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 June 30, 2021 OR ☐ 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) _ ...

Pegasystems Inc. (NASDAQ:PEGA) Q1 2021 Earnings Conference Call April 28, 2021 5:00 PM ET Company Participants Ken Stillwell - COO and CFO Alan Trefler - Founder and CEO Conference Call Participants Mark Murphy - JP Morgan Steve Koenig - SMBC Nikko Chris Merwin - Goldman Sachs Steve Enders - KeyBanc Capital Markets Jack Andrews - Needham Dan Ives - Wedbush Mark Schappel - Benchmark Fred Havemeyer - Macquarie Yun Kim - Loop Capital Partners Joey Marincek - JMP Securities Operator Good day everyone, and welco ...

Company Information [Registrant Details](index=1&type=section&id=Registrant%20Details) This section provides key identification information for Pegasystems Inc, including its filing status, stock market listing, and outstanding shares - The registrant is a **large accelerated filer**[3](index=3&type=chunk)[4](index=4&type=chunk) Company Basic Information | Metric | Value | |:---|:---| | Filing Type | Quarterly Report (Form 10-Q) | | Period Ended | March 31, 2021 | | Commission File Number | 1-11859 | | Registrant Name | PEGASYSTEMS INC. | | State of Incorporation | Massachusetts | | Trading Symbol | PEGA | | Exchange | NASDAQ Global Select Market | | Common Stock Outstanding (April 19, 2021) | 81,281,726 shares | PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section contains the company's unaudited condensed consolidated financial statements as of March 31, 2021, detailing its financial position and performance [Unaudited Condensed Consolidated Balance Sheets](index=3&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Key Condensed Consolidated Balance Sheet Data (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | Change | |:---|:---|:---|:---| | **Assets** | | | | | Total current assets | $922,153 | $976,910 | $(54,757) | | Total assets | $1,528,503 | $1,604,262 | $(75,759) | | **Liabilities** | | | | | Total current liabilities | $404,450 | $460,135 | $(55,685) | | Convertible senior notes, net | $588,418 | $518,203 | $70,215 | | Total liabilities | $1,049,578 | $1,062,090 | $(12,512) | | **Stockholders' Equity** | | | | | Total stockholders' equity | $478,925 | $542,172 | $(63,247) | [Unaudited Condensed Consolidated Statements of Operations](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations) Key Condensed Consolidated Statements of Operations Data (in thousands of U.S. dollars, except per share amounts) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Total revenue | $313,499 | $265,591 | $47,908 | 18.0% | | Gross profit | $231,052 | $186,063 | $44,989 | 24.2% | | Income (loss) from operations | $1,601 | $(24,318) | $25,919 | N/A | | Net (loss) | $(6,617) | $(25,372) | $18,755 | N/A | | Basic (loss) per share | $(0.08) | $(0.32) | $0.24 | N/A | | Diluted (loss) per share | $(0.08) | $(0.32) | $0.24 | N/A | [Unaudited Condensed Consolidated Statements of Comprehensive (Loss)](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)) Key Condensed Consolidated Statements of Comprehensive (Loss) Data (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | |:---|:---|:---|:---| | Net (loss) | $(6,617) | $(25,372) | $18,755 | | Total other comprehensive income (loss), net of tax | $280 | $(414) | $694 | | Comprehensive (loss) | $(6,337) | $(25,786) | $19,449 | [Unaudited Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) - The adoption of ASU 2020-06 resulted in a cumulative-effect adjustment that **decreased total stockholders' equity by $52.2 million**[16](index=16&type=chunk) Stockholders' Equity Changes (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | March 31, 2020 | |:---|:---|:---|:---| | Total Stockholders' Equity | $478,925 | $542,172 | $566,611 | | Common Stock (shares) | 81,246 | 80,890 | 80,076 | | Additional Paid-In Capital | $140,558 | $204,432 | $196,310 | | Retained Earnings | $340,223 | $339,879 | $383,142 | | Accumulated Other Comprehensive (Loss) | $(2,668) | $(2,948) | $(13,642) | [Unaudited Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Key Condensed Consolidated Statements of Cash Flows Data (in thousands of U.S. dollars) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | |:---|:---|:---|:---| | Operating activities | $21,650 | $(18,323) | $39,973 | | Investing activities | $15,489 | $(12,562) | $28,051 | | Financing activities | $(34,794) | $502,174 | $(536,968) | | Net increase in cash and cash equivalents | $809 | $469,779 | $(468,970) | | Cash and cash equivalents, end of period | $172,708 | $538,142 | $(365,434) | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [NOTE 1. BASIS OF PRESENTATION](index=8&type=section&id=NOTE%201.%20BASIS%20OF%20PRESENTATION) - The unaudited condensed consolidated financial statements are prepared according to SEC rules for interim reporting and do not include all information required for complete financial statements[20](index=20&type=chunk) - Management believes the financial statements include all necessary normal recurring adjustments for a fair presentation of the interim periods presented[21](index=21&type=chunk) - The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2021[22](index=22&type=chunk) [NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS](index=8&type=section&id=NOTE%202.%20NEW%20ACCOUNTING%20PRONOUNCEMENTS) - The company adopted ASU 2020-06 on January 1, 2021, simplifying the accounting for convertible instruments by removing the separation model for convertible instruments with cash conversion features[23](index=23&type=chunk)[24](index=24&type=chunk) Impact of Adopting ASU 2020-06 (in thousands of U.S. dollars) | Metric | Impact | |:---|:---| | Convertible Senior Notes Book Value Increase | $69,500 | | Retained Earnings Increase | $9,400 | [NOTE 3. MARKETABLE SECURITIES](index=8&type=section&id=NOTE%203.%20MARKETABLE%20SECURITIES) - As of March 31, 2021, the weighted-average remaining term of marketable securities was approximately **1.4 years**[26](index=26&type=chunk) Fair Value of Marketable Securities (in thousands of U.S. dollars) | Category | March 31, 2021 Fair Value | December 31, 2020 Fair Value | |:---|:---|:---| | Government debt | $13,001 | $39,988 | | Corporate debt | $256,649 | $253,281 | | Total marketable securities | $269,650 | $293,269 | [NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE](index=8&type=section&id=NOTE%204.%20RECEIVABLES,%20CONTRACT%20ASSETS,%20AND%20DEFERRED%20REVENUE) - Unbilled receivables expected to be invoiced within one year represent **68% of the total**[28](index=28&type=chunk) - No customer accounted for **10% or more** of the company's total receivables as of March 31, 2021, or December 31, 2020[29](index=29&type=chunk) - The change in deferred revenue was primarily due to new billings, partially offset by the recognition of **$107 million in revenue** that was included in deferred revenue as of December 31, 2020[34](index=34&type=chunk) Receivables, Contract Assets, and Deferred Revenue (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Accounts receivable | $159,324 | $215,827 | | Unbilled receivables (current) | $228,603 | $207,155 | | Long-term unbilled receivables | $108,048 | $113,278 | | Total receivables | $495,975 | $536,260 | | Contract assets (current) | $13,454 | $15,296 | | Long-term contract assets | $7,284 | $7,777 | | Total contract assets | $20,738 | $23,073 | | Deferred revenue (current) | $244,170 | $232,865 | | Long-term deferred revenue | $7,565 | $8,991 | | Total deferred revenue | $251,735 | $241,856 | [NOTE 5. DEFERRED COMMISSIONS](index=9&type=section&id=NOTE%205.