Progress(PRGS) - 2023 Q4 - Annual Report

Part I Business Progress Software Corporation provides enterprise software for business applications, focusing on a dual-channel sales model, customer retention, and growth via M&A - The company provides enterprise software products for the development, deployment, and management of high-impact business applications, operating globally through direct sales and indirect channel partners[13] - More than half of the company's worldwide license revenue is generated through indirect channels, including independent software vendors (ISVs), original equipment manufacturers (OEMs), distributors, and value-added resellers (VARs)[14][28] - No single customer or partner has accounted for more than 10% of total revenue in any of the last three fiscal years[33] - As of November 30, 2023, the company had 2,284 employees worldwide, with the largest group (886) in product development[58] Our Products The company's product portfolio spans the application lifecycle, including development, DevOps, data connectivity, and semantic AI - The product portfolio includes tools for application development, DevOps, UI components, load balancing, managed file transfer, data connectivity, network monitoring, and digital experience[17][18][19] - Recent additions to the portfolio include MarkLogic, a data agility platform, and Semaphore, a semantic AI platform, enhancing capabilities in data management and artificial intelligence[22][23] Customers The company utilizes a global dual-channel sales strategy, with indirect partners like ISVs increasingly adopting a SaaS model - Sales are conducted through a direct sales force targeting business and IT managers, as well as indirectly through ISVs, OEMs, systems integrators, VARs, and distributors[27] - A significant and growing portion of revenue from ISVs comes from those who have enabled their applications on a software-as-a-service (SaaS) platform[29] - OEMs embed Progress products into their software or devices, typically under one to three-year license agreements which have historically seen high renewal rates[30] Competition The company operates in a highly competitive software market against a diverse range of proprietary and open-source vendors - The software industry is intensely competitive, with competition from various sources for all products[45] - Competitors range from single-solution providers to large companies offering broad enterprise infrastructure solutions, including proprietary and open-source models[46] - Some competitors possess greater financial, marketing, or technical resources and may adapt more quickly to new technologies or customer requirements[48] Human Capital The company employed 2,284 people globally as of November 30, 2023, emphasizing talent retention through competitive compensation and a flexible, inclusive culture Employee Breakdown by Function (as of Nov 30, 2023) | Function | Number of Employees | | :--- | :--- | | Sales and marketing | 739 | | Customer support and services | 394 | | Product development | 886 | | Administration | 265 | | Total | 2,284 | - The company has implemented a flexible work approach, allowing employees to choose their office location or work from home, aiming to improve recruitment and retention[65] - An Inclusion and Diversity Advisory Committee, supported by a Chief Inclusion and Diversity Officer, guides the company's initiatives to foster an inclusive and diverse culture[66] Risk Factors The company faces significant risks from its dependency on OpenEdge products, intense competition, and major cybersecurity threats like the MOVEit vulnerability - The company is substantially dependent on its OpenEdge product set, which accounted for approximately 37% of aggregate revenue in fiscal year 2023[73] - A zero-day vulnerability in MOVEit Transfer was exploited in May 2023, leading to data exfiltration from customer environments and resulting in approximately 118 class action lawsuits, 31 customer indemnification claims, and formal investigations by the SEC and other regulators[88][89][92] - The company received a subpoena from the SEC on October 2, 2023, and another from the Office of the Attorney General for the District of Columbia on January 18, 2024, related to the MOVEit vulnerability[94][96] - Approximately 41% of total fiscal 2023 revenue was generated from sales outside North America, exposing the company to risks from global economic conditions, political instability, and foreign currency fluctuations[84] - As of November 30, 2023, the company had approximately $724 million of consolidated indebtedness, which could limit cash flow and expose it to financial risks[134] Unresolved Staff Comments As of the report date, the company has no open comments from the SEC regarding its financial statements or periodic filings - The company reports no open comments from the SEC as of the filing date[146] Properties The company leases its headquarters and various global offices, which are considered