PEGA(PEGA) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Pegasystems Inc., including the balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounts, and recent financial activities for the periods ended September 30, 2024 and December 31, 2023 Unaudited Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific reporting dates Unaudited Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Assets | | | | Total current assets | $1,119,080 | $1,029,027 | | Total assets | $1,579,232 | $1,510,736 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $1,024,543 | $577,059 | | Total liabilities | $1,106,209 | $1,156,898 | | Total stockholders' equity | $473,023 | $353,838 | - Total current liabilities significantly increased from $577,059 thousand at December 31, 2023, to $1,024,543 thousand at September 30, 2024, primarily due to the reclassification of convertible senior notes from long-term to current liabilities[5] Unaudited Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss over specific interim periods Unaudited Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue | $325,050 | $334,643 | $1,006,350 | $958,383 | | Gross profit | $228,344 | $240,880 | $718,040 | $670,546 | | (Loss) from operations | $(11,661) | $(10,816) | $(19,107) | $(74,312) | | Net (loss) | $(14,390) | $(7,279) | $(19,901) | $(74,857) | | Basic (Loss) per share | $(0.17) | $(0.09) | $(0.23) | $(0.90) | | Diluted (Loss) per share | $(0.17) | $(0.09) | $(0.23) | $(0.90) | - The company reported an increased net loss for the three months ended September 30, 2024, to $(14,390) thousand from $(7,279) thousand in the prior year, despite a decrease in total operating expenses for the nine-month period[7] Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Reports the net loss and other comprehensive income or loss components for the interim periods Unaudited Condensed Consolidated Statements of Comprehensive (Loss) (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net (loss) | $(14,390) | $(7,279) | $(19,901) | $(74,857) | | Total other comprehensive income (loss), net of tax | $10,864 | $(3,727) | $4,477 | $(2,018) | | Comprehensive (loss) | $(3,526) | $(11,006) | $(15,424) | $(76,875) | - Total other comprehensive income significantly improved to $10,864 thousand for the three months ended September 30, 2024, compared to a loss of $(3,727) thousand in the prior year, primarily driven by foreign currency translation adjustments[9] Unaudited Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including common stock and accumulated deficit Unaudited Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Dec 31, 2023 | Sep 30, 2024 | | :------------------------------------ | :----------- | :----------- | | Total stockholders' equity | $353,838 | $473,023 | | Additional paid-in capital | $379,584 | $514,173 | | Accumulated deficit | $(8,705) | $(28,606) | | Common stock shares outstanding | 83,840 | 85,808 | - Total stockholders' equity increased by $119,185 thousand from December 31, 2023, to September 30, 2024, primarily due to increases in additional paid-in capital from stock compensation plans and stock-based compensation, despite an increase in accumulated deficit[13] Unaudited Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Cash provided by operating activities | $250,697 | $137,920 | | Cash (used in) investing activities | $(215,999) | $(24,176) | | Cash provided by (used in) financing activities | $26,949 | $(85,031) | | Net increase in cash, cash equivalents, and restricted cash | $66,238 | $27,092 | | Cash, cash equivalents, and restricted cash, end of period | $299,065 | $172,146 | - Cash provided by operating activities significantly increased by 81.7% to $250,697 thousand for the nine months ended September 30, 2024, compared to $137,920 thousand in the prior year[15] - Cash used in investing activities increased substantially to $(215,999) thousand for the nine months ended September 30, 2024, from $(24,176) thousand in the prior year, primarily due to increased purchases of investments[15] Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1. BASIS OF PRESENTATION Explains the accounting principles and conventions used in preparing the interim financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for interim financial reporting and U.S. GAAP, including only normal recurring adjustments, and should be read in conjunction with the Company's 2023 Annual Report on Form 10-K[17] NOTE 2. MARKETABLE SECURITIES Details the company's investments in marketable securities, including