SEC Form 10-Q filed by Pegasystems Inc.

10/23/24 4:06:48 PM ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

_____________________________________


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, 2024


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________


Massachusetts			04-2787865
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

One Main Street, Cambridge, MA 02142

(Address of principal executive offices, including zip code)

(617) 374-9600

(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
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

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 x 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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 85,753,808 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 16, 2024.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023			3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 2024 and 2023			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2024 and 2023			6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 5. Other Information			31
Item 6. Exhibits			32

Signature			33

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
	September 30, 2024		December 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	287,649	$	229,902
Marketable securities	415,341		193,436
Total cash, cash equivalents, and marketable securities	702,990		423,338
Accounts receivable, net	173,623		300,173
Unbilled receivables, net	157,281		237,379
Other current assets	85,186		68,137
Total current assets	1,119,080		1,029,027
Long-term unbilled receivables, net	77,576		85,402
Goodwill	81,568		81,611
Other long-term assets	301,008		314,696
Total assets	$	1,579,232	$	1,510,736
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	20,103	$	11,290
Accrued expenses	41,236		39,941
Accrued compensation and related expenses	98,033		126,640
Deferred revenue	345,574		377,845
Convertible senior notes, net	501,225		—
Other current liabilities	18,372		21,343
Total current liabilities	1,024,543		577,059
Long-term convertible senior notes, net	—		499,368
Long-term operating lease liabilities	66,750		66,901
Other long-term liabilities	14,916		13,570
Total liabilities	1,106,209		1,156,898
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 85,808 and 83,840 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively	858		838
Additional paid-in capital	514,173		379,584
(Accumulated deficit)	(28,606)		(8,705)
Accumulated other comprehensive (loss)	(13,402)		(17,879)
Total stockholders’ equity	473,023		353,838
Total liabilities and stockholders’ equity	$	1,579,232	$	1,510,736

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Revenue
Subscription services	$	224,810	$	201,578	$	651,143	$	586,192
Subscription license	45,420		74,342		193,405		200,066
Consulting	54,364		55,976		160,451		167,396
Perpetual license	456		2,747		1,351		4,729
Total revenue	325,050		334,643		1,006,350		958,383
Cost of revenue
Subscription services	36,868		35,906		108,930		109,553
Subscription license	384		629		1,504		1,971
Consulting	59,451		57,204		177,864		176,262
Perpetual license	3		24		12		51
Total cost of revenue	96,706		93,763		288,310		287,837
Gross profit	228,344		240,880		718,040		670,546
Operating expenses
Selling and marketing	127,669		131,598		395,125		425,253
Research and development	74,157		74,955		221,695		224,262
General and administrative	35,694		27,321		84,641		73,893
Litigation settlement, net of recoveries	—		—		32,403		—
Restructuring	2,485		17,822		3,283		21,450
Total operating expenses	240,005		251,696		737,147		744,858
(Loss) from operations	(11,661)		(10,816)		(19,107)		(74,312)
Foreign currency transaction (loss) gain	(4,405)		1,994		(7,230)		(3,971)
Interest income	6,769		2,532		18,835		5,831
Interest expense	(1,639)		(1,533)		(5,047)		(5,229)
(Loss) on capped call transactions	(689)		(2,294)		(667)		(449)
Other income, net	—		6,383		1,684		18,668
(Loss) before provision for income taxes	(11,625)		(3,734)		(11,532)		(59,462)
Provision for income taxes	2,765		3,545		8,369		15,395
Net (loss)	$	(14,390)	$	(7,279)	$	(19,901)	$	(74,857)
(Loss) per share
Basic	$	(0.17)	$	(0.09)	$	(0.23)	$	(0.90)
Diluted	$	(0.17)	$	(0.09)	$	(0.23)	$	(0.90)
Weighted-average number of common shares outstanding
Basic	85,625		83,336		85,018		82,996
Diluted	85,625		83,336		85,018		82,996

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net (loss)	$	(14,390)	$	(7,279)	$	(19,901)	$	(74,857)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on available-for-sale securities	660		(40)		(158)		(281)
Foreign currency translation adjustments	10,204		(3,687)		4,635		(1,737)
Total other comprehensive income (loss), net of tax	10,864		(3,727)		4,477		(2,018)
Comprehensive (loss)	$	(3,526)	$	(11,006)	$	(15,424)	$	(76,875)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional paid-in capital		(Accumulated deficit)		Accumulated other comprehensive (loss)		Total stockholders’ equity
	Number of shares	Amount
December 31, 2022	82,436	$	824	$	229,602	$	(76,513)	$	(23,070)	$	130,843

Issuance of common stock for stock compensation plans	452	4		668		—		—		672
Issuance of common stock under the employee stock purchase plan	52	1		2,142		—		—		2,143
Stock-based compensation	—	—		42,557		—		—		42,557
Cash dividends declared ($0.03 per share)	—	—		(2,488)		—		—		(2,488)
Other comprehensive income	—	—		—		—		1,543		1,543
Net (loss)	—	—		—		(20,774)		—		(20,774)
March 31, 2023	82,940	$	829	$	272,481	$	(97,287)	$	(21,527)	$	154,496

Issuance of common stock for stock compensation plans	225	2		1,824		—		—		1,826
Issuance of common stock under the employee stock purchase plan	47	1		1,980		—		—		1,981
Stock-based compensation	—	—		36,227		—		—		36,227
Cash dividends declared ($0.03 per share)	—	—		(2,496)		—		—		(2,496)
Other comprehensive income	—	—		—		—		166		166
Net (loss)	—	—		—		(46,804)		—		(46,804)
June 30, 2023	83,212	$	832	$	310,016	$	(144,091)	$	(21,361)	$	145,396

Issuance of common stock for stock compensation plans	257	3		2,447		—		—		2,450
Issuance of common stock under the employee stock purchase plan	54	—		2,003		—		—		2,003
Stock-based compensation	—	—		31,299		—		—		31,299
Cash dividends declared ($0.03 per share)	—	—		(2,506)		—		—		(2,506)
Other comprehensive (loss)	—	—		—		—		(3,727)		(3,727)
Net (loss)	—	—		—		(7,279)		—		(7,279)
September 30, 2023	83,523	$	835	$	343,259	$	(151,370)	$	(25,088)	$	167,636