%20DEFERRED%20COMMISSIONS) - Amortization of deferred commissions **increased by $3.0 million (35.3%)** year-over-year[35](index=35&type=chunk) Deferred Commissions (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Deferred commissions | $103,474 | $108,624 | | Amortization of deferred commissions (3 months ended March 31) | $11,496 | $8,497 | [NOTE 6. GOODWILL AND OTHER INTANGIBLES](index=10&type=section&id=NOTE%206.%20GOODWILL%20AND%20OTHER%20INTANGIBLES) - Future estimated amortization expense for intangible assets is **$3.0 million for the remainder of 2021**, with a total remaining amount of $17.0 million[39](index=39&type=chunk) Goodwill Changes (in thousands of U.S. dollars) | Metric | March 31, 2021 | January 1, 2021 | |:---|:---|:---| | Goodwill | $82,037 | $79,231 | | Acquisition | $2,701 | N/A | | Currency translation adjustments | $105 | N/A | Net Book Value of Intangible Assets (in thousands of U.S. dollars) | Category | March 31, 2021 Net Book Value | December 31, 2020 Net Book Value | |:---|:---|:---| | Client-related | $6,920 | $7,291 | | Technology | $10,128 | $8,457 | | Other | $0 | $0 | | Total | $17,048 | $15,748 | Amortization of Intangible Assets (in thousands of U.S. dollars) | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:---|:---|:---| | Cost of revenue | $629 | $647 | | Selling and marketing | $373 | $371 | | Total amortization | $1,002 | $1,018 | [NOTE 7. LEASES](index=11&type=section&id=NOTE%207.%20LEASES) - The company agreed to accelerate its Cambridge headquarters exit to October 1, 2021, in exchange for a **one-time $18 million payment** from the landlord and a **$21.1 million reduction in lease liabilities**[40](index=40&type=chunk)[109](index=109&type=chunk) - As of March 31, 2021, the company's leases had a **weighted-average remaining lease term of 5.1 years** and a **weighted-average discount rate of 4.7%**[43](index=43&type=chunk) Lease Costs (in thousands of U.S. dollars) | Lease Cost Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | |:---|:---|:---|:---| | Fixed lease costs | $300 | $4,818 | $(4,518) | | Short-term lease costs | $459 | $455 | $4 | | Variable lease costs | $1,387 | $1,278 | $109 | | Total lease costs | $2,146 | $6,551 | $(4,405) | Lease Liabilities and Right-of-Use Assets (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Right of use assets | $44,330 | $67,651 | | Current lease liabilities | $14,161 | $18,541 | | Long-term lease liabilities | $36,471 | $59,053 | | Total lease liabilities | $50,632 | $77,594 | [NOTE 8. DEBT](index=12&type=section&id=NOTE%208.%20DEBT) - The company issued **$600 million in aggregate principal amount of convertible senior notes** in February 2020, due March 1, 2025, with an annual interest rate of 0.75%[46](index=46&type=chunk) - The conversion rate is **7.4045 shares of common stock per $1,000 principal amount** of notes, representing an initial conversion price of $135.05 per share[47](index=47&type=chunk) - As of March 31, 2021, the notes were **not eligible for conversion** at the option of the note holders[48](index=48&type=chunk) - The company entered into capped call transactions in February 2020 covering approximately **4.4 million shares** to reduce potential common stock dilution and/or offset cash payments upon note conversion, with a cap price of $196.44[56](index=56&type=chunk) - The company has a five-year, **$100 million senior secured revolving credit facility** with PNC Bank, with no outstanding borrowings as of March 31, 2021[60](index=60&type=chunk)[61](index=61&type=chunk) Book Value of Convertible Senior Notes (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Principal | $600,000 | $600,000 | | Unamortized debt discount | $0 | $(71,222) | | Unamortized issuance costs | $(11,582) | $(10,575) | | Convertible senior notes, net | $588,418 | $518,203 | Capped Call Transaction Changes (in thousands of U.S. dollars) | Metric | March 31, 2021 | January 1, 2021 | |:---|:---|:---| | Capped Call Transactions | $64,480 | $83,597 | | Fair value adjustment (3 months ended March 31) | $(19,117) | N/A | [NOTE 9. FAIR VALUE MEASUREMENTS](index=14&type=section&id=NOTE%209.%20FAIR%20VALUE%20MEASUREMENTS) - The company records cash equivalents, marketable securities, capped call transactions, and venture investments at fair value on a recurring basis, using a three-tier fair value hierarchy for classification[62](index=62&type=chunk)[63](index=63&type=chunk)[65](index=65&type=chunk) - As of March 31, 2021, the fair value of the convertible senior notes was **$665.9 million**, classified as Level 2 within the fair value hierarchy[67](index=67&type=chunk) Assets Measured at Fair Value (in thousands of U.S. dollars) | Asset | March 31, 2021 Total Fair Value | December 31, 2020 Total Fair Value | Fair Value Level (March 31, 2021) | |:---|:---|:---|:---| | Cash equivalents | $26,657 | $56,339 | Level 1 | | Marketable securities | $269,650 | $293,269 | Level 2 | | Capped Call Transactions | $64,480 | $83,597 | Level 2 | | Venture investments | $9,756 | $8,345 | Level 3 | Venture Investment Changes (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:---|:---|:---| | January 1, Balance | $8,345 | $4,871 | | New investments | $500 | $1,490 | | Sales of investments | $(400) | $(1,424) | | Changes in fair value (included in other income) | $100 | $1,374 | | Changes in fair value (included in other comprehensive income) | $1,220 | $100 | | March 31, Balance | $9,756 | $6,338 | [NOTE 10. REVENUE](index=15&type=section&id=NOTE%2010.%20REVENUE) - Total backlog **grew by 30%** since March 31, 2020[90](index=90&type=chunk) Revenue by Geography (in thousands of U.S. dollars) | Region | Three Months Ended March 31, 2021 | % of Total 2021 | Three Months Ended March 31, 2020 | % of Total 2020 | |:---|:---|:---|:---|:---| | U.S. | $194,568 | 62% | $172,417 | 65% | | Other Americas | $11,901 | 4% | $15,342 | 6% | | U.K. | $28,212 | 9% | $21,837 | 8% | | Europe (excl. U.K.), Middle East, Africa | $51,659 | 16% | $31,938 | 12% | | Asia-Pacific | $27,159 | 9% | $24,057 | 9% | | Total revenue | $313,499 | 100% | $265,591 | 100% | Revenue by Stream (in thousands of U.S. dollars) | Revenue Stream | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Perpetual license | $5,452 | $3,659 | $1,793 | 49.0% | | Term license | $111,509 | $90,257 | $21,252 | 23.5% | | Maintenance | $75,561 | $73,695 | $1,866 | 2.5% | | Pega Cloud | $67,858 | $43,466 | $24,392 | 56.1% | | Consulting | $53,119 | $54,514 | $(1,395) | (2.6)% | | Total revenue | $313,499 | $265,591 | $47,908 | 18.0% | Remaining Performance Obligations (Backlog) (in thousands of U.S. dollars) | Period | March 31, 2021 Total | March 31, 2020 Total | |:---|:---|:---| | 1 year or less | $543,946 | $433,262 | | 1-2 years | $251,239 | $168,577 | | 2-3 years | $134,009 | $107,209 | | Greater than 3 years | $50,616 | $44,778 | | Total Backlog | $979,810 | $753,826 | [NOTE 11. STOCK-BASED COMPENSATION](index=16&type=section&id=NOTE%2011.%20STOCK-BASED%20COMPENSATION) - As of March 31, 2021, unrecognized stock-based compensation expense was **$183.4 million**, expected to be recognized over a weighted-average period of 2.3 years[72](index=72&type=chunk) Stock-Based Compensation Expense (in thousands of U.S. dollars) | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | |:---|:---|:---|:---| | Cost of revenue | $5,925 | $5,152 | $773 | | Selling and marketing | $13,720 | $9,718 | $4,002 | | Research and development | $6,770 | $5,496 | $1,274 | | General and administrative | $3,685 | $2,809 | $876 | | Total stock-based compensation | $30,100 | $23,175 | $6,925 | Stock-Based Compensation Grants (in thousands of U.S. dollars) | Grant Type | Shares (thousands) | Total Fair Value | |:---|:---|:---| | RSUs | 684 | $89,291 | | Non-qualified stock options | 1,248 | $47,380 | [NOTE 12. INCOME TAXES](index=17&type=section&id=NOTE%2012.