PEGA(PEGA) - 2024 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Pegasystems Inc., including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial line items Unaudited Condensed Consolidated Balance Sheets This table presents the Company's financial position, detailing assets, liabilities, and stockholders' equity as of June 30, 2024, and December 31, 2023 | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Total assets | $1,536,532 | $1,510,736 | | Total liabilities | $1,101,130 | $1,156,898 | | Total stockholders' equity | $435,402 | $353,838 | Unaudited Condensed Consolidated Statements of Operations This table presents the Company's financial performance, including revenue, gross profit, operating income, and net income for the three and six months ended June 30, 2024 and 2023 | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total revenue | $351,153 | $298,268 | $681,300 | $623,740 | | Gross profit | $254,207 | $202,128 | $489,696 | $429,666 | | Income (loss) from operations | $12,966 | $(41,290) | $(7,446) | $(63,496) | | Net income (loss) | $6,613 | $(46,804) | $(5,511) | $(67,578) | | Basic EPS | $0.08 | $(0.56) | $(0.07) | $(0.82) | | Diluted EPS | $0.07 | $(0.56) | $(0.07) | $(0.82) | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) This table presents the Company's net income (loss) and other comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023 | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) | $6,613 | $(46,804) | $(5,511) | $(67,578) | | Total other comprehensive (loss) income, net of tax | $(2,214) | $166 | $(6,387) | $1,709 | | Comprehensive income (loss) | $4,399 | $(46,638) | $(11,898) | $(65,869) | Unaudited Condensed Consolidated Statements of Stockholders' Equity This table details changes in stockholders' equity, including net income (loss), stock-based compensation, and cash dividends, for the periods presented | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Total stockholders' equity | $435,402 | $353,838 | | Net income (loss) (6 months ended) | $6,613 | $(12,124) | | Stock-based compensation (6 months ended) | $36,224 | $36,227 | | Cash dividends declared (6 months ended) | $(2,561) | $(2,496) | Unaudited Condensed Consolidated Statements of Cash Flows This table summarizes cash flows from operating, investing, and financing activities for the six months ended June 30, 2024 and 2023 | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Cash provided by operating activities | $220,243 | $113,752 | | Cash (used in) provided by investing activities | $(209,700) | $15,979 | | Cash provided by (used in) financing activities | $22,503 | $(86,988) | | Net increase in cash, cash equivalents, and restricted cash | $30,204 | $43,753 | | Cash, cash equivalents, and restricted cash, end of period | $263,031 | $188,807 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements, covering accounting policies and specific financial line items Note 1. Basis of Presentation This note clarifies that the financial statements are unaudited, prepared in accordance with SEC interim reporting rules, and should be read in conjunction with the Company's annual 10-K. It also states that all intercompany transactions are eliminated and interim results do not necessarily indicate full-year performance Note 2. Marketable Securities This note provides a breakdown of marketable securities, primarily government and corporate debt, held by the Company, detailing their amortized cost, unrealized gains/losses, and fair value as of June 30, 2024, and December 31, 2023. Maturities range from July 2024 to January 2026 | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------- | :----------------------------- | :----------------------------- | | Government debt (Fair Value) | $12,925 | $11,503 | | Corporate debt (Fair Value) | $393,894 | $181,933 | | Total Marketable Securities (Fair Value) | $406,819 | $193,436 | | Weighted-average remaining maturity | 0.4 years | N/A | Note 3. Receivables, Contract Assets, and Deferred Revenue This note details the Company's accounts receivable, unbilled receivables, contract assets, and deferred revenue. It provides a breakdown of unbilled receivables by expected collection date and contract effective date, and explains the decrease in deferred revenue due to recognition | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Accounts receivable, net | $165,723 | $300,173 | | Unbilled receivables, net | $164,533 | $237,379 | | Long-term unbilled receivables, net | $81,218 | $85,402 | | Total Receivables | $411,474 | $622,954 | | Contract assets | $15,374 | $16,238 | | Long-term contract assets | $19,997 | $20,635 | | Deferred revenue | $352,618 | $377,845 | | Long-term deferred revenue | $2,443 | $2,478 | - The decrease in deferred revenue in the six months ended June 30, 2024, was primarily due to $272.7 million of revenue recognized that was in deferred revenue as of December 31, 2023[30] Note 