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional paid-in capital		(Accumulated deficit)		Accumulated other comprehensive (loss)		Total stockholders’ equity
	Number of shares	Amount
December 31, 2023	83,840	$	838	$	379,584	$	(8,705)	$	(17,879)	$	353,838

Issuance of common stock for stock compensation plans	1,139	12		18,644		—		—		18,656
Issuance of common stock under the employee stock purchase plan	32	—		1,758		—		—		1,758
Stock-based compensation	—	—		34,781		—		—		34,781
Cash dividends declared ($0.03 per share)	—	—		(2,550)		—		—		(2,550)
Other comprehensive (loss)	—	—		—		—		(4,173)		(4,173)
Net (loss)	—	—		—		(12,124)		—		(12,124)
March 31, 2024	85,011	$	850	$	432,217	$	(20,829)	$	(22,052)	$	390,186

Issuance of common stock for stock compensation plans	326	4		5,481		—		—		5,485
Issuance of common stock under the employee stock purchase plan	32	—		1,669		—		—		1,669
Stock-based compensation	—	—		36,224		—		—		36,224
Cash dividends declared ($0.03 per share)	—	—		(2,561)		—		—		(2,561)
Other comprehensive (loss)	—	—		—		—		(2,214)		(2,214)
Net income	—	—		—		6,613		—		6,613
June 30, 2024	85,369	$	854	$	473,030	$	(14,216)	$	(24,266)	$	435,402
Repurchase of common stock	(171)	(2)		(11,747)		—		—		(11,749)
Issuance of common stock for stock compensation plans	581	6		16,461		—		—		16,467
Issuance of common stock under the employee stock purchase plan	29	—		1,789		—		—		1,789
Stock-based compensation	—	—		37,213		—		—		37,213
Cash dividends declared ($0.03 per share)	—	—		(2,573)		—		—		(2,573)
Other comprehensive income	—	—		—		—		10,864		10,864
Net (loss)	—	—		—		(14,390)		—		(14,390)
September 30, 2024	85,808	$	858	$	514,173	$	(28,606)	$	(13,402)	$	473,023

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Nine Months Ended September 30,
	2024		2023
Operating activities
Net (loss)	$	(19,901)	$	(74,857)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation	108,218		110,083
Amortization of deferred commissions	47,143		43,974
Amortization of intangible assets and depreciation	13,289		14,181
Lease expense	13,748		12,018
Foreign currency transaction loss	7,230		3,971
Loss on capped call transactions	667		449
Deferred income taxes	(67)		(188)
(Gain) on investments	(1,628)		(10,841)
(Gain) on repurchases of convertible senior notes	—		(7,855)
Other non-cash	(8,564)		2,209
Change in operating assets and liabilities, net	90,562		44,776
Cash provided by operating activities	250,697		137,920
Investing activities
Purchases of investments	(417,310)		(190,466)
Proceeds from maturities and called investments	206,232		169,836
Sales of investments	—		10,725

Investment in property and equipment	(4,921)		(14,271)
Cash (used in) investing activities	(215,999)		(24,176)
Financing activities
Repurchases of convertible senior notes	—		(88,989)
Dividend payments to stockholders	(7,626)		(7,458)


Proceeds from employee stock plans	48,811		12,729
Common stock repurchases for tax withholdings for net settlement of equity awards	(2,987)		(1,654)
Common stock repurchases under stock repurchase program	(11,249)		—

Other	—		341
Cash provided by (used in) financing activities	26,949		(85,031)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	4,591		(1,621)
Net increase in cash, cash equivalents, and restricted cash	66,238		27,092
Cash, cash equivalents, and restricted cash, beginning of period	232,827		145,054
Cash, cash equivalents, and restricted cash, end of period	$	299,065	$	172,146

Cash and cash equivalents	$	287,649	$	169,023
Restricted cash included in other current assets	184		—
Restricted cash included in other long-term assets	11,232		3,123
Total cash, cash equivalents, and restricted cash	$	299,065	$	172,146

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for 2024.

NOTE 2. MARKETABLE SECURITIES


	September 30, 2024								December 31, 2023
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	11,659	$	8	$	(1)	$	11,666	$	11,471	$	33	$	(1)	$	11,503
Corporate debt	403,427		271		(23)		403,675		181,960		200		(227)		181,933
	$	415,086	$	279	$	(24)	$	415,341	$	193,431	$	233	$	(228)	$	193,436

As of September 30, 2024, marketable securities’ maturities ranged from October 2024 to January 2026, with a weighted-average remaining maturity of 0.3 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	September 30, 2024		December 31, 2023
Accounts receivable, net	$	173,623	$	300,173
Unbilled receivables, net	157,281		237,379
Long-term unbilled receivables, net	77,576		85,402
	$	408,480	$	622,954

Unbilled receivables

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing. Billing is solely subject to the passage of time.

Unbilled receivables by expected collection date:


(Dollars in thousands)	September 30, 2024
1 year or less	$	157,281	67	%
1-2 years	60,501		26	%
2-5 years	17,075		7	%
	$	234,857	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	September 30, 2024
2024	$	78,970	34	%
2023	118,866		50	%
2022	19,775		8	%
2021	13,546		6	%
2020 and prior	3,700		2	%
	$	234,857	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Contract assets

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation.


(in thousands)	September 30, 2024		December 31, 2023
Contract assets	$	15,719	$	16,238
Long-term contract assets	25,224		20,635
	$	40,943	$	36,873

Deferred revenue

Deferred revenue consists of billings made and payments received in advance of revenue recognition.