%20INCOME%20TAXES) - The effective income tax benefit rate **rose to 73%** from 48% in the prior year, primarily due to excess tax benefits from stock-based compensation and fair value adjustments on capped call transactions, which had a larger proportional impact on a lower pre-tax loss[74](index=74&type=chunk) (Benefit from) Income Taxes (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:---|:---|:---| | (Benefit from) income taxes | $(17,618) | $(23,810) | | Effective income tax benefit rate | 73% | 48% | [NOTE 13. (LOSS) PER SHARE](index=17&type=section&id=NOTE%2013.%20(LOSS)%20PER%20SHARE) - All dilutive securities, including stock options, RSUs, and convertible senior notes, were **excluded from the diluted EPS calculation** during loss periods as their inclusion would be anti-dilutive[76](index=76&type=chunk)[77](index=77&type=chunk) - As of March 31, 2021, anti-dilutive outstanding stock options and RSUs totaled **6,465 thousand shares**[76](index=76&type=chunk)[78](index=78&type=chunk) (Loss) Per Share Calculation (in thousands of U.S. dollars, except per share amounts) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:---|:---|:---| | Net (loss) | $(6,617) | $(25,372) | | Weighted-average common shares outstanding (Basic) | 81,004 | 79,808 | | (Loss) per share, basic | $(0.08) | $(0.32) | | Weighted-average common shares outstanding (Diluted) | 81,004 | 79,808 | | (Loss) per share, diluted | $(0.08) | $(0.32) | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of the company's financial condition and results of operations, focusing on its cloud transition, expenses, and market risks [FORWARD-LOOKING STATEMENTS](index=18&type=section&id=FORWARD-LOOKING%20STATEMENTS) - This quarterly report contains forward-looking statements subject to risks and uncertainties, and the company undertakes no obligation to publicly update them[80](index=80&type=chunk)[82](index=82&type=chunk) - Key risks include future financial performance, liquidity, dividend payments, revenue timing, subscription model transition, demand fluctuations, COVID-19 impacts, and other operational and economic factors[81](index=81&type=chunk) [BUSINESS OVERVIEW](index=18&type=section&id=BUSINESS%20OVERVIEW) - Pegasystems develops, markets, and supports enterprise software applications on its low-code, cloud-native Pega Platform™ to help organizations simplify business complexity[84](index=84&type=chunk) - The company is transitioning to a subscription-based model, primarily through Pega Cloud, which may result in lower revenue and operating cash flow growth until late 2022 or early 2023[86](index=86&type=chunk) - As of March 31, 2021, the **COVID-19 pandemic has not had a material impact** on the company's operating results or financial condition[87](index=87&type=chunk) - Foreign currency exchange rate changes contributed **3% to the total ACV growth** in 2021[88](index=88&type=chunk) Key Performance Indicators | Metric | Change since March 31, 2020 | |:---|:---| | Annual Contract Value (ACV) | Increased 20% | | Remaining Performance Obligations (Backlog) | Increased 30% | | Year to date Pega Cloud revenue | Increased 56% | [CRITICAL ACCOUNTING POLICIES](index=20&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) - There have been **no material changes** to critical accounting policies, except for the adoption of ASU 2020-06 as disclosed in Note 2[94](index=94&type=chunk) [RESULTS OF OPERATIONS](index=21&type=section&id=RESULTS%20OF%20OPERATIONS) [Revenue (MD&A)](index=21&type=section&id=Revenue%20(MD&A)) - **Total revenue increased by 18%** year-over-year, primarily driven by the cloud transition[96](index=96&type=chunk)[97](index=97&type=chunk) - Multi-year committed maintenance agreements contributed **$3.4 million to maintenance revenue growth** and reduced term license revenue growth by $5.5 million[99](index=99&type=chunk) - The decline in consulting revenue was primarily due to a **reduction in billable travel expenses** resulting from COVID-19[99](index=99&type=chunk) Revenue and Growth by Stream (in thousands of U.S. dollars) | Revenue Stream | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Pega Cloud | $67,858 | $43,466 | $24,392 | 56% | | Maintenance | $75,561 | $73,695 | $1,866 | 3% | | Term license | $111,509 | $90,257 | $21,252 | 24% | | Subscription (Total) | $254,928 | $207,418 | $47,510 | 23% | | Perpetual license | $5,452 | $3,659 | $1,793 | 49% | | Consulting | $53,119 | $54,514 | $(1,395) | (3)% | | **Total Revenue** | **$313,499** | **$265,591** | **$47,908** | **18%** | [Gross profit (MD&A)](index=21&type=section&id=Gross%20profit%20(MD&A)) - The increase in gross profit was primarily attributable to the cloud transition, revenue growth, and improved cost efficiencies for Pega Cloud[97](index=97&type=chunk) - The increase in consulting gross profit was mainly due to **improved consultant utilization**[98](index=98&type=chunk) Gross Profit by Revenue Stream (in thousands of U.S. dollars) | Revenue Stream | 3 Months Ended Mar 31, 2021 Gross Profit | 3 Months Ended Mar 31, 2020 Gross Profit | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Software license | $116,311 | $93,232 | $23,079 | 25% | | Maintenance | $69,775 | $68,119 | $1,656 | 2% | | Pega Cloud | $45,301 | $25,933 | $19,368 | 75% | | Consulting | $(335) | $(1,221) | $886 | 73% | | **Total Gross Profit** | **$231,052** | **$186,063** | **$44,989** | **24%** | [Operating expenses (MD&A)](index=22&type=section&id=Operating%20expenses%20(MD&A)) - The increase in selling and marketing expense was due to a **$25.4 million increase in compensation and benefits** from headcount and stock-based compensation, partially offset by reductions in travel and marketing activities due to COVID-19[100](index=100&type=chunk) - Increases in R&D and G&A expenses were primarily attributable to **higher compensation and benefits** from increased headcount and stock-based compensation[101](index=101&type=chunk) - Facilities expenses **decreased by $4.1 million** across operating expense categories due to the early exit from the Cambridge headquarters[101](index=101&type=chunk) Operating Expenses (in thousands of U.S. dollars) | Expense Category | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Selling and marketing | $148,739 | $136,024 | $12,715 | 9% | | Research and development | $62,442 | $58,727 | $3,715 | 6% | | General and administrative | $18,270 | $15,630 | $2,640 | 17% | [Other income (expense), net (MD&A)](index=22&type=section&id=Other%20income%20(expense),%20net%20(MD&A)) - Interest expense **decreased due to the adoption of ASU 2020-06**[102](index=102&type=chunk) - The decrease in other income, net was due to a **higher valuation of the venture investment portfolio** in the prior year period[103](index=103&type=chunk) Other Income (Expense), Net (in thousands of U.S. dollars) | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (YoY) | % Change (YoY) | |:---|:---|:---|:---|:---| | Foreign currency transaction (loss) | $(5,098) | $(5,947) | $849 | 14% | | Interest income | $153 | $607 | $(454) | (75)% | | Interest expense | $(1,880) | $(2,306) | $426 | 18% | | (Loss) on capped call transactions | $(19,117) | $(18,592) | $(525) | (3)% | | Other income, net | $106 | $1,374 | $(1,268) | (92)% | | **Total Other income (expense), net** | **$(25,836)** | **$(24,864)** | **$(972)** | **(4)%** | [(Benefit from) income taxes (MD&A)](index=23&type=section&id=(Benefit%20from)%20income%20taxes%20(MD&A)) - The effective income tax benefit rate **rose to 73%** from 48% in the prior year, primarily due to excess tax benefits from