4. Deferred Commissions This note outlines the balance of deferred commissions and their amortization, which is included in selling and marketing expenses. Amortization increased for both the three and six months ended June 30, 2024 | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------- | :----------------------------- | :----------------------------- | | Deferred commissions | $100,490 | $114,119 | | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization of deferred commissions | $14,994 | $14,750 | $32,276 | $29,027 | Note 5. Goodwill and Other Intangibles This note provides the carrying value of goodwill and other intangible assets, including client-related and technology assets, along with their accumulated amortization and estimated future amortization schedule | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------- | :----------------------------- | :----------------------------- | | Goodwill | $81,410 | $81,611 | | Intangible assets (Net Book Value) | $5,205 | $7,002 | | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization of intangible assets | $1,753 | $2,012 | | Future Estimated Amortization (in thousands) | | :------------------- | | Remainder of 2024: $1,399 | | 2025: $2,605 | | 2026: $874 | | 2027: $327 | | Total: $5,205 | Note 6. Other Assets and Liabilities This note details various other current and long-term assets and liabilities, including income tax receivables, contract assets, restricted cash, accrued expenses (such as cloud hosting and marketing), and other current/long-term liabilities | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Total other current assets | $76,323 | $68,137 | | Total other long-term assets | $302,249 | $314,696 | | Total accrued expenses | $44,875 | $39,941 | | Total other current liabilities | $20,677 | $21,343 | | Total other long-term liabilities | $14,362 | $13,570 | Note 7. Leases This note provides information on lease expenses, right-of-use assets, and operating lease liabilities. It also details the weighted-average remaining lease term, discount rate, and the maturity schedule for lease liabilities | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total lease costs | $7,444 | $7,377 | $13,858 | $15,898 | | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Right of use assets | $68,293 | $64,198 | | Operating lease liabilities (current) | $15,254 | $15,000 | | Long-term operating lease liabilities | $70,202 | $66,901 | | Weighted-average remaining lease term | 6.4 years | 6.8 years | | Weighted-average discount rate | 4.6 % | 4.0 % | | Maturities of Lease Liabilities (in thousands) | | :------------------- | | Remainder of 2024: $7,954 | | 2025: $18,784 | | 2026: $14,384 | | 2027: $13,387 | | 2028: $12,813 | | 2029: $10,099 | | Thereafter: $21,650 | | Total lease payments: $99,071 | Note 8. Debt This note details the Company's debt instruments, including Convertible Senior Notes due March 2025, their conversion and repurchase rights, carrying value, and interest expense. It also covers Capped Call Transactions designed to reduce stock dilution and the $100 million revolving Credit Facility, which was extended to February 2025 | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Convertible senior notes, net | $500,604 | $499,368 | | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Contractual interest expense (Notes) | $942 | $997 | $1,884 | $2,122 | | Amortization of issuance costs (Notes) | $619 | $647 | $1,236 | $1,375 | | Total Interest expense related to Notes | $1,561 | $1,644 | $3,120 | $3,497 | | Capped Call Transactions (in thousands) | | :------------------- | | June 30, 2024: $915 | | December 31, 2023: $893 | - The Credit Facility was amended on April 23, 2024, to extend its expiration date to February 4, 2025[57] - As of June 30, 2024, there were $27.3 million in outstanding letters of credit, but no outstanding cash borrowings[58] Note 9. Restructuring This note details the Company's restructuring activities, primarily focused on optimizing its go-to-market strategy and reassessing office space needs. It provides a breakdown of restructuring expenses and changes in accrued employee severance and related benefits | Restructuring Expense Type | Three Months Ended June 30, 2024 (in thousands) | | :----------------------------------- | :--------------------------------------- | | Office space reduction | $1,257 | | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Accrued employee severance and related benefits (January 1) | $8,095 | $18,573 | | Costs incurred | $(238) | $2,387 | | Cash disbursements | $(3,852) | $(17,521) | | Accrued employee severance and related benefits (June 30) | $3,836 | $3,624 | Note 10. Fair Value Measurements This note explains the Company's fair value hierarchy (Level 1, 2, and 3) and provides fair value measurements for cash equivalents, marketable securities, Capped Call Transactions, and venture investments. It also