluted weighted average shares outstanding | 44,395 | 44,411 | | Diluted earnings per share | $0.87 | $0.81 | - Approximately 993,000 shares of common stock were excluded from diluted EPS calculation for the six months ended May 31, 2024, as they were anti-dilutive[122] - The convertible senior notes were out of the money and thus not included in the diluted EPS calculation for the three and six months ended May 31, 2024[146] Note 14: Segment Information This note clarifies that the company operates as a single operating segment, with the CEO serving as the chief operating decision maker - The company operates as one operating segment: software products to develop, deploy, and manage high-impact applications[164] - The Chief Executive Officer is the chief operating decision maker (CODM) and evaluates financial information on a consolidated basis[147][164] Note 15: Cyber Related Matters This note discusses the MOVEit Vulnerability, related expenses, regulatory inquiries, and class action lawsuits, along with the company's cybersecurity insurance coverage - A zero-day vulnerability (MOVEit Vulnerability) in MOVEit Transfer and MOVEit Cloud was discovered on May 30, 2023, and a patch was released on May 31, 2023[7] - MOVEit Transfer and MOVEit Cloud represented less than 4% of total revenue for the six months ended May 31, 2024[7] - For the six months ended May 31, 2024, the company incurred $4.0 million in expenses related to the MOVEit Vulnerability, net of $1.9 million in insurance recoveries[171] - The company is cooperating with inquiries and investigations from domestic and foreign data privacy regulators, state attorneys general (including District of Columbia and New Jersey), a U.S. federal law enforcement agency, and the SEC[150][152][167][169] - The UK's Information Commissioner's Office, the Office of the Australian Information Commissioner's Office, and the Spanish data protection authority (AEPD) determined that regulatory action was not required[151][153][170] - The company is party to approximately 144 class action lawsuits related to data exfiltration from MOVEit Transfer customers, consolidated in the District of Massachusetts (MDL)[166] - A loss from these matters is reasonably possible, but a range of possible losses cannot be reasonably estimated due to early stages of litigation and ongoing investigations[172] - The company maintained $15.0 million in cybersecurity insurance coverage. As of May 31, 2024, $7.0 million in insurance recoveries have been recorded ($2.5 million for November 2022 incident, $4.5 million for MOVEit Vulnerability), leaving approximately $8.0 million remaining[173] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, including a detailed analysis of revenue, costs, operating expenses, and profitability for the three and six months ended May 31, 2024. It also discusses liquidity, capital resources, and key performance metrics like ARR and net retention rate - Progress provides enterprise software products for developing, deploying, and managing responsible, AI-powered applications and experiences[180] - Revenue from international operations is substantial and impacted by foreign currency exchange rate fluctuations[158] - Revenue growth rates are presented on a constant currency basis to enhance understanding of performance, in addition to GAAP results[175] Overview This overview describes Progress Software's core business of providing enterprise software for AI-powered applications and notes the impact of foreign currency fluctuations on international revenue - Progress Software Corporation provides enterprise software products for the development, deployment and management of responsible, AI-powered applications and experiences[180] - A substantial portion of total revenue comes from international operations, making it susceptible to foreign currency exchange rate fluctuations[158] Results of Operations This section analyzes the company's financial performance, detailing revenue, cost of revenue, gross profit, operating expenses, and net income for the periods presented Revenue This section analyzes the company's revenue performance, breaking it down by software licenses, maintenance and services, and geographic regions Software License Revenue This section details the company's software license revenue, highlighting changes and attributing increases to the MarkLogic acquisition Software Licenses Revenue (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change (As Reported) | % Change (Constant Currency) | | :----------------------------------- | :----------- | :----------- | :--------------------------- | :--------------------------- | | Three Months | $53,979 | $56,407 | (4)% | (4)% | | Six Months | $118,079 | $113,975 | 4% | 3% | - The increase in six-month revenue is attributed to the MarkLogic acquisition, as the current period includes a full six months of activity[182] Maintenance and Services Revenue This section analyzes the company's maintenance and services revenue, noting the impact of the MarkLogic acquisition on the six-month increase Maintenance and Services Revenue (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change (As Reported) | % Change (Constant Currency) | | :----------------------------------- | :----------- | :----------- | :--------------------------- | :--------------------------- | | Three