SECURITIES AND EXCHANGE COMMISSION
____________________________
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☒ | | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
For the fiscal year ended December 31,
20172020
OR
☐ | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
Commission File
No. 1-11859____________________
(Exact name of Registrant as specified in its charter)
____________________
| | | | | | | | | | | | | | | | | | | | | | | |
| Massachusetts | | 04-2787865 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
One Rogers Street, Cambridge, MA | | 02142-1209 |
(Address of principal executive offices) | | (zip code) |
(617)
One Rogers Street, Cambridge, MA 02142-1209
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class each class | Trading symbol(s) | Name of Each Exchangeeach exchange on Which Registered which registered |
Common Stock, $0.01$.01 par value per share | PEGA | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
____________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrantRegistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to thisForm 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging company,” in
Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | ☐ | ☐ |
| | | |
| Non-accelerated filer | ☐ | ☐ (Do not check if smaller reporting company) | | Smaller reporting company | ☐ | ☐ |
| | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of the Registrant’s common stock held by
non-affiliates, based upon the closing price of the Registrant’s common stock on the NASDAQ Global Select Market of
$58.35,$101.17, on June 30,
20172020 was approximately
$2.2$4.0 billion.
There were
78,099,41980,900,637 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on February
14, 2018.5, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement related to its 20182021 annual meeting of stockholders to be filed subsequently are incorporated by reference into Part III of this report.
ANNUAL REPORT ON FORM
10-K
| | | | | | | | |
| Item | | Page |
| PART I | |
| 1 | Business | |
| 1A | Risk Factors | |
| 1B | Unresolved Staff Comments | |
| 2 | Properties | |
| 3 | Legal Proceedings | |
| 4 | Mine Safety Disclosures | |
| | |
| PART II | |
| 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| 6 | Selected Financial Data | |
| 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 7A | Quantitative and Qualitative Disclosures about Market Risk | |
| 8 | Financial Statements and Supplementary Data | |
| 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| 9A | Controls and Procedures | |
| 9B | Other Information | |
| | |
| PART III | |
| 10 | Directors, Executive Officers, and Corporate Governance | |
| 11 | Executive Compensation | |
| 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| 13 | Certain Relationships and Related Transactions, and Director Independence | |
| 14 | Principal Accountant Fees and Services | |
| | |
| PART IV | |
| 15 | Exhibits and Financial Statement Schedules | |
| 16 | Form 10-K Summary | |
| | |
| Signatures | |
PART I
Forward-looking statements
FORWARD-LOOKING STATEMENTS
This Annual Report on Form10-K (“Annual Report”), including without limitation, Item“Item 1. “Business”, ItemBusiness,” “Item 1A. “Risk Factors”. ItemRisk Factors,” “Item 5. “Market ForMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”Securities,” and Item“Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations,” along with other reports that we have filed with the Securities and Exchange Commission (“SEC”), external documents and oral presentations, contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf.
Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,”expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions are intended to identify such forward-looking statements. These forward-looking statements, which are based on current expectations estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions.
These
forward-looking statements
deal with future events and are
not guarantees of future performancesubject to various risks and
involve certain risks, uncertainties
and assumptions that are difficult to
predict. Thesepredict, including, but not limited to, statements
include, among other things, statements regarding:about:•our future financial performance and business plans;
•the adequacy of our liquidity and capital resources;
•the continued payment of our quarterly dividends;
•the timing of revenue recognition under license and cloud arrangements;recognition;
the expected benefits to our clients and potential clients•management of our product and service offerings;transition to a more subscription-based business model;
the growth of•variation in demand for our business and revenues and our expectations about the factors that influence our success and trends in our business;
our expectation that revenue will continue to shift from perpetual licenses towards term licenses and cloud arrangements;
our international operations providing a significant portion of our total revenues;
our backlog of license, maintenance, cloud,products and services, agreements andincluding among clients in the timing of future cash receipts from committed license and cloud arrangements;public sector;
our belief that our acquisitions should allow us to grow and continue to make investments in research and development;
our expectation that research and development expenses and sales and marketing expenses will continue to increase in absolute dollar values and may increase as a percentage of revenues;
our expectations regarding •the impact of recent accounting pronouncementsactual or threatened public health emergencies, such as the Coronavirus (COVID-19);
•reliance on third-party service providers;
•compliance with our consolidated financial statements;debt obligations and debt covenants;
our beliefs regarding •the potential impact of our convertible senior notes and related Capped Call Transactions;
•reliance on key personnel;
•the Tax Cuts and Jobs Act (the “Tax Reform Act”), including its impact on income tax expense and deferred tax assets;
relocation of our beliefs that our net deferred tax assets will be realizedcorporate headquarters;
•the continued uncertainties in the foreseeable future, that we have adequately provided under U.S. generally accepted accounting principles for uncertain tax benefits, and that the undistributed earnings of our foreign subsidiaries are considered permanently reinvested; andglobal economy;
exposure to •foreign currency exchange ratesrates;
•the potential legal and continued realizationfinancial liabilities and reputation damage due to cyber-attacks;
•security breaches and security flaws;
•our ability to protect our intellectual property rights and costs associated with defending such rights;
•our client retention rate;
•management of gains or losses with respect to our foreign currency exposures.growth.
FactorsThese risks and others that could cause our actual results to differ from those expressed in forward-looking statements include, but are not limited to, those identified in Item 1A. “Risk Factors” of this Annual Report.
Except as required by law, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks. New information, future events or risks may cause actual results to differ materially from future resultsthose expressed or implied byin such forward-looking statements.
statements are described further in “Item 1A. Risk Factors” of this Annual Report and other filings we make with the SEC. Except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.The forward-looking statements contained in this Annual Report represent our views as of February 17, 2021.
ITEM 1. BUSINESS
We develop, market, license,
host, and support
enterprise software applications
that help organizations transform how they engage with their customers and process work. We also license our low code Pega Platform™ for
customer engagement and digital process automation, in addition to licensing our Pega® Platformrapid application development
product forto clients that wish to build and extend their
ownbusiness applications.
We are helping our clients accelerate digital transformation, by realizing high customer engagement and achieving operational excellence, and leveraging our artificial intelligence (AI) and Robotics technology. Our
cloud-architecturecloud-architected portfolio of customer engagement and digital process automation
applications—applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified
low code Pega
Platform—empowerPlatform, empowering businesses
with comprehensiveno-code tools to
quickly design, extend, and scale their enterprise applications to meet strategic business needs.
To grow our business, we intend to:
Grow•increase market share by developing and delivering market-leading applications for marketing, sales, service, and operations that can work together seamlessly with maximum differentiation and minimal customization;competitive differentiation;
Execute•execute new-market growth initiatives, further expanding go-to-market coverage within the Global 3000; and
Continue•continue to scale our digital platform and invest in awareness marketing efforts to support the way today’s clients want to buy.discover, evaluate, and buy products and services.
Whether
or not we are successful depends, in part, on our ability to:
Successfully •execute our marketing and sales strategies;
Appropriately•appropriately manage our expenses as we grow our organization;
Effectively•effectively develop new products and enhance our existing product;products; and
Successfully •incorporate acquired technologies into our customer relationship management (“CRM”) applications and unified Pega Platform.
Cloud Transition
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud (“Cloud Transition”). Until we substantially complete our Cloud Transition, which we anticipate will occur in early 2023, we expect to continue to experience lower revenue growth and lower operating cash flow growth or negative cash flow. The actual mix of revenue and new arrangements in a given period can fluctuate based on client preferences.
See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted." in Item 1A of this Annual Report for additional information.
Coronavirus (“COVID-19”)
As of December 31, 2020, COVID-19 has not had a material impact on our results of operations or financial condition.
COVID-19's ultimate impact on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak and the impact of COVID-19 on our sales cycles, partners, vendors, and employees, all of which is uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, the substantial size and available resources of our clients, and the critical nature of our products to our clients may reduce or delay the impact of COVID-19 on our business. However, it is not possible to estimate the ultimate impact that COVID-19 will have on our business at this time.
See “Coronavirus (“COVID-19”)” in Item 1A of this Annual Report for additional information.
Relocation of Corporate Headquarters
On February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts corporate headquarters on October 1, 2021, in exchange for a one-time payment to us of $18 million. We expect to enter into a new lease agreement for a facility within the greater Boston area.
Our Products
The
Pega
Platform and applications helpInfinity™, the latest version of our software portfolio, helps connect enterprises to their customers in
real-timereal time across channels, streamline business operations, and adapt to meet changing requirements.
Our applications and platform intersect with and encompass several software markets, including:
•Customer Engagement, including Customer Relationship Management (“CRM”);
•Digital Process Automation (“DPA”),
including Business Process Management (“BPM”) and Digital Process AutomationDynamic Case Management (“DPA”DCM”),;
•Robotic Process Automation (“RPA”),;
•Business Rules Management Systems (“BRMS”),;
Dynamic Case Management (“DCM”),
•Decision Management, including Predictivepredictive and Adaptive analytics,adaptive analytics;
No-code andlow-code•Low code application development platforms, including Mobile ApplicationMulti-experience Development Platforms (“MADP”MXDP”),; and
Vertical Specific•Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications.
1:1 Customer engagement
Engagement
Our
omni-channelomnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customers while ensuring a consistent, unified, and personalized customer experience. At the center of our customer
engagement-orCRM-applications engagement applications is the
Pega Customer Decision
Hub,Hub™, our
real-timereal time AI engine, which
leads the industry in its ability tocan predict a customer’s behavior and recommend the
“Next-best-action”“next best action” to take across channels in
real-time. | • | | ThePega® Marketing application is designed to enable enterprises to improve customer acquisition and experiences across inbound, outbound, and paid media channels. It incorporates AI in the form of predictive and machine-learning analytics, as well as business rules, and executes these decisions in real-time to evaluate the context of each customer interaction and dynamically deliver the most relevant action, offer, content, and channel. |
| • | | ThePega® SalesAutomationreal time. It is designed to enable enterprises to improve customer acquisition and experiences across inbound, outbound, and paid media channels. It incorporates AI in the form of predictive and machine-learning analytics, as well as business rules, and executes these decisions in real time to evaluate the context of each customer interaction and dynamically deliver the most relevant action, offer, content, and channel.Customer Service The Pega Customer Service™ application simplifies customer service. It is designed to anticipate customer needs, connect customers to the right people and systems, and automate or intelligently guide customer interactions, to rapidly and continuously evolve the customer service experience, and to allow enterprises to deliver consistent interactions across channels and improve employee productivity. The application consists of a contact center desktop, case management for customer service, chat, knowledge management, mobile field service, omnichannel self-service, AI-powered virtual assistants, and industry-specific processes (“Microjourneys™”) and data models. For clients who want to extend intelligence and automation into the early stages of the customer journey, Pega Sales Automation™ automates and manages the entire sales process, from prospecting to product fulfillment. Our software allows enterprises to capture best practices, and leverages AI to guide sales teams through the sales and customer onboarding processes. |
| • | | ThePega® Customer Service application is designed to anticipate customer needs, connect customers to the right people and systems, and automate or intelligently guide customer interactions, to rapidly and continuously evolve the customer service experience and to allow enterprises to deliver consistent interactions across channels and improve employee productivity. The application consists of a contact center desktop, case management for customer service, chat, knowledge management, mobile field service, omni-channel self-service,AI-powered virtual assistants, and industry-specific processes and data models. |
Digital process, automation
Pegasystems offers industry-specificfrom prospecting to product fulfillment. It allows enterprises to capture best practices and leverage AI to guide sales teams through the sales and customer onboarding processes.
Intelligent Automation
Our software applicationsfor Intelligent Automation boosts the efficiency of our clients’ processes. This technology allows organizations to take an end-to-end approach to transformation by using intelligence and design thinking to streamline processes and create better experiences for their customers and employees. Intelligent automation goes beyond traditional Business Process Management (BPM) to unify technologies such as Robotic Process Automation (RPA) and Artificial Intelligence (AI) and enable organization-wide digital transformation. The Pega Platform, with its intelligent automation capabilities, allows clients to break down silos, improve customer-centricity, add agility to legacy technology, and provide end-to-end automation to support the needs of customers and employees.
Our Capabilities
We drive better business outcomes in two ways:
•Making decisions: delivering real time customer engagement, powered by real time, omnichannel AI.
•Getting work done: making customer and employee-facing processes more efficient through end-to-end automation and robotics.
We deliver our solution through our Center-out Business™ Architecture®, which enables clients to transcend channels and internal data silos to achieve both quick wins and long-term transformation. This approach insulates business logic from back-end and front-end complexity, delivering both consistent experiences to customers and agility to the business.
The key aspects of this architecture are:
Centrally-managed intelligence
Pega’s centrally-managed intelligence ensures AI and business rules operate across all channels. Applications built on the Pega
Platform. These applications provide businesses with robust capabilities to automate industry-specific business processes. As they are built on the Pega Platform
these applications deliver flexibility beyond traditional, “off the shelf” products. Our applications allow our clients to offer differentiated service and value to their customers. The Pega Platform empowers organizations to implement new processes quickly, refine customer experiences, bring new offerings to market, and provide customized or specialized automated processing.Our capabilities
Real-time, Omni-channel AI
AI has been around for many years, in many forms, yet only in the past decade businesses have started experiencing its practical applications fueled by the new abundance of data to power decisions and ever-increasing customer expectations. Our CRM and other applications built on the Pega platform, leverage predictive and adaptive analytics to deliver more personalized customer experiences and maximize business objectives. TheFor example, Pega Customer Decision Hub,®, a centralized,always-on “brain” “customer brain,” unleashes the power of predictive analytics, machine learning, and real-timereal time decisioning across our clients’ data, systems, and touchpoints—touchpoints - orchestrating engagement on and across customer interactionsinteraction channels.
End-to-end
robotic automation
Pega brings aligned with business outcomes
We bring together Robotic Automationcapabilities-for both human-assisted robotic desktop automation and unattended robotic process automation-withautomation with our unified BPM,process and case management capabilities. This givesprovides our platform and applications and platform the differentiated ability to automate both customer-facing processes and back-office operational processes from“end-to-end, “end to end,” connecting across organizational and system silos to seamlessly and efficiently connect customers and employees to outcomes.outcomes seamlessly and easily.
Journey-centric rapid delivery
Consistent omni-channel experiences
With business and process logic centrally defined, Pega provides dynamic, open APIs to keep front-end channels and business logic operating in alignment for consistent customer experiences. By leveraging cutting-edge user interface (UI) technology, Pega-powered processes and decisions can be easily embedded into existing front-ends or used as the basis for new employee-facing applications.
Insulation of back-end complexity
Pega’s architecture insulates case and decision logic from the complexity of back-end systems. Our CRMdata virtualization automatically pulls in needed data in a common structure, regardless of source. This capability gives clients the agility to build new experiences on existing systems, modernizing legacy systems without breaking existing processes.
A Layered approach to managing variation
Pega’s Situational Layer Cake organizes logic into layers that map to the unique dimensions of a client’s business – customer types, lines of business, geographies, etc. This layered approach lets organizations manage variations of their business without duplicating logic. This capability allows initial deployments into a single department or region to seamlessly scale to manage the complexity of a global, multi-line enterprise.
In addition to our Center-out Business Architecture, Pega technology has been designed to be deployed rapidly, be changed easily, and DPAscale across changing architecture needs.
Pega Express™ Methodology and low code
Our solutions are designed to
quickly improve targeted customer outcomes
quickly and with
out-of-the-box functionality that connects enterprise data and systems to customer experience channels. From there, organizations can scale, one customer
journey-at-a-time, experience at a time, to realize greater value while delivering increasingly consistent and personalized customer experiences.
Software We prescribe a “Microjourney™” approach to delivery that writes your software
breaks customer journeys into discrete processes that drive meaningful outcomes, such as “inquiring about a bill” or “updating an insurance policy.” This allows us to combine design-thinking and out-of-the-box functionality to deliver rapid results and ensure the ability to enhance the application going forward.
Our approach
bypassesleverages low code to improve business and IT collaboration and bypass the error-prone and time-consuming process of manually translating requirements into code. Users design software in
no-code low code visual models that reflect the needs of the business. The software application is created and optimized automatically and directly from the model, helping to close the costly gap between vision and execution. Changes to the code are made by
changingaltering the model, and application documentation is generated directly from the model.
The Pega Platform is standards-based and can leverage a client’s existing technology to create new business applications that cross technology silos and bridge front and back-office.Unified future-proof platform
Pega offers a unified digital process automation platform, combining robotics, process automation, and case management together in a unified architecture. We build in powerful decision analytics, designed to allow our clients to automate any process while working faster and smarter. Ourno-code architecture is designed to empower organizations to scale across all dimensions of their business, including product lines, departments, and geographies, by reusing components and avoiding the traditional method of deploying multiple CRM and BPM instances that lead to even more silos and disjointed customer experiences.
Pega Cloud® Services allow allows clients to develop, test, and deploy, on an accelerated basis, our CRM applications and the Pega Platform using a secure, flexible internet-based infrastructure. Pega Cloud provides production, development, and testing (“Dev/Test”) services to accelerate the development and deployment of Pega applications and the Pega Platform. This allows our clients to minimize infrastructure, minimizing cost while focusing on core revenue generatingrevenue-generating competencies.Additionally,
Clients can also choose to manage the Pega
Platformdeployment themselves (“client cloud”) using the cloud architecture they prefer. This multi-cloud approach of both Pega Cloud and
CRM applications are deployable on otherclient-managed cloud
architectures, including client or partner-managed clouds. This cloud choice gives our clients the ability to select, and change as needed, the best cloud architecture for the security, data access,
speed-to-market, and budget requirements of each application they deploy.
We offer services and support through our Global CustomerClient Success, group, our Global CustomerService Assurance, Global Client Support, group, and our Pega®Academy training services group.™ groups. We also use third-party contractors to assist us in providing these services.
•Global CustomerClient Success – Our Global CustomerClient Success group combinesguides our sales and Pega consulting groups and provides guidance and implementation services to our clients and partners on how to best applymaximize their investment in our technology and develop strongrealize the business outcomes they are targeting. This includes building implementation expertise.expertise and creating awareness of product features and capabilities.
•Global Customer SupportService Assurance
– Our Global CustomerService Assurance group addresses risks to client success because of technical concerns. By providing technical staff dedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and increase clients’ confidence in our technology and client service. •Global Client Support – Our Global Client Support group overseesprovides technical support offor our products and Pega Cloud.Cloud services. Support services include managing thecloud service reliability management, online support community management, self-service knowledge, proactive problem prevention through information and knowledge sharing, and problem tracking, prioritization, escalation, diagnosis, and resolution.
PegaAcademy—Training Services
•Pega Academy – The success of our sales strategy for repeat sales to target clients depends on enablement and ecosystem engagement. We have increased our ability to train a large number of partners and clients to implement our technology.
technology and made it easier for individuals to stay current with our technology as it evolves. We offer training for our staff, clients,both instructor-led and partners through the following means:
Instructor-led training is offered at our regional training facilities in the Americas, the United Kingdom (the “U.K.”), Asia Pacific, and at third-party facilities in numerous other locations, including client sites.
Online training is a convenient way to learn our software anytime, anywhere. We expect online training to continue to help expand the number of trainedour employees, clients, and certified experts globally.
partners. We have also partnered with universities to offer Pegaprovide our courseware as part of the student curriculum taught by Pega instructors and university professors to expand our ecosystem.
Engagement is an important part of our strategy to create a broad ecosystem that is passionate about Pega technology.
We collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients.clients, as well as Independent Software Vendors (“ISVs”) and technology partners that extend clients’ investments with integrated solutions. In addition, Authorized Training Partners (“ATPs”) support Pega customers in local languages, while our Workforce Development Partners let clients outsource their recruiting. Strategic partnerships with technology consultingthese firms and systems integrators are important to our sales efforts because they influence buying decisions, help us to identify sales opportunities, and complement our software with their domain expertise, solutions, and services capabilities. These partners may deliver strategic business planning, consulting, project management, training, and implementation services to our clients.Currently, our
Our partners include well-respected major firms, such as Accenture PLC,
Atos SE,Amazon.com, Inc., Capgemini SA,
Coforge, Cognizant Technology Solutions Corporation, EY,
HCL Infosys,
Limited,Merkle, PwC, Tata Consultancy Services Limited, Tech Mahindra Limited, Virtusa Corporation, and Wipro Limited.
Our target clients are
industry-leading Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve.
This is achievedOur applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.
We also enable enterprise transformation initiatives by providing an application development platform that digitizesend-to-end processes and allows for multi-channel customer interactions, all enhanced by Pega Next-Best-Action analytics.Our clients represent
a number ofmany industries, including:
| • | | Financial Services—•Financial services – Financial services organizations rely on software to market, onboard, cross-sell, retain, and service their customers as well as automate the operations that support these customer interactions. Our customer service, sales and new account onboarding, Know Your Customer (“KYC”), marketing, collections, and dispute management applications allow clients to be responsive to changing business requirements. |
| • | | Healthcare—Healthcare organizations seek software that integrates their front and back-offices and helps them deliver personalized care and customer service while reducing cost, automating processes, and increasing operational efficiency. Our applications allow healthcare clients to address sales, service, operations, financial, administrative, and coverage requirements of healthcare consumerism and reform. |
| • | | Manufacturing and high tech—Manufacturers worldwide are transforming their businesses to better engage customers and suppliers, as well as to directly manage product performance throughout the product life-cycle. Our manufacturing applications address customer service and field service; manage warranties, recalls, repairs, and returns; improve the performance of direct sales forces; and extend existing enterprise resource planning system capabilities. |
| • | | Communications and media—Communications and media organizations need to address high levels of customer churn, growing pressure to increase revenue, and an ability to respond quickly to changing market conditions. Our applications enable organizations to reshape the way they engage with customers and increase customer lifetime value throughout the customer lifecycle by delivering omni-channel, personalized customer journeys. Our applications are designed to solve the most critical business issues from acquiring more customers at higher margin, increasingcross-sell/up-sell, improving the efficiency and effectiveness of customer service, and streamlining sales and quoting. |
| • | | Insurance—Insurance companies, whether competing globally or nationally, need software to automate the key activities of distribution management, quoting, underwriting, claims, and policy servicing. Insurers are also becoming increasingly sensitive to ways to improve customer service and the overall customer experience. Our applications for insurance carriers are designed to help increase business value by delivering customer-focused experiences and personalized interactions that help drive higher sales, lower expense ratios, and mitigate risk. |
| • | | Government—Government agencies need to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs, reduced fraud, and greater levels of transparency. Our applications deliver advanced capabilities to help streamline operations and optimize service delivery through an agile, omni-channel approach. |
| • | | Consumer Services—Organizations that provide services to a range of consumers in industries such as airlines/transportation, utilities, consumer-focused internet companies, retail, and hospitality and entertainment. Our marketing, customer service, and sales applications allow these organizations to personalize their customer engagement to acquire more customers, drive revenue throughcross-sell/up-sell, and increase service efficiency while increasing customer satisfaction. |
| • | | Life Sciences—Life sciences organizations are looking for solutions to improve customer engagement as well as increase efficiencies and transparency across the product development life-cycle. Our customer engagement, clinical, and pharmacovigilance applications are designed to deliver customer engagement, safety and risk management, and regulatory transparency. |
We also offer software to market, onboard, cross-sell, retain, and service their customers, as well as automate the operations that support these customer interactions. Our intelligent automation, customer service, account onboarding, Know Your Customer (“KYC”), payment dispute and exception management, collections, and next best action solutions allow clients to improve the efficiency of their operations and provide better service to their customers.