their fair values and maturities Marketable Securities (in thousands) | Type | Sep 30, 2024 Fair Value | Dec 31, 2023 Fair Value | | :---------------- | :---------------------- | :---------------------- | | Government debt | $11,666 | $11,503 | | Corporate debt | $403,675 | $181,933 | | Total | $415,341 | $193,436 | - As of September 30, 2024, marketable securities had a weighted-average remaining maturity of 0.3 years, with maturities ranging from October 2024 to January 2026[18] NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Presents information on accounts receivable, contract assets, and deferred revenue balances Receivables (in thousands) | Type | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------- | :----------- | :----------- | | Accounts receivable, net | $173,623 | $300,173 | | Unbilled receivables, net | $157,281 | $237,379 | | Long-term unbilled receivables, net | $77,576 | $85,402 | | Total | $408,480 | $622,954 | Deferred Revenue (in thousands) | Type | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------- | :----------- | :----------- | | Deferred revenue | $345,574 | $377,845 | | Long-term deferred revenue | $2,183 | $2,478 | | Total | $347,757 | $380,323 | - Deferred revenue decreased in the nine months ended September 30, 2024, primarily because $340.4 million of revenue recognized during the period from deferred revenue exceeded new billings[24] NOTE 4. DEFERRED COMMISSIONS Reports the balances and amortization of deferred commission expenses Deferred Commissions (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Deferred commissions | $98,415 | $114,119 | | Amortization of deferred commissions (9 months) | $47,143 | $43,974 | NOTE 5. GOODWILL AND OTHER INTANGIBLES Provides details on the company's goodwill and other intangible assets, including their net book values Goodwill and Intangible Assets (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Goodwill | $81,568 | $81,611 | | Net Book Value of Intangible Assets | $4,533 | $7,002 | - Goodwill remained relatively stable, while the net book value of intangible assets decreased from $7,002 thousand to $4,533 thousand, reflecting ongoing amortization[25][26] NOTE 6. OTHER ASSETS AND LIABILITIES Lists various other current and long-term assets and liabilities, including income tax receivables and accrued expenses Other Current Assets (in thousands) | Type | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------- | :----------- | :----------- | | Income tax receivables | $29,264 | $4,804 | | Contract assets | $15,719 | $16,238 | | Total other current assets | $85,186 | $68,137 | Other Long-Term Assets (in thousands) | Type | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------- | :----------- | :----------- | | Deferred commissions | $98,415 | $114,119 | | Right of use assets | $63,124 | $64,198 | | Property and equipment | $42,871 | $47,279 | | Total other long-term assets | $301,008 | $314,696 | Accrued Expenses (in thousands) | Type | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------- | :----------- | :----------- | | Cloud hosting | $12,840 | $1,358 | | Outside professional services | $12,684 | $10,419 | | Income and other taxes | $3,384 | $15,428 | | Total accrued expenses | $41,236 | $39,941 | NOTE 7. LEASES Discloses information about the company's lease arrangements, including lease costs and key lease metrics Lease Expenses (in thousands) | Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Fixed lease costs | $6,848 | $4,718 | $16,381 | $14,979 | | Total lease costs | $9,092 | $7,632 | $22,950 | $23,530 | Lease Metrics | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Weighted-average remaining lease term | 6.3 years | 6.8 years | | Weighted-average discount rate | 4.6% | 4.0% | - Cash paid for operating leases decreased to $13,249 thousand for the nine months ended September 30, 2024, from $14,378 thousand in the prior year[37] NOTE 8. DEBT Details the company's debt obligations, including convertible senior notes and revolving credit facilities - The Company issued $600 million in Convertible Senior Notes in February 2020, due March 1, 2025, with an annual interest rate of 0.75%; noteholders can convert their Notes at any time beginning September 1, 2024[38][39] Carrying Value of Convertible Senior Notes (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Principal | $502,270 | $502,270 | | Convertible senior notes, net | $501,225 | $499,368 | - The Company's $100 million senior secured revolving credit agreement was amended on