PEGA(PEGA) - 2025 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This part provides comprehensive financial information, including statements, notes, management's discussion, market risk, and controls ITEM 1. FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements, including balance sheets, operations, comprehensive income, equity, and cash flows Unaudited Condensed Consolidated Balance Sheets Total assets and liabilities decreased significantly from convertible note repayment; cash, marketable securities declined, equity rose Balance Sheet Summary | Metric | Sep 30, 2025 (in thousands) | Dec 31, 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Cash and cash equivalents | $148,699 | $337,103 | $(188,404) | | Marketable securities | $202,663 | $402,870 | $(200,207) | | Total cash, cash equivalents, and marketable securities | $351,362 | $739,973 | $(388,611) | | Accounts receivable, net | $160,919 | $305,468 | $(144,549) | | Total current assets | $811,804 | $1,333,704 | $(521,900) | | Total assets | $1,292,786 | $1,768,273 | $(475,487) | | Convertible senior notes, net | $— | $467,470 | $(467,470) | | Total current liabilities | $597,452 | $1,086,058 | $(488,606) | | Total liabilities | $695,956 | $1,182,793 | $(486,837) | | Total stockholders' equity | $596,830 | $585,480 | $11,350 | Unaudited Condensed Consolidated Statements of Operations The company achieved significant profitability for both three and nine months, driven by strong revenue growth and improved efficiency Statements of Operations Summary | Metric | 3 Months Ended Sep 30, 2025 (in thousands) | 3 Months Ended Sep 30, 2024 (in thousands) | 9 Months Ended Sep 30, 2025 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total revenue | $381,350 | $325,050 | $1,241,495 | $1,006,350 | | Gross profit | $275,457 | $228,344 | $923,578 | $718,040 | | Income (loss) from operations | $14,469 | $(11,661) | $158,737 | $(19,107) | | Net income (loss) | $43,364 | $(14,390) | $158,863 | $(19,901) | | Basic EPS | $0.25 | $(0.08) | $0.93 | $(0.12) | | Diluted EPS | $0.24 | $(0.08) | $0.86 | $(0.12) | - Total revenue increased by 17% for the three months ended September 30, 2025, and by 23% for the nine months ended September 30, 2025, compared to the prior year periods[12] - Net income significantly improved from a loss of $(14,390) thousand to a gain of $43,364 thousand for the three months, and from a loss of $(19,901) thousand to a gain of $158,863 thousand for the nine months ended September 30, 2025[12] Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income substantially increased for both periods, primarily due to improved net income and positive foreign currency adjustments Comprehensive Income Summary | Metric | 3 Months Ended Sep 30, 2025 (in thousands) | 3 Months Ended Sep 30, 2024 (in thousands) | 9 Months Ended Sep 30, 2025 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) | $43,364 | $(14,390) | $158,863 | $(19,901) | | Total other comprehensive (loss) income, net of tax | $(4,506) | $10,864 | $21,427 | $4,477 | | Comprehensive income (loss) | $38,858 | $(3,526) | $180,290 | $(15,424) | Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased, driven by net income and stock-based compensation, partially offset by repurchases and cash dividends Stockholders' Equity Summary | Metric | Dec 31, 2024 (in thousands) | Sep 30, 2025 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total stockholders' equity | $585,480 | $596,830 | $11,350 | | Repurchase of common stock | N/A | $(118,704) (9 months) | N/A | | Stock-based compensation | N/A | $41,425 (9 months) | N/A | | Net income | N/A | $85,422 (9 months) | N/A | - The company repurchased 8.7 million shares of common stock for $393.2 million during the nine months ended September 30, 2025[17][78] - Cash dividends declared totaled $10.3 million for the nine months ended September 30, 2025[17][152] Unaudited Condensed Consolidated Statements of Cash Flows Operating cash flow increased, investing activities shifted to inflow, while financing activities resulted in a substantial outflow Cash Flow Summary | Cash Flow Activity | 9 Months Ended Sep 30, 2025 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Operating activities | $346,796 | $250,697 | $96,099 | | Investing activities | $214,897 | $(215,999) | $430,896 | | Financing activities | $(756,391) | $26,949 | $(783,340) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(187,727) | $66,238 | $(253,965) | | Cash, cash equivalents, and restricted cash, end of period | $153,802 | $299,065 | $(145,263) | - Repayments of convertible senior notes amounted to $467.86 million, and common stock repurchases under the program totaled $394.69 million during the nine months ended September 30, 2025[18] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed disclosures for financial statements, covering accounting policies, assets, liabilities, segments, and