details changes in venture investments and the fair value of Convertible Senior Notes | Asset/Liability | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Cash equivalents (Level 1) | $18,345 | $54,357 | | Marketable securities (Level 2) | $406,819 | $193,436 | | Capped Call Transactions (Level 2) | $915 | $893 | | Venture investments (Level 3) | $21,047 | $19,450 | | Convertible Senior Notes (Fair Value, Level 2) | $485,300 | $466,500 | Note 11. Revenue This note provides a detailed breakdown of revenue by geographic region and revenue stream (Subscription license, Perpetual license, Maintenance, Pega Cloud, Consulting). It also presents the Company's remaining performance obligations (backlog) by expected recognition period | Geographic Region | 3 Months Ended June 30, 2024 (%) | 3 Months Ended June 30, 2023 (%) | 6 Months Ended June 30, 2024 (%) | 6 Months Ended June 30, 2023 (%) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | U.S. | 54 % | 50 % | 55 % | 54 % | | Other Americas | 6 % | 7 % | 6 % | 6 % | | U.K. | 11 % | 10 % | 10 % | 11 % | | Europe (excl. U.K.), Middle East, Africa | 15 % | 18 % | 17 % | 17 % | | Asia-Pacific | 14 % | 15 % | 12 % | 12 % | | Revenue Stream | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Subscription services | $214,430 | $197,105 | $426,333 | $384,614 | | Subscription license | $84,647 | $41,197 | $147,985 | $125,724 | | Consulting | $52,040 | $58,387 | $106,087 | $111,420 | | Perpetual license | $36 | $1,579 | $895 | $1,982 | | Total revenue | $351,153 | $298,268 | $681,300 | $623,740 | | Remaining Performance Obligations (Backlog) (in thousands) | | :------------------- | | As of June 30, 2024: $1,406,249 | | As of June 30, 2023: $1,266,096 | Note 12. Stock-Based Compensation This note details the stock-based compensation expense recognized across various functional areas and provides information on grants of restricted stock units (RSUs) and stock options, including their fair value and vesting conditions | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total stock-based compensation expense | $36,224 | $36,227 | $71,005 | $78,784 | | Income tax benefit | $(554) | $(581) | $(865) | $(1,253) | | Grants (Six Months Ended June 30, 2024) | | :------------------- | | Restricted stock units: 1,266 thousand units, Total Fair Value $78,071 thousand | | Non-qualified stock options: 1,738 thousand units, Total Fair Value $44,874 thousand | | Performance stock options: 566 thousand units, Total Fair Value $13,921 thousand | - As of June 30, 2024, the Company had $149.7 million of unrecognized stock-based compensation expense, expected to be recognized over a weighted-average period of 1.7 years[72] Note 13. Income Taxes This note discusses the Company's provision for income taxes and effective income tax rate, which was not meaningful for the six months ended June 30, 2024, due to the jurisdictional mix, timing of earnings/losses, and valuation allowances on deferred tax assets. The Company is also monitoring the impact of OECD Pillar Two global minimum tax regulations | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for income taxes | $5,604 | $11,850 | | Effective income tax rate | not meaningful | (21)% | - The effective income tax rate is impacted by the jurisdictional mix and timing of actual vs. projected earnings (losses), and valuation allowances on deferred tax assets in the U.S. and U.K.[75] - The Company anticipates meeting transitional safe harbors for OECD Pillar Two regulations in most jurisdictions for 2024, with any remaining top-up tax being immaterial[77][128] Note 14. Earnings (Loss) Per Share This note provides the calculation of basic and diluted earnings (loss) per share, including the weighted-average number of common shares outstanding and the dilutive effect of stock options, RSUs, and convertible senior notes | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) (in thousands) | $6,613 | $(46,804) | $(5,511) | $(67,578) | | Basic EPS | $0.08 | $(0.56) | $(0.07) | $(0.82) | | Diluted EPS | $0.07 | $(0.56) | $(0.07) | $(0.82) | | Weighted-average common shares outstanding (Basic, in thousands) | 85,157 | 83,039 | 84,712 | 82,823 | | Weighted-average common shares outstanding (Diluted, in thousands) | 88,500 | 83,039 | 84,712 | 82,823 | - The shares underlying the conversion options in the Company's Notes (approximately 3.7 million shares) are included using the if-converted method if dilutive[80] - Capped Call Transactions (approximately 3.7 million shares equivalent) are excluded from diluted EPS as their effect would be anti-dilutive[81] Note 15. Commitments and Contingencies This note outlines the Company's significant legal proceedings, including the Appian Corp. v. Pegasystems Inc. trade secret misappropriation lawsuit (with a $2 billion judgment under appeal), a securities class action lawsuit with a proposed $35 million settlement, and derivative litigation. It also mentions