Months | $121,098 | $121,844 | (1)% | (1)% | | Six Months | $241,683 | $228,502 | 6% | 5% | - The increase in six-month revenue is primarily due to the MarkLogic acquisition[192] Revenue by Region This section provides a breakdown of revenue by geographic region, explaining the drivers behind changes in North America and EMEA Revenue by Region (Six Months Ended May 31, in thousands) | Region | 2024 | 2023 | % Change (As Reported) | % Change (Constant Currency) | | :----------------------------------- | :----------- | :----------- | :--------------------------- | :--------------------------- | | North America | $210,184 | $204,560 | 3% | 3% | | EMEA | $120,625 | $109,590 | 10% | 9% | | Latin America | $9,267 | $8,979 | 3% | 2% | | Asia Pacific | $19,686 | $19,348 | 2% | 3% | - The increase in North America for the six months was primarily due to the timing of the MarkLogic acquisition[184] - The increase in EMEA was primarily due to an increase in the DataDirect product offering as a result of the timing of renewals on multiyear subscription contracts[184] - Revenue from markets outside North America represented 42% of total revenue for the first six months of fiscal year 2024[185] Cost of Revenue This section analyzes the company's cost of revenue, including software licenses, maintenance and services, and amortization of intangibles Cost of Software Licenses This section details the costs associated with software licenses, primarily consisting of inventories, royalties, and distribution expenses Cost of Software Licenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | % Change | | :----------------------------------- | :----------- | :----------- | :----- | :--------- | | Three Months | $2,497 | $2,814 | $(317) | (11)% | | Six Months | $5,228 | $5,266 | $(38) | (1)% | - Consists primarily of costs of inventories, royalties, electronic software distribution, duplication, and packaging[195] Cost of Maintenance and Services This section examines the costs related to maintenance and services, attributing increases to personnel costs from the MarkLogic acquisition and decreases to contractor expenses Cost of Maintenance and Services (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | % Change | | :----------------------------------- | :----------- | :----------- | :----- | :--------- | | Three Months | $22,176 | $22,970 | $(794) | (3)% | | Six Months | $44,395 | $40,471 | $3,924 | 10% | - The six-month increase is due to increased personnel-related costs resulting from the MarkLogic acquisition[196] - The three-month decrease was primarily due to decreased contractor and outside services costs and decreased hosting costs[196] Amortization of Intangibles (Cost of Revenue) This section analyzes the amortization expense for intangible assets included in the cost of revenue, noting the impact of the MarkLogic acquisition and fully amortized assets Amortization of Intangibles (Cost of Revenue, in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $7,398 | $7,994 | (7)% | | Six Months | $15,257 | $14,258 | 7% | - The year over year increase in the first six months of fiscal year 2024 is due to the acquisition of MarkLogic[189] - The decrease in the second quarter of fiscal year 2024 is due to certain intangible assets becoming fully amortized in the period[189] Gross Profit This section analyzes the company's gross profit, explaining the factors contributing to increases in the six-month period and slight decreases in the three-month period Gross Profit (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $143,006 | $144,473 | (1)% | | Six Months | $294,882 | $282,482 | 4% | - Our gross profit increased in the first six months of fiscal year 2024 as compared to the same period last year due to the increases in revenue, offset by the increases in costs of maintenance and services and the amortization of intangibles[190] - Our gross profit decreased slightly in the second quarter of fiscal year 2024 as compared to the same period last year due to the decreases in revenue, offset by the decreases in costs of software licenses, costs of maintenance and services and the amortization of intangibles[190] Operating Expenses This section provides an analysis of the company's operating expenses, including sales and marketing, product development, general and administrative, and amortization of intangibles Sales and Marketing This section analyzes sales and marketing expenses, attributing increases in the six-month period to the MarkLogic acquisition and decreases in the three-month period to reduced personnel and contractor costs Sales and Marketing Expenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | % Change | | :----------------------------------- | :----------- | :----------- | :----- | :--------- | | Three Months | $37,889 | $40,147 | $(2,258) | (6)% | | Six Months | $77,000 | $73,901 | $3,099 | 4% | - Sales and marketing expenses increased in the first six months of fiscal year 2024 primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as increases in marketing and sales events costs, partially offset by decreases in contractors and outside services costs[191] - Sales and marketing expenses decreased in the second quarter of fiscal year 2024 due to decreased personnel related costs, contractors and outside