contingencies NOTE 1. BASIS OF PRESENTATION Financial statements are prepared under SEC rules and GAAP, with a two-for-one forward stock split retroactively applied to all periods - A two-for-one forward stock split was approved on February 12, 2025, and effected on June 20, 2025, increasing authorized shares from 200,000,000 to 400,000,000. All share and per share information has been recast[23] NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS The company is evaluating new accounting pronouncements, ASU 2023-09 and ASU 2024-03, expecting only disclosure changes - ASU 2023-09 (Income Tax Disclosures) is effective for the year ending December 31, 2025, and is expected to result in disclosure changes only[24] - ASU 2024-03 (Expense Disaggregation Disclosures) is effective for the year ending December 31, 2027, and is expected to result in disclosure changes only[25] NOTE 3. MARKETABLE SECURITIES Marketable securities significantly decreased due to reduced corporate debt holdings, with a weighted-average remaining maturity of 1.4 years Marketable Securities Summary | (in thousands) | Sep 30, 2025 Fair Value | Dec 31, 2024 Fair Value | Change | | :---------------- | :---------------------- | :---------------------- | :----- | | Government debt | $10,503 | $11,833 | $(1,330) | | Corporate debt | $192,160 | $391,037 | $(198,877) | | Total | $202,663 | $402,870 | $(200,207) | - Marketable securities' maturities ranged from October 2025 to September 2028, with a weighted-average remaining maturity of 1.4 years as of September 30, 2025[26] NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Total receivables decreased, while contract assets increased and deferred revenue slightly declined due to new billings and revenue recognition Receivables and Deferred Revenue Summary | (in thousands) | Sep 30, 2025 | Dec 31, 2024 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Accounts receivable, net | $160,919 | $305,468 | $(144,549) | | Unbilled receivables, net | $175,732 | $173,085 | $2,647 | | Long-term unbilled receivables, net | $105,863 | $61,407 | $44,456 | | Total Receivables | $442,514 | $539,960 | $(97,446) | | Contract assets (current) | $22,465 | $13,498 | $8,967 | | Long-term contract assets | $28,588 | $18,321 | $10,267 | | Deferred revenue (current) | $404,757 | $423,910 | $(19,153) | | Long-term deferred revenue | $2,457 | $2,121 | $336 | - The change in deferred revenue was primarily due to new billings in advance of revenue recognition and $384 million of revenue recognized during the period that was previously deferred[32] NOTE 5. DEFERRED COMMISSIONS Deferred commissions decreased, and amortization of deferred commissions increased for both the three and nine months ended September 30, 2025 Deferred Commissions Summary | (in thousands) | Sep 30, 2025 | Dec 31, 2024 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Deferred commissions | $99,423 | $105,405 | $(5,982) | Deferred Commissions Summary | (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Amortization of deferred commissions | $16,916 | $14,867 | $50,494 | $47,143 | NOTE 6. GOODWILL AND OTHER INTANGIBLES Goodwill remained stable, while intangible assets' net book value decreased due to ongoing amortization Goodwill and Intangibles Summary | (in thousands) | Sep 30, 2025 | Dec 31, 2024 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Goodwill | $81,402 | $81,113 | $289 | | Net Book Value of Intangibles | $1,829 | $3,832 | $(2,003) | - Future estimated amortization of intangible assets is $627 thousand for the remainder of 2025, $874 thousand for 2026, and $328 thousand for 2027[36] NOTE 7. OTHER ASSETS AND LIABILITIES Other current assets and accrued expenses increased, while other long-term assets and liabilities saw modest changes Other Assets and Liabilities Summary | (in thousands) | Sep 30, 2025 | Dec 31, 2024 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Other current assets | $123,791 | $115,178 | $8,613 | | Other long-term assets | $293,717 | $292,049 | $1,668 | | Accrued expenses | $51,857 | $31,544 | $20,313 | | Other current liabilities | $21,131 | $18,866 | $2,265 | | Other long-term liabilities | $36,102 | $29,088 | $7,014 | - Accrued expenses saw a significant increase in cloud hosting ($16.4 million from $1.8 million) and outside professional services ($18.2 million from $10.6 million)[40] NOTE 8. SEGMENT INFORMATION The company operates as a single segment, providing software for case management, with U.S. operations holding most long-lived assets - The company has one operating and reportable segment, providing software for case management, business process management, and real-time decisioning solutions[44] Long-lived Assets by Geography | (in thousands) | Sep 30, 2025 | Dec 31, 2024 | | :-------------------------- | :----------- | :----------- | | U.S. Long-lived assets | $37,433 (87%) | $37,405 (89%) | | International Long-lived assets | $5,603 (13%) | $4,401 (11%) | NOTE 9. LEASES Lease expenses decreased due to lower fixed costs, following the relocation of corporate headquarters in January 2025 - Total lease costs decreased to $5.9 million for the three months and $18.1 million for the nine months ended September 30, 2025, from $9.1 million and $23.0 million in the prior year periods, respectively[47] - The company relocated its corporate headquarters on January 1, 2025[46] - Weighted-average remaining lease term is 5.7 years, and the weighted-average discount rate is 4.9% as of September 30, 2025[49] NOTE 10. DEBT The company fully repaid its Convertible Senior Notes, eliminating interest expense, and extended its revolving credit facility - Convertible Senior Notes with an aggregate principal of $600 million, due March 1, 2025, were fully repaid at maturity during the three months ended March 31, 2025[52] Interest Expense | (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Contractual interest expense | $— | $941 | $595 | $2,825 | | Amortization of issuance costs | $— | $621 | $394 | $1,857 | | Total Interest Expense | $— | $1,562 | $989 | $4,682 | - The $100 million senior secured revolving credit agreement was amended to extend its expiration date to February 4, 2027. As of September 30, 2025, the company had no cash borrowings under the facility[59][60] NOTE 11. RESTRUCTURING Restructuring activities resulted in a net benefit, significantly decreasing from prior year costs due to non-cash adjustments and reduced severance Restructuring Costs | (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Restructuring | $(5) | $2,485 | $(38) | $3,283 | - Accrued employee severance and related costs decreased from $2.0 million at January 1, 2025, to $366 thousand at September 30, 2025[62] NOTE 12. FAIR VALUE MEASUREMENTS Cash equivalents, marketable securities, and venture investments are measured at fair value; capped call transactions expired in Q1 2025 Fair Value of Financial Instruments | (in thousands) | Sep 30, 2025 Total Fair Value | Dec 31, 2024 Total Fair Value | | :-------------------------- | :---------------------------- | :---------------------------- | | Cash equivalents | $13,276 | $154,244 | | Marketable securities | $202,663 | $402,870 | | Capped Call Transactions | $— | $223 | | Venture investments | $20,214 | $21,234 | - During the nine months ended September 30, 2025, the company recognized an $18.7 million gain from the partial sale of a venture investment, included in other (loss) income, net[67] - The Capped Call Transactions expired upon maturity of the Notes during the three months ended March 31, 2025[65] NOTE 13. REVENUE Total revenue increased significantly, driven by Pega Cloud and subscription license growth, while maintenance revenue declined due to cloud migration Revenue Breakdown | Revenue Stream (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Pega Cloud | $184,549 | $144,108 | $502,415 | $409,096 | | Maintenance | $79,649 | $80,702 | $235,288 | $242,047 | | Subscription license | $60,600 | $45,420 | $327,118 | $193,405 | | Consulting | $56,394 | $54,364 | $174,639 | $160,451 | | Total revenue | $381,350 | $325,050 | $1,241,495 | $1,006,350 | - Pega Cloud revenue increased by 28% (3 months) and 23% (9 months), while subscription license revenue increased by 33% (3 months) and 69% (9 months)[72] - Remaining performance obligations (backlog) increased by 19% to $1.75 billion as of September 30, 2025, from $1.48 billion as of September 30, 2024[73][74] NOTE 14. STOCKHOLDERS' EQUITY Stock-based compensation expense increased; the share repurchase program was extended and authorized additional funds, with significant repurchases made Stock-based Compensation Expense | (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock-based Compensation Expense | $43,041 | $37,213 | $121,196 | $108,218 | - The share repurchase program was extended to June 30, 2026, and the authorized repurchase amount was increased by $500 million, leaving $347.3 million available as of September 30, 2025[77] - During the nine months ended September 30, 2025, the company repurchased 8.7 million shares for $393.2 million at an average price of $44.97 per share[78] NOTE 15. INCOME TAXES The effective income tax rate significantly improved to 10% due to stock-based compensation benefits and immediate R&E expensing Income Tax Provision and Rate | (Dollars in thousands) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | | (Benefit from) provision for income taxes | $16,790 | $8,369 | | Effective income tax rate | 10% | (73)% | - The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, reduced forecasted U.S. income tax expense for 2025 by allowing immediate expensing of domestic R&E expenditures[80] - The company maintains a full valuation allowance on its U.S. and U.K. net deferred