•Life sciences– Life sciences organizations are looking for solutions to improve customer engagement, as well as increase efficiencies and transparency across the product development lifecycle. Our customer engagement, clinical, and pharmacovigilance applications are designed to deliver customer engagement, safety and risk management, and regulatory transparency.
•Healthcare– Healthcare organizations seek software that integrates their front and back-offices and helps them deliver personalized care and customer service while reducing costs, automating processes, and increasing operational efficiency. Our applications allow healthcare clients to address the sales, service, operational, financial, administrative, and regulatory requirements of healthcare consumerism and reform.
•Communications and media– Communications and media organizations need to address high levels of customer churn, growing pressure to increase revenue, and an ability to respond quickly to changing market conditions. Our applications enable organizations to reshape the way they engage with customers and increase customer lifetime value throughout the customer lifecycle by delivering omnichannel, personalized customer experiences. Our applications are designed to solve the most critical business issues, including acquiring more customers at a broadhigher margin, increasing cross-sell/upsell, improving customer service efficiency and effectiveness, and streamlining sales and quoting.
•Government– Government agencies need to modernize legacy systems and processes to meet the growing demands for improved constituent service, lower costs, reduced fraud, and greater transparency. Our applications deliver advanced capabilities to help streamline operations and optimize service delivery through an agile, low risk approach.
•Insurance– Insurance companies, whether competing globally or nationally, need software to automate policyholder acquisition, cross sell/upsell, underwriting, claims, policy service, and retention activities across operations and channels of distribution. Insurers are also becoming increasingly sensitive to ways to improve customer service and the overall customer experience. Our applications for insurance carriers are designed to help increase business value by delivering customer-focused experiences and personalized interactions that help drive higher sales, lower expense ratios, and mitigate risk.
•Manufacturing and high tech– Manufacturers and high tech companies worldwide are transforming their businesses to engage customers and suppliers better, as well as to directly manage product performance throughout the product lifecycle. Our manufacturing applications address customer service and field service, manage warranties, recalls, repairs, returns, improve the performance of direct sales forces, and extend existing enterprise resource planning system capabilities.
•Consumer services– Consumer services organizations provide services to a range of other types of companiesconsumers in industries such as transportation, utilities, internet providers, retail, hospitality, and industries. For example, we license our applicationsentertainment. Our 1:1 customer engagement, customer service, and platformintelligent automation solutions help these organizations personalize their customer engagement to clients in travel, transportation, retail,acquire more customers, drive revenue through cross-sell/upsell, and other services.increase service efficiency while increasing customer satisfaction.
The markets for our offerings are intensely competitive, rapidly changing, and highly fragmented, as current competitors expand their product offerings and new companies enter the market.
We
encounter competition from:compete in the CRM, application vendors;
including marketing, sales, and customer service, and DPA, including BPM, vendors, includingno-codecase management, decision management, robotic automation, co-browsing, social engagement, andlow-code mobile application development platforms, and service-oriented architecture middleware vendors;
Case management vendors;
Decision management, data science and AI vendors,platform software markets, as well as vendors of solutions that leverage decision making and data science in managing customer relationships and marketing;
Robotic automation and workforce intelligence software providers;
Companies that provide application specific softwaremarkets for the financial services, healthcare, insurance,vertical applications we provide (e.g., Pega KYC™ for Financial Services, Pega Underwriting™ for Insurance).
We also compete with clients’ internal information systems departments that seek to modify their existing systems or develop their own proprietary systems, and other specific markets;
Mobile application platform vendors;
Co-browsing software providers;
Social listening, text analytics, and natural language processing vendors;
Professionalprofessional service organizations that develop their own products or create custom software in conjunction with rendering consulting services; andservices.
Clients’in-house information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.
Competitors vary in size, scope, and breadth of the products and services they offer and include some of the world’s largest companies, in the world, such asincluding Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (IBM)(“IBM”).
We have been most successful
in competing for clients whose businesses are characterized by a high degree of change, complexity, or regulation.
We believe the principal competitive factors within our market include:Product adaptability, scalability, functionality, and performance;
Proven success in delivering cost-savings and efficiency improvements;
Proven success in enabling improved customer interactions;
Ease-of-use for developers, business units, andend-users;
Timely development and introduction of new products and product enhancements;
Establishment of a significant base of reference clients;
Ability to integrate with other products and technologies;
Customer service and support;
Product price;
Vendor reputation; and
Relationships with systems integrators.
We believe we are competitively differentiated asfrom our competitors because our unified Pega Platform is designed to allow both client business and IT staff, using a single, intuitive user interface, to build and evolve enterprise applications in a fraction of the time it would take with disjointed architectures and tools offered by many of our competitors. In addition, our applications, built on the Pega Platform, provide the same level of flexibility and ability to adapt to our clients’ needs.needs as our Pega Platform. We believe we compete favorably due to our expertise in our target industries and our long-standing client relationships. We believe we compete less favorably on the basis of some of thesethe above factors with respect toagainst our larger competitors, many of which have greater sales, marketing, and financial resources, more extensive geographical presence, and greater name recognition than we do. In addition, we may be at a competitive disadvantage against our larger competitors with respect to our ability to provide expertise outside our target industries.
See
“Risk Factors—Therisk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and
highly fragmented.”fragmented" in Item 1A of this Annual
Report.Report for additional information.
We rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality and intellectual property agreements to protect our proprietary rights. We have obtained patents relating to our system architecture and products in strategic global markets. We enter into confidentiality, intellectual property ownership, and license agreements with our employees, partners, clients, and other third parties. We also control access to and ownership of software, services, documentation, and other proprietary information as means to protect our proprietary rights.
We
sellencourage our
software and services primarily through a direct sales
force.force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us grow our business more efficiently and focus our resources on continued innovation and enhancement of our solutions. In addition, strategic partnerships with management consulting firms and major systems integrators are important to our sales efforts because they influence buying decisions, help us identify sales opportunities and complement our software and services with their domain expertise and consulting capabilities. We also partner with technology providers and application developers.
To support our sales efforts, we conduct a broad range of marketing programs, including awareness advertising, client and industry-targeted solution campaigns, trade shows, including our PegaWorld® iNspire user conference, solution seminars and webinars, industry analyst and press relations, Webweb and digital marketing, community development, social media presence, and other direct and indirect marketing efforts. Our consulting staff,employees, business partners, and other third parties also conduct joint and separate marketing campaigns that generate sales leads.Sales by Geography
See Note 17, “Geographic Information and Major Clients,” included in Item 8 and “Risk Factors—We face risks from operations and clients based outside of the U.S.” in Item 1A of this Annual Report.
leads for us.
Our
research and development organization is responsible for product architecture, core technology development, product testing, and quality assurance. Our product development priority is to continue expanding
theour technology’s capabilities
of our technology.and ensure we deliver superior cloud-native solutions. We intend to maintain and extend the support of our existing applications, and we may choose to invest in additional strategic applications
whichthat incorporate the latest business innovations. We also intend to maintain and extend the support of popular hardware platforms, operating systems, databases, and connectivity options to facilitate easy and rapid deployment in diverse IT infrastructures. Our goal with all
of our products is to enhance product capabilities, ease of implementation, long-term flexibility, and the ability to provide improved client service.
During 2017, 2016, and 2015, research and development expenses were approximately $162.9 million, $145.5 million, and $126.4 million, respectively. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report. We expect that we will continue to commit significant resources to our product research and development in the future to maintain our leadership position.
Employees
As of January 31, 2018 we had 4,237 employees worldwide, of which 1,768 were based in North America, 834 were based in Europe, and 1,635 were based in Asia Pacific.
As of December 31,
2017,2020, we
had software license, maintenance, cloud, and services agreements with clients not yet recognizedexpected to recognize approximately $1.1 billion in
revenue (“backlog”) of approximately $850.3 million. As of December 31, 2016, we had approximately $707.8 million in backlog.Under some of these agreements, we must fulfill certain conditions prior to recognizing revenue, and there can be no assurance when, if ever, we will be able to satisfy all such conditions in each instance. Additionally, some backlog amounts may not be recognized as revenue in future periods as a result of the adoption of the new revenue recognition standard (“ASC 606”) effective January 1, 2018.from backlog on existing contracts. See Note 2. “Significant Accounting Polices”"Remaining performance obligations ("Backlog")" in Item 8 of this Annual Report.
Backlog may vary in any given period depending on the amount and timing of when arrangements are executed, as well as the mix between perpetual license, term license, and cloud arrangements. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report for additional information.
Our People
As of January 31, 2021, we had 5,776 employees, of which 2,476 were based in the Americas, 1,306 were based in Europe, 1,668 were based in India, and 326 were based elsewhere in Asia-Pacific.
As a discussionhigh technology company, our employees are critical to our success. We strive to be an employer of choice that can attract and retain exceptional talent. We aim to create a corporate culture that is equitable, inclusive, and diverse. We believe that encouraging employee development will help achieve our goal of developing, expanding, and retaining our workforce to support our business.
We build our corporate culture through a variety of initiatives, including global inclusion and diversity, employee engagement, pay equity, and employee development.
Global Inclusion and Diversity
An inclusive and diverse culture contributes to our ability to deliver innovative products and services, which is critical to our success. Our commitment to inclusion and diversity begins with a highly skilled and diverse board and includes our commitment to educate both managers and individual contributors about our corporate values. In 2020, we made significant investments in furthering our culture of inclusion, including hiring a Global Leader of Inclusion and Diversity and Diversity Talent Attraction Partner. We expanded our diversity recruiting efforts and delivered inclusivity workshops to leaders at all levels, among other efforts. We also currently sponsor formal resource groups for women, veterans, and members of the black and LGBTQIA+ communities, and plan to launch four additional resource groups in the first half of 2021.
Employee Engagement, Health, and Well-Being
Our efforts to recruit and retain diverse and passionate employees include providing competitive rewards packages and ensuring active communication throughout the Company. We regularly solicit and collect feedback to better understand and improve our employee experience and identify opportunities to strengthen our corporate culture. In 2020, in addition to our annual employee survey and continuous feedback tools, we hosted monthly check-in chats with our leadership team to directly address our employees’ questions and constructive feedback. We are committed to creating an environment that supports our employees’ health and overall well-being, focusing on licensephysical, emotional, financial, and cloud backlog, which excludespersonal wellness. PegaUp!, our employee wellness program, includes such programs as awareness campaigns, fitness classes, guided meditation, and health, wellness, and financial seminars.
Pay Equity
We compensate our employees for what they do and how they do it, regardless of their gender, race, or other personal characteristics. To deliver on that commitment, we benchmark and set pay ranges based on market data and consider individual factors, such as an employee’s role and experience, job location, and job performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our pay is fair and equitable.
Employee Development
Employee development underpins our efforts to execute our strategy and continue to create and sell innovative products and services. We continually invest in our employees’ career growth and provide employees with a wide range of development opportunities, including formal and informal learning, mentoring, and coaching. Pega Academy helps employees as well as clients and partners more rapidly gain and advance Pega software skills. To ensure our business’s long-term continuity, we actively manage the development of talent to fill the roles most critical to our success. To support our current and future
revenue from maintenanceleaders’ development, Pega currently offers five programs addressing the development of people managers and
service arrangements.Availableleaders in a cohort format comprised of all functions and geographies. We also provide educational resources and classes, career training, and education reimbursement programs. In 2020, more than 90% of our employees participated in a formal education program.
Pegasystems Inc. was incorporated in Massachusetts in 1983. Our stock is traded on the NASDAQ Global Select Market under the symbol
PEGA.“PEGA.” Our website is located at www.pega.com, and our investor relations website is located at www.pega.com/about/investors.
Available Information
We make available our Annual Reports on Form
10-K, Quarterly Reports on Form
10-Q, and Current Reports on Form
8-K, and amendments to these reports, free of charge through our website
(www.pega.com) as soon as reasonably practicable after we electronically file such material with or furnish such material to the
Securities and Exchange Commission (“SEC”).SEC. We also make available on our website reports filed by our executive officers and
Directorsdirectors on Forms 3, 4, and 5 regarding their ownership of our securities. Our Code of Conduct
and any amendments to our Code of Conduct, are alsois available on our website
at www.pega.com/about/leadership onin the “Governance”
tab.section.
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones
facing us. Other eventswe face. Events that we do not currently anticipate or that we currently
deemexpect to be immaterial
may also
may affect our results of operations, cash flows, and financial condition.
Factors relating
Risks Related to Our Business and Industry
If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted.
We are transitioning to a more subscription-based business model, which may have negative revenue and/or cash flow implications. The subscription model prices and delivers our software differently than a perpetual license model. These changes reflect a significant shift from perpetual license sales in favor of providing our clients the right to access our software in a hosted environment or use downloaded software for a specified subscription period. The potential shift of our clients’ preference to a cloud-based subscription model requires a considerable investment of technical, financial, legal, managerial and sales resources, and a scalable organization.
Market acceptance of our subscription-based offering will depend on our ability to continue to:
•innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements; and
•optimally price our products in light of marketplace conditions, competition, our costs, and client demand.
Our cloud-based subscription model also requires that we rely on third parties to host our products for our clients. We incur significant recurring third-party hosting expenses to deliver our Pega Cloud offering that we do not incur for our perpetual and term license products. These expenses may cause the gross margin we realize from our Pega Cloud sales to be lower than the gross margin we realize from our perpetual and term license products. If we are unable to meet these challenges effectively, our operating results and financial condition could be materially adversely affected.
The transition to a subscription-based business model gives rise to several risks, including the following:
•our revenues and cash flows may fluctuate more than anticipated in the near term;
•if the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flow because of our continued significant investments in our Pega Cloud offering;
•if new or current clients desire only perpetual licenses, our subscription sales may lag behind our expectations;
•we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption and projected renewal rates, or we may select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;
•if our clients do not renew their subscriptions, our revenue may decline, and our business may be materially adversely affected; and
•we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated.
The metrics our investors and we use to monitor our business model transition may evolve over the course of the transition as significant trends emerge. Therefore, it may be difficult to accurately determine the impact of this transition on our business on a contemporaneous basis or to clearly communicate the appropriate metrics to our
financial resultsinvestors.
We may not
be able to achieve the key elements of our strategy and grow our business as anticipated.
We currently intend to grow our business by pursuing strategic initiatives. Key elements of our strategy include
continuing to growgrowing our market share by developing and delivering robust applications
for marketing, sales automation, customer service, and operations that can work together seamlessly with maximum differentiation and minimal customization, offering versatility in our Pega Platform and application deployment and licensing options to meet the specific needs of our clients, growing our network of partner alliances, and developing the talent and organizational structure capable of supporting our revenue and earnings growth targets. We may not be able to achieve one or more of our key initiatives. Our success depends on our ability to
appropriately manage our expenses as we grow our
organization;organization appropriately, successfully execute our marketing and sales
strategies;strategies, successfully incorporate acquired technologies into our unified Pega
Platform;Platform and develop new products or product enhancements. If we are not able to execute
on these actions, our business may not grow as we
anticipated,anticipate, and our operating results
and financial condition could be
materially adversely affected.
We depend on key personnel, including our Chief Executive Officer, and must be able to attract and retain qualified personnel in the future.
Our business is dependent on key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer, who is also our founder and largest stockholder.
On February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts facility on October 1, 2021 and expect to enter into a new lease agreement for a facility within the greater Boston area. Although we believe this relocation will help us attract and retain key personnel and provide a dynamic space to engage with our employees, competition for talent, delays in and costs associated with development and occupancy of the new facility and changes in commuting for our existing employees could impact our ability to realize the intended benefits of the move.
The loss of key personnel could be disruptive to our operations, and materially adversely affect financial performance. We do not have any significant key-person life insurance on any officers or employees and do not plan to obtain any. Our success will largely depend on the ability to attract and retain qualified personnel and rapidly replace and develop new management. The number of potential employees who have the extensive knowledge needed to develop, sell, and maintain our offerings is limited, and competition for their services is intense. There can be no assurance that we will be able to attract and retain such personnel. If we are unable to do so, our business, operating results, and financial condition could be materially adversely affected.
The timing of our license and Pega Cloud revenue is difficult to predict accurately, which may cause our operating results to vary considerably.
A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloud arrangements can cause our revenues and cash flows to fluctuate materially between periods. Revenue from Pega Cloud arrangements is typically recognized over the contract term. In contrast, revenue from license sales is generally recognized upfront when the license rights become effective. Pega Cloud and term license arrangements are generally billed and collected over the contract term while perpetual license arrangements are generally billed in full and collected upfront when the license rights become effective.
Factors that may influence the predictability of our license and Pega Cloud revenue include:
•changes in clients’ budgets and decision-making processes that could affect both the timing and size of transactions;
•deferral of license revenue to future periods due to the timing of the execution of an agreement or our ability to deliver the products or services;
•changes in our business model; and
•our ability to execute our marketing and sales strategies.
We budget for our selling and marketing, product development, and other expenses based upon anticipated future bookings and revenue. If the timing or amount of revenue fails to meet our expectations in a given period, our financial performance is likely to be materially adversely affected because only a small portion of our expenses vary with revenue. Other factors that may cause our operating results to vary considerably include changes in foreign currency exchange rates, income tax effects, and the impact of new accounting pronouncements.
As a result, period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon to predict future performance. If our revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, or due to other factors discussed elsewhere in this section, the price of our common stock may decline.
The number of license and Pega Cloud arrangements has been increasing, and we may not be able to sustain this growth unless our partners and we can provide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value from our software.
Our clients typically request consulting and training to assist them in implementing our license and Pega Cloud offerings. Our clients also typically purchase maintenance on our perpetual and term licenses. As a result, an increase in the number of license and Pega Cloud arrangements is likely to increase demand for consulting, training, and maintenance related to our offerings. Given that the number of our license and Pega Cloud arrangements has been growing, we will need to provide our clients with more consulting, training, and maintenance to enable them to realize significant business value from our software. We have been increasing our partner and client enablement through training to create an expanded ecosystem of people that are skilled in the implementation of our products. However, if our partners and we are unable to provide sufficient high-quality consulting, training, and maintenance resources, our clients may not realize sufficient business value from our offerings to justify follow-on sales, which could impact our future financial performance. Further, some of our client engagements have high public visibility. If our partners or we encounter problems in helping these clients implement our license and Pega Cloud offerings or if there is negative publicity regarding these engagements (even if unrelated to our services or offerings) our reputation could be harmed and our future financial performance could be negatively impacted. Finally, the investments required to meet the increased demand for our consulting services could strain our ability to deliver our consulting engagements at desired profitability, thereby impacting our overall profitability and financial results.
We may not be able to maintain our retention rate for Pega Cloud clients.
An increasing percentage of our revenue has been derived from our Pega Cloud offerings. Our clients have no obligation to renew their Pega Cloud subscriptions, although historically, most have elected to do so. If our retention rate for those clients decreases our business, operating results, and financial condition could be materially adversely affected.
We are investing heavily in sales and marketing, research and development, and support resources in anticipation of continued growth in license and Pega Cloud arrangements, and we may experience decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balance our growth in expenses.
We have been expanding our sales and marketing capacity to meet the increasing demand for our software and to broaden our market coverage by hiring additional sales and marketing personnel. We anticipate that we will need to provide our clients with more maintenance support because of this increase in demand and have been hiring additional personnel in this area. We continue to invest significantly in research and development to expand and improve the Pega Platform and applications. These investments have resulted in increased fixed costs that do not vary with the level of revenue. If the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flow because of these increased fixed costs. Conversely, if we are unable to hire sales and marketing personnel to meet future demand or research and development personnel to enhance our current products or develop new products, we may not be able to achieve our sales and profitability targets.
We face risks from operations and clients based outside of the U.S.
We market our products and services to clients based outside of the U.S., which represent 43% of our revenue over the last three years. We have established offices in the Americas, Europe, Asia, and Australia. We believe that growth will necessitate expanded international operations, resulting in increased managerial attention and costs. We anticipate hiring additional personnel to accommodate increased international market demand, and we may also enter into agreements with local distributors, representatives, or resellers. If we are unable to do one or more of these things in a timely and effective manner, the growth, if any, of our international operations may be restricted, and our business, operating results, and financial condition could be materially adversely affected.
Additional risks inherent in our international business activities generally include:
•laws and business practices favoring local competitors;
•compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy and data privacy and protection, and increased tariffs and other trade barriers;
•the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses;
•longer payment cycles and credit and collectability risk on our foreign trade receivables;
•difficulties in enforcing contractual and intellectual property rights;
•heightened fraud and bribery risks;
•treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding, income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of “double taxation”);
•management of our international operations, including increased accounting, internal control, and compliance expenses;
•heightened risks of political and economic instability; and
•foreign currency exchange rate fluctuations and controls.
There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, operating results, and financial condition.
We rely on third-party relationships.
We have a number of relationships with third parties that are significant to our sales, marketing, support, and product development efforts, including hosting facilities for our Pega Cloud offering. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supply marketing and sales opportunities for our direct sales force and to strengthen our products using industry-standard tools and utilities. We also have relationships with third parties that distribute our products. There can be no assurance that these companies, many of which have far greater financial and marketing resources than us, will not develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships with us. Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security, which despite our due diligence, may be or become inadequate.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates. Our international sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the U.S. dollar, the Euro, and the Australian dollar relative to the British Pound. These exposures may change over time as business practices evolve.
We have historically used but do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates associated with our foreign currency-denominated cash, accounts receivable, and intercompany receivables and payables held by our U.S. parent company and its U.K. subsidiary. We may enter into hedging contracts again in the future if we believe it is appropriate.
Our realized gain or loss for foreign currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into forward contracts to offset these exposures and other factors. All of these factors could materially impact our operating results, financial condition, and cash flows.
Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.
We derive a substantial portion of our consulting revenue from implementations of new license and Pega Cloud arrangements managed by our consulting personnel and consulting for partner and client-led implementation efforts. Our strategy is to support and encourage partner-led and client-led implementations to increase the breadth, capability, and depth of market capacity to deliver implementation services to our clients. Accordingly, if our consulting personnel’s involvement in future implementations decreases, this could materially adversely affect our consulting revenue.
We frequently enter into a series of license or Pega Cloud arrangements that are each focused on a specific purpose or area of operations. If we are not successful in obtaining follow-on business from these clients, our financial performance could be materially adversely affected.
Once a client has realized the value of our software, we work with the client to identify opportunities for follow-on sales. However, we may not be successful in demonstrating this value for several reasons, including the performance of our products, the quality of the services and support provided by our partners and us, or external factors. Also, some of our smaller clients may have limited additional sales opportunities available. We may not obtain follow-on sales, or the follow-on sales may be delayed, and our future revenue could be limited. This could lower the total value of all transactions, and materially adversely affect our financial performance.
We will need to acquire or develop new products, evolve existing ones, address any defects or errors, and adapt to technology changes.
Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets in which we operate. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable. As a result, our success will depend upon our ability to enhance current products, address any product defects or errors, acquire or develop and introduce new products that meet client needs, keep pace with technology and regulatory changes, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement, and testing. We may not have sufficient resources to make the necessary product development investments. We may experience technical or other difficulties that will delay or prevent the successful development, introduction, or implementation of new or enhanced products. We may also experience technical or other challenges in the integration of acquired technologies into our existing platform and applications. Inability to introduce or implement new or enhanced products in a timely manner could result in loss of market share if competitors are able to provide solutions to meet client needs before we do, give rise to unanticipated expenses related to further development or modification of acquired technologies, and materially adversely affect our financial performance. We may also fail to adequately anticipate and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such as blockchain and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.