(in thousands)	September 30, 2024		December 31, 2023
Deferred revenue	$	345,574	$	377,845
Long-term deferred revenue	2,183		2,478
	$	347,757	$	380,323

Deferred revenue decreased in the nine months ended September 30, 2024, primarily due to $340.4 million of revenue recognized during the period included in deferred revenue as of December 31, 2023 exceeding new billings in advance of revenue recognition.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	September 30, 2024		December 31, 2023
Deferred commissions	$	98,415	$	114,119


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Amortization of deferred commissions (1)	$	14,867	$	14,947	$	47,143	$	43,974

(1) Included in selling and marketing.

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill


	Nine Months Ended September 30,
(in thousands)	2024		2023
January 1,	$	81,611	$	81,399

Currency translation adjustments	(43)		38
September 30,	$	81,568	$	81,437

Intangibles

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.


		September 30, 2024
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value
Client-related	4-10 years	$	63,157	$	(61,101)	$	2,056
Technology	2-10 years	68,115		(65,638)		2,477
Other	1-5 years	5,361		(5,361)		—
		$	136,633	$	(132,100)	$	4,533


		December 31, 2023
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value
Client-related	4-10 years	$	63,117	$	(60,035)	$	3,082
Technology	2-10 years	68,138		(64,218)		3,920
Other	1-5 years	5,361		(5,361)		—
		$	136,616	$	(129,614)	$	7,002

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future estimated amortization of intangible assets:


(in thousands)	September 30, 2024
Remainder of 2024	$	823
2025	2,509
2026	874
2027	327


	$	4,533

Amortization of intangible assets:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Cost of revenue	$	357	$	622	$	1,425	$	1,949
Selling and marketing	343		343		1,028		1,028

	$	700	$	965	$	2,453	$	2,977

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	September 30, 2024		December 31, 2023
Income tax receivables	$	29,264	$	4,804
Contract assets	15,719		16,238
Insurance receivable	—		1,954
Indirect tax receivable	2,647		1,924
Capped call transactions	226		—
Restricted cash	184		—
Other	37,146		43,217
	$	85,186	$	68,137

Other long-term assets


(in thousands)	September 30, 2024		December 31, 2023
Deferred commissions	$	98,415	$	114,119
Right of use assets	63,124		64,198
Property and equipment	42,871		47,279
Venture investments	21,172		19,450
Contract assets	25,224		20,635
Intangible assets	4,533		7,002
Capped call transactions	—		893
Deferred income taxes	3,651		3,678
Restricted cash	11,232		2,925
Other	30,786		34,517
	$	301,008	$	314,696

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued expenses


(in thousands)	September 30, 2024		December 31, 2023

Cloud hosting	$	12,840	$	1,358
Outside professional services	12,684		10,419
Marketing and sales program	2,319		2,557
Income and other taxes	3,384		15,428
Employee related	4,607		4,486
Other	5,402		5,693
	$	41,236	$	39,941

Other current liabilities


(in thousands)	September 30, 2024		December 31, 2023
Operating lease liabilities	$	14,982	$	15,000
Dividends payable	2,573		2,515
Other	817		3,828
	$	18,372	$	21,343

Other long-term liabilities


(in thousands)	September 30, 2024		December 31, 2023
Deferred revenue	$	2,183	$	2,478
Income taxes payable	867		859
Other	11,866		10,233
	$	14,916	$	13,570

NOTE 7. LEASES

Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Fixed lease costs	$	6,848	$	4,718	$	16,381	$	14,979
Short-term lease costs	381		660		1,334		2,137
Variable lease costs	1,863		2,254		5,235		6,414
	$	9,092	$	7,632	$	22,950	$	23,530

Right of use assets and lease liabilities


(in thousands)	September 30, 2024		December 31, 2023
Right of use assets	$	63,124	$	64,198
Operating lease liabilities	$	14,982	$	15,000
Long-term operating lease liabilities	$	66,750	$	66,901

Weighted-average remaining lease term and discount rate for the Company’s leases were:


	September 30, 2024		December 31, 2023
Weighted-average remaining lease term	6.3 years		6.8 years
Weighted-average discount rate (1)	4.6	%	4.0	%

(1) The rates implicit in the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maturities of lease liabilities:


(in thousands)	September 30, 2024
Remainder of 2024	$	4,094
2025	18,276
2026	13,754
2027	13,503
2028	12,939
2029	10,177
Thereafter	21,755
Total lease payments	94,498
Less: imputed interest (1)	(12,766)
	$	81,732

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event.

Cash flow information


	Nine Months Ended September 30,
(in thousands)	2024		2023
Cash paid for operating leases, net of tenant improvement allowances	$	13,249	$	14,378
Right of use assets recognized for new leases and amendments (non-cash)	$	12,290	$	1,782

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning September 1, 2020.

In the nine months ended September 30, 2023, the Company recognized a gain of $7.9 million, in other income, net from repurchases of Notes representing $97.7 million in aggregate principal amount.

Conversion rights

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

Before September 1, 2024, noteholders could convert their Notes in the following circumstances:

•During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), 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 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

•During the five consecutive business days immediately after any five 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 common stock on such trading day and the conversion rate on such trading day.

•Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date until the Company pays the redemption price).

Repurchase rights

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Carrying value of the Notes:


(in thousands)	September 30, 2024		December 31, 2023
Principal	$	502,270	$	502,270
Unamortized issuance costs	(1,045)		(2,902)
Convertible senior notes, net	$	501,225	$	499,368

Interest expense related to the Notes:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Contractual interest expense (0.75% coupon)	$	941	$	827	$	2,825	$	2,949
Amortization of issuance costs	621		613		1,857		1,988
	$	1,562	$	1,440	$	4,682	$	4,937

The average interest rate on the Notes in the nine months ended September 30, 2024 and 2023 was 1.2%.

Future payments:


	September 30, 2024
(in thousands)	Principal		Interest		Total

2025	$	502,270	$	1,884	$	504,154

	$	502,270	$	1,884	$	504,154

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions initially covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock. In the nine months ended September 30, 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $0.3 million. As of September 30, 2024, Capped Call Transactions covering approximately 3.7 million shares were outstanding.