stock-based compensation and fair value adjustments on capped call transactions, which had a larger proportional impact on a lower pre-tax loss[104](index=104&type=chunk) (Benefit from) Income Taxes (in thousands of U.S. dollars) | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | |:---|:---|:---| | (Benefit from) income taxes | $(17,618) | $(23,810) | | Effective income tax benefit rate | 73% | 48% | [LIQUIDITY AND CAPITAL RESOURCES](index=23&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) [Cash Flow Summary](index=23&type=section&id=Cash%20Flow%20Summary) - The company believes its current cash, cash flow from operations, and borrowing capacity are **sufficient to meet its operating needs** for at least the next 12 months[106](index=106&type=chunk) Cash Flow Activities (in thousands of U.S. dollars) | Cash Flow Activity | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (YoY) | |:---|:---|:---|:---| | Operating activities | $21,650 | $(18,323) | $39,973 | | Investing activities | $15,489 | $(12,562) | $28,051 | | Financing activities | $(34,794) | $502,174 | $(536,968) | | Net increase in cash and cash equivalents | $809 | $469,779 | $(468,970) | Cash, Cash Equivalents, and Marketable Securities Holdings (in thousands of U.S. dollars) | Location | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Held by U.S. entities | $342,016 | $399,138 | | Held by foreign entities | $100,342 | $66,030 | | Total cash, cash equivalents, and marketable securities | $442,358 | $465,168 | [Operating activities (MD&A)](index=23&type=section&id=Operating%20activities%20(MD&A)) - Cash provided by operating activities **increased significantly year-over-year**, primarily due to strong growth in customer collections[106](index=106&type=chunk)[109](index=109&type=chunk) - The cloud transition is expected to continue impacting the timing of billings and cash collections, potentially leading to **slower or negative operating cash flow growth** in the short term[108](index=108&type=chunk) - The early exit from the Cambridge headquarters **reduced future lease liabilities by $21.1 million**, with an expected payment of $18.0 million to be received in Q4 2021[109](index=109&type=chunk) [Investing activities (MD&A)](index=23&type=section&id=Investing%20activities%20(MD&A)) - The increase in cash provided by investing activities was driven by investments in financial instruments, an acquisition, and **reduced capital expenditures** related to office space[110](index=110&type=chunk) [Financing activities (MD&A)](index=23&type=section&id=Financing%20activities%20(MD&A)) - Financing activities shifted from a significant cash inflow in 2020, due to the issuance of convertible senior notes, to a **cash outflow in 2021**[18](index=18&type=chunk)[111](index=111&type=chunk) - There were **no outstanding borrowings** under the $100 million revolving credit facility as of March 31, 2021[111](index=111&type=chunk) [Stock repurchase program (MD&A)](index=24&type=section&id=Stock%20repurchase%20program%20(MD&A)) Stock Repurchase Program (in thousands of U.S. dollars) | Metric | March 31, 2021 | December 31, 2020 | |:---|:---|:---| | Remaining stock repurchase authority | $28,580 | $37,726 | Common Stock Repurchases (shares in thousands, amounts in thousands of U.S. dollars) | Repurchase Type | 3 Months Ended Mar 31, 2021 Shares | 3 Months Ended Mar 31, 2021 Amount | 3 Months Ended Mar 31, 2020 Shares | 3 Months Ended Mar 31, 2020 Amount | |:---|:---|:---|:---|:---| | Tax withholdings for net settlement of equity awards | 197 | $25,509 | 257 | $23,011 | | Stock repurchase program | 70 | $9,146 | 87 | $6,000 | | Total | 267 | $34,655 | 344 | $29,011 | [Dividends (MD&A)](index=24&type=section&id=Dividends%20(MD&A)) - The company plans to pay a **quarterly cash dividend of $0.03 per share**, though the Board of Directors may terminate or modify the program at any time[113](index=113&type=chunk) Dividend Payments (in thousands of U.S. dollars) | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | |:---|:---|:---| | Dividend payments to stockholders | $2,427 | $2,388 | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=24&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discloses the company's market risks, primarily focusing on foreign currency translation and remeasurement risks and their potential impact on financials [Foreign currency exposure](index=24&type=section&id=Foreign%20currency%20exposure) - The company faces foreign currency translation risk; a hypothetical **10% appreciation of the U.S. dollar** against other currencies would have decreased revenue by 4% and increased net income by 20% for the three months ended March 31, 2021[116](index=116&type=chunk) - The company is exposed to remeasurement risk, primarily from its U.K. subsidiary holding monetary assets and liabilities denominated in Australian dollars, Euros, and U.S. dollars[117](index=117&type=chunk)[118](index=118&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on management's evaluation of disclosure controls and procedures and any changes to internal control over financial reporting [Evaluation of disclosure controls and procedures](index=25&type=section&id=Evaluation%20of%20disclosure%20controls%20and%20procedures) - The CEO and CFO concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2021[119](index=119&type=chunk) [Changes in internal control over financial reporting](index=25&type=section&id=Changes%20in%20internal%20control%20over%20financial%20reporting) - There were **no changes** in internal control over financial reporting during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[120](index=120&type=chunk) PART II - OTHER INFORMATION [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) This section advises investors to consider the risk factors outlined in the company's Annual Report, which could materially affect its business and financial results - Readers are encouraged to review the risk factors identified in the company's Annual Report on Form 10-K for the year ended December 31, 2020, as they could materially impact the business, financial condition, and future results[121](index=121&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides details on the company's common stock repurchases during the reporting period, including volume, price, and remaining authorization [Issuer purchases of equity securities](index=26&type=section&id=Issuer%20purchases%20of%20equity%20securities) - The Board of Directors has extended the expiration of the current stock repurchase program to June 30, 2021, and increased the remaining repurchase authorization to **$60 million**[123](index=123&type=chunk) Common Stock Repurchase Program (shares in thousands, amounts in thousands of U.S. dollars) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased under Publicly Announced Program | Approximate Dollar Value Remaining under Program | |:---|:---|:---|:---|:---| | Jan 1 - Jan 31, 2021 | 29 | $134.92 | N/A | $34,877 | | Feb 1 - Feb 28, 2021 | 81 | $140.75 | N/A | $32,028 | | Mar 1 - Mar 31, 2021 | 234 | $125.62 | N/A | $28,580 | | **Total (3 months ended Mar 31, 2021)** | **344** | **$129.95** | **70** | **$28,580** | [Item 6. Exhibits](index=26&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the report, including corporate charters, officer certifications, and XBRL data files - The report includes various exhibits, such as the Restated Articles of Organization, Amended and Restated By-laws, CEO and CFO certifications (31.1, 31.2, 32), and Inline XBRL files (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[124](index=124&type=chunk) [Signature](index=27&type=section&id=Signature) This section confirms the formal signing of the report by the company's Chief Operating Officer and Chief Financial Officer, Kenneth Stillwell - The report was signed on April 28, 2021, by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer of Pegasystems Inc[130](index=130&type=chunk)