We encounter significant competition from:
•customer engagement vendors, including CRM application vendors;
•DPA vendors and platforms, including BPM vendors, low code application development platforms, and service-oriented architecture middleware vendors;
•case management vendors;
•decision management, data science, and AI vendors, as well as vendors of solutions that leverage decision making and data science in managing customer relationships and marketing;
•robotic automation and workforce intelligence software providers;
•companies that provide application-specific software for financial services, healthcare, insurance, and other specific markets;
•mobile application platform vendors;
•co-browsing software providers;
•social listening, text analytics, and natural language processing vendors;
•commercialized open-source vendors;
•professional service organizations that develop their own products or create custom software in conjunction with rendering consulting services; and
•clients’ in-house information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.
Many of our competitors, such as Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”), have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or changes in client requirements or preferences. Competitors may also be able to devote greater managerial and financial resources to develop, promote, and distribute products and to provide related consulting and training services.
We believe the principal competitive factors within our market include:
•product adaptability, scalability, functionality, and performance;
•proven success in delivering cost-savings and efficiency improvements;
•proven success in enabling improved customer interactions;
•ease-of-use for developers, business units, and end-users;
•timely development and introduction of new products and product enhancements;
•establishment of a significant base of reference clients;
•ability to integrate with other products and technologies;
•customer service and support;
•product price;
•vendor reputation; and
•relationships with systems integrators.
Competition for market share and pressure to reduce prices and make sales concessions is likely to increase. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures faced by us will not materially adversely affect our business, operating results, and financial condition.
See "Competition" in Item 1 of this Annual Report for additional information.
Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could materially adversely affect our other stockholders.
As of December 31, 2020, our Chief Executive Officer beneficially owned 49% of our outstanding common stock. As a result, he has the ability to exert significant influence over all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation, or sale of our assets. This concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders.
Risks Related to Information Technology Resilience and Security
We face risks related to outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure.
The increasing user traffic for our Pega Cloud offering demands more computing power. It requires that we maintain an internet connectivity infrastructure that is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanent loss of client data, power outages, or telecommunications infrastructure outages, by our third-party service providers or us, could diminish the quality of our user experience resulting in contractual liability, claims by clients and other third parties, damage to our reputation, loss of current and potential clients, and negatively impact our operating results and financial condition.
Security of our systems and
of global client data is a growing challenge on many fronts. Cyber-attacks and security breaches may expose us to significant legal and financial liabilities.
Our cloud offering provides Pega Platform environments that are provisioned, monitored, and maintained for individual clients to create and deploy Pega-based applications using an Internet-based infrastructure. These services involve the storage and transmission of clients’ data and potential proprietary information.
Security breaches could expose usour clients and our clientsus to a risk of loss or misuse of this information. Any security breach
could result in a loss of confidence in the security of our services, damage our reputation, disrupt our business, lead to legal liability, and negatively impact our future sales. High-profile security breaches at other companies have increased in recent years, and securityyears. Security industry experts and government officials have warned about the risks of hackers and cyber-attackers targeting information technology products and businesses. Threats to IT security can take a variety of forms. Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that pose threats tothreaten our clients and to our IT structure.
Additionally, our Pega Cloud offering provides environments that are provisioned, monitored, and maintained for individual clients to create and deploy Pega-based applications using an Internet-based infrastructure. These services involve the storage and transmission of clients’ data and other confidential information.
Our security measures and those of our clients may be breached
as a resultbecause of third-party actions or that of employees, consultants, or others, including intentional misconduct by computer hackers, system error, human error, technical flaws in our products, or otherwise.
The techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. While we have invested in the protection of our data and systems and of our clients’ data to reduce these risks, there can be no assurance that our efforts will prevent breaches. We carry data breach insurance coverage to mitigate the financial impact of potential legal liability, though this may prove insufficient in the event of a breach.Our cloud offering involves the hosting of clients’ applications on the servers of third-party technology providers. We also rely on third-party systems and technology including encryption, virtualized infrastructure and support, and we employ a shared security model with our clients and our third-party technology providers. Because we do not control the configuration of Pega applications by our clients, the transmissions between our clients and our third-party technology providers, the processing of data on the servers at third-party technology providers, or the internal controls maintained by our clients and third-party technology providers that could prevent unauthorized access or provide appropriate data encryption, we cannot fully ensure the complete integrity or security of such transmissions processing or controls. In addition, privacy, security, and data transmission concerns in some parts of the world may inhibit demand for our cloudPega Cloud offering or lead to requirements to provide our products or services in configurations that may increase the cost of serving such markets.
In order The techniques used to obtain unauthorized access or sabotage systems change frequently and are generally not recognized until launched against a target. While we have invested in protecting our data and systems and our clients’ data to reduce these risks, there can be no assurance that our efforts will prevent breaches. We carry data breach insurance coverage to mitigate the financial impact of a breach, though this may prove insufficient in the event of a breach.
Our Pega Cloud offering involves the hosting of clients’ applications on the servers of third-party technology providers. We also rely on third-party systems and technology, including encryption, virtualized infrastructure, and support, and we employ a shared security model with our clients and our third-party technology providers.
To defend against security threats, we need to continuously engineer products and services with enhanced security and reliability
features;features, improve the deployment of software updates to address security
vulnerabilities;vulnerabilities, apply technologies
whichthat mitigate the risk of
attacks;attacks, and maintain a digital security infrastructure that protects the integrity of our network, products, and services. The cost of these steps could negatively impact our operating
margins.The timingresults.
We may experience significant errors or security flaws in our products and services and could face privacy, product liability, and warranty claims as a result.
Despite quality testing each release, our software frequently contains errors or security flaws, especially when first introduced or when new versions are released. Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or new versions of our software. Additionally, the detection and correction of any security flaws can be time-consuming and costly. Errors or security flaws in our software could result in the inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties. Software errors and security flaws in our products or services could expose us to privacy, product liability, and/or warranty claims as well as harm our reputation, which could impact our future sales of products and services. Typically, we enter into license agreements that contain provisions intended to limit the nature and cloud revenueextent of our risk of product liability and warranty claims. There is difficulta risk that a court might interpret these terms in a limited way or could hold part or all of these terms to predict accurately,be unenforceable. Also, there is a risk that these contract terms might not bind a party other than the direct client. Furthermore, some of our licenses with our clients are governed by non-U.S. law, and there is a risk that foreign law might give us less or different protection. Although we have not experienced any material product liability claims to date, a product liability suit or action claiming a breach of warranty, whether meritorious, could result in substantial costs and a diversion of management’s attention and our resources.
Risks Related to Our Financial Obligations and Indebtedness
We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may
causeadversely affect our
operating results to vary considerably.A change in the number or sizeoperations and financial results.
As of
high value license and cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and cloud arrangements can causeDecember 31, 2020, we had $600 million aggregate principal amount of indebtedness under our
revenues to fluctuate materially between periods.Factors which may influence the predictability of our license and cloud revenue include:
changes in client budgets and decision-making processes that could affect both the timing and size of transactions;
deferral of license revenue to future periodsConvertible Senior Notes due to the timing of the execution of an agreement or2025 (the “Notes”).
Our indebtedness may:
•limit our ability to deliver the productsborrow additional funds for working capital, capital expenditures, acquisitions, or services;other business purposes;
•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general business purposes;
•require us to use a substantial portion of our cash flow from operations to make debt service payments;
•limit our flexibility to plan for, or react to, changes in our business model; and/and industry;
•place us at a competitive disadvantage compared to our less leveraged competitors;
•dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and
•increase our vulnerability to the impact of adverse economic and industry conditions.
Our ability to pay our debt when due or
refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, result in that and our other indebtedness becoming immediately payable in full which could harm our financial condition, results of operation or cost of borrowing. In addition, we may incur additional debt to meet future financing needs. If we incur additional indebtedness, the risks related to our business and our ability to executeservice or repay our indebtedness will increase.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
Under certain circumstances, the noteholders may convert their Notes at their option prior to the scheduled maturities. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020, between U.S. Bank National Association, as trustee (the “Trustee”) and us (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and we currently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Notes when the Indenture requires the repurchase or to pay any cash payable on the Notes’ future conversions as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our marketingfuture indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and sales strategies.repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The Capped Call Transactions may affect the value of the Notes and our common stock.
In connection with the Notes’ issuance, we entered into Capped Call Transactions with certain financial institutions (“option counterparties”). The Capped Call Transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the option counterparties that are parties to the Capped Call Transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions before the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
We budgetare exposed to counterparty risk for the Capped Call Transactions.
The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our selling and marketing, product development,exposure at the time under such transaction. Our exposure depends on many factors, but our exposure will generally increase if the market price or the volatility of our common stock increases. In addition, upon default or other failures to perform, or termination of obligations, by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Provisions in the Notes’ Indenture may deter or prevent a business combination that may be favorable to our stockholders.
If a fundamental change occurs prior to the Notes’ maturity date, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other expenses based upon anticipated future bookings and revenue. Ifprovisions in the timingIndenture could deter or amountprevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.
Conversion of revenue failsthe Notes may dilute the ownership interest of existing stockholders.
The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to meet our expectations in a given period,
our financial performance is likely to be adversely affected because only a small portionthe extent we deliver shares of our expenses vary with revenue. Other factors whichcommon stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect our common stock’s prevailing market prices. In addition, the existence of the Notes may cause our operating resultsencourage short selling by market participants because the conversion of the Notes could be used to vary considerably include changes in foreign currency exchange rates, income tax effects, andsatisfy short positions, or anticipated conversion of the impact of new accounting pronouncements.
As a result,period-to-period comparisonsNotes into shares of our operating results are not necessarily meaningful and should not be relied upon to predict future performance. If our revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market or due to other factors discussed elsewhere in this section,common stock could depress the price of our common stock may decline.
The number of our license and cloud arrangements has been increasing, and we may not be able to sustain this growth unless we and our partners can provide sufficient high quality consulting, training, and maintenance resources to enable our clients to realize significant business value from our software.
Our clients typically request consulting and training to assist them in implementing our license and cloud offerings. Our clients also purchase maintenance on our perpetual and term licenses. As a result, an increase in the number of license and cloud arrangements is likely to increase demand for consulting, training, and maintenance related to our offerings. Given that the number of our license and cloud arrangements has been increasing, we will need to provide our clients with more consulting, training, and maintenance to enable our clients to realize significant business value from our software. stock.
We have been increasing our partner and client enablement through training to create an expanded ecosystem of people that are skilled in the implementation of our products. However, if we and our partners are unable to provide sufficient high quality consulting, training, or maintenance resources to our clients, our clients may not realize sufficient business value from our offerings to justifyfollow-on sales, which could impact our future financial performance. In addition, the investments required to meetcomply with certain financial and operating covenants under our revolving credit facility. Failure to comply with these covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the increased demand forcredit facility.
We must comply with specified financial and operating covenants under our
consulting services could straincredit facility and to make payments, limiting our ability to
deliveroperate our
consulting engagements at desired levelsbusiness as we otherwise might. Our failure to comply with any of
profitability, thereby impacting our overall profitabilitythese covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and
financial results.payable. We frequently enter into a seriesmight not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of license or cloud arrangements that are each focused on a specific purpose or areaan acceleration of operations. Ifthose obligations. In addition, if we are not successful in obtainingfollow-on business from thesecompliance with the financial and operating covenants under the credit facility at the time we wish to borrow funds, we will be unable to borrow funds. The financial and operating covenants under the credit facility may limit our ability to borrow funds or capital, including for strategic acquisitions, share repurchases, and other general corporate purposes.
Risks Related to Government Regulation and Intellectual Property
Our success depends in part on maintaining and increasing our sales to clients
our financial performance could be adversely affected.Oncein the public sector.
We derive a client has realized the valueportion of our revenues from contracts with federal, state, local, and foreign governments and agencies. We believe that our business’s success and growth will continue to depend on our successful procurement of government contracts. Selling to government entities can be highly competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales.
Factors that could impede our ability to maintain or increase the revenue derived from government contracts include:
•changes in fiscal or contracting policies;
•decreases in available government funding;
•changes in government programs or applicable requirements;
•the adoption of new laws or regulations or changes to existing laws or regulations;
•potential delays or changes in the government appropriations or other funding authorization processes;
•governments and governmental agencies requiring contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and
•delays in the payment of our invoices by government payment offices.
The occurrence of any of those factors could cause governments and governmental agencies to delay or refrain from purchasing our software in the future or otherwise harm our business, results of operations, financial condition, and cash flows.
Further, to increase our sales to clients in the public sector, we
workmust comply with
the client to identify opportunities forfollow-on sales. However, we may not be successful in demonstrating this value to some clients, for reasonslaws and regulations relating to the
formation, administration, performance,
and pricing of
contracts with the public sector, including U.S. federal, state, and local governmental bodies, which affect how our
products, the quality of the services and support provided by ourchannel partners and
us, or external reasons. Also, some of our smaller clients may have limited additional sales opportunities available. For any of these clients, we may not obtainfollow-on sales or thefollow-on sales may be delayed, and our future revenue could be limited. This could lower the total value of all transactions and adversely affect our financial performance.Our consulting revenue is dependent to a significant extent on closing new license transactions with clients.
We derive a substantial portion of our consulting revenue from implementations of new licenses and cloud arrangements led by our consulting staff and where we provide consulting forpartner-led andclient-led implementation efforts. Accordingly, if we do not continuebusiness in connection with governmental agencies. These laws and regulations may impose added costs on our business, and failure to close more licensecomply with these laws and cloud arrangements transactionsregulations or other applicable requirements, including non-compliance in the past, could lead to claims for damages from our channel partners or government clients, penalties, termination of contracts, loss of intellectual property rights and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions, or limitations in our ability to do business with our clients, we may be unable to maintain or grow our consulting revenue, whichthe public sector could have ana material adverse effect on our business, results of operations, financial condition, and cash flows.
We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures. Any failure to comply with these laws and regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or have a material adverse effect on our business, financial condition, and results of operations.
Our
We are subject to extensive federal, state, and foreign laws and regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, data privacy and security laws, and similar laws and regulations. The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar foreign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to obtain or retain business. Similar laws and regulations exist in many other countries throughout the world in which we do or intend to do business. Data privacy laws and regulations in Europe, Australia, Latin America, and elsewhere are undergoing a rapid transformation toward increased restrictions.
In April 2016, the European Parliament adopted the General Data Protection Regulation (“GDPR”). It became effective in May 2018. The GDPR extends the scope of European privacy laws to any entity that controls or processes EU residents' personal data in connection with the offer of goods or services or the monitoring of behavior and imposes new compliance obligations concerning the handling of personal data. Complying with the GDPR and other emerging and changing requirements caused us to incur additional costs in 2020 and may cause us to incur substantial additional costs or require us to change our business practices. Compliance also depends on how regulators choose to interpret and apply the new requirements. Moreover, non-compliance, or if regulators assert we have not complied, with GDPR could result in significant monetary penalties of up to the higher of 20 million Euro or 4% of annual worldwide revenue, private lawsuits, and damage to our reputation, which could have a material adverse effect on our business, financial condition, and results of operation.
The California Consumer Privacy Act (“CCPA”), which creates new individual privacy rights for California consumers (as defined in the law) and places increased privacy and security obligations on entities handling certain personal data of consumers or households, went into effect on January 1, 2020, and the California Attorney General may now bring enforcement actions for violations. The CCPA requires, among other things, covered companies to provide new disclosure to consumers about such companies’ data collection, use and sharing practices, provide such consumers new ways to opt-out of certain sales or transfers of personal information, and provide consumers with additional causes of action. The CCPA may increase our compliance costs and potential liability.
We have developed and implemented a compliance program based on what we believe are current best practices, including the background checking of our current partners and prospective clients and partners. We cannot guarantee, however, that we, our employees, our consultants, our partners, or our contractors are or will be adversely affectedcompliant with all federal, state, and foreign regulations, particularly as we expand our operations outside of the U.S. If our representatives or we fail to comply with any of these laws or regulations, a range of fines, penalties, and/or other sanctions could be imposed on us, which could have a material adverse effect on our business, financial condition, and results of operations. Even if we are requireddetermined not to change certain estimates, judgments, and/have violated these laws, government inquiries into these issues typically require the expenditure of significant resources and generate negative publicity, which could also harm our business. In addition, regulation of data privacy and security laws is increasing worldwide, including various restrictions on cross-border access or positions relativetransfer of data, including personal data of our employees, our clients, and customers of our clients. Compliance with such regulations may increase our costs, and there is a risk of enforcement of such laws resulting in damage to our brand, as well as financial penalties and potential loss of business, which could be significant.
We may have exposure to greater than anticipated tax liabilities.
The determination of our worldwide provision for income
taxes and other
taxes.Intax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ordinary courseultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign jurisdictions. The determination of conducting our globaltax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing several inquiries, audits, and reviews by taxing authorities throughout the world. Any adverse outcome of any such audit or review could harm our business, enterprise, we cannot be certain ofand the ultimate tax outcome related to many transactionsmay differ from the amounts recorded in our financial statements and calculations. Some of these uncertainties arise as a consequence of
positionsmay materially affect our financial results in the period or periods for which such determination is made. While we have taken regardingestablished reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.
In addition, our future income taxes could be materially adversely affected by a shift in our jurisdictional income mix, by changes in the valuation of deferred tax assets, transfer pricing for transactions with our subsidiaries, and potential challenges to nexus and tax credit estimates. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability of such outcomes. Future realization of our deferred tax assets ultimately depends on the existenceand liabilities, as a result of sufficient taxable income within the available carryback or carryforward periods. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. If our taxable income is not consistent with our expectations or the timing of income is not within the applicable carryforward period, we may be required to establish a valuation allowance on all or a portion of these deferred tax assets. Changes in our valuation allowance impact our income tax expense in the period of adjustment. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters or our current estimates regarding these matters will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact, unfavorable or favorable, on our income tax provisions and effective tax rate, require us to change the recorded value of deferred tax assets, and adversely affect our financial results. Our effective tax rate may also be adversely affected by changes in the mix of taxable income derived by jurisdictions with varied statutory tax rates, changes in tax laws, regulations, or accounting principles, as well as by certain discrete items.
In light of continuing fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and
interpretations, changesother legislative action to
the financial accounting rules forincrease tax revenue, including corporate income taxes. Several U.S. states have attempted to increase corporate tax revenues by taking an expansive view of corporate presence to attempt to impose corporate income taxes and
assessments,other direct business taxes on companies that have no physical presence in their state, and
any interest or penalties, by taxing
authorities.Weauthorities in foreign jurisdictions may take similar actions. Many U.S. states are also subjectaltering their apportionment formulas tonon-income taxes such as payroll, sales increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe and use, value-added, net worth, property, and goods and services taxes in the U.S. and inelsewhere globally, there are various foreign jurisdictions. Wetax reform efforts underway designed to ensure that corporate entities are regularly under audit by tax authorities with respect to thesenon-income taxes and may have exposure to additionalnon-income tax liabilities which could have an adverse effecttaxed on our resultsa larger percentage of operations and financial condition.
Uncertainties in the interpretation and application of the Tax Reform Act could materially affect our tax obligations and effective tax rate.
On December 22, 2017, the President of the United States signed into law the Tax Reform Act, which significantly changed the U.S. tax code. The U.S. Department of the Treasury has broad authority to issue regulations and interpretive guidance that may significantly affect the application of the Tax Reform Act. The Tax Reform Act requires complex computations not previously required under U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Reform Act and the accounting for such provisions require accumulation of information not previously required or regularly gathered. As a result, we have recognized provisional tax impacts of the Tax Reform Act in our financial statements. As additional regulatory guidance is issued by the U.S. Department of the Treasury, the Internal Revenue Service, and/or state taxing authorities, as accounting treatment is clarified, and as we perform additional analysis on the application of the law, the final amounts may differ from our current provisional amounts.
their earnings.
If it
becamebecomes necessary
or desirable to repatriate any of our foreign cash balances to the United States, we may be subject to increased
income taxes, other restrictions, and limitations.
As of December 31, 2017, approximately $87.32020, $66.0 million of our cash and cash equivalents waswere held in our foreign subsidiaries. If we are unable to reinvest this cash outside of the U.S., we may have to repatriate some of our foreign cash to the U.S. which would increase our income tax liability. If it becamebecomes necessary or desirable to repatriate these funds, we may be required to pay U.S. federal, state, and local taxes, as well asincome and foreign withholding taxes upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, asreinvested. As a result, U.S. federal, state, U.S.and local, and foreign withholding taxes on such earnings have not been provided.provided in our financial statements. It is impracticalnot practical to estimate the amount of U.S. state, U.S. local and foreign tax we would have to pay upon repatriation due to the complexity of the income tax laws and other factors.
We face risks related to intellectual property claims or appropriation of our intellectual property rights.
We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents in strategically important global markets relating to the effectsarchitecture of our systems. We cannot assure that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. There can be no assurance that third parties, including clients, will not claim infringement by us for current or future products. Although we attempt to limit the amount and type of our contractual liability for infringement of the Tax Reform Actproprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or be precluded from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material adverse effect upon our business, operating results, and financial condition.
We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other factors.
violations of intellectual property rights. In addition, many of these companies can dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may, therefore, provide little or no deterrence. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims.
Coronavirus (“COVID-19”)
Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.
The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemics pose the risk that our employees, partners, and clients may be prevented from conducting business activities at full capacity for an indefinite period, including due to the spread of the disease within these groups or due to the shutdowns that are investing heavilyrequested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending and may adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of their contracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.
We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorld conference and encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implement them without adversely affecting our business operations.
We continue to monitor the situation and adjust our policies as more information and public health guidance become available. Precautionary measures that have been adopted, or may be adopted in
the future, could negatively affect our client success efforts, sales, and marketing
researchefforts, delay and
development, and support in anticipation of a continued increase in license and cloud arrangements, and we may experience decreased profitability or losses if we do not continue to increase the value of our license and cloud arrangements to balance our growth in expenses.We have been expandinglengthen our sales cycles, or create operational or other challenges, any of which could harm our business and marketing capacity to meet increasing demandresults of operations. In addition, COVID-19 may disrupt our clients’, vendors’, and partners’ operations for our software and to broaden our market coverage by hiring additional sales and marketing personnel. We anticipate that we will need to provide our clients with more maintenance supportan indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.
At this increasetime, it is not possible to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in demand,our results of operations until future periods. The extent to which COVID-19 impacts our business, operations, and also have been hiring additional personnel in this area. We continue to invest significantly in research and development to expand and improve the Pega Platform and applications. These investments have resulted in increased fixed costsfinancial results will depend on numerous evolving factors that do not vary with the level of revenue. If the increased demand for our offerings does not continue, we could experience decreased profitability or losses as a result of these increased fixed costs. Conversely, if we are unable to hire sales and marketing personnel to meet future demand or research and development personnel to enhance our current or develop new products, we may not be able to achieve our salespredict accurately, including:
•the duration and profitability targets.We will needscope of the pandemic;
•governmental, business, and individual actions taken in response to acquire or develop new products, evolve existing ones, address any defects or errors,the pandemic and adaptthe impact of those actions on global economic activity;
•the actions that are taken in response to technology changes.Technical developments, client requirements, programming languages,economic disruption;
•the impact of business disruptions and industry standards change frequentlyreductions in our markets. As a result, success in current marketsclients’ business and new markets will depend upon the resulting impact on their demand for our services and solutions; and
•our ability to enhance current products, addressprovide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of offices and facilities.