The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value calculated following the governing documents may not represent a fair value measurement. The Capped Call Transactions are remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in capped call transactions:


	Nine Months Ended September 30,
(in thousands)	2024		2023
January 1,	$	893	$	2,582
Settlements	—		(341)
Fair value adjustment	(667)		(449)
September 30,	$	226	$	1,792

Credit facility

In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments were originally scheduled to expire on November 4, 2024, and any outstanding loans would have been payable on such date. However on April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.

As of September 30, 2024 and December 31, 2023, the Company had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings.

NOTE 9. RESTRUCTURING

The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:


(in thousands)	Three months ended	Expense
Office space reduction	March 31, 2023	$	1,241
Employee severance and related benefits	June 30, 2023	$	1,581
Employee severance and related benefits and office space reduction	September 30, 2023	$	17,236
Office space reduction	December 31, 2023	$	1,497
Office space reduction	June 30, 2024	$	1,257
Office space reduction	September 30, 2024	$	2,882

Accrued employee severance and related benefits:

Change for all restructuring actions:


	Nine Months Ended September 30,
(in thousands)	2024		2023
January 1,	$	8,095	$	18,573
Costs incurred	(634)		19,921
Cash disbursements	(4,214)		(21,576)
Currency translation adjustments	(93)		(203)
September 30,	$	3,154	$	16,715

Note: Accrued employee severance and related benefits is included in accrued compensation and related expenses.

NOTE 10. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

•Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities;

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

•Level 2 - significant other inputs that are observable either directly or indirectly; and

•Level 3 - significant unobservable inputs with little or no market data, which require the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value.

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied volatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

Assets and liabilities measured at fair value on a recurring basis:


	September 30, 2024								December 31, 2023
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	16,760	$	—	$	—	$	16,760	$	54,357	$	—	$	—	$	54,357
Marketable securities	$	—	$	415,341	$	—	$	415,341	$	—	$	193,436	$	—	$	193,436
Capped Call Transactions	$	—	$	226	$	—	$	226	$	—	$	893	$	—	$	893
Venture investments (1)	$	—	$	—	$	21,172	$	21,172	$	—	$	—	$	19,450	$	19,450

(1) Investments in privately-held companies

Changes in venture investments:


	Nine Months Ended September 30,
(in thousands)	2024		2023
January 1,	$	19,450	$	13,069
New investments	350		400
Sales of investments	—		(2,773)
Changes in foreign exchange rates	106		27
Changes in fair value:
included in other income, net	1,628		10,886
included in other comprehensive (loss)	(362)		(2,261)
September 30,	$	21,172	$	19,348

The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities.

Fair value of the Convertible Senior Notes

The fair value of the Notes outstanding (including the embedded conversion feature) was $492.5 million as of September 30, 2024, and $466.5 million as of December 31, 2023.

The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

NOTE 11. REVENUE

Geographic revenue


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2024				2023				2024				2023
U.S.	$	156,135	48	%	$	154,741	47	%	$	526,332	53	%	$	489,645	51	%
Other Americas	28,836		9	%	23,497		7	%	71,936		7	%	58,013		6	%
United Kingdom (“U.K.”)	37,593		12	%	41,622		12	%	108,338		11	%	112,751		12	%
Europe (excluding U.K.), Middle East, and Africa	60,048		18	%	67,880		20	%	175,255		17	%	173,551		18	%
Asia-Pacific	42,438		13	%	46,903		14	%	124,489		12	%	124,423		13	%
	$	325,050	100	%	$	334,643	100	%	$	1,006,350	100	%	$	958,383	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue streams


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Subscription license	$	45,420	$	74,342	$	193,405	$	200,066
Perpetual license	456		2,747		1,351		4,729
Revenue recognized at a point in time	45,876		77,089		194,756		204,795
Maintenance	80,702		83,538		242,047		245,210
Pega Cloud	144,108		118,040		409,096		340,982
Consulting	54,364		55,976		160,451		167,396
Revenue recognized over time	279,174		257,554		811,594		753,588
Total revenue	$	325,050	$	334,643	$	1,006,350	$	958,383


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Pega Cloud	$	144,108	$	118,040	$	409,096	$	340,982
Maintenance	80,702		83,538		242,047		245,210
Subscription services	224,810		201,578		651,143		586,192
Subscription license	45,420		74,342		193,405		200,066
Subscription	270,230		275,920		844,548		786,258
Consulting	54,364		55,976		160,451		167,396
Perpetual license	456		2,747		1,351		4,729
	$	325,050	$	334,643	$	1,006,350	$	958,383

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of September 30, 2024:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Pega Cloud		Maintenance
1 year or less	$	495,637	$	188,905	$	38,175	$	2,252	$	54,203	$	779,172	53	%
1-2 years	310,020		63,701		9,686		317		3,062		386,786		26	%
2-3 years	146,877		26,436		3,046		—		2,008		178,367		12	%
Greater than 3 years	112,002		18,854		102		—		—		130,958		9	%
	$	1,064,536	$	297,896	$	51,009	$	2,569	$	59,273	$	1,475,283	100	%

As of September 30, 2023:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Pega Cloud		Maintenance
1 year or less	$	391,324	$	202,610	$	48,427	$	4,567	$	39,335	$	686,263	54	%
1-2 years	239,787		58,610		4,356		2,696		3,662		309,111		24	%
2-3 years	121,778		28,585		8,518		—		1,100		159,981		13	%
Greater than 3 years	89,870		17,478		2,664		—		—		110,012		9	%
	$	842,759	$	307,283	$	63,965	$	7,263	$	44,097	$	1,265,367	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12. STOCKHOLDERS' EQUITY

Stock-based compensation

Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2024		2023		2024		2023
Cost of revenue	$	6,894	$	6,410	$	20,558	$	22,497
Selling and marketing	14,169		10,401		41,621		43,410
Research and development	7,308		7,375		22,779		24,286
General and administrative	8,842		7,113		23,260		19,890
	$	37,213	$	31,299	$	108,218	$	110,083
Income tax benefit	$	(512)	$	(316)	$	(1,377)	$	(1,569)

As of September 30, 2024, the Company had $119.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.6 years.