tax assets, but believes there is a reasonable possibility of a substantial portion being released in the near future[82] NOTE 16. EARNINGS (LOSS) PER SHARE Basic and diluted EPS significantly improved, reflecting profitability, with the stock split retroactively applied to all periods Earnings Per Share Details | EPS Metric | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.25 | $(0.08) | $0.93 | $(0.12) | | Diluted EPS | $0.24 | $(0.08) | $0.86 | $(0.12) | | Weighted-average common shares outstanding (Basic) | 170,567 | 171,250 | 171,045 | 170,036 | | Weighted-average common shares outstanding (Diluted) | 184,095 | 171,250 | 185,005 | 170,036 | - The stock split on June 20, 2025, has been retroactively applied to all share and per share amounts presented[83] NOTE 17. COMMITMENTS AND CONTINGENCIES The company faces significant legal proceedings, including an appeal in the Appian trade secret case and multiple shareholder lawsuits - In the Appian Corp. v. Pegasystems Inc. case, the Court of Appeals reversed the $2.06 billion judgment and ordered a new trial on the trade secret misappropriation claim. The Supreme Court of Virginia granted Appian's petition for appeal and Pega's cross-error assignments, with oral arguments scheduled for October 28, 2025[87] - Multiple shareholder lawsuits (Eminence Fund, PS Lit Recovery, Larkin, Sagfors, Dwyer, Birch) have been filed in federal and state courts, alleging violations of the Exchange Act, common law fraud, negligent misrepresentation, and breach of fiduciary duty related to the Appian litigation and alleged misconduct[88][89][92][94][97][98] - The company believes it has strong defenses and is unable to reasonably estimate possible damages for these matters due to their early stages and unspecified damage claims[90][96][100] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial condition and operations, highlighting performance drivers, non-GAAP measures, policies, and the impact of cloud shift and litigation FORWARD-LOOKING STATEMENTS Forward-looking statements are based on current expectations and assumptions, subject to risks, and the company disclaims any obligation to update them - Forward-looking statements are based on current expectations and assumptions and are subject to risks such as future financial performance, liquidity, AI investments, and ongoing litigation[103][104] - The company disclaims any obligation to publicly update or revise these statements, except as required by applicable law[105] NON-GAAP MEASURES Non-GAAP measures provide insight into core operating results, consistent with management's assessment, but are not a substitute for GAAP - Non-GAAP measures help investors understand core operating results and prospects, consistent with management's performance assessment[107] - These measures are not a substitute for financial measures prepared under U.S. GAAP[107] BUSINESS OVERVIEW Pegasystems provides enterprise software for AI decisioning and workflow automation, helping Global 2000 clients optimize experiences and operations - The company provides enterprise software for AI decisioning and workflow automation, helping clients optimize decisions, hyper-personalize customer experiences, and streamline operations[108] - Target clients are Global 2000 organizations and government agencies seeking solutions to increase business agility, drive growth, improve productivity, and reduce risk[110] - Pega GenAI Blueprint is leveraged for rapid prototyping and accelerating the development and deployment of applications[108] Performance metrics The company uses ACV, Free Cash Flow, and Backlog as key performance metrics to analyze overall performance and forecast future periods Annual contract value ("ACV") ACV increased by 14% year-over-year to $1.557 billion, driven by growth in Pega Cloud and subscription license Annual Contract Value (ACV) | (Dollars in thousands) | Sep 30, 2025 | Sep 30, 2024 | Change | % Change | | :--------------------- | :----------- | :----------- | :----- | :------- | | Pega Cloud | $815,370 | $640,574 | $174,796 | 27% | | Maintenance | $296,955 | $306,753 | $(9,798) | (3)% | | Subscription services | $1,112,325 | $947,327 | $164,998 | 17% | | Subscription license | $444,601 | $412,678 | $31,923 | 8% | | Total ACV | $1,556,926 | $1,360,005 | $196,921 | 14% | - Constant currency ACV also increased by 14% year-over-year[115] Cash Flow Cash provided by operating activities increased by 38% to $346.8 million for the nine months ended September 30, 2025. Free cash flow also increased by 38% to $338.3 million, reflecting improved operational cash generation Free Cash Flow Calculation | (Dollars in thousands) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | Change | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | :------- | | Cash provided by operating activities | $346,796 | $250,697 | $96,099 | 38% | | Investment