General Risk Factors
The provision in our amended and restated bylaws, requiring exclusive forum in certain courts in The Commonwealth of Massachusetts or the federal district court for the District of Massachusetts for certain types of lawsuits, may have the effect of discouraging lawsuits against us and our directors, officers, and employees.
Our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the Business Litigation Section of the Superior Court of Suffolk County, Massachusetts (the “BLS”) or, if the BLS lacks jurisdiction, the federal district court for the District of Massachusetts, Eastern Division, shall be the exclusive forum for any product defects(i) derivative action or errors, acquire or develop and introduce new products that meet client needs, keep pace with technology changes, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement, and testing. We may not have sufficient resources to make necessary product development investments. We may experience technicalproceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other difficultiesemployees to us or our stockholders, (iii) any action asserting a claim arising pursuant to the Massachusetts Business Corporation Act (the “MBCA”), our articles of organization, or our bylaws (as each may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine.
The choice of forum provision may increase costs to bring a claim, discourage claims, or limit a stockholder’s ability to bring a claim in a judicial forum that
will delayit finds favorable for disputes with us or
prevent the successful development, introduction, or implementation of new or enhanced products. We may also experience technicalour directors, officers, or other
difficultiesemployees, which may discourage such lawsuits against us or our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision in
the integration of acquired technologies into our
existing platformamended and
applications. Inabilityrestated bylaws to
introducebe inapplicable or
implement new or enhanced productsunenforceable in
a timely manner could resultan action, we may incur additional costs associated with resolving such action in
loss of market share if competitors are able to provide solutions to meet client needs before we do, give rise to unanticipated expenses related to further development or modification of acquired technologies,other jurisdictions. The exclusive forum provision in our amended and
adversely affect future financial performance.The market for our offerings is intensely and increasingly competitive, rapidly changing, and highly fragmented.
We compete in the CRM (which includes marketing, sales, and customer service), BPM, case management, decision management, robotic automation,co-browsing, social engagement, and mobile application development platform software markets, as well as in markets for the vertical applications we provide (e.g. Pega® KYC for Financial Services, Pega® Underwriting for Insurance). These markets are intensely competitive, rapidly changing, and highly fragmented, as current competitors expand their product offerings and new companies enter the market.
We encounter significant competition from other technology vendors, as well as clients’ internal information systems departments, that seek to modify their existing systems or develop their own proprietary systems, and professional service organizations that develop their own products or create custom software in conjunction with rendering consulting services. Competition for market share and pressure to reduce prices and make sales concessions are likely to increase. Many of our competitors, such as IBM, Oracle, and Salesforce, have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages, or standards, or to changes in client requirements or preferences. Competitors may also be able to devote greater managerial and financial resources to develop, promote, and distribute products and to provide related consulting and training services. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures faced by usrestated bylaws will not materially adversely affect our business, operating results,preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws, including the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or the respective rules and financial condition. See “Competition” in Item 1 “Business” of this Annual Report.
regulations promulgated thereunder.
The continued uncertainties in the global economy may negatively impact our sales to, and the collection of receivables, from our clients.
Our sales to, and
ourthe collection of receivables from, our clients may be impacted by adverse changes in global economic conditions. The U.S. and other key international economies have experienced cyclical downturns from time to time, during which economic activity has been impacted by falling demand for goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity, and foreign exchange markets, bankruptcies, and economic uncertainty. These changes in global economic conditions could impact the ability and willingness of our clients to make investments in technology, which in turn may delay or reduce the purchases of our software and services. These factors could also impact the ability and willingness of these clients to pay their trade obligations and honor their contractual commitments. These clients may also become subject to increasingly restrictive regulatory requirements, which could limit or delay their ability to proceed with technology purchases and may result in longer sales cycles, increased price competition, and reductions in sales of our products and services. The financial uncertainties facing many of our clients and the industries in which they operate could negatively impact our business, operating results, and financial condition.
We have historically sold to the financial services, healthcare, insurance, and communications markets, and rapid changes or consolidation in these markets could affect the level of demand for our products.
We have historically derived a significant portion of our revenue from clients in the financial services, healthcare, insurance, and communications markets, and sales to these markets are important for our future growth. Competitive pressures, industry consolidation, decreasing operating margins, regulatory changes, and privacy concerns affect the financial condition of our clients and their willingness to buy. In addition, clients’ purchasing patterns in these industries for large technology projects are somewhat discretionary.
The
financial services and insurance markets continue to undergo intense domestic and international consolidation, and consolidation has increased in the healthcare and communications markets. Consolidation may interrupt normal buying behaviors and increase the volatility of our operating results. In recent years, several of our clients have been merged or consolidated, and we expect this to continue in the near future. Future mergers or consolidations may cause a decline in revenues and adversely affect our future financial performance. All of these factors affect the level of demand for our products from clients in these industries, and could adversely affect our business, operating results, and financial condition.We rely on certain third-party relationships.
We have a number of relationships with third parties that are significant to our sales, marketing and support activities, and to product development efforts, including hosting facilities for our cloud offering. We rely on software and hardware vendors, large system integrators, and technology consulting firms to provide marketing and sales opportunities for our direct sales force and to strengthen our products through the use of industry-standard tools and utilities. We also have relationships with third parties that distribute our products. There can be no assurance that these companies, many of which have far greater financial and marketing resources than we do, will not develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships with us. Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security as it is provided by such third parties, which despite our due diligence may be or become less than adequate.
We face risks from operations and clients based outside of the U.S.
Sales to clients based outside of the U.S. represent an average of 44% of our total revenue over the last three fiscal years. We market our products and services to clients based outside of the U.S. including clients based in Canada, Europe, Latin America, Asia, and Australia. We have established offices in the Americas, Europe (including Russia and Turkey), Asia (including India), and Australia. We believe that growth will necessitate expanded international operations, requiring increased managerial attention and costs. We anticipate hiring
additional personnel to accommodate international growth, and we may also enter into agreements with local distributors, representatives, or resellers. If we are unable to do one or more of these things in a timely and effective manner, the growth, if any, of our foreign operations may be restricted, and our business, operating results, and financial condition could be materially and adversely affected.
In addition, we may not be able to maintain or increase international market demand for our offerings. Additional risks inherent in our international business activities generally include:
laws and business practices favoring local competitors;
compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy and data privacy and protection, and increased tariffs and other trade barriers;
the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses;
longer payment cycles and credit and collectability risk on our foreign trade receivables;
economic and political uncertainty around the world, such as the United Kingdom’s referendum in June 2016 in which voters approved an exitU.K.’s withdrawal from the European Union commonly(commonly referred to as “Brexit”;
difficulties in enforcing contractual and intellectual property rights;
heightened fraud and anti-bribery awareness risks;
treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions) on repatriating earnings and the threat of “double taxation”);
managing our international operations, including increased accounting, internal control, and compliance expenses;
heightened risks of political and economic instability; and
foreign currency exchange rate fluctuations and controls.
There can be no assurance that one or more of these factors will notJanuary 31, 2020 could have a material adverse effect on our international operations, and, consequently,impact on our business, operating results,including our relationships with existing and financial condition.
We are exposed to fluctuations in currency exchange rates thatfuture clients, suppliers, and employees, which could negatively impactharm our financial results and cash flows.
Because a significant portionoperations.
We have material operations in the U.K. and European Union. The ultimate or perceived effects of the U.K.’s withdrawal from the European Union, could potentially disrupt the markets we serve and the tax jurisdictions in which we operate.
The market price of our businesscommon stock has been and is conducted outside the U.S., we face exposurelikely to adverse movements in foreign currency exchange rates. Our international sales are usually denominated in foreign currencies. continue to be volatile.
The operating expensesmarket price of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales. Our results of operationscommon stock may be highly volatile and cash flows are subject to fluctuationsmay fluctuate substantially due to a variety of factors, some of which are related in complex ways.
Factors that may affect the market price of our common stock include:
•actual or anticipated fluctuations in our financial condition and operating results;
•variance in our financial performance from expectations of securities analysts;
•changes in foreign currency exchange rates, particularly our projected operating and financial results;
•changes in the U.S. dollar, prices of our products and professional services;
•changes in laws or regulations applicable to our products or services;
•announcements by our competitors or us of significant business developments, acquisitions, or new offerings;
•our involvement in any litigation or investigations by regulators;
•our sale of our common stock or other securities;
•changes in our Board of Directors, senior management, or key personnel;
•the Euro,trading volume of our common stock;
•price and volume fluctuations in the Australian dollar relative tooverall stock market;
•changes in the British Pound. These exposuresanticipated future size and growth rate of our market; and
•general economic, regulatory, political, and market conditions.
Broad market and industry fluctuations, as well as general economic, regulatory, political, and market conditions, may change over time as business practices evolve, and they could have a material adversenegatively impact onthe market price of our financial results and cash flows.common stock. In the past, wecompanies that have used, but do not currently use, foreign currency forward contracts (“forward contracts”)experienced volatility in the market price of their securities have been subject to hedge our exposure to changes in foreign currency exchange rates associated with our foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by our U.S. parent company and its U.K. subsidiary.securities class action litigation. We may be the target of this type of litigation in the future, again enter into hedging contracts if we feel that it is appropriate. We do not enter into any hedging contracts for trading or speculative purposes. Our realized gain or loss with respect to foreign currency fluctuations will generally depend on the size
and type of cross-currency exposures that we enter into; the currency exchange rates associated with these exposures and changes in those rates; whether we have entered into forward contracts to offset these exposures; and other factors. All of these factors could materially impact our operating results, financial condition, and cash flows.
Factors relating to our internal operations and potential liabilities
We depend on a number of key personnel, and must be able to attract and retain qualified personnel in the future.
The business is dependent on key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer who is also our founder and majority stockholder. The loss of key personnel could be disruptive to our operations and adversely affect financial performance. We do not have any significantkey-man life insurance on any officers or employees and do not plan to obtain any. Our success will depend in large part on the ability to attract and retain qualified personnel, and rapidly replace and develop new management. The number of potential employees who have the extensive knowledge needed to develop, sell, and maintain our offerings is limited, and competition for their services is intense, and there can be no assurance that we will be able to attract and retain such personnel. If we are unable to do so, our business, operating results, and financial condition could be materially adversely affected.
The acquisition of other businesses and technologies may present new risks.
We have undertaken acquisitions in the past, and we continue to evaluate and consider other potential strategic transactions, including domestic and international acquisitions of businesses, technologies, services, products, and other assets. These acquisitions, if undertaken, may involve significant new risks and uncertainties, including distraction of management attention away from our current business operations, insufficient new revenue to offset expenses, inadequate return on capital, integration challenges, new regulatory and/or legal requirements, new third-party intellectual property infringement claims related to the acquired technology and/or services, dilution of shareholder value, cross border legal issues, and issues not discovered in our due diligence process. No assurance can be given that such acquisitions will be successful and will not adversely affect our profitability or operations.
We may experience significant errors or security flaws in our product and services, and could face privacy, product liability, and/or warranty claims as a result.
Despite quality testing prior to its release, our software frequently contains errors or security flaws, especially when first introduced or when new versions are released. Errors in our software could affect its ability to work with hardware or other software, or could delay the development or release of new products or new versions of our software. Additionally, the detection and correction of any security flaws can be time consuming and costly. Errors or security flaws in our software could result in the inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties. Software errors and security flaws in our products or services could expose us to privacy, product liability, and/or warranty claims as well as harm our reputation, which could impact our future sales of products and services. Typically, we enter into license agreements that contain provisions intended to limit the nature and extent of our risk of product liability and warranty claims. There is a risk that a court might interpret these terms in a limited way or could hold part or all of these terms to be unenforceable. Also, there is a risk that these contract terms might not bind a party other than the direct client. Furthermore, some of our licenses with our clients are governed bynon-U.S. law, and there is a risk that foreign law might give us less or different protection. Although we have not experienced any material product liability claims to date, a product liability suit or action claiming a breach of warranty, whether or not meritorious, could result in substantial costs and a diversion ofdivert our management’s attentionattention.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our resources.
We face risks relatedstock price to intellectual property claims or appropriation of our intellectual property rights.
We rely primarily on a combination of copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. decline.
We have
obtained patents in strategically important global markets relatingprovided and may continue to
the architecture of our systems. We cannot assure that such patents will not be challenged, invalidated, or circumvented or that rights granted thereunder or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment withgive guidance on our business,
partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. There can be no assurance that third parties, including clients, will not claim infringement by us with respect to current or future products. Although we attempt to limit the amount and type of our contractual liability for infringement of the proprietary rights of third parties, and also assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or be precluded from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results, and financial condition.
We are subject to increasingly complexother business metrics. In developing this guidance, our management must make certain assumptions and burdensome U.S.judgments about our future performance. Furthermore, analysts and foreign lawsinvestors may develop and regulations, and any failure to comply with these laws and regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or have a material adverse effect onpublish their own projections of our business, financial conditionwhich may form a consensus about our future performance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control and which could materially adversely affect our operations and operating results. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results of operations.
We are subject to extensive federal, state, and foreign laws and regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, data privacy and security laws, and similar laws and regulations. The Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar foreign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Similar laws and regulations exist in many other countries throughout the world in which we do or intend to do business. Data privacy laws and regulations in Europe, Australia, Latin America and elsewhere are undergoing rapid transformation towards increased restrictions. For example, in October 2015, the European Court of Justice invalidated theU.S.-EU Safe Harbor framework that had been in place since 2000, which allowed companiesfails to meet certain European legal requirements for the transferexpectations of personal data from the European Economic Area to the United States. In April 2016, the European Parliament adopted the General Data Protection Regulation (“GDPR”). The GDPR has atwo-yearphase-in period, with an effective date of May 25, 2018 and extends the scope of European privacy laws to any entity which controlssecurities analysts, investors, or processes personal data of E.U. residents in connection with the offer of goodsother interested parties, our common stock price would decline.
If securities or servicesindustry analysts do not publish research or the monitoring of behavior. Complying with the GDPR and other emerging and changing requirements may cause us to incur substantial costs or require us to changereports about our business, practices.
We have developed and implemented a compliance program based on what we believe are current best practices, including the background checking of our current partners and prospective clients and partners, but we cannot guarantee that we, our employees, our consultants, our partners, or our contractors are or will be in compliance with all federal, state, and foreign regulations, particularly as we expand our operations outside of the U.S. If we or our representatives fail to comply with any of these laws or regulations, a range of fines, penalties, and/or other sanctions could be imposed on us, which could have a material adverse effect onpublish negative reports about our business, financial condition,our stock price and results of operations. Even if we are determined not to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, whichtrading volume could also have an adverse effect on our business, financial condition, and results of operations. In addition, regulation of data privacy and security laws is increasing worldwide, including various restrictions on cross-border access or transfer of data, including personal data of our employees, our clients, and customers of our clients. Compliance with such regulations may increase our costs and there is a risk of enforcement of such laws resulting in damage to our brand as well as financial penalties and potential loss of business, which could be significant.
We face risks related to outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure.
decline.
The
increasing user traffictrading market for our
cloud offering demands more computing power. It requirescommon stock depends, in part, on the research and reports that
we maintain an Internet connectivity infrastructure that is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficienciessecurities or
operational failures, including temporary or permanent loss of client data, power outages, or telecommunications infrastructure outages, byindustry analysts publish about us or our
third party service providers could diminishbusiness. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the
qualityanalysts who cover us downgrade our shares or change their opinion of our
user experience resulting in contractual liability, claims by clients and other third parties, damageshares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to
our reputation, loss of current and potential clients, and harm to our operating results and financial condition.Our implementation of significant modifications to our enterprise resource planning (“ERP”) system may adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.
During 2016,publish reports on us regularly, we implemented the billing and revenue recognition modules in our existing ERP system. The new revenue recognition module was implemented to facilitate the preparation of our financial statements under both the current revenue recognition guidance under Accounting Standards Codification985-605, Software—Revenue Recognition and the new guidance under Accounting Standard UpdateNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. See Note 2, “Significant Accounting Policies—New accounting pronouncements,” included in Item 8 of this Annual Report for further discussion of new guidance. Implementations of a project of this size and complexity involve risks inherentcould lose visibility in the conversionfinancial markets, which could cause our share price or trading volume to a new computer system, including loss of information and potential disruption of normal operations. The implementation was completed in the fourth quarter of 2016; however, post-implementation support activities are still ongoing. Our business and results of operations may be adversely affected if we experience operating problems with the new system that result in increased costs to correct post-implementation issues identified. Additionally, if the new system and the associated process changes do not give rise to the benefits that we expect, or if the new system does not operate as intended, it could adversely affect our financial reporting systems and processes, our ability to produce timely and accurate financial reports, and/or the effectiveness of internal control over financial reporting. We have assessed, and continue to monitor, our processes and procedures as a result of the implementation, as well as the impact on our internal controls over financial reporting.
decline.ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support, and research and development operations are
located in Cambridge, Massachusetts
in an approximately 185,000 square foot leased facility. Our lease expires in 2023, subject to our option to extend for two additional five-year periods. A significant portion of our research and
development is conducted in Hyderabad,
India in an approximately 238,000 square foot leased facility. Our Hyderabad facility is subject to two leases which expire in 2019 and 2020 and are subject to our option to extend for two additional five-year periods.India. We also lease space for smallermaintain offices elsewhere in the Americas, Europe, and the Asia Pacific under leases that expire at various dates through 2022.Asia-Pacific regions. On February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts corporate headquarters on October 1, 2021, in exchange for a one-time payment to us of $18 million. We periodically evaluateexpect to enter into a new lease agreement for a facility within the adequacygreater Boston area. All of existing facilitiesour properties are leased. We are currently assessing the impact of the COVID-19 pandemic and wethe increase in remote work on our future real estate needs. We believe that additional or alternative spacewe will be availableable to obtain future space as needed in the future on acceptable and commercially reasonable terms.
See
Note 12 “Commitments and Contingencies,”"Note 9. Leases" in Item 8 of this Annual Report for
more information about our lease commitments.additional information.None.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and civil and regulatory claims that arise in the ordinary course of our business activities. Regardless of the outcome, litigation can have a material adverse effect on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Informationinformation
Our common stock is quoted on the NASDAQ Global Select Market
(“NASDAQ”) under the symbol “PEGA.”
The following table sets forth the range of high and low sales prices of our common stock on NASDAQ for each quarter in 2017 and 2016: | | | | | | | | | | | | | | | | |
| | | Common Stock Price | |
| | | 2017 | | | 2016 | |
| | | High | | | Low | | | High | | | Low | |
First Quarter | | $ | 45.20 | | | $ | 35.50 | | | $ | 27.19 | | | $ | 20.62 | |
Second Quarter | | $ | 63.65 | | | $ | 43.00 | | | $ | 29.00 | | | $ | 24.32 | |
Third Quarter | | $ | 62.35 | | | $ | 52.00 | | | $ | 29.61 | | | $ | 25.02 | |
Fourth Quarter | | $ | 60.30 | | | $ | 46.55 | | | $ | 36.65 | | | $ | 28.76 | |
As of February 14, 2018,5, 2021, we had approximately 2348 stockholders of recordrecord.
Dividends
During 2020, 2019, and
approximately 21,100 beneficial owners of our common stock.Dividends
In 2017 and 2016,2018, we paid quarterly cash dividends of $0.03 per share of common stock. It is our current intentionWe currently expect to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without prior notice.
Issuer Purchasespurchases of Equity SecuritiesThe following table sets forth information regarding repurchases of our commonequity securities
(1) Common stock
duringrepurchased in the three months ended December 31,
2017: | | | | | | | | | | | | | | | | |
Period | | Total Number
of Shares
Purchased (1)(2)
(in thousands) | | | Average Price
Paid per
Share(1)(2) | | | Total Number
of Shares
Purchased as Part
of Publicly
Announced Share
Repurchase
Program (2)
(in thousands) | | | Approximate Dollar
Value of Shares That
May Yet Be Purchased
at Period End Under
Publicly Announced
Share Repurchased
Programs (2)
(in thousands) | |
October 1, 2017 – October 31, 2017 | | | 14 | | | $ | 58.56 | | | | — | | | $ | 36,399 | |
November 1, 2017 – November 30, 2017 | | | 93 | | | $ | 52.72 | | | | 1 | | | $ | 36,355 | |
December 1, 2017 – December 31, 2017 | | | 146 | | | $ | 49.24 | | | | 30 | | | $ | 34,892 | |
| | | | | | | | | | | | | | | | |
Total | | | 253 | | | $ | 51.03 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1) | We net settle the majority of our employee stock option exercises and restricted stock unit (“RSU”) vestings, which results in the withholding of shares to cover the option exercise price and the minimum statutory withholding tax obligations that we are required to pay in cash to the applicable taxing authorities on behalf of our employees. Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of the company’s stock compensation awards have been included in the above table. |
2020: (2) | Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2018 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established apre-arranged stock repurchase plan, intended to comply with the requirements of Rule10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule10b-18 under the Exchange Act (the“10b5-1 Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1 Plan. |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | Total Number of Shares Purchased (2) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program | | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs |
| October 1, 2020 - October 31, 2020 | 37 | | | $ | 125.97 | | | 26 | | | $ | 43,873 | |
| November 1, 2020 - November 30, 2020 | 105 | | | $ | 123.82 | | | 23 | | | $ | 41,024 | |
| December 1, 2020 - December 31, 2020 | 138 | | | $ | 128.76 | | | 25 | | | $ | 37,726 | |
| Total | 280 | | | $ | 126.54 | | | | | |
(1) See "Stock repurchase program" in Item 7 of this Annual Report for additional information.
(2) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
Stock Performance Graphperformance graph and Cumulative Total Stockholder Returncumulative total stockholder return
(1) The following performance graph represents a comparison of the cumulative total stockholder return, (assumingassuming the reinvestment of dividends)dividends, for a $100 investment on December 31, 20122015 in our common stock, the Total Return Index for the NASDAQ Composite, (“NASDAQ Composite”), a broad market index, and the Standard & Poor’s (“S&P”) North American Technology Sector—Sector - Software Index™ (“S&P NA Tech Software”), a published industry index.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Pegasystems Inc. | $ | 100.00 | | | $ | 131.46 | | | $ | 172.58 | | | $ | 175.44 | | | $ | 292.66 | | | $ | 490.22 | |
| NASDAQ Composite | $ | 100.00 | | | $ | 108.87 | | | $ | 141.13 | | | $ | 137.12 | | | $ | 187.44 | | | $ | 271.64 | |
| S&P NA Tech Software | $ | 100.00 | | | $ | 106.20 | | | $ | 151.66 | | | $ | 170.83 | | | $ | 229.93 | | | $ | 349.26 | |
(1) The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.
We paid dividends of $0.12 per share during 2017, 2016, and 2015, $0.09 per share during 2014, and $0.045 per share during 2013, respectively. The dividends paid per share have been adjusted for thetwo-for-one common stock split effected in the form of a common stock dividend on April 1, 2014.