adequate for its needs, especially given its flexible work approach - The headquarters facility in Burlington, Massachusetts is a leased space of approximately 33,000 square feet[148] - Additional offices are leased in key locations including North Carolina, Georgia, California, Virginia, Bulgaria, Ireland, Czech Republic, India, Singapore, and the Netherlands[149] - The company adopted a flexible work approach in 2021, allowing employees to work from home, but has not terminated any significant lease arrangements as of November 30, 2023[150] Legal Proceedings This section refers to the MD&A for discussion of legal proceedings related to the MOVEit Vulnerability - Information regarding legal proceedings, specifically concerning the MOVEit Vulnerability, is detailed in the MD&A section of the report[151] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ (PRGS), and in FY2023 it returned capital to shareholders via dividends and share repurchases Q4 2023 Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | Dollar Value of Shares Remaining for Purchase ($ thousands) | | :--- | :--- | :--- | :--- | | September 2023 | — | $ — | $197,959 | | October 2023 | — | $ — | $197,959 | | November 2023 | 76,373 | $51.86 | $193,998 | | Total | 76,373 | $51.86 | $193,998 | - On January 10, 2023, the Board of Directors increased the share repurchase authorization by $150.0 million, bringing the total authorization to $228.0 million[157] Dividends Paid | Fiscal Year | Aggregate Per Share Dividend | Total Cash Dividends Paid | | :--- | :--- | :--- | | 2023 | $0.70 | $31.6 million | | 2022 | $0.70 | $31.1 million | | 2021 | $0.70 | $31.6 million | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2023 revenue grew 15% to $694.4 million, driven by the MarkLogic acquisition, while net income fell 26% due to higher operating costs and incident-related expenses Fiscal Year 2023 vs 2022 Performance | Metric (In thousands) | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $694,439 | $602,013 | 15% | | Gross Profit | $567,862 | $507,517 | 12% | | Income from Operations | $110,523 | $132,131 | (16)% | | Net Income | $70,197 | $95,069 | (26)% | - The increase in revenue was primarily driven by the acquisition of MarkLogic, which closed in the first quarter of fiscal year 2023[173] - Annual Recurring Revenue (ARR) increased by 17.1% year-over-year, reaching $574.0 million as of November 30, 2023, largely due to the MarkLogic acquisition[199] - The company incurred net expenses of $6.2 million in FY2023 for cyber incidents, including $1.5 million for the MOVEit vulnerability and $4.7 million for a November 2022 incident[190][238] Results of Operations FY2023 revenue grew 15% to $694.4 million, boosted by the MarkLogic acquisition, but higher operating expenses led to a 16% drop in operating income Revenue Breakdown (FY 2023 vs FY 2022) | Revenue Type (In thousands) | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Software License | $220,789 | $188,336 | 17% | | Maintenance | $401,501 | $362,335 | 11% | | Professional Services | $72,149 | $51,342 | 41% | | Total Revenue | $694,439 | $602,013 | 15% | Operating Expenses (FY 2023 vs FY 2022) | Expense (In thousands) | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Sales and Marketing | $156,076 | $140,760 | 11% | | Product Development | $132,401 | $114,568 | 16% | | General and Administrative | $83,157 | $77,876 | 7% | | Restructuring Expenses | $8,407 | $879 | 856% | - North America remains the largest region, contributing 59% of total revenue in FY2023, up from 57% in FY2022[176] Liquidity and Capital Resources Cash decreased by $129.3 million, primarily due to the $355.3 million MarkLogic acquisition, which was partially funded by debt and operating cash flow Cash Flow Summary (In thousands) | Cash Flow Activity | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $173,920 | $192,160 | $178,530 | | Net cash (used in) from investing activities | ($360,382) | $21,992 | ($250,335) | | Net cash from (used in) financing activities | $51,188 | ($101,423) | $132,113 | - The decrease in cash was primarily due to $355.3 million paid for acquisitions, net of cash acquired[202] - As of November 30, 2023, the company had $110.0 million outstanding under its revolving line of credit and $261.3 million outstanding on its term loan[207][252] - In April 2021, the company issued $360 million in 1.00% Convertible Senior Notes due 2026[209] Recent Developments: MOVEit Vulnerability A May 2023 vulnerability in MOVEit products, representing less than 4% of revenue, has led to significant litigation and regulatory scrutiny - A zero-day vulnerability in MOVEit Transfer and MOVEit Cloud was discovered on May 30, 2023, after being exploited by malicious actors[232] - The MOVEit product line represented less than 4% of the company's total revenue for the fiscal year ended November 30, 2023[236] - As of the filing date, the company faces approximately 118 class action lawsuits and 31 customer indemnification