April 23, 2024, extending its expiration date to February 4, 2025, with no outstanding cash borrowings but $27.3 million in outstanding letters of credit as of September 30, 2024[48] NOTE 9. RESTRUCTURING Reports expenses and activities related to the company's restructuring initiatives Restructuring Expenses (in thousands) | Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :-------------------------- | :------------------------------ | :------------------------------ | | Office space reduction | $2,882 | $17,236 | | Employee severance and related benefits | — | $17,236 | | Total restructuring expense | $2,882 | $17,236 | - Restructuring activities in the three months ended September 30, 2024, primarily involved office space reduction, totaling $2,882 thousand, a significant decrease from $17,236 thousand in the prior year[49] NOTE 10. FAIR VALUE MEASUREMENTS Provides fair value measurements for various assets and liabilities, categorized by valuation hierarchy levels Assets Measured at Fair Value (in thousands) | Type | Sep 30, 2024 Total Fair Value | Dec 31, 2023 Total Fair Value | | :------------------------------------ | :---------------------------- | :---------------------------- | | Cash equivalents | $16,760 | $54,357 | | Marketable securities | $415,341 | $193,436 | | Capped Call Transactions | $226 | $893 | | Venture investments | $21,172 | $19,450 | - The fair value of Convertible Senior Notes increased to $492.5 million as of September 30, 2024, from $466.5 million as of December 31, 2023, and is classified within Level 2 of the fair value hierarchy[54] NOTE 11. REVENUE Presents a detailed breakdown of revenue by geographic region and service type Geographic Revenue (in thousands) | Region | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | U.S. | $526,332 (53%) | $489,645 (51%) | | Other Americas | $71,936 (7%) | $58,013 (6%) | | United Kingdom | $108,338 (11%) | $112,751 (12%) | | Europe (excluding U.K.), Middle East, and Africa | $175,255 (17%) | $173,551 (18%) | | Asia-Pacific | $124,489 (12%) | $124,423 (13%) | | Total revenue | $1,006,350 (100%) | $958,383 (100%) | Revenue Streams (in thousands) | Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Pega Cloud | $144,108 | $118,040 | $409,096 | $340,982 | | Maintenance | $80,702 | $83,538 | $242,047 | $245,210 | | Subscription services | $224,810 | $201,578 | $651,143 | $586,192 | | Subscription license | $45,420 | $74,342 | $193,405 | $200,066 | | Consulting | $54,364 | $55,976 | $160,451 | $167,396 | | Perpetual license | $456 | $2,747 | $1,351 | $4,729 | | Total revenue | $325,050 | $334,643 | $1,006,350 | $958,383 | - Remaining performance obligations (backlog) increased to $1,475,283 thousand as of September 30, 2024, from $1,265,367 thousand as of September 30, 2023, with 53% expected to be recognized within one year[58][59] NOTE 12. STOCKHOLDERS' EQUITY Details stock-based compensation expenses and the company's share repurchase program Stock-Based Compensation Expense (in thousands) | Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $6,894 | $6,410 | $20,558 | $22,497 | | Selling and marketing | $14,169 | $10,401 | $41,621 | $43,410 | | Research and development | $7,308 | $7,375 | $22,779 | $24,286 | | General and administrative | $8,842 | $7,113 | $23,260 | $19,890 | | Total expense | $37,213 | $31,299 | $108,218 | $110,083 | - As of September 30, 2024, the Company had $119.6 million of unrecognized stock-based compensation expense, expected to be recognized over a weighted-average period of 1.6 years[61] - The Board of Directors extended the share repurchase program to December 31, 2025, and increased the authorized repurchase by $250 million to $310 million as of October 22, 2024[61] NOTE 13. INCOME TAXES Discusses the company's income tax provision and effective income tax rate Effective Income Tax Rate | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Provision for income taxes | $8,369 | $15,395 | | Effective income tax rate | (73)% | (26)% | - The effective income tax rate for the nine months ended September 30, 2024, was (73)%, impacted by the jurisdictional mix of earnings/losses, valuation allowance on deferred tax assets in the U.S. and U.K., and a near break-even year-to-date pretax loss[63] NOTE 14. (LOSS) PER SHARE Provides calculations for basic and diluted loss per share (Loss) Per Share (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net (loss) | $(14,390) | $(7,279) | $(19,901) | $(74,857) | | Weighted-average common shares outstanding | 85,625 | 