in property and equipment | $(8,485) | $(4,921) | $(3,564) | N/A | | Free cash flow | $338,311 | $245,776 | $92,535 | 38% | - Supplemental information highlights a decrease in litigation settlement costs and interest paid on convertible senior notes, but an increase in legal fees[119] Remaining performance obligations ("Backlog") Backlog (remaining performance obligations) increased by 19% to $1.755 billion as of September 30, 2025, from $1.475 billion in the prior year, indicating strong future revenue visibility Backlog Summary | (in millions) | Sep 30, 2025 | Sep 30, 2024 | 1-Year Growth Rate | | :------------ | :----------- | :----------- | :----------------- | | Backlog - GAAP | $1,755 | $1,475 | 19% | | Constant currency backlog | $1,745 | $1,475 | 18% | CRITICAL ACCOUNTING POLICIES Critical accounting policies remain consistent with the prior Annual Report on Form 10-K, with no significant changes - No significant changes have been made to the critical accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[128] RESULTS OF OPERATIONS Robust revenue growth across subscription services and licenses led to improved gross profit margins, despite increased operating expenses Revenue Total revenue increased by 17% (3 months) and 23% (9 months), driven by Pega Cloud and subscription license, with maintenance revenue declining Revenue Breakdown | Revenue Stream (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | % Change (3M) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | % Change (9M) | | :---------------------------- | :-------------------------- | :-------------------------- | :------------ | :-------------------------- | :-------------------------- | :------------ | | Pega Cloud | $184,549 | $144,108 | 28% | $502,415 | $409,096 | 23% | | Maintenance | $79,649 | $80,702 | (1)% | $235,288 | $242,047 | (3)% | | Subscription license | $60,600 | $45,420 | 33% | $327,118 | $193,405 | 69% | | Consulting | $56,394 | $54,364 | 4% | $174,639 | $160,451 | 9% | | Total revenue | $381,350 | $325,050 | 17% | $1,241,495 | $1,006,350 | 23% | - Increases in Pega Cloud revenue were due to expanded client adoption, while decreases in maintenance revenue were due to client shifts to Pega Cloud-based offerings[130] - Subscription license revenue growth was primarily due to several large multi-year contracts[130] Gross profit Total gross profit increased, with overall margins improving; Pega Cloud margins rose due to efficiencies, while consulting margins decreased Gross Profit Breakdown | Gross Profit Stream (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | % Change (3M) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | % Change (9M) | | :--------------------------------- | :-------------------------- | :-------------------------- | :------------ | :-------------------------- | :-------------------------- | :------------ | | Pega Cloud | $146,811 (80%) | $113,625 (79%) | 29% | $396,450 (79%) | $319,261 (78%) | 24% | | Maintenance | $74,409 (93%) | $74,317 (92%) | 0% | $218,637 (93%) | $222,952 (92%) | (2)% | | Subscription license | $60,286 (99%) | $45,036 (99%) | 34% | $326,058 (100%) | $191,901 (99%) | 70% | | Consulting | $(6,207) (11%) | $(5,087) (9%) | (22)% | $(19,596) (11%) | $(17,413) (11%) | (13)% | | Total Gross Profit | $275,457 (72%) | $228,344 (70%) | 21% | $923,578 (74%) | $718,040 (71%) | 29% | - Pega Cloud gross profit percent increased due to increased hosting cost efficiencies and headcount reallocation[132] - Consulting gross profit percent decreased in the three months due to increased compensation and contracted services, remaining flat for nine months as utilization rate increases offset cost increases[133] Operating expenses Operating expenses increased across all categories due to higher compensation, headcount, and legal fees, while litigation settlement costs decreased Operating Expenses Breakdown | Operating Expense (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | % Change (3M) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | % Change (9M) | | :------------------------------- | :-------------------------- | :-------------------------- | :------------ | :-------------------------- | :-------------------------- | :------------ | | Selling and marketing | $140,129 (37%) | $127,669 (39%) | 10% | $425,329 (34%) | $395,125 (39%) | 8% | | Research and development | $78,756 (21%) | $74,157 (23%) | 6% | $231,826 (19%) | $221,695 (22%) | 5% | | General and administrative | $42,108 (11%) | $35,694 (11%) | 18% | $107,724 (9%) | $84,641 (8%) | 27% | | Litigation settlement, net of recoveries | $— (0%) | $— (0%) | * | $— (0%) | $32,403 (3%) | * | | Restructuring | $(5) (0%) | $2,485 (1%) | * | $(38) (0%) | $3,283 (0%) | * | - Selling and marketing expenses increased due to higher headcount and incentive compensation[138] - General and administrative expenses increased due to equity