an ongoing SEC inquiry related to the Appian litigation's accounting treatment - In Appian Corp. v. Pegasystems Inc., a jury awarded $2.037 billion for trade secret misappropriation. The Company filed an appeal, and the judgment is suspended during the appeal process[87] - A securities class action lawsuit has a proposed settlement of $35 million, with $32.4 million paid by the Company and $2.6 million by insurance carriers, pending final court approval[89] - The Company is involved in derivative litigation alleging breach of fiduciary duties related to the Appian lawsuit and an SEC inquiry regarding the accounting treatment of the Appian litigation[91][92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the three and six months ended June 30, 2024. It includes forward-looking statements, a business overview, key performance metrics, critical accounting policies, and a detailed analysis of revenue, gross profit, operating expenses, and liquidity Forward-Looking Statements This subsection serves as a cautionary note regarding statements about future events, emphasizing that they are subject to risks and uncertainties and that the Company does not undertake to publicly update or revise them - Forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties, including future financial performance, liquidity, revenue recognition, and ongoing litigation[95][96] Non-GAAP Measures This subsection explains the Company's use of non-GAAP financial measures to provide investors with a clearer understanding of core operating results and prospects, noting that these measures are not a substitute for GAAP - Non-GAAP financial measures are used to help investors understand core operating results and prospects, consistent with management's assessment and forecasting of performance, excluding one-time charges and items outside normal operations[99] Business Overview This subsection describes Pegasystems' core business, which involves developing, marketing, licensing, hosting, and supporting enterprise software. The Company's low-code platform, powered by AI, helps Global 2000 organizations and government agencies achieve business agility, enhance customer experiences, and automate critical processes - Pegasystems develops enterprise software with a powerful, low-code platform for workflow automation and AI-powered decisioning, enabling hyper-personalization, streamlined customer service, and automated business processes[100] - Target clients are Global 2000 organizations and government agencies seeking solutions to increase business agility, drive growth, improve productivity, and reduce risk[101] Performance Metrics This subsection details the key performance metrics used by management to analyze and assess overall performance, including Annual Contract Value (ACV), Free Cash Flow, and Remaining Performance Obligations (Backlog), providing their definitions and reconciliations Annual Contract Value (ACV) ACV, representing the annualized value of active contracts, increased by 12% year-over-year to $1,305 million as of June 30, 2024, or 13% on a constant currency basis | Metric | June 30, 2023 (in millions) | June 30, 2024 (in millions) | 1-Year Change | | :---------------------- | :-------------------------- | :-------------------------- | :------------ | | ACV | $1,164 | $1,305 | 12 % | | Constant currency ACV | $1,164 | $1,310 | 13 % | Cash Flow (Free Cash Flow) Free cash flow, defined as cash from operating activities less investment in property and equipment, significantly increased by 119% to $218.4 million for the six months ended June 30, 2024. This was driven by higher operating cash flow and reduced capital expenditures | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :----- | | Cash provided by operating activities | $220,243 | $113,752 | 94 % | | Investment in property and equipment | $(1,857) | $(13,933) | | | Free cash flow | $218,386 | $99,819 | 119 % | - Supplemental information highlights a $32.4 million litigation settlement (net of recoveries) and a decrease in restructuring cash disbursements from $17.5 million in H1 2023 to $3.85 million in H1 2024[105][106][107] Remaining Performance Obligations (Backlog) The GAAP backlog, representing expected future revenue from existing non-cancellable contracts, grew by 11% year-over-year to $1,406 million as of June 30, 2024, or 12% on a constant currency basis | Metric | June 30, 2023 (in millions) | June 30, 2024 (in millions) | 1-Year Growth Rate | | :---------------------- | :-------------------------- | :-------------------------- | :----------------- | | Backlog - GAAP | $1,266 | $1,406 | 11 % | | Constant currency backlog | $1,266 | $1,413 | 12 % | Critical Accounting Policies This subsection states that no significant changes have been made to the critical accounting policies previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 - No significant changes have been made to the critical accounting