claims related to the vulnerability[244] - The company has received formal inquiries from the SEC, a U.S. federal law enforcement agency, and the D.C. Attorney General[245][247] - For FY2023, costs related to the MOVEit vulnerability were $1.5 million, net of $3.7 million in insurance recoveries, with $8.8 million of its $15.0 million cybersecurity policy remaining[238][241] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from its variable-rate debt and foreign currency risk, which it manages using derivatives - The company is exposed to interest rate risk on its $261.3 million term loan under the Credit Agreement, which has variable rates[252] - An interest rate swap with a notional value of $103.1 million is used to manage cash flow variability on about half of the variable rate debt[253][254] Outstanding Foreign Currency Forward Contracts (in thousands) | Contract Type | Notional Value (Nov 30, 2023) | Fair Value (Nov 30, 2023) | | :--- | :--- | :--- | | Forward contracts to sell U.S. dollars | $102,229 | $(2,526) | | Forward contracts to purchase U.S. dollars | $844 | $(4) | | Total | $103,073 | $(2,530) | Financial Statements and Supplementary Data This section contains the audited financial statements and the independent auditor's report, which highlights revenue recognition and the MOVEit vulnerability as critical audit matters - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting[259][260] - Critical Audit Matters identified were: 1) Revenue recognition for arrangements with multiple performance obligations due to significant management judgment, and 2) Accounting for the MOVEit Vulnerability due to the complexity and uncertainty in estimating potential losses[265][267] Consolidated Financial Statements The financial statements show total assets of $1.60 billion and net income of $70.2 million on revenues of $694.4 million for FY2023 Consolidated Balance Sheet Highlights (in thousands) | Account | Nov 30, 2023 | Nov 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $330,788 | $426,053 | | Goodwill | $832,101 | $671,037 | | Total Assets | $1,602,783 | $1,411,479 | | Total Current Liabilities | $352,118 | $318,004 | | Long-term debt, net | $710,883 | $611,845 | | Total Liabilities | $1,143,068 | $953,145 | | Total Stockholders' Equity | $459,715 | $398,504 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $694,439 | $602,013 | $531,313 | | Gross Profit | $567,862 | $507,517 | $452,864 | | Income from Operations | $110,523 | $132,131 | $116,102 | | Net Income | $70,197 | $95,069 | $78,420 | Notes to Consolidated Financial Statements The notes detail key accounting policies, the MarkLogic acquisition, debt structure, and the unquantifiable but possible loss contingency for the MOVEit vulnerability - The company completed the acquisition of MarkLogic on February 7, 2023, for a base purchase price of $355.0 million in cash, resulting in $161.1 million of goodwill[347][350] - Total debt as of Nov 30, 2023, includes $360 million in 1.00% Convertible Senior Notes due 2026, a $261.3 million term loan, and $110.0 million drawn on the revolving line of credit[366] - Regarding the MOVEit vulnerability, the company states that while a loss from litigation and investigations is reasonably possible, it cannot estimate a range of possible losses and has therefore not recorded a loss contingency liability[450] - The company maintains a $15.0 million cybersecurity insurance policy and has $8.8 million of coverage remaining as of Nov 30, 2023[453] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of November 30, 2023[457] - Management's assessment, based on the COSO 2013 framework, concluded that internal control over financial reporting was effective as of November 30, 2023[459] - The independent registered public accounting firm, Deloitte & Touche LLP, also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[463] Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - This information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[474] Executive Compensation Required information is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - This information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[475] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - This information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[476] Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - This information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[477] Principal Accounting Fees and Services Required information is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - This information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[478] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K, with schedules omitted as not required - The financial statements are included in Part II, Item 8 of the report[479] - Financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements[479][484] - A list of exhibits filed with the report is provided, referencing previously filed documents where applicable[480]