83,336 | 85,018 | 82,996 | | (Loss) per share, basic | $(0.17) | $(0.09) | $(0.23) | $(0.90) | | (Loss) per share, diluted | $(0.17) | $(0.09) | $(0.23) | $(0.90) | - All dilutive securities, including stock options, RSUs, and convertible senior notes, were excluded from diluted EPS calculation as their inclusion would be anti-dilutive due to the net loss[64] NOTE 15. COMMITMENTS AND CONTINGENCIES Discloses information on ongoing legal proceedings and other contingent liabilities - The Company is a defendant in ongoing litigation with Appian Corp., where a jury awarded $2.06 billion in damages for trade secret misappropriation, with the Court of Appeals of Virginia reversing the judgment and ordering a new trial, which Appian has appealed to the Supreme Court of Virginia[68] - A class action lawsuit alleging securities law violations against the Company and its CEO was preliminarily settled for $35 million, with final approval granted by the Court on September 19, 2024[68] - The SEC concluded its investigation into the Company's accounting treatment of the Appian litigation and, as of September 9, 2024, does not intend to recommend any enforcement action against the Company[71] 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, including forward-looking statements, non-GAAP measures, business overview, performance metrics, critical accounting policies, and a detailed analysis of revenue, gross profit, operating expenses, other income/expenses, income taxes, and liquidity and capital resources FORWARD-LOOKING STATEMENTS Cautions readers about statements regarding future events that involve risks and uncertainties - The report contains forward-looking statements regarding future financial performance, liquidity, capital resources, revenue recognition, client demand, reliance on key personnel and third-party providers, debt obligations, foreign currency, cyber-attacks, intellectual property rights, ongoing litigation, client retention, and growth management[73] NON-GAAP MEASURES Explains the use and limitations of non-GAAP financial measures in assessing performance - Non-GAAP financial measures are used by management to understand core operating results and prospects, assess performance, and establish goals, but are not a substitute for GAAP measures[74] BUSINESS OVERVIEW Describes the company's core business, products, and target market - Pegasystems Inc. develops, markets, licenses, hosts, and supports enterprise software, offering a low-code platform for workflow automation and AI-powered decisioning to Global 2000 organizations and government agencies[75][76] Performance metrics Presents key operational and financial metrics used to evaluate the company's business performance Annual contract value ("ACV") Details the annual contract value for various service types, indicating recurring revenue streams Annual Contract Value (ACV) (in millions) | Metric | Sep 30, 2024 | Sep 30, 2023 | 1-Year Change | | :------------------------------------ | :----------- | :----------- | :------------ | | Pega Cloud | $640.6 | $494.6 | 30% | | Maintenance | $306.8 | $319.3 | (4)% | | Subscription services | $947.3 | $813.8 | 16% | | Subscription license | $412.7 | $355.1 | 16% | | Total ACV | $1,360.0 | $1,168.9 | 16% | | Constant currency ACV | $1,332.0 | $1,169.0 | 14% | - Total ACV increased by 16% to $1,360.0 million as of September 30, 2024, driven by a 30% growth in Pega Cloud ACV[78] Cash flow Summarizes the company's cash generation from operating activities and its free cash flow Cash Flow (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change | | :------------------------------------ | :----------------------------- | :----------------------------- | :----- | | Cash provided by operating activities | $250,697 | $137,920 | 82% | | Investment in property and equipment | $(4,921) | $(14,271) | | | Free cash flow | $245,776 | $123,649 | 99% | - Free cash flow increased by 99% to $245,776 thousand for the nine months ended September 30, 2024, primarily due to an 82% increase in cash provided by operating activities and reduced investment in property and equipment[82] Remaining performance obligations ("Backlog") Reports the total value of future revenue from existing customer contracts Backlog (in millions) | Metric | Sep 30, 2024 | Sep 30, 2023 | 1-Year Growth Rate | | :------------------------------------ | :----------- | :----------- | :----------------- | | Backlog - GAAP | $1,475 | $1,265 | 17% | | Constant currency backlog | $1,432 | $1,265 | 13% | - GAAP backlog