policies disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023[113] Results of Operations This subsection provides a detailed analysis of the Company's revenue, gross profit, and operating expenses for the three and six months ended June 30, 2024, highlighting key drivers of changes and their impact on financial performance Revenue Total revenue increased by 18% for the three months and 9% for the six months ended June 30, 2024, primarily driven by a 105% surge in subscription license revenue for the quarter and 19% growth in Pega Cloud revenue. Consulting and perpetual license revenues experienced declines | Revenue Stream | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (%) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (%) | | :-------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Pega Cloud | $134,086 | $115,063 | 17 % | $264,988 | $222,942 | 19 % | | Maintenance | $80,344 | $82,042 | (2)% | $161,345 | $161,672 | 0 % | | Subscription services | $214,430 | $197,105 | 9 % | $426,333 | $384,614 | 11 % | | Subscription license | $84,647 | $41,197 | 105 % | $147,985 | $125,724 | 18 % | | Total Subscription | $299,077 | $238,302 | 26 % | $574,318 | $510,338 | 13 % | | Consulting | $52,040 | $58,387 | (11)% | $106,087 | $111,420 | (5)% | | Perpetual license | $36 | $1,579 | (98)% | $895 | $1,982 | (55)% | | Total Revenue | $351,153 | $298,268 | 18 % | $681,300 | $623,740 | 9 % | - Pega Cloud revenue increased due to additional investments by existing clients, while subscription license revenue grew significantly due to several large multi-year contracts[114][115] - Maintenance revenue decreased due to a shift to Pega Cloud-based offerings, and consulting revenue declined due to decreases in consultant billable hours[115][116] Gross Profit Gross profit increased by 26% for the three months and 14% for the six months ended June 30, 2024. Pega Cloud gross profit percentage improved due to increased cost efficiency, while consulting gross profit percentage decreased significantly due to lower consultant utilization rates | Gross Profit Stream | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (%) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (%) | | :-------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Pega Cloud | $104,331 | $84,761 | 23 % | $205,636 | $162,390 | 27 % | | Maintenance | $73,861 | $75,561 | (2)% | $148,635 | $148,577 | 0 % | | Subscription services | $178,192 | $160,322 | 11 % | $354,271 | $310,967 | 14 % | | Subscription license | $84,170 | $40,574 | 107 % | $146,865 | $124,382 | 18 % | | Total Subscription | $262,362 | $200,896 | 31 % | $501,136 | $435,349 | 15 % | | Consulting | $(8,191) | $(323) | (2436)% | $(12,326) | $(7,638) | (61)% | | Perpetual license | $36 | $1,555 | (98)% | $886 | $1,955 | (55)% | | Total Gross Profit | $254,207 | $202,128 | 26 % | $489,696 | $429,666 | 14 % | - Pega Cloud gross profit percentage increased due to improved cost efficiency in hosting services and employee compensation[117] - Consulting gross profit percentage decreased primarily due to lower consultant utilization rates[118] Operating Expenses Operating expenses saw a decrease in selling and marketing due to reduced headcount from go-to-market optimization, while general and administrative expenses increased due to higher incentive-based compensation. Litigation settlement costs significantly impacted the six-month operating expenses | Operating Expense | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (%) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Selling and marketing | $139,761 | $143,858 | (3)% | $267,456 | $293,655 | (9)% | | Research and development | $75,425 | $73,931 | 2 % | $147,538 | $149,307 | (1)% | | General and administrative | $25,420 | $23,462 | 8 % | $48,947 | $46,572 | 5 % | | Litigation settlement, net of recoveries | $0 | $0 | * | $32,403 | $0 | * | | Restructuring | $635 | $2,167 | (71)% | $798 | $3,628 | (78)% | | Total Operating Expenses | $241,241 | $243,418 | (1)% | $497,142 | $493,162 | 1 % | - Selling and marketing expenses decreased due to reduced headcount as part of go-to-market strategy optimization[120] - General and administrative expenses increased due to higher incentive-based compensation[122] - A $32.4 million litigation settlement, net of recoveries, significantly increased operating expenses for the six months ended June 30, 2024[125] Other Income and Expenses Interest income saw a substantial increase due to higher investment balances and market interest rates. Foreign currency transaction gains/losses fluctuated, and other income, net, decreased significantly due to prior year gains from convertible senior note repurchases and venture investments | Item | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (%) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Foreign currency transaction gain (loss) | $437 | $(3,290) | * | $(2,825) | $(5,965) | 53 % | | Interest