Financial Data and Key Metrics Changes - Pegasystems achieved total revenue of over $1 billion for the first time, growing from $911 million in 2019 to $1.02 billion in 2020, representing a 12% year-over-year increase [28][30] - Subscription revenue grew by 26% in 2020, indicating strong demand for recurring revenue models [23][27] - Pega Cloud revenue increased by 56%, from $134 million in 2018 to $208 million in 2020 [27] - The company reported a total annual contract value (ACV) growth of 21%, reaching $835 million [25] - Remaining performance obligation (backlog) grew by 28% year-over-year, exceeding $1 billion for the first time, increasing from $836 million to $1.07 billion [26] Business Line Data and Key Metrics Changes - Pega Cloud annual contract value grew by 57% year-over-year, from $169 million in 2019 to $267 million in 2020 [25] - The transition to a recurring revenue model has seen perpetual licenses decrease from about 10% of new client commitments in 2019 to about 5% in 2020 [25] - The company completed the move of Pega Cloud clients onto a next-generation cloud platform, setting the stage for long-term margin improvements [7] Market Data and Key Metrics Changes - The company noted strong demand for digital transformation solutions, which have become central to clients' strategies for survival and growth [12] - Pega's solutions are increasingly recognized by industry analysts, maintaining technology leadership in areas such as CRM and intelligent automation [10] Company Strategy and Development Direction - Pegasystems is focused on enhancing its partner ecosystem and brand awareness to drive revenue and margin growth [9] - The company is committed to a multi-year cloud transition, aiming to achieve a recurring revenue model and improve operational efficiency [22] - The introduction of new solutions and enhancements to existing products is aimed at addressing both short-term and long-term client needs [13] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's positioning to support clients' digital transformation needs, emphasizing the importance of adaptability in a changing environment [18] - The company anticipates continued growth in key metrics for 2021, projecting total revenue of $1.25 billion, a 23% increase year-over-year [29] Other Important Information - Pegasystems celebrated its $1 billion revenue milestone and plans to hold its annual customer conference, PegaWorld iNspire, on May 4 [11][30] - The company has made significant investments in sales and marketing to enhance its market presence and attract top talent [9][21] Q&A Session Summary Question: Can you provide insights on cloud mix in Q4 and its impact on top-line results? - Management noted that Pega Cloud typically represents about 50% of new client commitments, but this may skew lower in Q4 due to year-end budget spending [34][36] Question: What updates can you provide on Project Phoenix and its functionalities? - Management highlighted improvements in cloud margins and the ability to innovate faster through microservices, enhancing customer options [37][38] Question: How is the partner ecosystem progressing and what new logo wins are being generated? - The company reported a significant increase in partner-sourced deals and emphasized the importance of partnerships in driving growth [42][45] Question: Can you provide updates on the process fabric and its customer feedback? - Management indicated positive reception from customers using the process fabric, which integrates work across multiple systems [50] Question: What are the expectations for future cloud gross margin expansion? - Management expects cloud gross margins to improve through scale and operational efficiencies, aiming for margins above 70% [71]

Part I [Business](index=4&type=section&id=Item%201.%20Business) Pegasystems develops enterprise software for customer engagement and digital process automation, transitioning to a subscription model - The company is transitioning its business to a subscription model, particularly Pega Cloud, which is anticipated to be substantially complete in early 2023, potentially causing lower interim revenue and operating cash flow growth[15](index=15&type=chunk) - As of December 31, 2020, the company's backlog of contracted revenue to be recognized in future periods was approximately **$1.1 billion**[50](index=50&type=chunk) - As of January 31, 2021, the company had **5,776 employees** globally, with the majority based in the Americas and India[51](index=51&type=chunk) - On February 12, 2021, the company agreed to vacate its Cambridge, MA headquarters by October 1, 2021, for a payment of **$18 million** and plans to lease a new facility in the greater Boston area[20](index=20&type=chunk) [Our Products and Capabilities](index=5&type=section&id=Our%20Products%20and%20Capabilities) Pega Infinity™ offers a software portfolio for customer engagement and intelligent automation, leveraging a unique "Center-out Business™ Architecture" - Pega Infinity™ is the latest software portfolio, designed to connect enterprises with customers in real-time and streamline business operations[23](index=23&type=chunk) - The Pega Customer Decision Hub™ acts as a real-time AI engine to predict customer behavior and recommend the 'next best action' across various channels[23](index=23&type=chunk) - The company's 'Center-out Business™ Architecture' is a key differentiator, enabling clients to centralize business logic and intelligence, separate from front-end channels and back-end systems, for greater agility and consistency[26](index=26&type=chunk) [Our Markets and Competition](index=7&type=section&id=Our%20Markets%20and%20Competition) Pegasystems targets Global 3000 and government clients in competitive markets, differentiating with its unified platform and industry expertise - Target clients are Global 3000 organizations and government agencies in industries like financial services, healthcare, insurance, and communications[37](index=37&type=chunk)[39](index=39&type=chunk)[46](index=46&type=chunk) - The company competes with some of the world's largest software companies, including Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and IBM[43](index=43&type=chunk) - Pega's competitive differentiation lies in its unified platform that allows business and IT users to build and evolve applications quickly, contrasting with the disjointed tools offered by many competitors[44](index=44&type=chunk) [Our People](index=9&type=section&id=Our%20People) Pegasystems employs 5,776 people globally, focusing on an inclusive, diverse culture, pay equity, and extensive employee development - The company has a strong focus on building an inclusive and diverse culture, with formal resource groups for women, veterans, and members of the black and LGBTQIA+ communities[54](index=54&type=chunk) - Pegasystems is committed to pay equity, regularly reviewing compensation practices to ensure fairness regardless of gender, race, or other personal characteristics[56](index=56&type=chunk) - In 2020, over **90% of employees** participated in a formal education program, highlighting the company's investment in employee development[57](index=57&type=chunk) [Risk Factors](index=10&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from its subscription model transition, intense competition, key personnel, cybersecurity, debt, and global economic uncertainties - The transition to a subscription-based