Comparison of 5 Year Cumulative Total Return
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
Pegasystems Inc. | | $ | 100.00 | | | $ | 217.56 | | | $ | 184.71 | | | $ | 245.78 | | | $ | 323.10 | | | $ | 424.16 | |
NASDAQ Composite | | | 100.00 | | | | 140.12 | | | | 160.78 | | | | 171.97 | | | | 187.22 | | | | 242.71 | |
S&P NA Tech Software | | $ | 100.00 | | | $ | 131.10 | | | $ | 149.30 | | | $ | 167.95 | | | $ | 178.37 | | | $ | 254.71 | |
ITEM 6. | SELECTED FINANCIAL DATA |
The selected financial data presented below has been derived from our audited consolidated financial statements. This data should be read in conjunction
ITEM 6. SELECTED FINANCIAL DATA
Consistent with
Item 7.the final rules promulgated by the SEC on November 19, 2020 (Release 33-10890 titled “Management’s Discussion and Analysis,
ofSelected Financial
Condition and Results of Operations” and Item 8. “Financial StatementsData, and Supplementary
Financial Data”
), we have elected early adoption of
this Annual Report. | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands, except per share amounts) | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Consolidated Statements of Operations Data: (1)(2) | | | | | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | | | | | |
Perpetual license | | $ | 141,819 | | | $ | 147,529 | | | $ | 166,305 | | | $ | 136,154 | | | $ | 122,644 | |
Term license | | | 146,515 | | | | 132,466 | | | | 109,283 | | | | 96,182 | | | | 69,232 | |
Maintenance | | | 244,347 | | | | 220,336 | | | | 202,802 | | | | 186,239 | | | | 157,309 | |
Cloud | | | 51,892 | | | | 41,438 | | | | 30,626 | | | | 16,614 | | | | 8,720 | |
Consulting and training | | | 256,009 | | | | 208,497 | | | | 173,679 | | | | 154,815 | | | | 151,049 | |
| | | | | | | | | | | | | | | | | | | | |
Total revenue | | | 840,582 | | | | 750,266 | | | | 682,695 | | | | 590,004 | | | | 508,954 | |
Income from operations | | | 38,660 | | | | 37,759 | | | | 64,661 | | | | 51,539 | | | | 58,097 | |
Income before provision for income taxes | | | 37,100 | | | | 35,202 | | | | 60,505 | | | | 47,994 | | | | 56,393 | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | | | $ | 33,255 | | | $ | 38,043 | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.43 | | | $ | 0.35 | | | $ | 0.47 | | | $ | 0.44 | | | $ | 0.50 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | | 0.40 | | | | 0.34 | | | | 0.46 | | | | 0.42 | | | | 0.49 | |
| | | | | | | | | | | | | | | | | | | | |
Cash dividends declared per common share | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.105 | | | $ | 0.06 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | We elected to early adopt Accounting Standards Update (“ASU”)2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU2016-09”) in 2016, which requires us, among other things to record excess tax benefits as a reduction of the provision for income taxes in the consolidated statement of operations, whereas they were previously recognized in equity. We are required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that includes the period of adoption. As such, certain information above for 2016 included the impact of the ASU2016-09 adoption. |
(2) | The per share amounts have been retroactively restated for all prior periods presented to reflect thetwo-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014. |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
Consolidated Balance Sheet Data: (1) | | | | | | | | | | | | | | | | | | | | |
Total cash, cash equivalents, and marketable securities | | $ | 223,748 | | | $ | 133,761 | | | $ | 219,078 | | | $ | 211,216 | | | $ | 156,692 | |
Working capital | | | 188,309 | | | | 137,660 | | | | 179,297 | | | | 150,474 | | | | 145,487 | |
Property and equipment, net | | | 40,359 | | | | 38,281 | | | | 31,319 | | | | 30,156 | | | | 28,957 | |
Intangible assets, net | | | 31,899 | | | | 44,191 | | | | 33,418 | | | | 45,664 | | | | 56,574 | |
Goodwill | | | 72,952 | | | | 73,164 | | | | 46,776 | | | | 46,860 | | | | 43,469 | |
Total assets | | | 721,606 | | | | 654,656 | | | | 627,758 | | | | 587,801 | | | | 536,480 | |
Total stockholders’ equity | | $ | 371,078 | | | $ | 335,889 | | | $ | 322,859 | | | $ | 294,705 | | | $ | 271,788 | |
(1) | We retrospectively adopted ASU2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” in 2016. As a result, all net deferred income taxes assets are classified as long-term deferred income tax assets in the consolidated balance sheets for all periods presented. The amounts reclassified as of December 31, 2015, 2014, and 2013, were $12.4 million, $13 million, and $12.3 million, respectively. |
the elimination of Item 301 of Regulation S-K. ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We develop, market, license,
host, and support
enterprise software applications
that help organizations transform how they engage with their customers and process work. We also license our low code Pega Platform™ for
customer engagement and digital process automation, in addition to licensing our Pega Platformrapid application development
product forto clients that wish to build and extend their
ownbusiness applications.
TheOur cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified low code Pega Platform,
empowering businesses to quickly design, extend, and
applications help connect enterprises toscale their
customers in real-time across channels, streamline business operations, and adaptenterprise applications to meet
changing requirements.strategic business needs.
Our target clients includeare Global 3000 companiesorganizations and government agencies that seekrequire applications to differentiate themselves in the markets they serve. Our applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.
Cloud Transition
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud (“Cloud Transition”). Until we substantially complete our Cloud Transition, which we anticipate will occur in early 2023, we expect to continue to experience lower revenue growth and lower operating cash flow growth or negative cash flow. The actual mix of revenue and new arrangements in a given period can fluctuate based on client preferences.
See risk factor "If we fail to manage
complex enterprise systems and customer service issues with greater agility and cost-effectiveness. Our strategy isour transition to
sell a
client a series of licenses, each focused on a specific purpose or areamore subscription-based business model successfully, our results of operations
and/or cash flows could be negatively impacted." in
supportItem 1A of
longer term enterprise-wide digital transformation initiatives.this Annual Report for additional information.
Coronavirus (“COVID-19”)
As of December 31, 2020, COVID-19 has not had a material impact on our results of operations or financial condition.
COVID-19's ultimate impact on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak and the impact of COVID-19 on our sales cycles, partners, vendors, and employees, all of which is uncertain and unpredictable. Our
licenseshift towards subscription-based revenue
is primarily derived from salesstreams, the industry mix of our
applicationsclients, the substantial size and
available resources of our
Pega Platform.Our cloud revenue is derived fromclients, and the critical nature of our hosted Pega Platform and software application environments.
Our consulting services revenue is primarily relatedproducts to new license implementations.
Financial and Performance Metrics
Management evaluates our financial performance basedclients may reduce or delay the impact of COVID-19 on a number of financial and performance metrics. The metrics are periodically reviewed and revised to reflect any changes in our business. Historically, recurring revenueHowever, it is not possible to estimate the ultimate impact that COVID-19 will have on our business at this time.
See “Coronavirus (“COVID-19”)” in Item 1A of this Annual Report for additional information.
Relocation of Corporate Headquarters
On February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts corporate headquarters on October 1, 2021, in exchange for a one-time payment to us of $18 million. We expect to enter into a new lease agreement for a facility within the greater Boston area.
Performance metrics
We utilize several performance metrics to analyze and licenseassess our overall performance, make operating decisions, and cloud backlog have beenforecast and plan for future periods, including:
Annual contract value (“ACV”) | Increased 21% since December 31, 2019
•ACV, as reported, represents the annualized value of our primary performance metrics. However, dueactive contracts as of the measurement date. The contract's total value is divided by its duration in years to the change in the timing of revenue recognitioncalculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates. Foreign currency contributed 1%-2% to ACV growth in 2020.
Remaining performance obligations (“Backlog”) | Increased 28% since December 31, 2019
•Backlog represents contracted revenue that has not yet been recognized and includes deferred revenue and non-cancellable amounts expected to be invoiced and recognized as revenue in future periods.
•
Pega Cloud revenue | Increased 56% since 2019
•Pega Cloud revenue is revenue as reported under U.S. GAAP for cloud contracts.
RESULTS OF OPERATIONS
Revenue
Cloud Transition
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Revenue growth has and is expected to continue to be slower during this transition Revenue from Pega Cloud arrangements is typically recognized over the contract term. In contrast, revenue from license sales is generally recognized upfront when the license rights become effective.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2020 | | 2019 | | Change |
| Pega Cloud | $ | 208,268 | | 20 | % | | $ | 133,746 | | 15 | % | | $ | 74,522 | | 56 | % |
| Maintenance | 296,709 | | 30 | % | | 280,580 | | 30 | % | | 16,129 | | 6 | % |
| Term license | 266,352 | | 26 | % | | 199,433 | | 22 | % | | 66,919 | | 34 | % |
Subscription (1) | $ | 771,329 | | 76 | % | | $ | 613,759 | | 67 | % | | 157,570 | | 26 | % |
| Perpetual license | 28,558 | | 3 | % | | 80,015 | | 9 | % | | (51,457) | | (64) | % |
| Consulting | 217,630 | | 21 | % | | 217,609 | | 24 | % | | 21 | | — | % |
| $ | 1,017,517 | | 100 | % | | $ | 911,383 | | 100 | % | | $ | 106,134 | | 12 | % |
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).
The change in total revenue since 2019 generally reflects the impact of our Cloud Transition. Additional contributing factors were:
•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance periods. Under such arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than as term license revenue upon effectiveness of the license rights. In 2020, multi-year committed maintenance contributed $10.2 million to maintenance revenue growth and reduced term revenue growth by $20.8 million.
•Maintenance renewal rates remained over 90% in 2020.
•The slight increase in consulting revenue in 2020 was primarily due to increased billable hours, which offset the impact of reduced billable travel expenses due to COVID-19. As part of our long-term strategy, we intend to continue growing and increasingly leveraging our ecosystem of partners on future implementation projects, potentially reducing our future consulting revenue growth rate.
Gross profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2020 | | 2019 | | Change |
| Software license | $ | 291,982 | | 99 | % | | $ | 275,792 | | 99 | % | | $ | 16,190 | | 6 | % |
| Maintenance | 274,398 | | 92 | % | | 254,924 | | 91 | % | | 19,474 | | 8 | % |
| Pega Cloud | 131,693 | | 63 | % | | 67,918 | | 51 | % | | 63,775 | | 94 | % |
| Consulting | 8,531 | | 4 | % | | 2,727 | | 1 | % | | 5,804 | | 213 | % |
| $ | 706,604 | | 69 | % | | $ | 601,361 | | 66 | % | | $ | 105,243 | | 18 | % |
•The increase in gross profit in 2020 was primarily due to cost-efficiency gains as Pega Cloud grows and scales as a result of our Cloud Transition and overall revenue growth.
•The increase in consulting gross profit in 2020 was primarily due to a decrease in travel and entertainment expenses and an increase in consultant utilization. Consultant utilization is impacted by several factors, including the expectedtiming of new implementation projects and our scope and level of involvement in these projects compared to that of our consulting partners and enabled clients.
Operating expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | Change |
| (Dollars in thousands) | | % of Revenue | | | % of Revenue | |
| Selling and marketing | $ | 545,693 | | 54 | % | | $ | 474,459 | | 52 | % | | $ | 71,234 | | 15 | % |
| Research and development | $ | 236,986 | | 23 | % | | $ | 205,210 | | 23 | % | | $ | 31,776 | | 15 | % |
| General and administrative | $ | 67,452 | | 7 | % | | $ | 56,570 | | 6 | % | | $ | 10,882 | | 19 | % |
•The increase in selling and marketing in 2020 was primarily due to an increase in compensation and benefits of $97.2 million, attributable to increases in headcount and equity compensation, partially offset by a decrease in travel and entertainment of $27.2 million due to COVID-19. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.
•The increase in research and development in 2020 was primarily due to an increase in compensation and benefits of $30.2 million, attributable to increases in headcount and equity compensation. The increase in headcount reflects additional investments in the new revenue accounting standard (See Note 2. “Significant Accounting Polices”)development of our products, particularly for Pega Cloud.
•The increase in general and administrative in 2020 was primarily due to an increase in compensation and benefits of $4.0 million, attributable to increases in headcount and equity compensation to support the growth in our operations and an increase in professional services fees of $4.2 million.
Other income (expense),
we are utilizing annual contract value (ACV) as a key performance metric.Select Financial Metrics
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| (Dollars in thousands, except per share amounts) | | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Total revenue | | $ | 840,582 | | | $ | 750,266 | | | $ | 682,695 | | | | 12 | % | | | 10 | % |
Operating margin | | | 5 | % | | | 5 | % | | | 9 | % | | | 0 | % | | | (44 | )% |
Diluted earnings per share | | $ | 0.40 | | | $ | 0.34 | | | $ | 0.46 | | | | 18 | % | | | (26 | )% |
Cash flow provided by operating activities | | $ | 158,235 | | | $ | 39,874 | | | $ | 67,803 | | | | 297 | % | | | (41 | )% |
Select Performance Metrics
ACV
net
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2020 | | 2019 | | Change |
| Foreign currency transaction gain (loss) | 3,704 | | | (2,335) | | | $ | 6,039 | | * |
| Interest income | 1,223 | | | 2,020 | | | (797) | | (39) | % |
| Interest expense | (19,356) | | | (212) | | | (19,144) | | (9,030) | % |
| Gain on capped call transactions | 31,697 | | | — | | | 31,697 | | * |
| Other (loss) income, net | 1,370 | | | 559 | | | 811 | | 145 | % |
| $ | 18,638 | | | $ | 32 | | | $ | 18,606 | | 58,144 | % |
* not meaningful
•The change in ACV measuresforeign currency transaction gain (loss) in 2020 was primarily due to the growthimpact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, accounts receivable, and predictabilityintercompany receivables and payables held by our United Kingdom (“U.K.”) subsidiary.
•The decrease in interest income in 2020 was due to the significant decline in market interest rates despite the significant increase in our interest-bearing investment balances.
•The increase in interest expense in 2020 was due to our issuance of future cash flows from committed term license, cloud, and maintenance arrangements as$600 million in aggregate principal amount of the end of the particular reporting period.
ACV, as of a given date, is the sum of the following two components:
The sum of the annual value of each term and cloud contract in effectNotes on such date, with the annual value of a term or cloud contract being equal to the total value of the contract divided by the total number of years of the contract.
Maintenance revenue reported for the quarter ended on such date, multiplied by four.
| | | | | | | | | | | | | | | | |
| | | December 31, | | | Change | |
| (Dollars in thousands) | | 2017 | | | 2016 | | |
Term License and Cloud ACV | | $ | 215,122 | | | $ | 178,965 | | | $ | 36,157 | | | | 20 | % |
Maintenance ACV | | | 254,352 | | | | 228,648 | | | $ | 25,704 | | | | 11 | % |
| | | | | | | | | | | | | | | | |
Term License, cloud and Maintenance ACV | | $ | 469,474 | | | $ | 407,613 | | | $ | 61,861 | | | | 15 | % |
| | | | | | | | | | | | | | | | |
License and Cloud Backlog
A measure of the continued growth of our business as a result of future contractual commitments by our clients.
License and cloud backlog is the sum of the following two components:
Deferred license and cloud revenue as recorded on our balance sheet. (See Note 11 “Deferred Revenue”)
License and cloud contractual commitments, which are not recorded on our balance sheet because we have not yet invoiced our clients, nor have we recognized the associated revenue. (See “Future Cash Receipts from Committed License and Cloud Arrangements” for additional information)
License and cloud backlog may vary in any given period depending on the amount and timing of when the arrangements are executed, as well as the mix between perpetual, term, and cloud license arrangements, which may depend on our clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. Under U.S. GAAP as of December 31, 2017, a higher proportion of term and cloud license arrangements executed will generally result in revenue being recognized over longer periods. For a discussion about how changes in U.S. GAAP will affect our recognition of revenue, please see Note 2. “Significant Accounting Polices”February 24, 2020. See "Note 10. Debt" in Item 8 of this Annual Report for additional information.
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | Change | |
| (Dollars in thousands) | | 2017 | | | 2016 | | |
Deferred license and cloud revenue on the balance sheet | | | | | | | | | | | | | | | | | | | | |
Term license and cloud | | $ | 41,407 | | | | 65 | % | | $ | 30,725 | | | | 50 | % | | | 35 | % |
Perpetual license | | | 21,845 | | | | 35 | % | | | 31,098 | | | | 50 | % | | | (30 | )% |
| | | | | | | | | | | | | | | | | | | | |
Total deferred license and cloud revenue | | | 63,252 | | | | 100 | % | | | 61,823 | | | | 100 | % | | | 2 | % |
| | | | | | | | | | | | | | | | | | | | |
License and cloud contractual commitments not on the balance sheet | | | | | | | | | | | | | | | | | | | | |
Term license and cloud | | | 522,077 | | | | 89 | % | | | 434,323 | | | | 93 | % | | | 20 | % |
Perpetual license | | | 63,176 | | | | 11 | % | | | 31,652 | | | | 7 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
Total license and cloud commitments | | | 585,253 | | | | 100 | % | | | 465,975 | | | | 100 | % | | | 26 | % |
| | | | | | | | | | | | | | | | | | | | |
Total license (term and perpetual) and cloud backlog | | $ | 648,505 | | | | | | | $ | 527,798 | | | | | | | | 23 | % |
| | | | | | | | | | | | | | | | | | | | |
Total term license and cloud backlog | | $ | 563,484 | | | | 87 | % | | $ | 465,048 | | | | 88 | % | | | 21 | % |
| | | | | | | | | | | | | | | | | | | | |
Recurring Revenue
A measure ofInterest expense related to the predictability and repeatability of our revenue.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| (Dollars in thousands) | | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Recurring revenue | | | | | | | | | | | | | | | | | | | | |
Term license | | $ | 146,515 | | | $ | 132,466 | | | $ | 109,283 | | | | 11 | % | | | 21 | % |
Maintenance | | | 244,347 | | | | 220,336 | | | | 202,802 | | | | 11 | % | | | 9 | % |
Cloud | | | 51,892 | | | | 41,438 | | | | 30,626 | | | | 25 | % | | | 35 | % |
| | | | | | | | | | | | | | | | | | | | |
Total recurring revenue | | $ | 442,754 | | | $ | 394,240 | | | $ | 342,711 | | | | 12 | % | | | 15 | % |
| | | | | | | | | | | | | | | | | | | | |
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| (Dollars in thousands) | | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Total revenue | | $ | 840,582 | | | $ | 750,266 | | | $ | 682,695 | | | | 12 | % | | | 10 | % |
Gross profit | | $ | 560,909 | | | $ | 511,010 | | | $ | 469,249 | | | | 10 | % | | | 9 | % |
Income from operations | | $ | 38,660 | | | $ | 37,759 | | | $ | 64,661 | | | | 2 | % | | | (42 | )% |
Income before provision for income taxes | | $ | 37,100 | | | $ | 35,202 | | | $ | 60,505 | | | | 5 | % | | | (42 | )% |
Net Income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | | | | 22 | % | | | (26 | )% |
Revenue
Notes:
| | | | | | | | | | | | | | | | | |
| Year Ended
December 31, | | Change |
| (in thousands) | 2020 | | 2019 | |
| Contractual interest expense (0.75% coupon) | $ | 3,825 | | | $ | — | | | $ | 3,825 | |
| Amortization of debt discount | 12,898 | | | — | | | 12,898 | |
| Amortization of issuance costs | 1,915 | | | — | | | 1,915 | |
| $ | 18,638 | | | $ | — | | | $ | 18,638 | |
•The adoption of the new revenue recognition standard (“ASC 606”)increase in the first quarter of 2018 will have a material impact primarilygain on our term license revenue.capped call transactions in 2020 was due to fair value adjustments on the Capped Call Transactions. See Note 2. “Significant Accounting Polices”"Note 10. Debt" in Item 8 of this Annual Report for additional information.Software license
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | % Change | |
| (Dollars in thousands) | | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Perpetual license | | $ | 141,819 | | | | 49 | % | | $ | 147,529 | | | | 53 | % | | $ | 166,305 | | | | 60 | % | | | (4 | )% | | | (11 | )% |
Term license | | | 146,515 | | | | 51 | % | | | 132,466 | | | | 47 | % | | | 109,283 | | | | 40 | % | | | 11 | % | | | 21 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software license | | $ | 288,334 | | | | 100 | % | | $ | 279,995 | | | | 100 | % | | $ | 275,588 | | | | 100 | % | | | 3 | % | | | 2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Under U.S. GAAP applicable to 2017, a higher proportion of term license arrangements executed would result
•The increase in more term license revenue being recognized over longer periods. However, with the adoption of the new revenue standard effective January 1, 2018, term license revenue will be recognizedother (loss) income, net in full in the year that control of the license is transferred to the client instead of over the term of the agreement.The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix may cause our revenues to vary materially from period to period. Additionally, some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods.
During 2017 and 2016, revenue from term licenses continued to grow as a proportion of our total license revenue reflecting a possible shift of our client preferences towards recurring arrangements.
2017 Compared to 2016
The decrease in perpetual license revenue in the current period2020 was primarily due to a lower proportion of perpetual arrangements for which revenue was recognized ingain from our venture investments portfolio.
(Benefit from) income taxes
| | | | | | | | | | | |
| (Dollars in thousands) | 2020 | | 2019 |
| (Benefit from) income taxes | $ | (63,516) | | | $ | (44,413) | |
| Effective income tax benefit rate | 51 | % | | 33 | % |
During 2020, the
same period that they were executed.The increase in term license revenueour effective income tax benefit rate was primarily due to an increase in revenue recognized in the current period for term arrangements executed in the preceding two years.
2016 Compared to 2015
The decrease in perpetual license revenue was primarilyexcess tax benefits from stock-based compensation and a carryback claim benefit due to the lower average value of perpetual license arrangements executed during 2016 compared to 2015Coronavirus Aid, Relief, and the acceleration of the recognition of $4.6 million in revenue in the fourth quarter of 2015 from an existing license arrangement which was being recognized ratably.
The increase in term license revenue was primarily due to a term license arrangement greater than $10 million for which the license fee for the three year license term was paid and recognized in full in the first quarter of 2016 as well as the increase in term license arrangements executed during 2016 and 2015, reflecting the shift towards recurring revenue streams.
Maintenance
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Maintenance | | $ | 244,347 | | | $ | 220,336 | | | $ | 202,802 | | | | 11 | % | | | 9 | % |
The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our software and continued renewal rates in excess of 90%Economic Security Act (“Cares Act”).
Services
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Consulting and Training | | $ | 256,009 | | | | 83 | % | | $ | 208,497 | | | | 83 | % | | $ | 173,679 | | | | 85 | % | | | 23 | % | | | 20 | % |
Cloud | | | 51,892 | | | | 17 | % | | | 41,438 | | | | 17 | % | | | 30,626 | | | | 15 | % | | | 25 | % | | | 35 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Services | | $ | 307,901 | | | | 100 | % | | $ | 249,935 | | | | 100 | % | | $ | 204,305 | | | | 100 | % | | | 23 | % | | | 22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consulting revenue represents revenue primarily from new license implementations. Our consulting revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.
2017 Compared to 2016
The increase in consulting revenue was primarily due to increased billable hours driven by a large project which began in the second half of 2016.
The increase in cloud revenue was primarily due to growth of our cloud client base.
2016 Compared to 2015
The increase in consulting revenue was due to higher realization rates and increased billable hours primarily related to two large projects in 2016, compared to unusually low demand in Europe in the first half of 2015.
The increase in cloud revenue was primarily due to growth of our cloud client base.
Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Software license | | $ | 283,249 | | | $ | 275,052 | | | $ | 271,463 | | | | 3 | % | | | 1 | % |
Maintenance | | | 216,442 | | | | 194,831 | | | | 180,899 | | | | 11 | % | | | 8 | % |
Consulting and Training | | | 33,097 | | | | 21,996 | | | | 7,687 | | | | 50 | % | | | 186 | % |
Cloud | | | 28,121 | | | | 19,131 | | | | 9,200 | | | | 47 | % | | | 108 | % |
Services | | | 61,218 | | | | 41,127 | | | | 16,887 | | | | 49 | % | | | 144 | % |
| | | | | | | | | | | | | | | | | | | | |
Total gross profit | | $ | 560,909 | | | $ | 511,010 | | | $ | 469,249 | | | | 10 | % | | | 9 | % |
| | | | | | | | | | | | | | | | | | | | |
Software license | | | 98 | % | | | 98 | % | | | 99 | % | | | | | | | | |
Maintenance | | | 89 | % | | | 88 | % | | | 89 | % | | | | | | | | |
Consulting and Training | | | 13 | % | | | 11 | % | | | 4 | % | | | | | | | | |
Cloud | | | 54 | % | | | 46 | % | | | 30 | % | | | | | | | | |
Services | | | 20 | % | | | 16 | % | | | 8 | % | | | | | | | | |
Total gross profit % | | | 67 | % | | | 68 | % | | | 69 | % | | | | | | | | |
2017 Compared to 2016
The increase in total gross profit was primarily due to increases in maintenance and services revenue.
The increase in services gross profit percent was primarily due to the recognition of revenue in 2017 related to a large cloud project which had been delayed from prior periods for which the majority of the associated costs had already been recognized in 2016, a large project which began in the second half of 2016, and a decrease in amortization expense due to the full amortization in 2016 of certain cloud-related intangibles acquired through past acquisitions.
2016 Compared to 2015
The increase in total gross profit was primarily due to increases in maintenance and services revenue.
The increase in services gross profit percent was primarily due to higher realization rates in 2016 compared to 2015 and the recognition of revenue in 2016 related to several large projects which had been delayed from prior periods, for which the majority of the associated costs had already been recognized in 2015.
Operating expenses
Selling and marketing
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Selling and marketing | | $ | 307,210 | | | $ | 278,849 | | | $ | 241,387 | | | | 10 | % | | | 16 | % |
As a percent of total revenue | | | 37 | % | | | 37 | % | | | 35 | % | | | | | | | | |
Selling and marketing headcount, end of period | | | 984 | | | | 898 | | | | 750 | | | | 10 | % | | | 20 | % |
Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of client related intangibles.
The increases in headcount reflect our efforts to increase our sales capacity to deepen relationships at existing accounts and industries while also expanding our coverage in new industries and geographies.
2017 Compared to 2016
The increase was primarily due to an $18.5 million increase in compensation and benefits expenses associated with higher headcount and increased equity compensation costs primarily from the increased value of our annual periodic equity awards, a $2.4 million increase in travel and entertainment driven by our increased sales headcount, a $2 million increase in partner and marketing contractor compensation, and a $1.5 million increase in sales and marketing programs expenses primarily related to our annual PegaWorld user conference.
2016 Compared to 2015
The increase was primarily due to a $29.4 million increase in compensation and benefit expenses associated with higher headcount and sales commission, a $2 million increase in sales and marketing programs expenses primarily related to our digital advertising and brand awareness campaigns and our PegaWorld annual user conference, and a $1 million increase in amortization expense due to the client-related intangible assets acquired from OpenSpan.
Research and development
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Research and development | | $ | 162,886 | | | $ | 145,548 | | | $ | 126,374 | | | | 12 | % | | | 15 | % |
As a percent of total revenue | | | 19 | % | | | 19 | % | | | 19 | % | | | | | | | | |
Research and development headcount, end of period | | | 1,479 | | | | 1,431 | | | | 1,222 | | | | 3 | % | | | 17 | % |
Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products as well as enhancements and engineering changes to existing products and integration of acquired technologies.
2017 Compared to 2016
The increase was primarily due to a $16.5 million increase in compensation and benefit expenses associated with higher headcount, higher stock-based compensation expense primarily from the increased value of our annual periodic equity awards, and annual merit salary increases.
2016 Compared to 2015
The increase was primarily due to a $16.1 million increase in compensation and benefit expenses associated with higher headcount and a $1.5 million increase in expendable equipment and software license expenses.
General and administrative
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
General and administrative | | $ | 52,153 | | | $ | 45,951 | | | $ | 36,738 | | | | 13 | % | | | 25 | % |
As a percent of total revenue | | | 6 | % | | | 6 | % | | | 5 | % | | | | | | | | |
General and administrative headcount, end of period | | | 425 | | | | 378 | | | | 353 | | | | 12 | % | | | 7 | % |
General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. They also include accounting, legal, and other professional consulting and administrative fees. The general and administrative headcount includes employees in human resources, information technology, and corporate services departments whose costs are allocated to our other functional departments.
2017 Compared to 2016
The increase was primarily due to a $5.1 million increase in compensation and benefits due to higher stock-based compensation expense primarily from the increased value of our annual periodic equity awards and increased facilities costs due to our expansion in Poland and India.
2016 Compared to 2015
The increase was primarily due to a $4.9 million increase in compensation and benefits expenses associated with higher headcount, of which $2.2 million was due to higher stock-based compensation expense primarily from the increased value of our annual periodic equity awards. The increase was also due to the fact that 2016 did not include a $1.8 million benefit from the settlement of our indemnification claims against the former Antenna, Inc. shareholders and a $1.6 million benefit from the settlement of certain indirect tax liabilities, which reduced our general and administrative expense in 2015.
Stock-based compensation
We recognize stock-based compensation expense associated with equity awards in our consolidated statements of operations based on the fair value of these awards at the date of grant using the accelerated recognition method, while treating each vesting tranche as if it were an individual grant.
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Cost of revenues | | $ | 14,573 | | | $ | 11,459 | | | $ | 8,772 | | | | 27 | % | | | 31 | % |
Selling and marketing | | | 15,720 | | | | 12,464 | | | | 8,911 | | | | 26 | % | | | 40 | % |
Research and development | | | 13,618 | | | | 10,043 | | | | 8,116 | | | | 36 | % | | | 24 | % |
General and administrative | | | 9,402 | | | | 6,513 | | | | 4,255 | | | | 44 | % | | | 53 | % |
Acquisition-related | | | — | | | | 342 | | | | — | | | | (100 | )% | | | n/m | |
| | | | | | | | | | | | | | | | | | | | |
Total stock-based compensation before tax | | $ | 53,313 | | | $ | 40,821 | | | $ | 30,054 | | | | 31 | % | | | 36 | % |
| | | | | | | | | | | | | | | | | | | | |
Income tax benefit | | | (12,113 | ) | | | (12,198 | ) | | | (8,098 | ) | | | (1 | )% | | | 51 | % |
The increases were primarily due to the increased value of our annual periodic equity awards granted in March 2017 and 2016. These awards generally have a five-year vesting schedule.
See Note 14 “Stock-Based Compensation”"Note 16. Income Taxes" in Item 8 of this Annual Report for furtheradditional information.
Amortization
Stock-based compensation increases the variability of
intangibles | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Cost of revenue | | $ | 5,103 | | | $ | 5,986 | | | $ | 5,392 | | | | (15 | )% | | | 11 | % |
Selling and marketing | | | 7,235 | | | | 7,145 | | | | 6,127 | | | | 1 | % | | | 17 | % |
General and administrative | | | — | | | | 277 | | | | 683 | | | | (100 | )% | | | (59 | )% |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 12,338 | | | $ | 13,408 | | | $ | 12,202 | | | | (8 | )% | | | 10 | % |
| | | | | | | | | | | | | | | | | | | | |
2017 Compared to 2016
The decrease was primarily due to the full amortization of certain intangibles acquired through past acquisitions.
2016 Compared to 2015
The increase was primarily due to the amortization associated with the $24.3 million of intangible assets acquired from OpenSpan in April 2016.
Non-operating income and expenses, net
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year Ended December 31, | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Foreign currency transaction (loss)/gain | | $ | (900 | ) | | $ | 2,247 | | | $ | (4,168 | ) | | | (140 | )% | | | (154 | )% |
Interest income, net | | | 731 | | | | 776 | | | | 1,056 | | | | (6 | )% | | | (27 | )% |
Other expense, net | | | (1,391 | ) | | | (5,580 | ) | | | (1,044 | ) | | | (75 | )% | | | 434 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | (1,560 | ) | | $ | (2,557 | ) | | $ | (4,156 | ) | | | (39 | )% | | | (38 | )% |
| | | | | | | | | | | | | | | | | | | | |
In May 2017, we discontinued our forward contracts program; however, we continue to periodically evaluate our foreign exchange exposures and mayre-initiate this program if deemed necessary. We have historically used foreign currency forward contracts (“forward contracts”) to hedge our exposure to fluctuations in foreign currency exchange rates associated with our foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held primarily by our U.S. parent company and its United Kingdom (“U.K.”) subsidiary.
The total change in the fair value of our foreign currency forward contracts recorded in other expense, net, during 2017, 2016, and 2015 was a gain of $0.3 million, a loss of $5.6 million, and a loss of $1 million, respectively. The gain on forward contracts in 2017 was offset by $1.7 million in professional fees for capital advisory services.
Provision for income taxes
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | % Change | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 vs. 2016 | | | 2016 vs. 2015 | |
Provision for income taxes | | $ | 4,166 | | | $ | 8,216 | | | $ | 24,183 | | | | (49 | )% | | | (66 | )% |
Effective income tax rate | | | 11 | % | | | 23 | % | | | 40 | % | | | | | | | | |
The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes.
2017 Compared to 2016
The decrease in our effective income tax rate was primarily due to a $24.5 million increase in excess tax benefits on share-based payments recognized in the provision for income taxes, partially offset by an additional expense of $20.4 million recorded in 2017 tore-measure our deferred income taxes to the new U.S. statutory tax rate as a result of the Tax Reform Act.
We have estimated the impact of the Tax Reform Act as part of our 2017 income tax provision; however, the ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the we have made, additional regulatory guidance that may be issued, and actions we may undertake as a result of the Tax Reform Act. The accounting is expected to be complete during 2018. See Note 15 “Income Taxes” in Item 8 of this Annual report for more information.
As of December 31, 2017, we had approximately $19.2 million of total unrecognized tax benefits, which would decrease our effective tax rate if recognized. Due to the expiration of the applicable statute of limitations, we expect that the change in the unrecognized benefits in the next twelve months will be approximately $0.5 million, which will reduce our effective tax rate if recognized.
2016 Compared to 2015
rates. The decrease in the effective income tax rate for 2016 compared to 2015 was primarily due to the impact of stock-based compensation on a given period depends on our profitability, the adoptionattributes of ASU2016-09, which decreased income tax expense by $6.7 million. The adoption of ASU2016-09 significantly impacts both the timingour stock compensation awards we grant, and method of how the tax effects of share-based awards are recognized. ASU2016-09 requires the income tax effects to be recognized in the provision for income taxes when the awards vest or are settled whereas previously such income tax benefits were recognized as part of additionalpaid-in capital and could not be recognized until they were realized through a reduction in income taxes payable.
As of December 31, 2016 and 2015, we had $22.7 million and $24 million, respectively, of total unrecognized tax benefits, which would decrease our effective tax rate if recognized.
award holders' exercise behavior.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Cash provided by (used in): | | | | | | | | | | | | |
Operating activities | | $ | 158,235 | | | $ | 39,874 | | | $ | 67,803 | |
Investing activities | | | (14,759 | ) | | | (7,172 | ) | | | (44,452 | ) |
Financing activities | | | (54,229 | ) | | | (51,716 | ) | | | (40,659 | ) |
Effect of exchange rate on cash | | | 2,438 | | | | (3,418 | ) | | | (4,251 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | 91,685 | | | $ | (22,432 | ) | | $ | (21,559 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | As of December 31, | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Held in US Entities | | $ | 136,444 | | | $ | 82,008 | | | $ | 165,625 | |
Held in Foreign Entities | | | 87,304 | | | | 51,753 | | | | 53,453 | |
| | | | | | | | | | | | |
Total cash, cash equivalents, and marketable securities | | $ | 223,748 | | | $ | 133,761 | | | $ | 219,078 | |
| | | | | | | | | | | | |
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| Cash provided by (used in) | | | |
| Operating activities | $ | (563) | | | $ | (42,165) | |
| Investing activities | (321,683) | | | 70,074 | |
| Financing activities | 423,448 | | | (74,258) | |
| Effect of exchange rate on cash and cash equivalents | 2,334 | | | 290 | |
| Net increase (decrease) in cash and cash equivalents | $ | 103,536 | | | $ | (46,059) | |
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2020 | | 2019 |
| Held in U.S. entities | $ | 399,138 | | | $ | 23,437 | |
| Held in foreign entities | 66,030 | | | 44,926 | |
| Total cash, cash equivalents, and marketable securities | $ | 465,168 | | | $ | 68,363 | |
We believe that our current cash, cash
equivalents, and cash flow from operations,
and borrowing capacity will be sufficient to fund our operations,
stock repurchases, and
our share repurchase programquarterly cash dividends for at least the next 12 months.
Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our growth, operating results, and the investments required to respond to the possible increased demand for our services. If we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.
If it became necessary to repatriate foreign funds, we may be required to pay U.S.
state and
local taxes as well as foreign taxes upon repatriation. Due to the complexity of
the income tax laws and
the effects ofregulations, and the Tax Reform
Act,Act’s effects, it is impracticable to estimate the amount of
U.S state, U.S. local, and foreign taxtaxes we would have to pay. See
“Risk Factors—Ifrisk factor "If it
becamebecomes necessary
or desirable to repatriate any of our foreign cash balances to the United States, we may be subject to increased
income taxes, other restrictions, and
limitations”limitations" in Item 1A of this Annual
Report.Report for additional information.
Cash (used in) operating activities
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has and is expected to continue to impact our billings and resulting timing of cash collections. Pega Cloud and term license arrangements are generally billed and collected over the contract term while perpetual license arrangements are generally billed in full and collected upfront when the license rights become effective. As client preferences continue to shift in favor of Pega Cloud arrangements, we could continue to experience slower operating cash flow growth, or negative cash flow, in the near term
In 2020, COVID-19 did not have a material impact on our cash flows from operations. See “Coronavirus (“COVID-19”)” in Item 1A. of this Annual Report for additional information.
The change in cash (used in) operating activities in 2020 was primarily due to improved cash collections. The increased cash collections were partially offset by increased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.
Cash (used in) provided by investing activities
The change in cash (used in) provided by investing activities in 2020 was primarily driven by purchases of financial instruments and property and equipment investments for our offices.
Cash provided by
operating(used in) financing activities
The primary drivers during 2017 were net income
Convertible senior notes
In February 2020, we issued $600 million in aggregate principal amount of
$32.9 million and $23.8 million from trade accounts receivable, largelyour convertible senior notes (the “Notes”) due
to increased cash collections and the timing of billings.The primary driver during 2016 was net income of $27.0 million.
The primary drivers during 2015 were net income of $36.3 million and a $17.7 million increase in deferred revenue primarily resulting from the difference in timing of billings and revenue recognition.
March 1, 2025, which provided proceeds as follows: Future Cash Receipts from Committed License and Cloud Arrangements
As of December 31, 2017, none
| | | | | | | | |
| (in thousands) | | Amount |
| Principal | $ | 600,000 | |
| Less: issuance costs | (14,527) | |
| Less: Capped Call Transactions | (51,900) | |
| | $ | 533,573 | |
A portion of the
amounts shown in the table below had been billed and no revenue had been recognized.The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a resultproceeds of the adoptionNotes was used to fund the Capped Call Transactions, with the remainder to be used for working capital and other general corporate purposes. The Notes mature on March 1, 2025; however, under certain circumstances, holders may surrender their Notes for conversion prior to the maturity date. We may settle conversion by paying or delivering, as applicable, cash, shares of the new revenue recognition standard, ASC 606.our common
stock or a combination of cash and shares of our common stock. See
Note 2. ”Significant Accounting Polices”"Note 10. Debt" in Item 8 of this Annual Report for additional information.
| | | | | | | | | | | | |
| | | December 31, 2017 | |
| (in thousands) | | Term and cloud
contracts | | | Perpetual contracts (1) | | | Total | |
2018 | | $ | 166,619 | | | $ | 46,195 | | | $ | 212,814 | |
2019 | | | 158,428 | | | | 14,630 | | | | 173,058 | |
2020 | | | 110,588 | | | | 1,979 | | | | 112,567 | |
2021 | | | 57,890 | | | | 372 | | | | 58,262 | |
2022 and thereafter | | | 28,552 | | | | — | | | | 28,552 | |
| | | | | | | | | | | | |
Total | | $ | 522,077 | | | $ | 63,176 | | | $ | 585,253 | |
| | | | | | | | | | | | |
(1) | These amounts are for perpetual licenses with extended payment terms and/or additional rights of use. |
Total contractual future cash receipts due from our existing license agreements was approximately $466
Credit facility
In November 2019, and as amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million
assenior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of December 31,
2016 and $356.4 million as2020, we had no outstanding borrowings under the Credit Facility. See "Note 10. Debt" in Item 8 of
December 31, 2015.Cash usedthis Annual Report for additional information.
Stock repurchase program
Changes in
investing activitiesDuring 2017, we purchased $27.7 million of investments, primarily marketable debt securities, and made investments of $13.7 million in property and equipment, partially offset by proceeds received from maturities of investments, including called investment securities of $27 million.
During 2016, we acquired OpenSpan for $48.8 million, net of cash acquired, and invested $19.1 million primarily in internally developed software and leasehold improvements at our corporate headquarters and our office in Hyderabad, India, partially offset by proceeds received from the sales of investments of $62.2 million.
During 2015, we purchased investments for $75.7 million, partially offset by the proceeds received from sales, maturities and called investments of $43.9 million. In 2015, we paid additional cash consideration of $1.6 million to the selling shareholders of companies acquired in 2014 based on the achievement of certain performance milestones. We also invested $11 million primarily in leasehold improvements for thebuild-out of our office in Hyderabad, India and purchases of computer equipment for our U.S. and India offices.
Cash used in financing activities
Net cash used in financing activities during 2017, 2016, and 2015 was primarily for repurchases of our common stock and the payment of our quarterly dividend. Since 2004, our Board of Directors has approved annualremaining stock repurchase programs that have authorized the repurchase of up to $195 million of our common stock.authority:
| | | | | |
| (in thousands) | 2020 |
| December 31, 2019 | $ | 45,484 | |
Authorizations (1) | 20,516 | |
Repurchases (2) | (28,274) | |
| December 31, 2020 | $ | 37,726 | |
(1) On
May 30, 2017,June 15, 2020, we announced that our Board of Directors extended the
expiration date of the current stock repurchase
programprogram’s expiration date to June 30,
2018 (the “Current Program”).As of December 31, 2017, $153.5 million had been repurchased, $34.9 million remained available for2021 and increased the remaining common stock repurchase and $6.4 million had expired.authority to $60 million.
(2) Purchases under these programsthis program have been made on the open market.
Common stock repurchases
The following table is a summary of our repurchase activity:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| (in thousands) | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
Net settlement of tax under stock-based compensation | | | 818 | | | $ | 41,825 | | | | 572 | | | $ | 16,183 | | | | 411 | | | $ | 9,776 | |
Share repurchase program (1) | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchases paid | | | 96 | | | $ | 4,335 | | | | 1,078 | | | $ | 27,028 | | | | 944 | | | $ | 22,530 | |
Repurchases unsettled at period end | | | 3 | | | $ | 158 | | | | — | | | $ | — | | | | 8 | | | $ | 220 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Activity in Period | | | 917 | | | $ | 46,318 | | | | 1,650 | | | $ | 43,211 | | | | 1,363 | | | $ | 32,526 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents activity under our publicly announced share repurchase program. |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| (in thousands) | Shares | | Amount | | Shares | | Amount |
| Tax withholdings for net settlement of equity awards | 725 | | | $ | 75,560 | | | 645 | | | $ | 44,857 | |
| Stock repurchase program | 278 | | | 28,274 | | | 333 | | | 21,136 | |
| 1,003 | | | $ | 103,834 | | | 978 | | | $ | 65,993 | |
During
2017, 2016,2020 and
2015,2019, instead of receiving cash from the equity holders, we withheld shares with a value of
$28.1 million, $18.1$59.6 million and
$11.9$41.7 million, respectively, for the exercise price of options. These amounts have been excluded from the table above.
Dividends
| | | | | | | | | | | | |
| (per share) | | 2017 | | | 2016 | | | 2015 | |
Dividends Declared | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | |
For 2017, 2016, and 2015, we paid cash dividends of $9.3 million, $9.2 million, and $9.2 million, respectively. It is our current intention
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| Dividend payments to stockholders | $ | 9,628 | | | $ | 9,486 | |
We currently intend to pay a quarterly cash dividend of $0.03 per
share, however,share. However, the Board of Directors may terminate or modify
thisthe dividend program at any time without prior notice.
As of December 31, 2017, we had2020, our contractual obligations were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period | | |
| (in thousands) | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and after | | Other | | Total |
| Convertible senior notes (1) | $ | 4,500 | | | $ | 4,500 | | | $ | 4,500 | | | $ | 4,500 | | | $ | 601,488 | | | $ | — | | | $ | 619,488 | |
| Purchase obligations (2) | 59,685 | | | 56,829 | | | 7,669 | | | 747 | | | 351 | | | — | | | 125,281 | |
| Operating lease obligations | 22,164 | | | 21,747 | | | 21,599 | | | 7,683 | | | 14,431 | | | — | | | 87,624 | |
| Investment commitments (3) | 500 | | | — | | | — | | | — | | | — | | | — | | | 500 | |
| Liability for uncertain tax positions (4) | — | | | — | | | — | | | — | | | — | | | 4,680 | | | 4,680 | |
| $ | 86,849 | | | $ | 83,076 | | | $ | 33,768 | | | $ | 12,930 | | | $ | 616,270 | | | $ | 4,680 | | | $ | 837,573 | |
(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for client supporthosting services and sales and marketing programs,programs.
(3) Represents the maximum funding under existing venture investment agreements. Our investment agreements generally allow us to withhold unpaid funds at our discretion.
(4) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
A detailed discussion and
payments under operating leases. Our lease arrangementanalysis of the 2019 year-over-year changes can be found in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for
our office headquarters expires in 2023, subject to our option to extend for two additional five-year periods. We also lease space for our other offices under noncancellable operating leases that expire at various dates through 2022. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Payments due by period | |
| (in thousands) | | Total | | | 2018 | | | 2019-2020 | | | 2021-2022 | | | 2023 and
thereafter | | | Other | |
Purchase obligations (1) | | $ | 40,085 | | | $ | 17,085 | | | $ | 23,000 | | | $ | — | | | $ | — | | | $ | — | |
Investment commitments (2) | | | 2,060 | | | | 2,060 | | | | — | | | | — | | | | — | | | | — | |
Liability for uncertain tax positions (3) | | | 4,717 | | | | — | | | | — | | | | — | | | | — | | | | 4,717 | |
Operating lease obligations (4) | | | 71,975 | | | | 15,395 | | | | 26,618 | | | | 21,002 | | | | 8,960 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 118,837 | | | $ | 34,540 | | | $ | 49,618 | | | $ | 21,002 | | | $ | 8,960 | | | $ | 4,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents the fixed or minimum amounts due under purchase obligations for client support and sales and marketing programs. |
(2) | Represents the maximum funding that would be required under existing investment agreements with privately-held companies. |
(3) | As of December 31, 2017, our recorded liability for uncertain tax positions was approximately $4.7 million. We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions. |
(4) | Includes deferred rent of approximately $2.3 million included in accrued expenses and approximately $8.5 million in other long-term liabilities as of December 31, 2017 in the Consolidated Balance Sheet in Item 8 of this Annual Report. |
the year ended December 31, 2019.
CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTS
Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. and the rules and regulations of the SEC for annual financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future, given
the available information.
We believe that, of our significant accounting policies,
which are described in
Note 2, “Significant“Note 2. Significant Accounting
Policies,”Policies” in Item 8 of this Annual Report, the following accounting policies are most important to the portrayal of our financial condition and require the most subjective judgment. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.
Our contracts with clients typically contain promises by us to provide multiple products and services. Specifically, contracts associated with Pega Platform sales and other software applications, sold either as licenses to use functional intellectual property or as a cloud-based solution, typically include consulting services. Determining whether such products and services within a client contract are considered distinct performance obligations that should be accounted for separately requires significant judgment. We review client contracts to identify all separate promises to transfer goods and services that would be considered performance obligations. Judgment is also required in determining whether an option to acquire additional products and services within a client contract represents a material right that the client would not receive without entering into the contract.
A contract modification is a legally binding change to the scope, price, or both of an existing contract. Contract modifications are reviewed to determine whether they should be accounted for as part of the original contract or as a separate contract. This determination requires significant judgment, which could impact the timing of revenue recognition. We typically account for contract modifications prospectively as a separate contract. The additional performance obligation(s) in our contract modifications are generally distinct and priced at their stand-alone selling price.
We allocate the transaction price to the distinct performance obligations, including options in contracts determined to represent a material right, based on each performance obligation's relative stand-alone selling price. Judgment is
derived primarily fromrequired in estimating stand-alone selling prices. We maximize the use of observable inputs by maintaining pricing analyses that consider our pricing policies, historical stand-alone sales when they exist, and historical renewal prices charged to clients. We have concluded that the stand-alone selling prices of certain performance obligations, specifically the stand-alone selling prices of software licenses and
related maintenance fees, cloudPega Cloud arrangements,
and consulting services. Our arrangements, whether involving licenses or cloud, generally also contain multipleare highly variable. In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on total transaction price minus the stand-alone selling price of other
elements, including consulting services, training, andperformance obligations promised in the
casecontract. We update our stand-alone selling price analysis periodically, including a re-assessment of
whether the residual approach used to determine the stand-alone selling prices for software licenses
software maintenance services. See Note 2, “Significant Accounting Policies” in Item 8 of this Annual Report for our full revenue recognition accounting policy.Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether VSOE of fair value exists for those elements. The amount of consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and is recognized as those elements are delivered. Any remaining portion of the total arrangement fee is allocated to the software license—the first element delivered. Revenue is recognized for each element when all of the revenue recognition criteria have been met. Pega Cloud arrangements remains appropriate.
Changes in the
mixassumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly impact the timing and amount of
the elementsrevenue we report in a
software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and changes to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue.particular period.
Goodwill and
Intangible Assets Impairmentintangible assets impairment
Our goodwill and intangible assets result from our previous business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. We do not carry any intangible assets with indefinite useful lives other than goodwill. We perform our annual goodwill impairment test as of November 30th of each fiscal year.30th. To assess if goodwill is impaired, we first perform a qualitative assessment to determine whether further impairment testing is necessary. If as a result ofbased on the qualitative assessment, we consider itmore-likely-than-not that the fair value of our reporting unitunit's fair value is less than its carrying amount, we perform a quantitative impairment test in atwo-step process. For the first step, we screen for impairment, and if any possible impairment exists, we undertake a second step of measuring such impairment by performing discounted cash flow analysis. This analysis is based on cash flow assumptions that are consistent with the plans and estimates being used to manage our business. In the first step, we review the carrying amount of our reporting unit compared to the “fair value” of the reporting unit.test. An excess of carrying value over fair value would indicate that goodwill may be impaired. If we determined that goodwill may be impaired, then we would compare the “implied fair value” to the carrying value of the goodwill. We periodicallyre-evaluate reevaluate our business and have determined that we have one operating segment and one reporting unit. If our assumptions change in the future, we may be required to record impairment charges to reduce theour goodwill's carrying value of our goodwill.value. Changes in the
valuation of goodwill could materially impact our operating results and financial position.
We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that
thesuch assets' carrying amount
of such assets may not be recoverable. In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to:
•whether there has been a significant adverse change in the business climate that affects the value of an asset;
•whether there has been a significant change in the extent or manner in whichway an asset is used; and
•whether thereit is an expectationexpected that the asset will be sold or disposed of before the end of its originally estimated useful life.
If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. The key assumptions of the cash flow model involve significant subjectivity. If such assets are
considered to be impaired,
thean impairment
recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.
As of December 31,
2017,2020, we had
$73.0$79.2 million of goodwill and
$31.9$15.7 million of intangible
assets. If our estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce or eliminate the carrying value of these assets. Changes in the valuation of long-lived assets could materially impact our operating results and financial position. To date, there have been no impairments of goodwill or intangible assets.
Accounting for
Income Taxesincome taxes
Significant judgment is required
in determiningto determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in
the application ofapplying accounting principles and complex tax laws. Changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact our financial statements.
We regularly assess the need for a valuation allowance against our deferred tax assets. Future realization of our deferred tax assets ultimately depends on
the existence of sufficient taxable income within the available carryback or carryforward periods. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income
that are based on historical and projected information.
We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is
more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not
more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements.
As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise
as a consequence ofdue to transfer pricing for transactions with our subsidiaries,
andthe determination of tax nexus, and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability of such outcomes.
Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such
differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.
See
Note 15 “Income Taxes”"Note 16. Income Taxes" in Item 8 of this Annual Report for additional information.
NEW ACCOUNTING PRONOUNCEMENTS
New
Convertible senior notes and capped call transactions
In February 2020, we issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. We also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes.
In accounting for the convertible senior notes and Capped Call Transactions:
•The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the Notes’ contractual term. The fair value was determined utilizing a discounted cash flow model and required us to make various estimates including, implied credit spread, expected volatility, and the risk-free rate for notes with a similar term.
•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes.
•The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement.
The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and, to a lesser extent, historical peer group volatility levels.
Applying the accounting framework for the Convertible Senior Notes and the Capped Call Transactions requires the exercise of judgment and the determination of the fair value of the liability component of the convertible notes and the fair value of the Capped Call Transactions requires the Company to make significant estimates and assumptions. As of December 31, 2020, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $96.5 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $70.3 million.
See "Note 2. Significant Accounting
Pronouncements are detailed in Note 2, “Significant Accounting Policies,”Policies", "Note 10. Debt", and "Note 12. Fair Value Measurements" in Item 8 of this Annual
Report.Report for additional information. New accounting pronouncements
See "Note 2. Significant Accounting Policies" in Item 8 of this Annual Report for additional information.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates.
Our market risk exposure is primarily related to fluctuations in foreign exchange rates and interest rates.
Foreign currency exposure
Translation risk
Our international salesforeign operations’ operating expenses are usuallyprimarily denominated in foreign currencies. However, the operating expenses of our foreign operationsinternational sales are also primarily denominated in foreign currencies, which partially offsetoffsets our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in an approximately 4%, 3%, and 3% decrease in revenues for 2017, 2016, and 2015, respectively, but would not have a material impact on our results of operations. See “Risk Factors—the following impact:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| (Decrease) increase in revenue | (4) | % | | (4) | % | | (4) | % |
| (Decrease) increase in net income | 12 | % | | (7) | % | | (1) | % |
Remeasurement risk
We
are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” in Item 1A “Risk Factors” of this Annual Report.We have experienced and expect to continue to experience fluctuations in our net income as a result of transaction gains or losses related to remeasuringfrom remeasurement of monetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with
the Australian dollar, Euro, and U.S.
dollar denominateddollar-denominated cash
and cash equivalents, accounts receivable,
unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.
We recognized a net foreign currency transaction (loss)/gain of $(0.9) million, $2.2 million, and $(4.2) million for the 2017, 2016, and 2015, respectively. We have historically used, but do not currently use, forward contracts to manage our exposure to changes
A hypothetical 10% strengthening in
foreign currency exchange rates. These forward contracts were not designated as hedging instruments, and changes in the fair value of these forward contracts are recognized in other expense, net, in the Consolidated Statements of Operations in Item 8 of this Annual Report.If the British pound exchange rate in comparison toagainst the Australian dollar, Euro, and U.S. dollar at December 31, 2017 and December 31, 2016 uniformly strengthened by 10%,would result in the total impact to foreign currency transaction (loss)/gain and other expense would have decreased our results of operations by $1.6 million for both periods.
Interest rate exposure
As of December 31, 2017, we had $61.5 million of marketable debt securities, which consisted primarily of corporate and municipal bonds, with a weighted-average remaining maturity of 12 months. Due to the overall short-term remaining maturities of our marketable debt securities, our interest rate exposure is not significant. As of December 31, 2017, a 200 basis point increase in market interest rates would have reduced the fair value of our fixed rate marketable debt securities by approximately $1.2 million.
following impact: | | | | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| Foreign currency (loss) gain | $ | (7,782) | | | $ | 3,633 | | | $ | (6,295) | |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | Page | |
| |
Report of Independent Registered Public Accounting Firm | | | 42 | |
| |
Consolidated Balance Sheets as of December 31, 20172020 and 2016 2019 | | | 44 | |
| |
Consolidated Statements of Operations for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 45 | |
| |
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 46 | |
| |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 47 | |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 48 | |
| |
Notes to Consolidated Financial Statements | | | 49 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Pegasystems Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the “Company”"Company") as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control—Control — Integrated Framework (2013) issued issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control—Control — Integrated Framework (2013) issued by COSO. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on and Changes in Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles.principles”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.
Revenue Recognition – Software License Arrangements - Refer to Note 2 to the financial statements
The Company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the Company’s Pega Platform and other software applications, maintenance revenue from client support, and services revenue primarily derived from cloud sales of the Company’s hosted Pega Platform and other software applications and consulting services.
The Company’s license and cloud arrangements often contain multiple performance obligations. These performance obligations may be included in the same contract or negotiated separately. Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications. Certain new complex arrangements require a detailed analysis of the contractual terms and application of more complex accounting guidance, specifically for contracts with higher contract values. Factors with potentially significant judgments include:
•Identification of the complete client arrangement
•Accounting treatment of contract modifications
•Valuation and allocation of identified material rights
•Allocation of arrangement consideration to bundled fixed price work orders
Given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved especially complex and subjective auditor judgment in relation to license and cloud arrangements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to license and cloud revenue arrangements included the following, among others:
•We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment of contract modifications, identification of material rights, and allocation of arrangement consideration.
•We selected a sample of client contracts and performed the following:
◦Evaluated whether the Company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.
◦Evaluated whether the Company appropriately identified all performance obligations in the arrangement and whether the methodology to allocate the transaction price to the individual performance obligations was appropriately applied.
◦Tested the accuracy of management’s calculation of revenue for each performance obligation by developing an expectation for the revenue to be recorded in the current period and comparing it to the Company’s recorded balances.
◦Evaluated management’s assessment of any ongoing negotiations with clients and bundling with statements of work.
◦Analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products and services in the original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.
◦Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represented material rights included in the contract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.
◦For contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each project will require and independently recalculated the stand-alone selling price for each bundled fixed price service.
◦Obtained evidence of delivery of the elements of the arrangement to the client.
Convertible senior notes and capped calls— Refer to Note 10 to the financial statements
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value was determined utilizing a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In February 2020, the Company also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes. The Capped Call Transactions are accounted for as derivative instruments which are recorded at fair value at the end of each reporting period. The fair value was determined utilizing a lattice model that includes inputs and assumptions such as stock price, expected term, volatility, risk-free rate and implied yield.
There is complexity in applying the accounting framework for the Notes and the related Capped Call Transactions. In addition, the determination of the fair value of the liability component of the convertible notes and the Capped Call Transactions requires the Company to make significant estimates and assumptions relating to the implied credit spread, expected volatility, and the risk-free rate for the liability component of the Convertible Notes, and the expected term, volatility, risk-free rate and implied yield for the derivative value of the Capped Call Transactions. Performing audit procedures to evaluate the appropriateness of the accounting framework and the reasonableness of the estimates and assumptions used in the fair value of the liability component of the Notes and the Capped Call Transactions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the Notes and Capped Call Transactions, including the Company’s judgments and calculations related to the fair value of the liability component of the Notes and the derivative value of the Capped Call Transactions, included the following procedures, among others:
•We tested the effectiveness of controls over the Company’s accounting for the Notes and Capped Call Transactions, and over the determination of the fair value of the liability component of the Notes and fair value of the Capped Call Transaction derivative.
•With the assistance of professionals in our firm having expertise in debt issuance and derivative transaction accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the Notes and Capped Call Transactions.
•With the assistance of fair value specialists, we evaluated the reasonableness of the valuation methodologies and the significant assumptions used to determine the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative, by:
◦Testing the source information underlying the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative and the mathematical accuracy of the calculations.
◦Developing estimates of the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative using independent expectations of the significant assumptions, and comparing our estimates of fair value to the Company’s estimates.
/s/ DELOITTE & TOUCHE LLP
February
26, 201817, 2021
We have served as the Company’sCompany's auditor since 2000.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| | | | | | | | |
| | | As of December 31, | |
| | | 2017 | | | 2016 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 162,279 | | | $ | 70,594 | |
Marketable securities | | | 61,469 | | | | 63,167 | |
| | | | | | | | |
Total cash, cash equivalents, and marketable securities | | | 223,748 | | | | 133,761 | |
Trade accounts receivable, net of allowance of $7,655 and $4,126 | | | 248,331 | | | | 265,028 | |
Income taxes receivable | | | 25,662 | | | | 14,155 | |
Other current assets | | | 14,559 | | | | 12,188 | |
| | | | | | | | |
Total current assets | | | 512,300 | | | | 425,132 | |
Property and equipment, net | | | 40,359 | | | | 38,281 | |
Deferred income taxes | | | 57,127 | | | | 69,898 | |
Other long-term assets | | | 6,969 | | | | 3,990 | |
Intangible assets, net | | | 31,899 | | | | 44,191 | |
Goodwill | | | 72,952 | | | | 73,164 | |
| | | | | | | | |
Total assets | | $ | 721,606 | | | $ | 654,656 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 17,370 | | | $ | 14,414 | |
Accrued expenses | | | 45,508 | | | | 36,751 | |
Accrued compensation and related expenses | | | 66,040 | | | | 60,660 | |
Deferred revenue | | | 195,073 | | | | 175,647 | |
| | | | | | | | |
Total current liabilities | | | 323,991 | | | | 287,472 | |
Income taxes payable | | | 4,717 | | | | 4,263 | |
Long-term Deferred revenue | | | 6,591 | | | | 10,989 | |
Other long-term liabilities | | | 15,229 | | | | 16,043 | |
| | | | | | | | |
Total liabilities | | | 350,528 | | | | 318,767 | |
| | | | | | | | |
Commitments and contingencies (Note 12) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 1,000 shares authorized; no shares issued and outstanding | | | — | | | | — | |
Common stock, $0.01 par value, 200,000 shares authorized; 78,081 and 76,591 shares issued and outstanding at December 31, 2017 and 2016, respectively | | | 781 | | | | 766 | |
Additionalpaid-in capital | | | 152,097 | | | | 143,903 | |
Retained earnings | | | 221,926 | | | | 198,315 | |
Accumulated other comprehensive loss: | | | | | | | | |
Net unrealized loss onavailable-for-sale marketable securities, net of tax | | | (232 | ) | | | (169 | ) |
Foreign currency translation adjustments | | | (3,494 | ) | | | (6,926 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 371,078 | | | | 335,889 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 721,606 | | | $ | 654,656 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 171,899 | | | $ | 68,363 | |
| Marketable securities | 293,269 | | | 0 | |
| Total cash, cash equivalents, and marketable securities | 465,168 | | | 68,363 | |
| Accounts receivable | 215,827 | | | 199,720 | |
| Unbilled receivables | 207,155 | | | 180,219 | |
| Other current assets | 88,760 | | | 57,308 | |
| Total current assets | 976,910 | | | 505,610 | |
| Unbilled receivables | 113,278 | | | 121,736 | |
| Goodwill | 79,231 | | | 79,039 | |
| Other long-term assets | 434,843 | | | 278,427 | |
| Total assets | $ | 1,604,262 | | | $ | 984,812 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 24,028 | | | $ | 17,475 | |
| Accrued expenses | 59,261 | | | 48,001 | |
| Accrued compensation and related expenses | 123,012 | | | 104,126 | |
| Deferred revenue | 232,865 | | | 190,080 | |
| Other current liabilities | 20,969 | | | 18,273 | |
| Total current liabilities | 460,135 | | | 377,955 | |
| Convertible senior notes, net | 518,203 | | | 0 | |
| Operating lease liabilities | 59,053 | | | 52,610 | |
| Other long-term liabilities | 24,699 | | | 15,237 | |
| Total liabilities | 1,062,090 | | | 445,802 | |
| Commitments and Contingencies (Note 19) | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value, 1,000 shares authorized; NaN issued | 0 | | | 0 | |
| Common stock, $0.01 par value, 200,000 shares authorized; 80,890 and 79,599 shares issued and outstanding at December 31, 2020 and 2019, respectively | 809 | | | 796 | |
| Additional paid-in capital | 204,432 | | | 140,523 | |
| Retained earnings | 339,879 | | | 410,919 | |
| Accumulated other comprehensive (loss) | | | |
| Net unrealized gain on available-for-sale marketable securities, net of tax | 46 | | | 0 | |
| Foreign currency translation adjustments | (2,994) | | | (13,228) | |
| Total stockholders’ equity | 542,172 | | | 539,010 | |
| Total liabilities and stockholders’ equity | $ | 1,604,262 | | | $ | 984,812 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Revenue: | | | | | | | | | | | | |
Software license | | $ | 288,334 | | | $ | 279,995 | | | $ | 275,588 | |
Maintenance | | | 244,347 | | | | 220,336 | | | | 202,802 | |
Services | | | 307,901 | | | | 249,935 | | | | 204,305 | |
| | | | | | | | | | | | |
Total revenue | | | 840,582 | | | | 750,266 | | | | 682,695 | |
| | | | | | | | | | | | |
Cost of revenue: | | | | | | | | | | | | |
Software license | | | 5,085 | | | | 4,943 | | | | 4,125 | |
Maintenance | | | 27,905 | | | | 25,505 | | | | 21,903 | |
Services | | | 246,683 | | | | 208,808 | | | | 187,418 | |
| | | | | | | | | | | | |
Total cost of revenue | | | 279,673 | | | | 239,256 | | | | 213,446 | |
| | | | | | | | | | | | |
Gross profit | | | 560,909 | | | | 511,010 | | | | 469,249 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Selling and marketing | | | 307,210 | | | | 278,849 | | | | 241,387 | |
Research and development | | | 162,886 | | | | 145,548 | | | | 126,374 | |
General and administrative | | | 52,153 | | | | 45,951 | | | | 36,738 | |
Acquisition-related | | | — | | | | 2,903 | | | | 89 | |
| | | | | | | | | | | | |
Total operating expenses | | | 522,249 | | | | 473,251 | | | | 404,588 | |
| | | | | | | | | | | | |
Income from operations | | | 38,660 | | | | 37,759 | | | | 64,661 | |
Foreign currency transaction (loss)/gain | | | (900 | ) | | | 2,247 | | | | (4,168 | ) |
Interest income, net | | | 731 | | | | 776 | | | | 1,056 | |
Other expense, net | | | (1,391 | ) | | | (5,580 | ) | | | (1,044 | ) |
| | | | | | | | | | | | |
Income before provision for income taxes | | | 37,100 | | | | 35,202 | | | | 60,505 | |
Provision for income taxes | | | 4,166 | | | | 8,216 | | | | 24,183 | |
| | | | | | | | | | | | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 0.43 | | | $ | 0.35 | | | $ | 0.47 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.40 | | | $ | 0.34 | | | $ | 0.46 | |
| | | | | | | | | | | | |
Weighted-average number of common shares outstanding: | | | | | | | | | | | | |
Basic | | | 77,431 | | | | 76,343 | | | | 76,507 | |
Diluted | | | 82,832 | | | | 79,732 | | | | 79,043 | |
| | | | | | | | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 | | 2018 |
| Revenue | | | | | |
| Software license | $ | 294,910 | | | $ | 279,448 | | | $ | 288,119 | |
| Maintenance | 296,709 | | | 280,580 | | | 263,875 | |
| Pega Cloud | 208,268 | | | 133,746 | | | 82,627 | |
| Consulting | 217,630 | | | 217,609 | | | 256,960 | |
| Total revenue | 1,017,517 | | | 911,383 | | | 891,581 | |
| Cost of revenue | | | | | |
| Software license | 2,928 | | | 3,656 | | | 5,169 | |
| Maintenance | 22,311 | | | 25,656 | | | 24,565 | |
| Pega Cloud | 76,575 | | | 65,828 | | | 37,409 | |
| Consulting | 209,099 | | | 214,882 | | | 234,622 | |
| Total cost of revenue | 310,913 | | | 310,022 | | | 301,765 | |
| Gross profit | 706,604 | | | 601,361 | | | 589,816 | |
| Operating expenses | | | | | |
| Selling and marketing | 545,693 | | | 474,459 | | | 373,495 | |
| Research and development | 236,986 | | | 205,210 | | | 181,710 | |
| General and administrative | 67,452 | | | 56,570 | | | 51,643 | |
| Total operating expenses | 850,131 | | | 736,239 | | | 606,848 | |