income | $6,785 | $1,814 | 274 % | $12,066 | $3,299 | 266 % | | Interest expense | $(1,656) | $(1,778) | 7 % | $(3,408) | $(3,696) | 8 % | | (Loss) income on capped call transactions | $(3,277) | $(1,361) | (141)% | $22 | $1,845 | (99)% | | Other income, net | $0 | $5,702 | (100)% | $1,684 | $12,285 | (86)% | - Interest income increased significantly due to higher investment balances and market interest rates[126] - Other income, net, decreased primarily due to prior year gains from repurchases of convertible senior notes and venture investments[126] Provision for Income Taxes The effective income tax rate for the six months ended June 30, 2024, was not meaningful due to the jurisdictional mix, timing of earnings/losses, and valuation allowances on deferred tax assets in the U.S. and U.K. The Company is also evaluating the potential impact of OECD Pillar Two global minimum tax regulations | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for income taxes | $5,604 | $11,850 | | Effective income tax rate | not meaningful | (21)% | - The effective income tax rate is not meaningful due to the jurisdictional mix, timing of actual vs. projected earnings (losses), and valuation allowances on deferred tax assets in the U.S. and U.K.[127] - The Company anticipates meeting transitional safe harbors for OECD Pillar Two regulations in most jurisdictions for 2024, with any remaining top-up tax being immaterial[128] Liquidity and Capital Resources This subsection discusses the Company's liquidity position, asserting that current cash, marketable securities, operating cash flow, borrowing capacity, and capital market access are sufficient to fund operations, settle convertible senior notes, execute stock repurchases, and pay dividends for at least the next 12 months - The Company believes its current liquidity sources are sufficient to fund operations, settle convertible senior notes, stock repurchases, and quarterly cash dividends for at least the next 12 months[129] Cash Flow Summary Cash provided by operating activities significantly increased to $220.2 million for the six months ended June 30, 2024, while investing activities shifted to a net use of cash due to increased investments in financial instruments and reduced property/equipment spending | Cash Flow Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating activities | $220,243 | $113,752 | | Investing activities | $(209,700) | $15,979 | | Financing activities | $22,503 | $(86,988) | | Net increase in cash, cash equivalents, and restricted cash | $30,204 | $43,753 | - The change in cash provided by operating activities was primarily due to growth in client collections and cost-efficiency initiatives[131] - The change in cash (used in) provided by investing activities was primarily due to investments in financial instruments and reduced investment in property and equipment[132] Debt Financing The Company has $502.3 million in outstanding Convertible Senior Notes due March 2025 and a $100 million senior secured revolving Credit Facility, which was amended to extend its expiration date to February 4, 2025. As of June 30, 2024, there were no outstanding cash borrowings under the Credit Facility - As of June 30, 2024, $502.3 million in aggregate principal amount of Convertible Senior Notes were outstanding, maturing on March 1, 2025[133] - The $100 million Credit Facility's expiration date was extended to February 4, 2025. As of June 30, 2024, $27.3 million in outstanding letters of credit reduced available borrowing capacity, with no outstanding cash borrowings[134] Stock Repurchase Program The Board of Directors extended the Company's current share repurchase program to June 30, 2025, maintaining a remaining repurchase authority of $60 million | Metric | June 30, 2024 (in thousands) | | :--------------------------------------- | :----------------------------- | | Remaining stock repurchase authority | $60,000 | - The Board of Directors extended the expiration date of the current share repurchase program from June 30, 2024, to June 30, 2025[135] Common Stock Repurchases Common stock repurchases for the three months ended June 30, 2024, totaled 7,000 shares at an average price of $57.86 per share, primarily for tax withholdings related to net settlement of equity awards | Item | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | | :--------------------------------------- | :--------------------------------------- | :--------------------------- | | April 1, 2024 - April 30, 2024 | 1 | $58.28 | | June 1, 2024 - June 30, 2024 | 6 | $57.81 | | Total (3 months ended June 30, 2024) | 7 | $57.86 | - Repurchases include shares withheld to cover the option exercise price and tax withholding obligations for stock compensation awards subject to net settlement provisions[151] Dividends The Company intends to continue paying a quarterly cash dividend of $0.03 per share, with total dividend payments to stockholders