Grants


	Nine Months Ended September 30, 2024
(in thousands)	Quantity	Total Fair Value
Restricted stock units (1)	1,306	$	80,642
Non-qualified stock options	1,789	$	46,365
Performance stock options (2)	566	$	13,921
Common stock	11	$	750

(1) Includes units issued when employees elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.

(2) Performance stock options allow the holder to purchase a specified number of common stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date. For the performance stock options granted in the nine months ended September 30, 2024, 25% can vest on the first anniversary of the grant date, and 75% can vest on the second anniversary of the grant date, based on the achievement of specific performance conditions. The options expire ten years from the grant date.

Stock repurchase program

On April 23, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2024 to June 30, 2025. On October 22, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchase by $250 million to $310 million as of that date.

During the nine months ended September 30, 2024, the Company repurchased 0.2 million of its common stock for $11.7 million at an average price per share of $68.84. All purchases under this program have been made on the open market. As of September 30, 2024, the Company was authorized to purchase an additional $48.3 million of its common stock under the share repurchase program.

NOTE 13. INCOME TAXES

Effective income tax rate


	Nine Months Ended September 30,
(Dollars in thousands)		2024			2023
Provision for income taxes		$	8,369		$	15,395
Effective income tax rate		(73)		%	(26)		%

The Company’s effective income tax rate for the nine months ended September 30, 2024, is impacted by the jurisdictional mix and timing of the actual compared to projected earnings (losses). It is also impacted by the valuation allowance on its deferred tax assets in the U.S. and U.K. and a near break-even year-to-date pretax loss resulting in a not meaningful effective income tax rate.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. A deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income. Quarterly, the Company reassesses the need for a valuation allowance on its net deferred tax assets by weighting all available and objectively verifiable negative and positive evidence, including projected future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income, including the impact of enacted legislation, tax-planning strategies, and recent operating results.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company intends to maintain a valuation allowance on its U.S. and U.K. net deferred tax assets until sufficient evidence exists to support their realization.

NOTE 14. (LOSS) PER SHARE

Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.

Calculation of (loss) per share:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2024		2023		2024		2023
Net (loss)	$	(14,390)	$	(7,279)	$	(19,901)	$	(74,857)
Weighted-average common shares outstanding	85,625		83,336		85,018		82,996
(Loss) per share, basic	$	(0.17)	$	(0.09)	$	(0.23)	$	(0.90)

Net (loss)	$	(14,390)	$	(7,279)	$	(19,901)	$	(74,857)







Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	85,625		83,336		85,018		82,996
(Loss) per share, diluted	$	(0.17)	$	(0.09)	$	(0.23)	$	(0.90)

Outstanding anti-dilutive stock options and RSUs (4)	4,528		2,255		3,682		1,652

(1) All dilutive securities are excluded when their inclusion would be anti-dilutive.

(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue approximately 3.7 million shares as of September 30, 2024.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are convertible) as of September 30, 2024. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may be dilutive in the future.

NOTE 15. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. Leases" for additional information.

Legal proceedings

In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material. The Company had no accrued losses for litigation for the below matters as of September 30, 2024 and December 31, 2023.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Appian Corp. v. Pegasystems Inc. & Youyong Zou

The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a written opinion on July 30, 2024. The Court of Appeals reversed the judgment on Appian’s Virginia Uniform Trade Secrets Act claim and ordered a new trial on that claim. Appian filed a petition for appeal with the Supreme Court of Virginia on August 29, 2024, and the Company filed a response to the petition on October 21, 2024. Although it is not possible to predict timing, the entirety of the appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives - Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund - have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company moved to dismiss the consolidated amended complaint on December 19, 2022. The hearing on the Company’s motion to dismiss took place on May 17, 2023. After hearing argument from both sides, the Court denied the Company’s motion from the bench and stated that a written opinion would follow. On June 30, 2023, the Company filed its Answer to the complaint. On July 24, 2023, the Court issued its written opinion denying the motion to dismiss as to the Company and Defendant Trefler but granting the motion without prejudice as to Mr. Stillwell.

On March 4, 2024, the parties agreed in principle to a proposed settlement of the litigation for an aggregate sum of $35 million. On April 23, 2024, the parties executed a stipulation of settlement. On April 23, 2024, the plaintiffs filed a motion seeking preliminary approval of the settlement. On May 15, 2024, the Court granted plaintiffs’ motion for preliminary approval of the settlement. On September 6, 2024, the Company received notice that certain shareholders, representing approximately 3% of the settlement class, would be excluded from the settlement. On September 19, 2024, the Court approved the settlement, including an award of attorneys’ fees and the plan of allocation, and thereafter, on September 25, 2024, entered Final Judgment.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In re Pegasystems Inc., Derivative Litigation

On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc., asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court. The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters. On June 28, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned John Dwyer and Ray Gerber, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Don Schuerman, Kerim Akgonul, and Benjamin Baril, Defendants, Pegasystems Inc., Nominal Defendant (Case 2484CV01734). The complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the approximately $2 billion verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, the recent class action settlement, and litigation costs from various proceedings. On October 18, 2024 the defendants served a motion to dismiss the complaint. The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being no specified quantum of damages sought in the complaints.

SEC Inquiry

Beginning in March 2023, the U.S. Securities and Exchange Commission (“SEC”) has requested certain information relating to, among other things, the accounting treatment of the Company’s above-described litigation with Appian Corporation.