compensation, headcount reallocation, and an $8.8 million increase in legal fees from proceedings outside the ordinary course of business[138] Other income and expenses Other income and expenses saw a positive shift from a venture investment gain and reduced interest expense, with foreign currency gains contributing Other Income and Expenses | Other Income/Expense (in thousands) | 3 Months Ended Sep 30, 2025 | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Foreign currency transaction gain (loss) | $7,154 | $(4,405) | $(12,179) | $(7,230) | | Interest income | $2,660 | $6,769 | $11,243 | $18,835 | | Interest expense | $(144) | $(1,639) | $(1,172) | $(5,047) | | (Loss) on capped call transactions | $— | $(689) | $(223) | $(667) | | Other (loss) income, net | $(43) | $— | $19,247 | $1,684 | - The increase in other (loss) income, net for the nine months was primarily due to a gain from the partial sale of a venture investment[139] - Decreases in interest income and expense were primarily due to lower investment balances and the repayment of the Convertible Senior Notes[139] (Benefit from) provision for income taxes The effective income tax rate significantly improved to 10% from (73)%, driven by stock-based compensation benefits and R&E expensing Income Tax Provision and Rate | (Dollars in thousands) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | | (Benefit from) provision for income taxes | $16,790 | $8,369 | | Effective income tax rate | 10% | (73)% | - The OBBBA, enacted July 4, 2025, allows immediate expensing of domestic R&E expenditures, reducing forecasted U.S. income tax expense for 2025[140] - The company does not expect Pillar Two global minimum tax regulations to have a material impact on its consolidated financial statements[141] LIQUIDITY AND CAPITAL RESOURCES The company has sufficient liquidity to fund operations, repurchases, and dividends; operating cash flow increased, investing shifted to inflow, financing had outflow - The company believes it has sufficient liquidity to fund operations, stock repurchases, and quarterly cash dividends for at least the next 12 months[142] Cash Flow Summary | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Operating activities | $346,796 | $250,697 | | Investing activities | $214,897 | $(215,999) | | Financing activities | $(756,391) | $26,949 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(187,727) | $66,238 | Cash and Marketable Securities | Cash & Securities (in thousands) | Sep 30, 2025 | Dec 31, 2024 | | :------------------------------- | :----------- | :----------- | | Total cash, cash equivalents, and marketable securities | $351,362 | $739,973 | Operating activities Cash provided by operating activities increased by $96.1 million to $346.8 million for the nine months ended September 30, 2025, primarily due to increased client collections - The increase in cash provided by operating activities was primarily due to increased client collections[144] Investing activities Investing activities generated a net cash inflow of $214.9 million for the nine months ended September 30, 2025, a significant shift from a net outflow in the prior year. This was mainly driven by scheduled maturities of investments and proceeds from the sale of a venture investment - The shift to cash provided by investing activities was primarily due to scheduled maturities of financial instrument investments in anticipation of Convertible Senior Notes repayment and consideration from the sale of a venture investment[145] Financing activities Financing activities resulted in a net cash outflow of $756.4 million for the nine months ended September 30, 2025, primarily due to the full repayment of $468 million in Convertible Senior Notes and $393.2 million in common stock repurchases. The credit facility was extended, and quarterly dividends are planned at $0.03 per share - The company repaid $468 million in Convertible Senior Notes at maturity during the nine months ended September 30, 2025[146] - Common stock repurchases under the program amounted to $393.2 million for 8.7 million shares during the nine months ended September 30, 2025[149] - The Board intends to pay a quarterly cash dividend of $0.03 per share, commencing with the third quarter of 2025, following the stock split[151] Contractual obligations Total contractual obligations amounted to $529.97 million, mainly purchase and operating lease obligations, with most due within two years Contractual Obligations Summary | (in thousands) | Remainder of 2025 | 2026 | 2027 | 2028 | 2029 | 2030 and after | Other | Total | | :-------------------------- | :---------------- | :----- | :----- | :----- | :----- | :------------- | :---- | :------ | | Purchase obligations | $25,483 | $163,337 | $184,290 | $45,931 | $493 | $510 | $— | $420,044 | | Operating lease obligations | $4,615 | $16,971 | $15,494 | $14,357 | $11,343 | $25,165 | $— | $87,945 | | Venture investment commitments | $500 | $500 | $— | $— | $— | $— | $— | $1,000 | | Liability for uncertain tax positions | $— | $— | $— | $— | $— | $— | $20,983 | $20,983 | | Total | $30,598 | $180,808 | $199,784 | $60,288 | $11,836 | $25,675 | $20,983 | $529,972 | ITEM 3. QUANTITATIVE AND QUALITURES ABOUT MARKET RISK This section outlines market risks, primarily foreign currency fluctuations, impacting financial results through translation and remeasurement risks Foreign currency exposure The company faces foreign currency exposure from international operations, impacting revenue, net income, and monetary assets/liabilities Translation risk A 10% USD strengthening would decrease revenue by 4% and net income by 4% for the nine months ended September 30, 2025 Impact of USD Strengthening | Impact of 10% USD Strengthening | 9 Months Ended Sep 30, 2025 | 9 Months Ended Sep 30, 2024 | | :------------------------------ | :-------------------------- | :-------------------------- | | (Decrease) in revenue | (4)% | (4)% | | (Decrease) in net income | (4)% | (23)% | Remeasurement risk The company incurs transaction gains/losses from remeasuring non-functional currency assets/liabilities, primarily for its U.K. subsidiary - The company is primarily exposed to foreign currency exchange rate changes associated with the Australian dollar, Euro, and U.S. dollar-denominated balances held by its U.K. subsidiary[157] Impact of GBP Strengthening | Impact of 10% GBP Strengthening | 9 Months Ended Sep 30, 2025 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | | :------------------------------ | :--------------------------------------- | :--------------------------------------- | | Foreign currency (loss) | $(30,790) | $(12,771) | ITEM 4. CONTROLS AND PROCEDURES Management confirmed effective disclosure controls and procedures as of September 30, 2025, with no material changes in internal control over financial reporting Evaluation of disclosure controls and procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2025, providing reasonable assurance - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2025[158] Changes in internal control over financial reporting No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2025 - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2025[159] PART II - OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, other information, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS Legal proceedings information is incorporated by reference from "Note 17. Commitments and Contingencies" in Part I, Item 1 - Legal proceedings information is incorporated by reference from "Note 17. Commitments and Contingencies"[160] ITEM 1A. RISK FACTORS Readers should review risk factors from the Annual Report on Form 10-K for 2024, as they could materially affect the business - Readers are encouraged to consider risk factors from the Annual Report on Form 10-K for the year ended December 31, 2024, as they could materially affect the business[161] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company repurchased 2.93 million shares for $156.9 million under its share repurchase program, with $347.25 million remaining authorization Share Repurchase Activity | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (in thousands) | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs (in thousands) | | :-------------------------- | :-------------------------------------------- | :--------------------------- | :--------------------------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------ | | July 1, 2025 - July 31, 2025 | 551 | $58.50 | 378 | $467,254 | | August 1, 2025 - August 31, 2025 | 2,312 | $52.28 | 2,297 | $347,254 | | September 1, 2025 - September 30, 2025 | 67 | $57.32 | — | $347,254 | | Total (3 months) | 2,930 | $53.57 | 2,675 | N/A | - The share repurchase program has $347.25 million remaining authorization as of September 30, 2025[162] ITEM 5. OTHER INFORMATION Kenneth Stillwell, COO and CFO, entered a Rule 10b5-1 trading arrangement for 36,000 shares, terminating December 31, 2026 - Kenneth Stillwell, COO and CFO, entered into a Rule 10b5-1 trading arrangement on August 12, 2025, to sell 36,000 shares of common stock, terminating on December 31, 2026[163] ITEM 6. EXHIBITS Exhibits include restated articles, bylaws, compensation programs, certifications, and XBRL documents - Exhibits include Restated Articles of Organization, Amended and Restated Bylaws, Compensation Program for non-employee directors, CEO and CFO certifications, and Inline XBRL documents[165] SIGNATURE This section contains the official signature confirming the report's submission SIGNATURE The report was duly signed by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer, on October 21, 2025 - The report was signed by Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer, on October 21, 2025[170]