services costs, and marketing and sales events costs[191] Product Development This section analyzes product development expenses, attributing increases to personnel-related costs from the MarkLogic acquisition and higher contractor expenses Product Development Expenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | % Change | | :----------------------------------- | :----------- | :----------- | :----- | :--------- | | Three Months | $35,435 | $34,820 | $615 | 2% | | Six Months | $70,423 | $65,258 | $5,165 | 8% | - Product development expenses increased in the first six months of fiscal year 2024 primarily due to increased personnel related costs associated with our acquisition of MarkLogic, as well as an increase in contractors and outside services costs[199] - Product development expenses increased in the second quarter of fiscal year 2024 as compared to the same period in the prior year primarily due to increased personnel related costs[199] General and Administrative This section analyzes general and administrative expenses, noting increases primarily due to higher personnel costs and other general expenses, partially offset by decreased contractor costs General and Administrative Expenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | % Change | | :----------------------------------- | :----------- | :----------- | :----- | :--------- | | Three Months | $21,983 | $21,469 | $514 | 2% | | Six Months | $43,327 | $40,255 | $3,072 | 8% | - General and administrative expenses increased in all periods primarily due to higher personnel costs and other general and administrative costs[206] - These increases were offset by decreases in contractors and outside services costs in all periods[206] Amortization of Intangibles (Operating Expenses) This section analyzes the amortization expense for intangible assets included in operating expenses, noting the impact of the MarkLogic acquisition and fully amortized assets Amortization of Intangibles (Operating Expenses, in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $16,316 | $17,546 | (7)% | | Six Months | $33,705 | $31,157 | 8% | - The increase in the first six months of fiscal year 2024 is due to the addition of MarkLogic intangible assets[2] - The decrease in the second quarter of fiscal year 2024 is due to certain intangible assets becoming fully amortized in the period[2] Cyber Incident and Vulnerability Response Expenses, Net This section details the net expenses incurred for cyber incidents and vulnerability responses, including the MOVEit Vulnerability, net of insurance recoveries Cyber Incident and Vulnerability Response Expenses, Net (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $3,036 | $1,483 | 105% | | Six Months | $4,023 | $4,175 | (4)% | - Cyber incident and MOVEit Vulnerability costs relate to the engagement of external cybersecurity experts and other incident response professionals and are net of received and expected insurance recoveries[207] Restructuring Expenses This section details restructuring expenses, primarily related to a facility closure in connection with the MarkLogic acquisition restructuring action from the first fiscal quarter of 2023 Restructuring Expenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $651 | $3,990 | (84)% | | Six Months | $3,000 | $5,387 | (44)% | - Restructuring expenses recorded in the first six months of fiscal year 2024 primarily relate to a facility closure in connection with the restructuring action from the first fiscal quarter of 2023, related to the MarkLogic acquisition[277] Acquisition-Related Expenses This section details acquisition-related expenses, noting that current period expenses are for other opportunities, while prior period expenses were primarily for the MarkLogic acquisition Acquisition-Related Expenses (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $548 | $1,991 | (72)% | | Six Months | $1,250 | $3,734 | (67)% | - Acquisition-related expenses in the first six months of fiscal year 2024 were primarily related to our pursuit of other acquisition opportunities. Acquisition-related expenses in the same periods of fiscal year 2023 were primarily related to our acquisition of MarkLogic[224] Income from Operations This section analyzes the company's income from operations, explaining the factors contributing to increases in both the three-month and six-month periods Income from Operations (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $27,148 | $23,027 | 18% | | Six Months | $62,154 | $58,615 | 6% | - Income from operations increased in the second quarter of fiscal year 2024 due to a decrease in costs of revenue and operating expenses, offset by decreased revenue[218] - Income from operations increased in the first six months of fiscal year 2024 due to an increase in revenue, partially offset by an increase in costs of revenue and operating expenses[218] Other (Expense) Income This section analyzes other expense, net, noting a decrease in the second quarter due to lower interest rates from debt refinancing and higher interest income from invested cash balances Total Other Expense, Net (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $(7,020) | $(8,418) | (17)% | | Six Months | $(14,419) | $(14,082) | 2% | - Other expense, net, decreased in the second quarter of fiscal year 2024 due to lower