By letter dated September 9, 2024, the Staff of the Division of Enforcement of the SEC (“Staff”) notified the Company that the Staff had concluded its investigation of the Company commenced March 2023 and that, based on the information that it had as of September 9, 2024, the Staff did not intend to recommend any enforcement action against the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words and other similar expressions identify forward-looking statements. These statements represent our views only as of the date the statement was made and are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

•our future financial performance and business plans;

•the adequacy of our liquidity and capital resources;

•the continued payment of our quarterly dividends;

•the timing of revenue recognition;

•variation in demand for our products and services, including among clients in the public sector;

•reliance on key personnel;

•reliance on third-party service providers, including hosting providers;

•compliance with our debt obligations and covenants;

•the potential impact of our convertible senior notes and Capped Call Transactions;

•foreign currency exchange rates;

•potential legal and financial liabilities, as well as damage to our reputation, due to cyber-attacks;

•security breaches and security flaws;

•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;

•our ongoing litigation with Appian Corp.;

•our client retention rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2023, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results included in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of October 23, 2024.

NON-GAAP MEASURES

Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. Management uses these measures to assess the performance of the company's operations and establish operational goals and incentives. They are not a substitute for financial measures prepared under U.S. GAAP. A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change. Our powerful, low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to our clients’ specific industry.

Performance metrics

We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”)

ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV. ACV is a performance measure that we believe provides useful information to our management and investors.


	September 30, 2024		September 30, 2023		Change				Constant Currency Change
Pega Cloud	$	640,574	$	494,571	$	146,003	30	%	26	%
Maintenance	306,753		319,250		(12,497)		(4)	%	(6)	%
Subscription services	947,327		813,821		133,506		16	%	14	%
Subscription license	412,678		355,055		57,623		16	%	15	%
	$	1,360,005	$	1,168,876	$	191,129	16	%	14	%

Reconciliation of ACV and constant currency ACV


(in millions, except percentages)	September 30, 2023		September 30, 2024		1-Year Change
ACV	$	1,169	$	1,360	16	%
Impact of changes in foreign exchange rates	—		(28)
Constant currency ACV	$	1,169	$	1,332	14	%

Note: Constant currency ACV is calculated by applying the September 30, 2023 foreign exchange rates to all periods shown.

Cash flow (1)


(Dollars in thousands)	Nine Months Ended September 30,				Change
	2024		2023
Cash provided by operating activities	$	250,697	$	137,920	82	%
Investment in property and equipment	(4,921)		(14,271)
Free cash flow (1)	$	245,776	$	123,649	99	%

Supplemental information (2)
Litigation settlement, net of recoveries	$	32,403	$	—
Legal fees	9,232		5,867
Restructuring	4,214		21,576
Interest on convertible senior notes	3,767		4,134

Income taxes	32,246		7,913
	$	81,862	$	39,490

(1) Our non-GAAP free cash flow is defined as cash provided by operating activities less investment in property and equipment. Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP.

(2) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance.

◦Litigation settlement, net of recoveries: Cost to settle litigation, net of insurance recoveries, arising from proceedings outside the ordinary course of business. See Note 15. Commitments and Contingencies in our Quarterly Report for the three months ended September 30, 2024 for additional information.

◦Legal fees: Legal and related fees arising from proceedings outside the ordinary course of business.

◦Restructuring: Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.

◦Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. The convertible senior notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1.

◦Income taxes: Direct income taxes paid net of refunds received.

Remaining performance obligations (“Backlog”)

Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP)


(in millions, except percentages)	September 30, 2023		September 30, 2024		1-Year Growth Rate
Backlog - GAAP	$	1,265	$	1,475	17	%
Impact of changes in foreign exchange rates	—		(43)
Constant currency backlog	$	1,265	$	1,432	13	%

Note: Constant currency Backlog is calculated by applying the September 30, 2023 foreign exchange rates to all periods shown.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States of America (“U.S.”) and the rules and regulations of the SEC for interim financial reporting. Preparing these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future based on the available information.

For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2023:

•“Critical Accounting Estimates and Significant Judgments” in Item 7; and

•“Note 2. Significant Accounting Policies” in Item 8.

No significant changes have been made to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

RESULTS OF OPERATIONS

Revenue


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2024				2023								2024				2023
Pega Cloud	$	144,108	44	%	$	118,040	35	%	$	26,068	22	%	$	409,096	41	%	$	340,982	36	%	$	68,114	20	%
Maintenance	80,702		25	%	83,538		25	%	(2,836)		(3)	%	242,047		24	%	245,210		25	%	(3,163)		(1)	%
Subscription services	224,810		69	%	201,578		60	%	23,232		12	%	651,143		65	%	586,192		61	%	64,951		11	%
Subscription license	45,420		14	%	74,342		22	%	(28,922)		(39)	%	193,405		19	%	200,066		21	%	(6,661)		(3)	%
Subscription	270,230		83	%	275,920		82	%	(5,690)		(2)	%	844,548		84	%	786,258		82	%	58,290		7	%
Consulting	54,364		17	%	55,976		17	%	(1,612)		(3)	%	160,451		16	%	167,396		18	%	(6,945)		(4)	%
Perpetual license	456		—	%	2,747		1	%	(2,291)		(83)	%	1,351		—	%	4,729		—	%	(3,378)		(71)	%
	$	325,050	100	%	$	334,643	100	%	$	(9,593)	(3)	%	$	1,006,350	100	%	$	958,383	100	%	$	47,967	5	%

•The increases in Pega Cloud revenue for the three and nine months ended September 30, 2024 were primarily due to additional investments made by our existing clients as they continued to expand their use of Pega Cloud.

•The decreases in maintenance revenue in the three and nine months ended September 30, 2024 were primarily due to our clients’ shift to Pega Cloud-based offerings, which do not generally result in maintenance revenue.

•The decreases in subscription license revenue in the three and nine months ended September 30, 2024 were primarily due to several large multi-year contracts recognized in revenue in the three and nine months ended September 30, 2023.

•The decreases in consulting revenue in the three and nine months ended September 30, 2024 were primarily due to decreases in consultant billable hours and utilization.