business model poses risks of fluctuating revenues and cash flows, potentially decreased profitability, and challenges in maintaining client renewal rates[62](index=62&type=chunk)[64](index=64&type=chunk) - The company faces significant competition from larger rivals like Salesforce.com, Microsoft, Oracle, and IBM, which have greater financial and marketing resources[84](index=84&type=chunk) - The CEO beneficially owned **49% of outstanding common stock** as of December 31, 2020, giving him significant influence over stockholder matters, which could deter a change in control[86](index=86&type=chunk) - The company has **$600 million** in aggregate principal amount of Convertible Senior Notes due 2025, which introduces risks related to debt service, potential dilution, and financial covenants[93](index=93&type=chunk) - The global COVID-19 pandemic poses risks that could adversely affect sales cycles, client IT spending, and operational activities, with the full impact remaining uncertain[116](index=116&type=chunk)[119](index=119&type=chunk) [Unresolved Staff Comments](index=22&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[127](index=127&type=chunk) [Properties](index=22&type=section&id=Item%202.%20Properties) The company operates from leased facilities globally, with its Cambridge headquarters relocating by October 2021 for an $18 million payment - All of the company's properties are leased, with principal locations in Cambridge, MA and Hyderabad, India[128](index=128&type=chunk) - The company will vacate its Cambridge, MA headquarters on October 1, 2021, in exchange for an **$18 million** payment and intends to lease a new facility in the greater Boston area[128](index=128&type=chunk) [Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) The company is subject to ordinary course legal proceedings, which can materially impact operations due to costs and diverted resources - The company is subject to legal proceedings from time to time in the ordinary course of business[130](index=130&type=chunk) [Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[131](index=131&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) PEGA common stock trades on NASDAQ, with 48 stockholders of record, paying a $0.03 quarterly dividend, and conducting stock repurchases - The company paid a quarterly cash dividend of **$0.03 per share** in 2020, 2019, and 2018[134](index=134&type=chunk) Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased (in thousands) | Average Price Paid per Share | Value of Shares Remaining for Repurchase ($ in thousands) | | :--- | :--- | :--- | :--- | | Oct 2020 | 37 | $125.97 | $43,873 | | Nov 2020 | 105 | $123.82 | $41,024 | | Dec 2020 | 138 | $128.76 | $37,726 | | **Total** | **280** | **$126.54** | **$37,726** | Stock Performance Comparison (2015-2020) | Year | Pegasystems Inc. | NASDAQ Composite | S&P NA Tech Software | | :--- | :--- | :--- | :--- | | 2015 | $100.00 | $100.00 | $100.00 | | 2016 | $131.46 | $108.87 | $106.20 | | 2017 | $172.58 | $141.13 | $151.66 | | 2018 | $175.44 | $137.12 | $170.83 | | 2019 | $292.66 | $187.44 | $229.93 | | 2020 | $490.22 | $271.64 | $349.26 | [Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) The company has omitted this section, consistent with new SEC rules eliminating Item 301 of Regulation S-K - The company has elected early adoption of the SEC's elimination of Item 301 of Regulation S-K, and therefore has not presented selected financial data[141](index=141&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, emphasizing the subscription transition, 12% revenue growth to $1.02 billion, strong ACV and Backlog, an operating loss, and enhanced liquidity Key Performance Metrics (as of Dec 31, 2020) | Metric | Value/Change | Note | | :--- | :--- | :--- | | Annual Contract Value (ACV) | Increased **21%** since Dec 31, 2019 | Represents the annualized value of active contracts | | Backlog | Increased **28%** since Dec 31, 2019 | Represents contracted revenue not yet recognized | | Pega Cloud Revenue | Increased **56%** since 2019 | GAAP revenue for cloud contracts | [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Total revenue grew 12% to $1.02 billion in 2020, driven by subscription revenue growth and Pega Cloud, while operating expenses increased due to headcount Revenue by Type (2020 vs. 2019) | Revenue Type | 2020 ($ in thousands) | 2019 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Pega Cloud | $208,268 | $133,746 | 56% | | Maintenance | $296,709 | $280,580 | 6% | | Term license | $266,352 | $199,433 | 34% | | **Subscription Total** | **$771,329** | **$613,759** | **26%** | | Perpetual license | $28,558 | $80,015 | (64)% | | Consulting | $217,630 | $217,609 | 0% | | **Total Revenue** | **$1,017,517** | **$911,383** | **12%** | Gross Profit by Segment (2020 vs. 2019) | Segment | 2020 ($ in thousands) | 2019 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Software license | $291,982 | $275,792 | 6% | | Maintenance | $274,398 | $254,924 | 8% | | Pega Cloud | $131,693 | $67,918 | 94% | | Consulting | $8,531 | $2,727 | 213% | | **Total Gross Profit** | **$706,604** | **$601,361** | **18%** | - Operating expenses increased across all categories in 2020, with Selling and marketing up **15%**, Research and development up **15%**, and General and administrative up **19%**, primarily due to increased headcount and compensation[158](index=158&type=chunk)[159](index=159&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity significantly strengthened to $465.2 million in 2020, driven by $533.6 million from convertible notes, with minimal cash used in operations Cash Flow Summary (2020 vs. 2019) | Cash Flow Activity ($ in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Operating activities | $(563) | $(42,165) | | Investing activities | $(321,683) | $70,074 | | Financing activities | $423,448 | $(74,258) | - In February 2020, the company issued **$600 million** in convertible senior notes due 2025, receiving net proceeds of **$533.6 million** after issuance costs and the purchase of Capped Call Transactions[172](index=172&type=chunk)[298](index=298&type=chunk) Contractual Obligations as of Dec 31, 2020 | Obligation Type ($ in thousands) | Total | Payments Due in 2021 | | :--- | :--- | :--- | | Convertible senior notes | $619,488 | $4,500 | | Purchase obligations | $125,281 | $59,685 | | Operating lease obligations | $87,624 | $22,164 | | **Total** | **$837,573** | **$86,849** | [Critical Accounting Estimates and Significant Judgments](index=31&type=section&id=Critical%20Accounting%20Estimates%20and%20Significant%20Judgments) Management identifies critical accounting estimates in revenue recognition, goodwill and intangible asset impairment, income taxes, and the complex accounting for convertible senior notes - Significant judgment is required for revenue recognition, including identifying distinct performance obligations and allocating transaction prices based on relative stand-alone selling prices, for which the company often uses the residual approach for software licenses and Pega Cloud arrangements[183](index=183&type=chunk)[185](index=185&type=chunk) - Goodwill and intangible assets (**$79.2 million** and **$15.7 million** respectively as of Dec 31, 2020) are tested for impairment at least annually, requiring management to make assumptions about future performance[187](index=187&type=chunk)[189](index=189&type=chunk) - Accounting for the convertible senior notes required separating the instrument into liability and equity components and valuing the related Capped Call Transactions as derivatives, which involved significant estimates for inputs like credit spreads and