interest rates as a result of our debt refinancing[227] - Interest income and other, net, was higher in fiscal year 2024, resulting from higher interest rates on our invested cash balance, increasing by 40% for the six months ended May 31, 2024[219][227] Provision for Income Taxes This section analyzes the provision for income taxes, noting an increase in the effective tax rate due to the absence of significant discrete tax benefits in the current period Provision for Income Taxes (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $3,940 | $2,519 | 56% | | Six Months | $8,908 | $8,769 | 2% | - The effective tax rate was 20% in the second fiscal quarter of 2024, up from 17% in 2023[231] - The primary reason for the increase in the effective rate was due to the absence of significant discrete tax benefits in the second fiscal quarter of 2024, which were present in the prior year[231] Net Income This section presents the company's net income for the three and six months ended May 31, 2024 and 2023 Net Income (in thousands) | Period | May 31, 2024 | May 31, 2023 | % Change | | :----------------------------------- | :----------- | :----------- | :--------- | | Three Months | $16,188 | $12,090 | 34% | | Six Months | $38,827 | $35,764 | 9% | Select Performance Metrics This section discusses key performance indicators such as Annualized Recurring Revenue (ARR) and Net Retention Rate, which management uses to assess business health and trends Annualized Recurring Revenue ("ARR") This section defines Annualized Recurring Revenue (ARR) and presents its value, highlighting its use by management to understand customer trends and business health ARR as of May 31 | Year | ARR (millions) | YoY Change | | :----------------------------------- | :------------- | :--------- | | 2024 | $579.0 | 1% | | 2023 | $574.0 | | - ARR is defined as the annualized revenue of all active and contractually binding term-based contracts from all customers at a point in time, including revenue from maintenance, software upgrade rights, public cloud, and on-premises subscription-based transactions and managed services[209] - Management uses ARR to understand customer trends and the overall health of the Company's business, helping it to formulate strategic business decisions[209] - ARR is not defined in GAAP and is not intended to be combined with or to replace either GAAP revenue or deferred revenue[213] Net Retention Rate This section discusses the company's net retention rates, emphasizing their consistency and role in illustrating predictable top-line performance - Our net retention rates have generally ranged between 99% and 102% for all periods presented[217] - High net retention rates illustrate predictable and durable top line performance[217] - Net retention rate is calculated by dividing the Current Period ARR (from a cohort of customers 12 months prior, including expansion and net of contraction/attrition, excluding new customers) by the Prior Period ARR[216] Liquidity and Capital Resources This section analyzes the company's liquidity and capital resources, including cash and cash equivalents, cash flows from operating, investing, and financing activities, and its liquidity outlook Cash and Cash Equivalents This section details the company's cash and cash equivalents, explaining the factors contributing to the increase, including debt refinancing and operational cash inflows Cash and Cash Equivalents (in thousands) | Date | Amount | | :----------------------------------- | :----------- | | May 31, 2024 | $190,420 | | November 30, 2023 | $126,958 | - The increase in cash and cash equivalents was due to proceeds from the issuance of convertible senior notes ($396.5 million net), cash inflows from operations ($134.2 million), and cash received from the issuance of common stock ($2.3 million)[210] - These inflows were offset by cash outflows of $261.3 million to pay off the term loan, $110.0 million to pay off the revolving line of credit, $72.5 million for common stock repurchases, $16.1 million for dividend payments, and $42.2 million for the purchase of capped calls[210] - $76.0 million of cash and cash equivalents was held by foreign subsidiaries and invested indefinitely outside of the U.S[221] Cash Flows From Operating Activities This section analyzes the company's net cash flows from operating activities, attributing the increase to higher billings and improved collections Net Cash Flows from Operating Activities (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Six Months | $134,185 | $94,718 | 42% | - Operating cash flows increased due to higher billings and collections[235] - Days sales outstanding (DSO) in accounts receivable decreased to 41 days from 44 days in the second fiscal quarter of 2023[235] Cash Flows Used in Investing Activities This section analyzes the company's net cash flows used in investing activities, noting a significant decrease due to the absence of large acquisition payments in the current period Net Cash Flows Used in Investing Activities (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Six Months | $(1,264) | $(357,627) | (100)% | - The significant decrease in cash used in investing activities is due to the absence of large payments for acquisitions in the first six months of fiscal year 2024, compared to $356.1 million in 2023 (MarkLogic acquisition)[243] - Purchases of property and equipment were $1.3 million in 2024 compared to $2.0 million in 2023[243] Cash Flows (Used in) From Financing Activities This section details the company's net cash flows from financing activities, including proceeds from convertible notes, debt repayments, stock repurchases, and dividend payments Net Cash Flows (Used in) From Financing Activities (in thousands) | Period | May 31, 2024 | May 31, 2023 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Six Months | $(67,798) | $128,956 | (153)% | Key Activities (Six Months Ended May 31, 2024, in thousands) | Item | Amount | | :----------------------------------- | :----------- | | Proceeds from issuance of senior convertible notes, net | $438,750 | | Purchase of capped calls | $(42,210) | | Repayment of revolving line of credit | $(110,000) | | Principal payment on term loan | $(261,250) | | Repurchases of common stock | $(72,449) | | Dividend payments to stockholders | $(16,122) | Liquidity Outlook This section outlines management's belief regarding the sufficiency of existing cash, operational funds, and credit facilities to meet foreseeable cash requirements for at least the next twelve months - Management believes that existing cash balances, funds generated from operations, and amounts available under the revolving credit facility will be sufficient to finance operations and meet foreseeable cash requirements through at least the next twelve months[247] - Foreseeable cash needs include capital expenditures, acquisitions, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations[247] - The company does not contemplate a need for any foreign repatriation of indefinitely invested foreign earnings, and does not anticipate a material adverse impact if repatriation were to occur[247] Share Repurchase Program This section provides an update on the company's share repurchase program, including the number of shares repurchased and the remaining authorization amount - The company repurchased 1.4 million shares for $72.4 million during the six months ended May 31, 2024, under its $228.0 million authorization, with $121.5 million remaining[220] Dividends This section announces the quarterly dividend declared by the Board of Directors, including the per-share amount and payment date - On June 17, 2024, the Board of Directors declared a quarterly dividend of $0.175 per share of common stock, payable on September 16, 2024[232] Long-term Debt and Credit Facility This section directs readers to Note 7 for detailed information on the company's long-term debt and credit facility - Refer to Note 7: Debt for detailed information on the company's long-term debt and credit facility[234] Restructuring Activities This section directs readers to Note 12 for detailed information on the company's restructuring activities - Refer to Note 12: Restructuring Charges to the condensed consolidated financial statements for details on restructuring activities[229] Critical Accounting Policies This section states that there have been no significant changes to critical accounting policies and highlights the most significant estimates - There have been no significant changes to the company's critical accounting policies and estimates since its 2023 Annual Report[174] - The most significant estimates relate to revenue recognition, loss contingencies (including the MOVEit Vulnerability), and business combinations[174] Cautionary Note Regarding Forward-Looking Statements This section advises that the Form 10-Q may contain forward-looking statements and warns that actual results could differ materially due to various risk factors - This Form 10-Q may contain forward-looking statements, identified by words such as "believe," "expect," "intend," etc[179] - Actual future results may differ materially from those contained in or implied by forward-looking statements due to various factors described in the Risk Factors section of the 2023 Annual Report and this 10-Q[179] - The company undertakes no obligation to update any forward-looking statements[179] Use of Constant Currency This section explains the use of constant currency reporting to enhance understanding of revenue results by isolating the impact of foreign currency exchange rate fluctuations - The presentation of revenue growth rates on a constant currency basis enhances the understanding of revenue results and evaluation of performance in comparison to prior periods, as foreign currency exchange rates are an important factor[175] - Constant currency information is calculated by translating current period results using prior period weighted average foreign currency exchange rates[175] - These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP[175] Recent Accounting Pronouncements This section directs readers to Note 1 for further discussion on recent accounting pronouncements and their potential impact - Refer to Note 1: Basis of Presentation (Part I, Item 1 of this Form 10-Q) for further discussion on recent accounting pronouncements[240] Legal and Other Regulatory Matters This section discusses the company's involvement in litigation and governmental investigations related to the MOVEit Vulnerability, noting expected insurance recoveries - The company received an initial customer support call indicating unusual