Gross profit


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2024				2023								2024				2023
Pega Cloud	$	113,625	79	%	$	88,553	75	%	$	25,072	28	%	$	319,261	78	%	$	250,943	74	%	$	68,318	27	%
Maintenance	74,317		92	%	77,119		92	%	(2,802)		(4)	%	222,952		92	%	225,696		92	%	(2,744)		(1)	%
Subscription services	187,942		84	%	165,672		82	%	22,270		13	%	542,213		83	%	476,639		81	%	65,574		14	%
Subscription license	45,036		99	%	73,713		99	%	(28,677)		(39)	%	191,901		99	%	198,095		99	%	(6,194)		(3)	%
Subscription	232,978		86	%	239,385		87	%	(6,407)		(3)	%	734,114		87	%	674,734		86	%	59,380		9	%
Consulting	(5,087)		(9)	%	(1,228)		(2)	%	(3,859)		(314)	%	(17,413)		(11)	%	(8,866)		(5)	%	(8,547)		(96)	%
Perpetual license	453		99	%	2,723		99	%	(2,270)		(83)	%	1,339		99	%	4,678		99	%	(3,339)		(71)	%
	$	228,344	70	%	$	240,880	72	%	$	(12,536)	(5)	%	$	718,040	71	%	$	670,546	70	%	$	47,494	7	%

•The increases in Pega Cloud gross profit percent in the three and nine months ended September 30, 2024 were primarily due to increased cost efficiency, primarily for hosting services and employee compensation and benefits, as Pega Cloud continues to grow and scale.

•The decreases in consulting gross profit percent in the three and nine months ended September 30, 2024 were primarily due to decreases in consultant utilization rates.

Operating expenses


(Dollars in thousands)	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2024			2023							2024			2023
Selling and marketing	$	127,669		$	131,598		$	(3,929)	(3)	%	$	395,125		$	425,253		$	(30,128)	(7)	%
% of Revenue	39		%	39		%					39		%	44		%
Research and development	$	74,157		$	74,955		$	(798)	(1)	%	$	221,695		$	224,262		$	(2,567)	(1)	%
% of Revenue	23		%	22		%					22		%	23		%
General and administrative	$	35,694		$	27,321		$	8,373	31	%	$	84,641		$	73,893		$	10,748	15	%
% of Revenue	11		%	8		%					8		%	8		%
Litigation settlement, net of recoveries	$	—		$	—		$	—	*		$	32,403		$	—		$	32,403	*
% of Revenue	—		%	—		%					3		%	—		%
Restructuring	$	2,485		$	17,822		$	(15,337)	(86)	%	$	3,283		$	21,450		$	(18,167)	(85)	%
% of Revenue	1		%	5		%					—		%	2		%

* not meaningful

•The decreases in selling and marketing during the three and nine months ended September 30, 2024 were primarily due to decreases in compensation and benefits of $2.4 million and $27.5 million, respectively, from reduced headcount as a result of our effort to optimize our go-to-market strategy. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

•The decrease in research and development for the three months ended September 30, 2024 was primarily due to a decrease in compensation and benefits of $1.1 million. The decrease in research and development for the nine months ended September 30, 2024 was primarily due to a decrease in cloud hosting expenses of $1.8 million and a decrease in compensation and benefits of $1.5 million.

•The increases in general and administrative during the three and nine months ended September 30, 2024 were primarily due to increases in compensation and benefits of $3.1 million and $7.2 million, respectively, due to increases in incentive-based compensation.

•The increase in litigation settlement, net of recoveries in the nine months ended September 30, 2024 was primarily due to the cost to settle litigation arising from proceedings outside the ordinary course of business. See "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part I, Item 1A of our Annual Report for the year ended December 31, 2023 for additional information.

•The decreases in restructuring expenses during the three and nine months ended September 30, 2024 were primarily due to efforts to optimize our go-to-market organization and office space. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

Other income and expenses


(Dollars in thousands)	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2024		2023						2024		2023
Foreign currency transaction (loss) gain	$	(4,405)	$	1,994	$	(6,399)	*		$	(7,230)	$	(3,971)	$	(3,259)	(82)	%
Interest income	6,769		2,532		4,237		167	%	18,835		5,831		13,004		223	%
Interest expense	(1,639)		(1,533)		(106)		(7)	%	(5,047)		(5,229)		182		3	%
(Loss) on capped call transactions	(689)		(2,294)		1,605		70	%	(667)		(449)		(218)		(49)	%
Other income, net	—		6,383		(6,383)		(100)	%	1,684		18,668		(16,984)		(91)	%
	$	36	$	7,082	$	(7,046)	(99)	%	$	7,575	$	14,850	$	(7,275)	(49)	%

* not meaningful

•The changes in foreign currency transaction (loss) gain in the three and nine months ended September 30, 2024 was primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

•The increases in interest income in the three and nine months ended September 30, 2024 were primarily due to higher investment balances and higher interest rate yields.

•The changes in (loss) on capped call transactions in the three and nine months ended September 30, 2024 were due to fair value adjustments for our capped call transactions.

•The decrease in other income, net in the three months ended September 30, 2024 was due to a gain of $6.4 million on our venture investments in the three months ended September 30, 2023. The decrease in other income, net in the nine months ended September 30, 2024 was due to a gain of $7.9 million from repurchases of our convertible senior notes and a decrease of $9.3 million in the gain from our venture investments in the nine months ended September 30, 2024. For additional information, see “Note 8. Debt” and "Note 10. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report.

Provision for income taxes


	Nine Months Ended September 30,
(Dollars in thousands)		2024			2023
Provision for income taxes		$	8,369		$	15,395
Effective income tax rate		(73)		%	(26)		%

Our effective income tax rate for the nine months ended September 30, 2024, is impacted by the jurisdictional mix and timing of the actual compared to projected earnings (losses). It is also impacted by the valuation allowance on our deferred tax assets in the U.S. and U.K. and a near break-even year-to-date pretax loss resulting in a not meaningful effective income tax rate.

The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax regulations, known as Pillar Two, that began to come into effect on January 1, 2024. We are monitoring this development and evaluating its potential impact on our tax rate and eligibility to qualify for the safe harbor provisions. For 2024, we currently anticipate meeting the transitional safe harbors in most jurisdictions, with any remaining top-up tax being immaterial.