amounting to $5.065 million for the six months ended June 30, 2024 - The Company intends to pay a quarterly cash dividend of $0.03 per share, though the program may be terminated or modified[137] | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Dividend payments to stockholders | $5,065 | $4,962 | Contractual Obligations As of June 30, 2024, the Company's total contractual obligations amounted to approximately $1.095 billion, primarily consisting of convertible senior notes, purchase obligations for software licenses and hosting services, and operating lease obligations | Obligation Type | Total (in thousands) | | :-------------------------- | :------------------- | | Convertible senior notes | $506,037 | | Purchase obligations | $487,762 | | Operating lease obligations | $99,071 | | Venture investment commitments | $1,000 | | Liability for uncertain tax positions | $858 | | Total Contractual Obligations | $1,094,728 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the Company's exposure to market risk, specifically focusing on foreign currency fluctuations. It details both translation risk, where international operations' expenses and sales are denominated in foreign currencies, and remeasurement risk, particularly for the U.K. subsidiary's monetary assets and liabilities Foreign Currency Exposure The Company is exposed to foreign currency fluctuations, with a hypothetical 10% strengthening of the U.S. dollar potentially decreasing revenue by 4% and net income by 56% for the six months ended June 30, 2024. Remeasurement risk, primarily from the U.K. subsidiary, could result in significant foreign currency losses - A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in a 4% decrease in revenue and a 56% decrease in net income for the six months ended June 30, 2024[142] - A hypothetical 10% strengthening in the British pound against the Australian dollar, Euro, and U.S. dollar would result in a foreign currency loss of $12.86 million for the six months ended June 30, 2024[144] Item 4. Controls and Procedures This section confirms that the Company's management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2024, concluding they were effective. No material changes to internal control over financial reporting occurred during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024[145] - There have been no changes in internal control over financial reporting during the quarter ended June 30, 2024, that have materially affected or are reasonably likely to materially affect it[146] PART II - OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, equity security sales, other information, and a list of exhibits Item 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings provided in Note 15 of the financial statements, which includes updates on the Appian lawsuit, securities class action, and derivative litigation - Information on legal proceedings is incorporated by reference from Note 15. Commitments and Contingencies in Part I, Item 1 of this Quarterly Report[148] Item 1A. Risk Factors This section advises readers to carefully consider the risk factors outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as these factors could materially impact the business, financial condition, and future results - Readers are encouraged to review risk factors identified in Item 1A. 'Risk Factors' of the Annual Report on Form 10-K for the year ended December 31, 2023, as they could materially affect the business[149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchases for the three months ended June 30, 2024, which primarily involved shares withheld to cover tax withholding obligations for stock compensation awards | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | | :--------------------------- | :--------------------------------------- | :--------------------------- | | April 1, 2024 - April 30, 2024 | 1 | $58.28 | | May 1, 2024 - May 31, 2024 | 0 | $0.00 | | June 1, 2024 - June 30, 2024 | 6 | $57.81 | | Total (3 months ended June 30, 2024) | 7 | $57.86 | - Repurchases include shares withheld to cover the option exercise price and tax withholding obligations for stock compensation awards subject to net settlement provisions[151] Item 5. Other Information This section discloses that Richard H. Jones, a director, entered into a Rule 10b5-1 trading plan on April 30, 2024, to sell an aggregate of 50,000 shares of common stock, with the plan set to terminate on April 30, 2025 - Director Richard H. Jones entered into a Rule 10b5-1 trading plan on April 30, 2024, to sell an aggregate of 50,000 shares of common stock, with the plan terminating on April 30, 2025[152] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and various Inline XBRL documents Signature This section provides the official signature and date of filing for the quarterly report - The report was signed on July 24, 2024, by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer[157]