volatility[196](index=196&type=chunk)[197](index=197&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=33&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is foreign currency fluctuations, impacting financial results through translation and remeasurement risks Impact of a Hypothetical 10% Strengthening in the U.S. Dollar | Impact On | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | (4)% | (4)% | (4)% | | Net Income | 12% | (7)% | (1)% | - The company is primarily exposed to remeasurement risk from monetary assets and liabilities denominated in Australian dollars, Euros, and U.S. dollars held by its U.K. subsidiary, which has a British pound functional currency[203](index=203&type=chunk) [Financial Statements and Supplementary Data](index=34&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2018-2020, including balance sheets, income statements, and cash flow statements, with detailed notes Consolidated Balance Sheet Highlights (as of Dec 31) | Account ($ in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $1,604,262 | $984,812 | | Total Liabilities | $1,062,090 | $445,802 | | Total Stockholders' Equity | $542,172 | $539,010 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account ($ in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue | $1,017,517 | $911,383 | $891,581 | | Gross Profit | $706,604 | $601,361 | $589,816 | | (Loss) from Operations | $(143,527) | $(134,878) | $(17,032) | | Net (Loss) Income | $(61,373) | $(90,433) | $10,617 | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=61&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[369](index=369&type=chunk) [Controls and Procedures](index=61&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[370](index=370&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[372](index=372&type=chunk) [Other Information](index=61&type=section&id=Item%209B.%20Other%20Information) The company executed a Lease Termination Agreement for its Cambridge headquarters, effective October 1, 2021, for an $18 million payment - On February 12, 2021, the company executed an agreement to terminate its Cambridge, MA headquarters lease effective October 1, 2021, in exchange for an **$18 million** payment[374](index=374&type=chunk) Part III [Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees](index=62&type=section&id=Items%2010%2C%2011%2C%2012%2C%2013%2C%20and%2014) Information for Items 10 through 14, covering governance, compensation, and related matters, is incorporated by reference from the 2021 proxy statement - Information for Part III (Items 10-14) is incorporated by reference from the company's 2021 proxy statement[377](index=377&type=chunk)[379](index=379&type=chunk)[380](index=380&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=63&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements and exhibits filed with the Form 10-K, with all financial statement schedules omitted - This section contains the list of financial statements and exhibits filed with the Form 10-K[384](index=384&type=chunk)[385](index=385&type=chunk) - All financial statement schedules were omitted because the required information was not present or was included in the consolidated financial statements or notes[387](index=387&type=chunk) [Form 10-K Summary](index=64&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has opted to omit the Form 10-K summary - Omitted at Registrant's option[388](index=388&type=chunk)

Pegasystems Inc. (NASDAQ:PEGA) Q3 2020 Earnings Conference Call October 28, 2020 5:00 PM ET Company Participants Ken Stillwell - CFO Alan Trefler - Founder and CEO Conference Call Participants Jack Andrews - Needham Mark Murphy - JP Morgan Mohit Gogia - Barclays Yun Kim - Capital Partners Rishi Jaluria - D.A. Davidson Steve Enders - KeyBanc Operator Good day and welcome to the Pegasystems' Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn t ...

Financial Data and Key Metrics Changes - Total Annual Contract Value (ACV) increased by 21% year-over-year, reaching $738 million, up from $611 million in Q2 2019 [51] - Total revenue for the first half of 2020 was $493 million, an increase of 18% from the same period in 2019, driven by a 55% increase in Pega Cloud revenue [56][57] - Non-GAAP net loss was $0.28 per share, compared to a net loss of $0.30 per share a year ago [61] Business Line Data and Key Metrics Changes - Pega Cloud business grew by over 50% year-over-year, with its ACV increasing by 66% from $135 million to $211 million [9][51] - Subscription revenue for the first half of 2020 increased by 38% year-over-year, from $270 million to $373 million [58] - Professional services revenue declined by about 6%, primarily due to reduced reimbursable expenses for travel [58] Market Data and Key Metrics Changes - Approximately 80% of new license bookings in Q2 came from financial services, insurance, healthcare, and government sectors, which are less exposed to pandemic impacts [46] - The backlog increased by 30% year-over-year, from $628 million to $817 million, with Pega Cloud backlog increasing by 26% [55] Company Strategy and Development Direction - The company is focused on digital transformation, which has become increasingly critical for clients during the pandemic [10][30] - Pega is transitioning to a recurring revenue model, with over 90% of software revenue now recurring, which provides more stability during economic disruptions [44][45] - The company plans to invest in go-to-market resources to capture a larger share of client spending on digital transformation [53] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the urgency for digital transformation among clients, which is expected to drive growth [38][39] - The company has a strong cash position with over $0.5 billion in liquidity, allowing it to weather the current economic challenges [10][48] - Management believes that the current environment presents opportunities for growth, particularly in the federal vertical and among existing clients [96][98] Other Important Information - The company successfully pivoted to a nearly 100% remote workforce and has maintained effective operations during this transition [26] - Pega held a virtual event that attracted over 42,000 registrations, significantly higher than previous in-person events [27][29] Q&A Session Summary Question: Update on hiring plans for new sales reps and sales coverage - Management noted that the increased sales force has provided greater liability and has been effective during the pandemic, with successful onboarding in a remote environment [68][69] Question: Insights on project delays or pipeline growth - Management indicated that many clients are prioritizing critical digital transformation projects, and there is no significant evidence of sacrificing the second half for the first half [70][71] Question: Challenges with remote professional services - It was clarified that while some clients may struggle with remote work, it is rare and not significantly impacting overall operations [72][74] Question: Trends in product use cases and digital transformation - Management observed that organizations are recognizing previously unaddressed problems, leading to more strategic conversations about digital transformation [76][78] Question: Acceleration of backlog growth - The increase in backlog growth was attributed to hiring more account executives and improved client engagement, resulting in a strong Q2 performance [79][81] Question: Current pipeline status and top-of-funnel performance - The pipeline remains strong, with significant opportunities primarily with existing large customers [84] Question: Incumbency as a differentiator in capturing new customers - Incumbency has been beneficial, especially in large organizations, and there is still significant upside potential for growth [86][88] Question: Federal vertical growth and competitive landscape - The federal vertical has shown strong growth, with opportunities for further expansion and partnerships [92][95] Question: Opportunities to accelerate ACB growth - Management highlighted the potential for growth through existing client relationships and the federal vertical, which is still underpenetrated [97][98] Question: Trends in Pega Cloud deal sizes and commitments - The average deal size for Pega Cloud has remained consistent, indicating a balanced approach to new and existing customer commitments [102][103]