grew by 17% to $1,475 million as of September 30, 2024, indicating strong future revenue from existing non-cancellable contracts[84] CRITICAL ACCOUNTING POLICIES Confirms no significant changes to the company's key accounting policies - No significant changes were made to the Company's critical accounting policies as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023[86] RESULTS OF OPERATIONS Analyzes the company's financial performance across revenue, gross profit, and operating expenses Revenue Provides a detailed analysis of revenue trends by type and their underlying drivers Revenue by Type (in thousands) | Type | Three Months Ended Sep 30, 2024 | Change (YoY) | Nine Months Ended Sep 30, 2024 | Change (YoY) | | :-------------------------- | :------------------------------ | :----------- | :----------------------------- | :----------- | | Pega Cloud | $144,108 | 22% | $409,096 | 20% | | Maintenance | $80,702 | (3)% | $242,047 | (1)% | | Subscription license | $45,420 | (39)% | $193,405 | (3)% | | Consulting | $54,364 | (3)% | $160,451 | (4)% | | Perpetual license | $456 | (83)% | $1,351 | (71)% | | Total revenue | $325,050 | (3)% | $1,006,350 | 5% | - Pega Cloud revenue increased by 22% and 20% for the three and nine months ended September 30, 2024, respectively, due to increased client investments and expansion of Pega Cloud usage[88] - Subscription license revenue decreased by 39% for the three months and 3% for the nine months ended September 30, 2024, primarily due to several large multi-year contracts recognized in the prior year[88] Gross profit Examines gross profit and gross profit percentages across different revenue streams Gross Profit by Type (in thousands) | Type | Three Months Ended Sep 30, 2024 | Gross Profit % | Nine Months Ended Sep 30, 2024 | Gross Profit % | | :-------------------------- | :------------------------------ | :------------- | :----------------------------- | :------------- | | Pega Cloud | $113,625 | 79% | $319,261 | 78% | | Maintenance | $74,317 | 92% | $222,952 | 92% | | Subscription license | $45,036 | 99% | $191,901 | 99% | | Consulting | $(5,087) | (9)% | $(17,413) | (11)% | | Total gross profit | $228,344 | 70% | $718,040 | 71% | - Pega Cloud gross profit percentage increased due to improved cost efficiency in hosting services and employee compensation, as Pega Cloud scales[89] - Consulting gross profit percentage decreased significantly due to lower consultant utilization rates[89] Operating expenses Analyzes trends and drivers for selling, marketing, research, development, and administrative expenses Operating Expenses (in thousands) | Type | Three Months Ended Sep 30, 2024 | Change (YoY) | Nine Months Ended Sep 30, 2024 | Change (YoY) | | :------------------------------------ | :------------------------------ | :----------- | :----------------------------- | :----------- | | Selling and marketing | $127,669 | (3)% | $395,125 | (7)% | | Research and development | $74,157 | (1)% | $221,695 | (1)% | | General and administrative | $35,694 | 31% | $84,641 | 15% | | Litigation settlement, net of recoveries | $0 | * | $32,403 | * | | Restructuring | $2,485 | (86)% | $3,283 | (85)% | - Selling and marketing expenses decreased due to reduced headcount from optimizing the go-to-market strategy[91] - General and administrative expenses increased due to higher incentive-based compensation[91] - Litigation settlement, net of recoveries, increased significantly for the nine-month period due to the cost to settle litigation outside the ordinary course of business[91] Other income and expenses Details non-operating income and expenses, including interest income and foreign currency impacts Other Income and Expenses (in thousands) | Type | Three Months Ended Sep 30, 2024 | Change (YoY) | Nine Months Ended Sep 30, 2024 | Change (YoY) | | :------------------------------------ | :------------------------------ | :----------- | :----------------------------- | :----------- | | Foreign currency transaction (loss) gain | $(4,405) | * | $(7,230) | (82)% | | Interest income | $6,769 | 167% | $18,835 | 223% | | (Loss) on capped call transactions | $(689) | 70% | $(667) | (49)% | | Other income, net | $0 | (100)% | $1,684 | (91)% | | Total | $36 | (99)% | $7,575 | (49)% | - Interest income significantly increased due to higher investment balances and interest rate yields[92] - Other income, net, decreased substantially due to a gain on venture investments in the prior year and a gain from repurchases of convertible senior notes in the