LIQUIDITY AND CAPITAL RESOURCES


	Nine Months Ended September 30,
(in thousands)	2024		2023
Cash provided by (used in):
Operating activities	$	250,697	$	137,920
Investing activities	(215,999)		(24,176)
Financing activities	26,949		(85,031)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	4,591		(1,621)
Net increase in cash, cash equivalents, and restricted cash	$	66,238	$	27,092


(in thousands)	September 30, 2024		December 31, 2023
Held in U.S. entities	$	464,232	$	263,453
Held in foreign entities	238,758		159,885
Total cash, cash equivalents, and marketable securities	702,990		423,338
Restricted cash included in other current assets	184		—
Restricted cash included in other long-term assets	11,232		2,925
Total cash, cash equivalents, marketable securities, and restricted cash	$	714,406	$	426,263

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, settlement of our convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. We may utilize available funds or seek external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations.

Operating activities

The change in cash provided by operating activities in the nine months ended September 30, 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives. For additional information, see “Note 9. Restructuring” and "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report.

Investing activities

The change in cash (used in) investing activities in the nine months ended September 30, 2024 was primarily due to our investments in financial instruments and reduced investment in property and equipment as we optimized our office space.

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. As of September 30, 2024, we had $502.3 million in aggregate principal amount of convertible senior notes outstanding. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

In November 2019, and as since amended, we entered into a $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025. As of September 30, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	Nine Months Ended September 30, 2024
December 31, 2023	$	60,000
Authorizations (1)	—
Repurchases (2)	(11,749)
September 30, 2024	$	48,251

(1) On April 23, 2024, our Board of Directors extended the expiration date of our share repurchase program from June 30, 2024 to June 30, 2025. On October 22, 2024, our Board of Directors extended the expiration date of our share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchase by $250 million to $310 million as of that date.

(2) All purchases under this program have been made on the open market.

Common stock repurchases


	Nine Months Ended September 30,
	2024			2023
(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid	164	$	11,249	—	$	—
Repurchases unpaid at period end	7	500		—	—
Stock repurchase program	171	11,749		—	—
Tax withholdings for net settlement of equity awards	48	2,987		39	1,654
	219	14,736		39	1,654

In the nine months ended September 30, 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $3.3 million and $1.0 million, respectively, for the exercise price of options. These amounts are not included in the table above.

Dividends

We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.


	Nine Months Ended September 30,
(in thousands)	2024		2023
Dividend payments to stockholders	$	7,626	$	7,458

Contractual obligations

As of September 30, 2024, our contractual obligations were:


	Payments due by period
(in thousands)	Remainder of 2024		2025		2026		2027		2028		2029 and after		Other		Total
Convertible senior notes (1)	$	—	$	504,154	$	—	$	—	$	—	$	—	$	—	$	504,154
Purchase obligations (2)	51,146		142,370		127,548		135,488		990		—		—		457,542
Operating lease obligations	4,094		18,276		13,754		13,503		12,939		31,932		—		94,498
Venture investment commitments (3)	—		500		500		—		—		—		—		1,000
Liability for uncertain tax positions (4)	—		—		—		—		—		—		867		867
	$	55,240	$	665,300	$	141,802	$	148,991	$	13,929	$	31,932	$	867	$	1,058,061

(1) Includes principal and interest.

(2) Represents the fixed amount owed for purchase obligations including for software licenses, hosting services, and sales and marketing programs.

(3) Represents the maximum funding under existing venture investment agreements. Our venture investment agreements generally allow us to withhold unpaid funds at our discretion.

(4) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, partially offsetting our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in the following:


	Nine Months Ended September 30,
	2024		2023
(Decrease) in revenue	(4)	%	(4)	%
(Decrease) increase in net income	(23)	%	(5)	%

Remeasurement risk

We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:


	Nine Months Ended September 30,
(in thousands)	2024		2023
Foreign currency (loss)	$	(12,771)	$	(11,351)

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2024. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2024.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in “Note 15. Commitments and Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.

ITEM 1A. RISK FACTORS

We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results and may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of equity securities (1)

Common stock repurchased in the three months ended September 30, 2024:


(in thousands, except per share amounts)	Total Number of Shares Purchased (2)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs
July 1, 2024 - July 31, 2024	1	$	65.27	—	$	60,000
August 1, 2024 - August 31, 2024	34	68.95		25	$	58,250
September 1, 2024 - September 30, 2024	152	68.82		146	$	48,251
	187	$	68.82	171

(1) For additional information, see "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report.

(2) Includes shares withheld to cover the option exercise price and tax withholding obligations for stock compensation awards subject to net settlement provisions.

ITEM 5. OTHER INFORMATION

Rule 10b5-1 and non-rule 10b5-1 trading arrangements

On August 29, 2024, Kenneth Stillwell, our Chief Financial Officer and Chief Operating Officer, entered into a trading plan that provides for the sale of 18,000 shares of our common stock. The plan will terminate on August 31, 2025, subject to early termination for certain specified events set forth in the plan.

Other than as disclosed above, during the three months ended September 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Share Repurchase Program

On October 22, 2024, our Board of Directors extended the expiration date of our share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchase by $250 million to $310 million as of that date. Any actual repurchases under the current repurchase program will be disclosed in the Company’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for the annual and applicable quarterly periods ending between December 31, 2024 and 2025.

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

+ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

SIGNATURE

Pursuant to the requirements 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.


		Pegasystems Inc.

Dated:	October 23, 2024	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)

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Date	Price Target	Rating	Analyst
8/1/2024	$68.00 → $84.00	Hold → Buy	Loop Capital
7/31/2024	$85.00	Mkt Perform → Mkt Outperform	JMP Securities
7/30/2024		Mkt Perform → Outperform	William Blair
1/12/2024	$52.00	Underweight → Equal Weight	Barclays
7/5/2023	$50.00 → $65.00	Neutral → Outperform	Exane BNP Paribas
6/6/2023	$48.00	Neutral	DA Davidson
5/8/2023	$56.00	Buy	Rosenblatt
3/9/2023		Mkt Perform	William Blair

SEC Form 10-Q filed by Pegasystems Inc.

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