Financial Data and Key Metrics Changes - Total Annual Contract Value (ACV) increased by 21% year-over-year, reaching $711 million, up from $588 million in Q1 2019 [40] - Pega Cloud ACV grew by 43%, from $127 million to $182 million [40] - Total revenue for Q1 2020 was $266 million, a 25% increase from $213 million in Q1 2019, driven by a 57% increase in cloud revenue [42] - Non-GAAP net income was $0.05 per share compared to a net loss of $0.12 per share a year ago [43] - Total cash and marketable securities at the end of Q1 2020 was $538 million [44] Business Line Data and Key Metrics Changes - Approximately 95% of new client commitments were either Pega or client cloud, with about 5% being perpetual licenses [42] - Pega Cloud backlog increased by 18% from $351 million to $414 million [41] - Total backlog increased by 19% from $633 million to $754 million [41] Market Data and Key Metrics Changes - Core verticals such as financial services, insurance, healthcare, telecommunications, and government are less exposed to the pandemic's short-term impacts compared to industries like airlines and retail [37] - The company has a strong customer base consisting of large enterprises and federal government clients, which helps mitigate exposure to economic downturns [37] Company Strategy and Development Direction - The company is focused on a shift to a recurring revenue model, which has increased from about 50% to 75% [35] - The introduction of new industry-specific solutions to help clients adapt to COVID-19 while supporting long-term business transformation initiatives [12] - The company is positioning its core architecture for future needs through Project Phoenix, anticipating increased demand for digital transformation solutions [25][27] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the pandemic's impact but remains confident in the company's resilience and ability to navigate challenges [32][36] - There is an expectation for increased demand for intelligent automation and digital transformation solutions in a post-COVID-19 world [47] - The company is monitoring client spending priorities and is prepared to offer flexibility in payment terms [49] Other Important Information - The company announced the appointment of Hayden Stafford as President of Global Client Engagement, effective June 1, 2020 [21] - The first virtual customer engagement summit had over 4,700 registered participants, indicating strong interest in the company's offerings [23] Q&A Session Summary Question: Thoughts on ACV growth despite potential booking declines - Management indicated that while there may be short-term impacts on professional services, the recurring revenue model provides insulation against immediate revenue declines [60][62] Question: Impact of bookings on ACV growth - Management stated that even with a reduction in bookings, ACV could still grow, but significant reductions would hinder achieving the long-term target of 20% growth [65] Question: Customer requests for extended payment terms - Management noted that while some customers may request delayed payment terms, it is not widespread among their traditional clients [71] Question: Pipeline generation and deal delays - Management reported a significant increase in new pipeline generation year-over-year, despite some deals being delayed [85] Question: Key initiatives for new leadership - The new President is expected to accelerate the company's go-to-market strategy and leverage his experience in growing businesses [88]

Pegasystems Inc. (NASDAQ:PEGA) Q4 2019 Earnings Conference Call February 12, 2020 5:00 PM ET Company Participants Kenneth Stillwell - SVP, CFO & Chief Administrative Officer Alan Trefler - Founder & CEO Conference Call Participants Rishi Jaluria - D.A. Davidson Steve Koenig - Wedbush Securities Yun Kim - Rosenblatt Securities Mark Schappel - Benchmark Steve Enders - KeyBanc Operator Good day, everyone and welcome to the Pegasystems' Fourth Quarter 2019 Earnings Results Conference Call. Today's call is being ...

Financial Data and Key Metrics Changes - Total Annual Contract Value (ACV) reached $634 million, an increase of $106 million or 20% year-over-year [27] - Pega Cloud ACV grew by 51% during the same period [27] - Revenue for the first three quarters of 2019 totaled $635 million, effectively flat compared to the same period in 2018 [32] - Pega Cloud revenue increased by 63% to $95 million, while maintenance revenue grew by 6% to $207 million [34] Business Line Data and Key Metrics Changes - Consulting revenue decreased by approximately 15% to $167 million, attributed to a strategic shift towards partners for implementation efforts [35] - Pega Cloud backlog increased by $100 million to $363 million, a 38% increase year-over-year [29] - Total Remaining Performance Obligation (RPO) rose by $86 million to $609 million, a 17% increase compared to the previous year [29] Market Data and Key Metrics Changes - The government sector is experiencing significant growth, with Pega winning new business in various government departments [15][18] - There is a notable increase in demand for digital transformation solutions, particularly in the public sector [39] Company Strategy and Development Direction - The company is focused on transitioning to a recurring revenue model, with 57% of bookings coming from Pega Cloud [28] - The strategy includes increasing sales capacity to better penetrate target accounts, with early returns showing healthy pipeline growth [25] - The company aims to establish a repeatable approach to address focused micro journeys for clients [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the market opportunity and the company's capabilities to help clients succeed [23] - The company is navigating disruptions such as Brexit and trade tariffs, with clients seeking adaptable solutions [6] - Management anticipates that the fourth quarter will be the largest quarter, consistent with historical trends [39] Other Important Information - The company returned approximately $62 million to shareholders, including $7 million in dividends and $55 million in share buybacks [38] - Employee count increased by approximately 13% year-over-year, with more than half of the growth in the go-to-market organization [38] Q&A Session Summary Question: Spending growth and targets - Management indicated that go-to-market investment is on pace with initial targets, with increased investment in Pega Cloud due to higher-than-expected growth [43] Question: Project Phoenix update - Management expressed enthusiasm about Project Phoenix, highlighting positive feedback from clients and the integration of multi-tenancy capabilities [49][50] Question: Changes in customer buying behavior - Management noted a resurgence in interest in the MIA region and emphasized ongoing recruitment efforts to enhance sales coverage [58][60] Question: Sales strategy in the public sector - Management highlighted the importance of partnerships in the public sector and noted an acceleration in growth within this sector [65]