prior year[92] Provision for income taxes Discusses the company's income tax provision and the factors influencing its effective tax rate Provision for Income Taxes (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Provision for income taxes | $8,369 | $15,395 | | Effective income tax rate | (73)% | (26)% | - The effective income tax rate for the nine months ended September 30, 2024, was (73)%, influenced by jurisdictional mix, valuation allowances on deferred tax assets, and a near break-even pretax loss[93] Liquidity and Capital Resources This section details the Company's cash position, sources of liquidity, and capital allocation strategies, including operating, investing, and financing activities, debt management, stock repurchases, and dividend payments Cash, Cash Equivalents, and Marketable Securities (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Held in U.S. entities | $464,232 | $263,453 | | Held in foreign entities | $238,758 | $159,885 | | Total cash, cash equivalents, and marketable securities | $702,990 | $423,338 | | Total cash, cash equivalents, marketable securities, and restricted cash | $714,406 | $426,263 | - The Company believes its current cash, marketable securities, operating cash flow, borrowing capacity, and access to capital markets are sufficient to fund operations, convertible senior notes settlement, stock repurchases, and dividends for at least the next 12 months[95] Operating activities Explains the cash generated from the company's primary business operations - Cash provided by operating activities increased for the nine months ended September 30, 2024, primarily due to growth in client collections and the impact of cost-efficiency initiatives[96] Investing activities Details cash flows related to the purchase and sale of investments and property and equipment - Cash used in investing activities increased for the nine months ended September 30, 2024, mainly due to investments in financial instruments and reduced investment in property and equipment[97] Financing activities Reports cash flows from debt, equity transactions, and dividend payments Debt financing Provides an update on the company's outstanding debt obligations and credit facilities - As of September 30, 2024, $502.3 million in aggregate principal amount of convertible senior notes remained outstanding, maturing on March 1, 2025[98] - The Credit Facility's expiration date was extended to February 4, 2025, with $27.3 million in outstanding letters of credit and no cash borrowings as of September 30, 2024[98] Stock repurchase program Details the company's share repurchase activities and authorized repurchase limits Stock Repurchase Authority (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | | :------------------------------------ | :----------------------------- | | December 31, 2023 | $60,000 | | Repurchases | $(11,749) | | September 30, 2024 | $48,251 | - The Board of Directors extended the share repurchase program to December 31, 2025, and increased the authorized repurchase by $250 million to $310 million as of October 22, 2024[100] Dividends Reports dividend payments to stockholders and the company's dividend policy Dividend Payments (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Dividend payments to stockholders | $7,626 | $7,458 | - The Company intends to pay a quarterly cash dividend of $0.03 per share, subject to Board discretion[101] Contractual obligations Outlines the company's future payment commitments under various contractual agreements Contractual Obligations as of September 30, 2024 (in thousands) | Type | Remainder of 2024 | 2025 | 2026 | 2027 | 2028 | 2029 and after | Total | | :------------------------------------ | :---------------- | :----- | :----- | :----- | :----- | :------------- | :-------- | | Convertible senior notes | $0 | $504,154 | $0 | $0 | $0 | $0 | $504,154 | | Purchase obligations | $51,146 | $142,370 | $127,548 | $135,488 | $990 | $0 | $457,542 | | Operating lease obligations | $4,094 | $18,276 | $13,754 | $13,503 | $12,939 | $31,932 | $94,498 | | Venture investment commitments | $0 | $500 | $500 | $0 | $0 | $0 | $1,000 | | Liability for uncertain tax positions | $0 | $0 | $0 | $0 | $0 | $0 | $867 | | Total | $55,240 | $665,300 | $141,802 | $148,991 | $13,929 | $31,932 | $1,058,061 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the Company's exposure to market risk, particularly foreign currency fluctuations, and its potential impact on revenue and net income Foreign currency exposure Discusses the company's