activity within their MOVEit Transfer instance on May 28, 2023, leading to the discovery of a zero-day vulnerability on May 30, 2023[239] - The company is subject to litigation and governmental investigations related to the MOVEit Vulnerability, for which expenses have been incurred and future costs are expected[249] - Exposure to such expenses and liabilities is expected to be reduced by insurance[249] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes occurred in the company's quantitative and qualitative disclosures about market risk during the first six months of fiscal year 2024, with the exception of debt repayments and changes to debt structure - During the first six months of fiscal year 2024, with the exception of repayments on our revolving line of credit and changes to our debt as described in Note 7: Debt, there were no significant changes to our quantitative and qualitative disclosures about market risk[254] - For a more complete discussion of the market risks, refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our 2023 Annual Report[254] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of May 31, 2024. There were no material changes in internal control over financial reporting during the quarter Evaluation of disclosure controls and procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of May 31, 2024, providing reasonable assurance for timely and accurate reporting - Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of May 31, 2024[257] - Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within specified time periods, and communicated to management for timely decisions[250] Changes in internal control over financial reporting There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended May 31, 2024 - There were no changes in our internal control over financial reporting during the fiscal quarter ended May 31, 2024 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting[258] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal proceedings related to the MOVEit Vulnerability, as detailed in Note 15, and other ordinary course of business claims. Management does not believe the outcome of these other claims will materially affect its financial position, results of operations, or cash flows - Refer to Note 15: Cyber Related Matters to the Consolidated Financial Statements included in Item 1, Financial Statements for a discussion of legal proceedings related to the MOVEit Vulnerability[259] - The company is also subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business[260] - 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[260] Item 1A. Risk Factors The company operates in a rapidly changing environment with inherent risks and uncertainties. Readers are directed to the 2023 Annual Report for a comprehensive discussion of factors that could materially affect the business, financial condition, or future results - The company operates in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control[266] - Refer to Part I, Item 1A. Risk Factors in our 2023 Annual Report for a more complete discussion regarding certain factors that could materially affect our business, financial condition or future results[266] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is typically where unregistered sales of equity securities and the use of proceeds from such sales are disclosed. No specific details are provided in the given chunks for this item, but it is listed as a standard section Item 5. Other Information This section provides additional information, including details on stock repurchases and a statement regarding insider trading arrangements Stock Repurchases This section details the company's stock repurchase activity during Q2 Fiscal Year 2024, including shares purchased, average price, and remaining authorization Stock Repurchases (Q2 Fiscal Year 2024, in thousands, except per share data) | 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 | | :----------------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | March 2024 | 552,881 | $52.95 | 552,881 | $142,220 | | April 2024 | 291,675 | $50.96 | 291,675 | $127,349 | | May 2024 | 116,473 | $49.79 | 116,473 | $121,548 | | Total | 961,029 | $51.96 | 961,029 | $121,548 | - As of May 31, 2024, there was $121.5 million remaining under the current authorization[253] Insider Adoption or Termination of Trading Arrangements This section confirms that no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the second quarter of fiscal year 2024 - During the second quarter of fiscal year 2024, none of our directors or officers informed us of the adoption or termination of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement"[261] Item 6. Exhibits This section lists the exhibits filed or furnished as part of the Quarterly Report on Form 10-Q, including indentures, convertible senior note forms, capped call confirmations, credit agreements, and certifications - Key exhibits include the Indenture dated March 1, 2024, Form of 3.50% Convertible Senior Note due 2030, Form of Capped Call Confirmation, and the Fourth Amended and Restated Credit Agreement dated March 7, 2024[262][270] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act are also filed[270] - The Interactive Data File (iXBRL) for the financial statements is included as Exhibit 101[270][271]