sensitivity to fluctuations in foreign currency exchange rates Translation risk Explains the impact of foreign currency exchange rate changes on the translation of foreign subsidiary financial statements Impact of 10% USD Strengthening | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | (Decrease) in revenue | (4)% | (4)% | | (Decrease) increase in net income | (23)% | (5)% | - A hypothetical 10% strengthening of the U.S. dollar against other currencies would result in a 4% decrease in revenue for both the nine months ended September 30, 2024 and 2023[106] Remeasurement risk Addresses the risk associated with remeasuring foreign currency-denominated balances into the functional currency Impact of 10% GBP Strengthening (in thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Foreign currency (loss) | $(12,771) | $(11,351) | - The Company is exposed to remeasurement risk primarily from changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated balances held by its U.K. subsidiary[107] ITEM 4. CONTROLS AND PROCEDURES This section outlines the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of disclosure controls and procedures Assesses the effectiveness of controls designed to ensure timely and accurate financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2024, providing reasonable assurance of achieving their objectives[108] Changes in internal control over financial reporting Reports any material changes in the company's internal controls over financial reporting - There have been no material changes in the Company's internal control over financial reporting during the quarter ended September 30, 2024[109] PART II - OTHER INFORMATION Contains additional disclosures not included in the financial statements, such as legal proceedings and risk factors ITEM 1. LEGAL PROCEEDINGS This section incorporates by reference the detailed information on legal proceedings from Note 15, Commitments and Contingencies, in Part I, Item 1 of this Quarterly Report - Information regarding legal proceedings is incorporated by reference from Note 15. Commitments and Contingencies[111] ITEM 1A. RISK FACTORS This section refers readers to the comprehensive risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect its business and financial results - Readers are encouraged to review the risk factors in the Annual Report on Form 10-K for the year ended December 31, 2023, as they could materially affect the Company's business, financial condition, and future results[112] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section provides details on issuer purchases of equity securities, specifically common stock repurchases, during the three months ended September 30, 2024 Common Stock Repurchased (in thousands, except per share amounts) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Value of Shares That May Yet Be Repurchased Under Publicly Announced Programs | | :------------------------------------ | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------------------ | | July 1, 2024 - July 31, 2024 | 1 | $65.27 | $60,000 | | August 1, 2024 - August 31, 2024 | 34 | $68.95 | $58,250 | | September 1, 2024 - September 30, 2024 | 152 | $68.82 | $48,251 | | Total (3 months ended Sep 30, 2024) | 187 | $68.82 | | ITEM 5. OTHER INFORMATION This section discloses trading arrangements by officers and updates on the Company's share repurchase program Rule 10b5-1 and non-rule 10b5-1 trading arrangements Discloses trading plans established by officers for the sale of company stock - On August 29, 2024, Kenneth Stillwell, CFO and COO, entered into a trading plan for the sale of 18,000 shares of common stock, set to terminate on August 31, 2025[114] Share Repurchase Program Provides an update on the company's share repurchase program, including extensions and increased authorization - On October 22, 2024, the Board of Directors extended the share repurchase program to December 31, 2025, and increased the authorized repurchase by $250 million to $310 million[115] ITEM 6. EXHIBITS This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, certifications, and XBRL data files - The exhibits include certifications from the CEO and CFO (31.1, 31.2, 32) and various XBRL taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[117] Signature The report is signed by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer, on behalf of Pegasystems Inc., dated October 23, 2024 - The report was signed by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer, on October 23, 2024[119]