| (Loss) from operations | (143,527) | | | (134,878) | | | (17,032) | |
| Foreign currency transaction gain (loss) | 3,704 | | | (2,335) | | | 2,421 | |
| Interest income | 1,223 | | | 2,020 | | | 2,715 | |
| Interest expense | (19,356) | | | (212) | | | (10) | |
| Gain on capped call transactions | 31,697 | | | 0 | | | 0 | |
| Other income (loss), net | 1,370 | | | 559 | | | 363 | |
| (Loss) before (benefit from) income taxes | (124,889) | | | (134,846) | | | (11,543) | |
| (Benefit from) income taxes | (63,516) | | | (44,413) | | | (22,160) | |
| Net (loss) income | $ | (61,373) | | | $ | (90,433) | | | $ | 10,617 | |
| (Loss) earnings per share | | | | | |
| Basic | $ | (0.76) | | | $ | (1.14) | | | $ | 0.14 | |
| Diluted | $ | (0.76) | | | $ | (1.14) | | | $ | 0.13 | |
| Weighted-average number of common shares outstanding | | | | | |
| Basic | 80,336 | | | 79,055 | | | 78,564 | |
| Diluted | 80,336 | | | 79,055 | | | 83,064 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME
(in thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | |
Other comprehensive income/(loss), net of tax | | | | | | | | | | | | |
Unrealized loss onavailable-for-sale marketable securities, net of tax | | | (63 | ) | | | (19 | ) | | | (85 | ) |
Foreign currency translation adjustments | | | 3,432 | | | | (3,569 | ) | | | (2,810 | ) |
| | | | | | | | | | | | |
Total other comprehensive income/(loss), net of tax | | | 3,369 | | | | (3,588 | ) | | | (2,895 | ) |
| | | | | | | | | | | | |
Comprehensive income | | $ | 36,303 | | | $ | 23,398 | | | $ | 33,427 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Net (loss) income | $ | (61,373) | | | $ | (90,433) | | | $ | 10,617 | |
| Other comprehensive income (loss), net of tax | | | | | |
| Unrealized gain (loss) on available-for-sale securities | 46 | | | 249 | | | (17) | |
| Foreign currency translation adjustments | 10,234 | | | (155) | | | (6,600) | |
| Total other comprehensive income (loss), net of tax | 10,280 | | | 94 | | | (6,617) | |
| Comprehensive (loss) income | $ | (51,093) | | | $ | (90,339) | | | $ | 4,000 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional
Paid-In Capital | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
(Loss) Income | | | Total
Stockholders’
Equity | |
| | | Number
of Shares | | | Amount | | | | | |
Balance at January 1, 2015 | | | 76,357 | | | $ | 764 | | | $ | 141,495 | | | $ | 153,058 | | | $ | (612 | ) | | $ | 294,705 | |
Repurchase of common stock | | | (952 | ) | | | (10 | ) | | | (22,740 | ) | | | — | | | | — | | | | (22,750 | ) |
Issuance of common stock for share-based compensation plans | | | 1,059 | | | | 11 | | | | (9,201 | ) | | | — | | | | — | | | | (9,190 | ) |
Issuance of common stock under Employee Stock Purchase Plan | | | 24 | | | | — | | | | 550 | | | | — | | | | — | | | | 550 | |
Stock-based compensation expense | | | — | | | | — | | | | 30,078 | | | | — | | | | — | | | | 30,078 | |
Tax benefit from exercise or vesting of equity awards, net of deferred tax asset deficiencies of $105 | | | — | | | | — | | | | 5,236 | | | | — | | | | — | | | | 5,236 | |
Cash dividends declared ($0.12 per share) | | | — | | | | — | | | | — | | | | (9,197 | ) | | | — | | | | (9,197 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (2,895 | ) | | | (2,895 | ) |
Net income | | | — | | | | — | | | | — | | | | 36,322 | | | | — | | | | 36,322 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | 76,488 | | | $ | 765 | | | $ | 145,418 | | | $ | 180,183 | | | $ | (3,507 | ) | | $ | 322,859 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative-effect adjustment from adoption of ASU2016-09 | | | — | | | | — | | | | — | | | | 321 | | | | — | | | | 321 | |
Repurchase of common stock | | | (1,078 | ) | | | (11 | ) | | | (27,017 | ) | | | — | | | | — | | | | (27,028 | ) |
Issuance of common stock for share-based compensation plans | | | 1,161 | | | | 12 | | | | (15,868 | ) | | | — | | | | — | | | | (15,856 | ) |
Issuance of common stock under Employee Stock Purchase Plan | | | 20 | | | | — | | | | 562 | | | | — | | | | — | | | | 562 | |
Stock-based compensation expense | | | — | | | | — | | | | 40,808 | | | | — | | | | — | | | | 40,808 | |
Cash dividends declared ($0.12 per share) | | | — | | | | — | | | | — | | | | (9,175 | ) | | | — | | | | (9,175 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (3,588 | ) | | | (3,588 | ) |
Net income | | | — | | | | — | | | | — | | | | 26,986 | | | | — | | | | 26,986 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | 76,591 | | | $ | 766 | | | $ | 143,903 | | | $ | 198,315 | | | $ | (7,095 | ) | | $ | 335,889 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | (99 | ) | | | — | | | | (4,493 | ) | | | — | | | | — | | | | (4,493 | ) |
Issuance of common stock for share-based compensation plans | | | 1,568 | | | | 15 | | | | (41,642 | ) | | | — | | | | — | | | | (41,627 | ) |
Issuance of common stock under Employee Stock Purchase Plan | | | 21 | | | | — | | | | 1,009 | | | | — | | | | — | | | | 1,009 | |
Stock-based compensation expense | | | — | | | | — | | | | 53,320 | | | | — | | | | — | | | | 53,320 | |
Cash dividends declared ($0.12 per share) | | | — | | | | — | | | | — | | | | (9,323 | ) | | | — | | | | (9,323 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 3,369 | | | | 3,369 | |
Net income | | | — | | | | — | | | | — | | | | 32,934 | | | | — | | | | 32,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | 78,081 | | | $ | 781 | | | $ | 152,097 | | | $ | 221,926 | | | $ | (3,726 | ) | | $ | 371,078 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total
Stockholders’ Equity |
| Number
of Shares | | Amount | | | | |
| Balance at January 1, 2018 | 78,081 | | | $ | 781 | | | $ | 152,097 | | | $ | 509,697 | | | $ | (6,705) | | | $ | 655,870 | |
| Repurchase of common stock | (1,001) | | | (10) | | | (55,265) | | | — | | | — | | | (55,275) | |
| Issuance of common stock for stock compensation plans | 1,413 | | | 14 | | | (39,375) | | | — | | | — | | | (39,361) | |
| Issuance of common stock under the employee stock purchase plan | 33 | | | — | | | 1,767 | | | — | | | — | | | 1,767 | |
| Stock-based compensation | — | | | — | | | 63,981 | | | — | | | — | | | 63,981 | |
| Cash dividends declared ($0.12 per share) | — | | | — | | | — | | | (9,451) | | | — | | | (9,451) | |
| Other comprehensive (loss) | — | | | — | | | — | | | — | | | (6,617) | | | (6,617) | |
| Net income | — | | | $ | — | | | $ | — | | | $ | 10,617 | | | $ | — | | | $ | 10,617 | |
| December 31, 2018 | 78,526 | | | $ | 785 | | | $ | 123,205 | | | $ | 510,863 | | | $ | (13,322) | | | $ | 621,531 | |
| Repurchase of common stock | (333) | | | (3) | | | (21,133) | | | — | | | — | | | (21,136) | |
| Issuance of common stock for stock compensation plans | 1,375 | | | 14 | | | (44,853) | | | — | | | — | | | (44,839) | |
| Issuance of common stock under the employee stock purchase plan | 31 | | | — | | | 2,202 | | | — | | | — | | | 2,202 | |
| Stock-based compensation | — | | | — | | | 81,102 | | | — | | | — | | | 81,102 | |
| Cash dividends declared ($0.12 per share) | — | | | — | | | — | | | (9,511) | | | — | | | (9,511) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 94 | | | 94 | |
| Net (loss) | — | | | — | | | — | | | (90,433) | | | — | | | (90,433) | |
| December 31, 2019 | 79,599 | | | $ | 796 | | | $ | 140,523 | | | $ | 410,919 | | | $ | (13,228) | | | $ | 539,010 | |
| Equity component of convertible senior notes, net | — | | | — | | | 61,604 | | | — | | | — | | | 61,604 | |
| Repurchase of common stock | (278) | | | (3) | | | (28,271) | | | — | | | — | | | (28,274) | |
| Issuance of common stock for stock compensation plans | 1,536 | | | 16 | | | (75,578) | | | — | | | — | | | (75,562) | |
| Issuance of common stock under the employee stock purchase plan | 33 | | | — | | | 3,039 | | | — | | | — | | | 3,039 | |
| Stock-based compensation | — | | | — | | | 103,115 | | | — | | | — | | | 103,115 | |
| Cash dividends declared ($0.12 per share) | — | | | — | | | — | | | (9,667) | | | — | | | (9,667) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 10,280 | | | 10,280 | |
| Net (loss) | — | | | — | | | — | | | (61,373) | | | — | | | (61,373) | |
| December 31, 2020 | 80,890 | | | $ | 809 | | | $ | 204,432 | | | $ | 339,879 | | | $ | (2,948) | | | $ | 542,172 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Operating activities: | | | | | | | | | | | | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | |
Adjustment to reconcile net income to cash provided by operating activities: | | | | | | | | | | | | |
Deferred income taxes | | | 13,795 | | | | (5,810 | ) | | | (2,099 | ) |
Depreciation and amortization | | | 24,713 | | | | 24,137 | | | | 23,093 | |
Stock-based compensation expense | | | 53,313 | | | | 40,821 | | | | 30,054 | |
Foreign currency transaction loss (gain) | | | 900 | | | | (2,247 | ) | | | 4,168 | |
Amortization of investments | | | 1,381 | | | | 1,862 | | | | 2,238 | |
Othernon-cash | | | (1,383 | ) | | | (1,382 | ) | | | 822 | |
Change in operating assets and liabilities: | | | | | | | | | | | | |
Trade accounts receivable | | | 23,814 | | | | (56,730 | ) | | | (62,235 | ) |
Income taxes receivable and other current assets | | | (13,393 | ) | | | (10,818 | ) | | | 3,223 | |
Accounts payable and accrued expenses | | | 14,473 | | | | 1,531 | | | | 16,572 | |
Deferred revenue | | | 8,363 | | | | 21,271 | | | | 17,668 | |
Other long-term assets and liabilities | | | (675 | ) | | | 253 | | | | (2,023 | ) |
| | | | | | | | | | | | |
Cash provided by operating activities | | | 158,235 | | | | 39,874 | | | | 67,803 | |
| | | | | | | | | | | | |
Investing activities: | | | | | | | | | | | | |
Purchases of investments | | | (27,718 | ) | | | (23,969 | ) | | | (75,702 | ) |
Proceeds from maturities and called investments | | | 26,997 | | | | 22,788 | | | | 42,026 | |
Sales of investments | | | — | | | | 62,210 | | | | 1,915 | |
Payments for acquisitions, net of cash acquired | | | (297 | ) | | | (49,113 | ) | | | (1,671 | ) |
Investment in property and equipment | | | (13,741 | ) | | | (19,088 | ) | | | (11,020 | ) |
| | | | | | | | | | | | |
Cash used in investing activities | | | (14,759 | ) | | | (7,172 | ) | | | (44,452 | ) |
| | | | | | | | | | | | |
Financing activities: | | | | | | | | | | | | |
Dividend payments to shareholders | | | (9,277 | ) | | | (9,174 | ) | | | (9,194 | ) |
Common stock repurchases for tax withholdings for net settlement of equity awards | | | (40,617 | ) | | | (15,294 | ) | | | (8,640 | ) |
Common stock repurchases under share repurchase program | | | (4,335 | ) | | | (27,248 | ) | | | (22,825 | ) |
| | | | | | | | | | | | |
Cash used in financing activities | | | (54,229 | ) | | | (51,716 | ) | | | (40,659 | ) |
| | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | 2,438 | | | | (3,418 | ) | | | (4,251 | ) |
| | | | | | | | | | | | |
Net increase/(decrease) in cash and cash equivalents | | | 91,685 | | | | (22,432 | ) | | | (21,559 | ) |
Cash and cash equivalents, beginning of period | | | 70,594 | | | | 93,026 | | | | 114,585 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 162,279 | | | $ | 70,594 | | | $ | 93,026 | |
| | | | | | | | | | | | |
Supplemental disclosures: | | | | | | | | | | | | |
Income taxes (refunded)/paid | | $ | (2,322 | ) | | $ | 28,844 | | | $ | 30,215 | |
Non-cash investing and financing activity: | | | | | | | | | | | | |
Dividends payable | | $ | 2,344 | | | $ | 2,298 | | | $ | 2,297 | |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Operating activities | | | | | |
| Net (loss) income | $ | (61,373) | | | $ | (90,433) | | | $ | 10,617 | |
| Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities | | | | | |
| Stock-based compensation | 103,068 | | | 80,909 | | | 63,862 | |
| (Gain) loss on capped call transactions | (31,697) | | | 0 | | | 0 | |
| Deferred income taxes | (59,777) | | | (49,317) | | | (30,898) | |
| Amortization of deferred commissions | 33,302 | | | 29,152 | | | 17,271 | |
| Lease expense | 16,248 | | | 14,497 | | | — | |
| Amortization of debt discount and issuance costs | 14,813 | | | 0 | | | 0 | |
| Amortization of intangible assets and depreciation | 21,348 | | | 21,396 | | | 25,295 | |
| Amortization of investments | 1,073 | | | 800 | | | 1,596 | |
| Foreign currency transaction (gain) loss | (3,704) | | | 2,335 | | | (2,421) | |
| Other non-cash | (879) | | | (521) | | | (1,678) | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable, unbilled receivables, and contract assets | (32,321) | | | 1,088 | | | 25,779 | |
| Other current assets | (12,959) | | | (6,344) | | | (6,068) | |
| Accounts payable, accrued compensation, and accrued expenses | 37,945 | | | 25,670 | | | 20,798 | |
| Deferred revenue | 43,661 | | | 1,937 | | | 28,951 | |
| Deferred commissions | (55,175) | | | (49,746) | | | (44,036) | |
| Other long-term assets and liabilities | (14,136) | | | (23,588) | | | (4,712) | |
| Cash (used in) provided by operating activities | (563) | | | (42,165) | | | 104,356 | |
| Investing activities | | | | | |
| Purchases of investments | (326,549) | | | (11,424) | | | (69,494) | |
| Proceeds from maturities and called investments | 28,811 | | | 13,634 | | | 33,991 | |
| Sales of investments | 1,424 | | | 89,406 | | | 0 | |
| Payments for acquisitions, net of cash acquired | 0 | | | (10,934) | | | (800) | |
| Investment in property and equipment | (25,369) | | | (10,608) | | | (11,893) | |
| Cash (used in) provided by investing activities | (321,683) | | | 70,074 | | | (48,196) | |
| Financing activities | | | | | |
| Proceeds from issuance of convertible senior notes | 600,000 | | | 0 | | | 0 | |
| Purchase of capped calls related to convertible senior notes | (51,900) | | | 0 | | | 0 | |
| Payment of debt issuance costs | (14,527) | | | 0 | | | 0 | |
| Dividend payments to stockholders | (9,628) | | | (9,486) | | | (9,432) | |
| Proceeds from revolving credit facility | 0 | | | 45,000 | | | 0 | |
| Payments on revolving credit facility | 0 | | | (45,000) | | | 0 | |
| Common stock repurchases for tax withholdings for net settlement of equity awards | (72,523) | | | (42,637) | | | (37,594) | |
| Common stock repurchases under stock repurchase program | (27,974) | | | (22,135) | | | (54,434) | |
| Cash provided by (used in) financing activities | 423,448 | | | (74,258) | | | (101,460) | |
| Effect of exchange rate changes on cash and cash equivalents | 2,334 | | | 290 | | | (2,557) | |
| Net increase (decrease) in cash and cash equivalents | 103,536 | | | (46,059) | | | (47,857) | |
| Cash and cash equivalents, beginning of period | 68,363 | | | 114,422 | | | 162,279 | |
| Cash and cash equivalents, end of period | $ | 171,899 | | | $ | 68,363 | | | $ | 114,422 | |
| | | | | |
| Supplemental disclosures | | | | | |
| Interest paid on convertible notes | $ | 2,338 | | | $ | 0 | | | $ | 0 | |
| Income taxes paid | $ | 3,377 | | | $ | 4,745 | | | $ | 6,630 | |
| Non-cash investing and financing activity: | | | | | |
| Dividends payable | $ | 2,427 | | | $ | 2,388 | | | $ | 2,363 | |
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company develops, markets, licenses, and supports
customer engagement and digital process automation software applications
for marketing, sales automation, customer service, and operations, in addition to the Pega
PlatformPlatform™ for clients that wish to build and extend their own applications. The Company provides
implementation, consulting, training,
technical support, and hosting services to facilitate the use of its software.
Management estimates and reporting
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Accounts with reported amounts based on significant estimates and judgments include, but are not limited to, revenue,
unbilled receivables, deferred revenue, deferred income taxes,
deferred commissions, income taxes payable,
convertible senior notes, capped call transactions, intangible assets, and goodwill.
Principles of consolidation
The Company’s consolidated financial statements reflect Pegasystems Inc. and subsidiaries in which the Company holds a controlling financial interest.
All intercompany accounts and transactions were eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company’s revenue is primarily derived from:
•software license revenue from sales of the Company’s Pega Platform and software applications. Software licenses represent functional intellectual property and are delivered separately from maintenance and services.
•maintenance revenue from client support including software upgrades (on a when and if available basis), telephone support, and bug fixes or patches.
•Pega Cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications.
•consulting revenue, which is primarily related to new software license implementations, training, and reimbursable costs.
Performance Obligations
The Company’s software license and Pega Cloud arrangements often contain multiple performance obligations. If a contract contains multiple performance obligations, the Company accounts for each distinct performance obligation separately. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. Any discounts or expected potential future price concessions are considered when determining the total transaction price. The Company’s policy is to exclude sales and similar taxes collected from clients from the determination of transaction price.
The Company’s typical performance obligations are:
| | | | | | | | | | | | | | | | | | | | |
| Performance Obligation | | How Standalone Selling Price is Typically Determined | | When Performance Obligation is Typically Satisfied | | When Payment is Typically Due |
| Perpetual license | | Residual approach | | Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) | | Effective date of the license |
| Term license | | Residual approach | | Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) | | Annually, or more frequently, over the term of the license |
| Maintenance | | Consistent pricing relationship as a percentage of the related license and observable in stand-alone renewal transactions (1) | | Ratably over the term of the maintenance (over time) | | Annually, or more frequently, over the term of the maintenance |
| Pega Cloud | | Residual approach | | Ratably over the term of the service (over time) | | Annually, or more frequently, over the term of the service |
Consulting
- time and materials | | Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes | | Based on hours incurred to date | | Monthly |
Consulting
- fixed price | | Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes multiplied by estimated hours for the project | | Based on hours incurred as a percentage of total estimated hours | | As contract milestones are achieved |
(1) Technical support and software licenses, cloud arrangements, maintenance feesupdates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.
The Company utilizes the residual approach for performance obligations since the selling price is highly variable and stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company reevaluates whether the residual approach remains appropriate. As required, the Company evaluates its residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its stand-alone selling price.
If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to the client that the client would not receive without entering into that contract. Discounts on options to purchase additional products and services greater than discounts available to similar clients are accounted for as an additional performance obligation.
During most of each client contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfer control of the performance obligation related to the
Company’s software
licenses, and consulting services. The Company’s license
arrangements, whether involving a perpetual license or a term license, generally also contain multiple elements, including consulting services, training, and software maintenance services.Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”)at the inception of fair value exists for those elements. The amount of arrangement consideration allocated to undelivered elements is based on the VSOE of fair value for those elements and recognized as those elements are delivered. Any remainingcontract term. A significant portion of the total arrangement feecontract consideration is typically allocated to the software license—license performance obligation. Therefore, our contracts often result in the first delivered element. Revenue is recognized for each element when allrecording of unbilled receivables and contract assets throughout most of the contract term. The Company records an unbilled receivable or contract asset when revenue recognition criteria have been met. Revenue is recognized net of any taxes collected from clients and subsequently remitted to governmental authorities.
Changes in the mix of the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and changes to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue.
Before the Company can recognize revenue, the following four basic criteria must be met:
| • | | Persuasive evidence of an arrangement—As evidence of the existence of an arrangement, the Company uses a contract or purchase order signed by the client and the Company for software, including cloud, and maintenance, and a statement of work for consulting services. In the event the client is a reseller, the Company ensures a binding agreement exists between the reseller and end user of the software. |
| • | | Delivery of product and services—The Company delivers its software electronically and/or ships it via disc media. Services are considered delivered as the work is performed or, in the case of maintenance, over the contractual service period. |
| • | | Fee is fixed or determinable—The Company assesses whether a fee is fixed or determinable at the onset of the arrangement. In addition, the Company assesses whether contract modifications to an existing arrangement constitute a concession or whether extended payment terms exist. The Company’s agreements do not include a right of return. |
| • | | Collection of fee is probable—The Company assesses the probability of collecting from each client at the onset of the arrangement based on a number of factors, including the client’s payment history, its current creditworthiness, economic conditions in the client’s industry and geographic location, and general economic conditions. If, in the Company’s judgment, collection of a fee is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met. |
Software license revenues
Perpetual software license fees are recognized as revenue when the software is delivered, any acceptance required by the contract that is not perfunctory is obtained, no significant obligations or contingencies exist related to the software, all other undelivered elements in a multiple element arrangement possess VSOE, and all other revenue recognition criteria are met.
Term software license fees are usually payable on a monthly, quarterly, or annual basis under license agreements that typically have a three to five-year term and may be renewed for additional terms atcontract exceeds the client’s option.billings. The Company recognizes term license revenue overan impairment on receivables and contract assets if, after contract inception, it becomes probable that payment is not collectible. The Company reviews receivables and contract assets on an individual basis for impairment.
Variable consideration
The Company’s arrangements can include variable fees, such as the
termoption to purchase additional usage of
a previously delivered software license. The Company may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts. For variable fees arising from the
agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met.Maintenance revenues
First-year maintenance typically is sold with the relatedclient’s acquisition of additional usage of a previously delivered software license, the Company applies the sales and renewed on an annual basis thereafter. Maintenanceusage-based royalties guidance related to a license of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs. The Company includes variable fees in the determination of total transaction price if it is deferrednot probable that a future significant reversal of revenue will occur. The Company uses the expected value or most likely value amount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and recognized ratably over the term of the support period, which is generally one year and subject to annual renewals. Perpetual software maintenance obligationsestimates are based on separately stated renewal rates in the arrangement that are substantivelevel of historical price concessions offered to clients. The variable consideration related to pricing concessions and therefore represent VSOEother forms of fair value. Term license arrangements include separately stated maintenancevariable consideration, including usage-based fees, and the Company uses stand-alone sales to determine VSOE of fair value.
Services revenues
The Company’s services revenue is comprised of fees for consulting services including software implementation, training, reimbursable expenses, and for sales of its Pega Cloudas-a-platform offering (“Pega Cloud”), which includes the Pega Cloud Dev/Test environment and the Pega Cloud Production environment. Consulting services may be provided on a “stand-alone” basis or bundled with a license and software maintenance services.
Revenue from training services and consulting services under time and materials contracts is recognized as services are performed. The Company has VSOE of fair value for its training services and consulting services under time and materials contracts in the Americas, Europe, and certain regions of Asia.
Consulting services may sometimes be provided on a fixed-price basis. The Company doeshave not have VSOE of fair value for fixed-price services or time and materials services in certain geographical regions. When these services are part of a multiple element arrangement, and the services are not essentialbeen material to the functionality of the software, and when services, including maintenance, are the only undelivered element, the Company recognizes
the revenue from the total arrangement ratably over the longer of the software maintenance period or the service period. Revenue from fixed-price services that are not bundled with a software license is generally recognized ratably over the service period, which is typically less than four months.
Revenue from stand-alone sales of the Pega Cloud Dev/Test environment is recognized as services are performed because the Company has VSOE of fair value.
Revenue from stand-alone sales of the Pega Cloud Production environment is recognized ratably over the term of the service. When implementation services are sold together with the Company’s Pega Cloud offering and these services have stand-alone value to the client, the Company accounts for these services separately from this offering. Stand-alone value is established through the client’s ability to buy these services from many trained partner system integrators and from transactions sold independently from the sale of Pega Cloud. Since these multiple-element arrangements are not software license sales, the Company applies a selling price hierarchy to determine the fair value of each element in the arrangement. Under the selling price hierarchy, each element’s fair value is determined based on its VSOE, if available. If VSOE does not exist, third-party evidence of fair value (“TPE”) will be considered, and estimated selling price (“ESP”) will be used if neither VSOE nor TPE is available. consolidated financial statements.
Significant financing components
The Company generally does not have VSOEintend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms of contracts between the Company and its Pega Cloud offeringclients. Although there may be instances with an intervening period between the delivery of the license and the payment, typically in term license arrangements, the purpose of that timing difference is not able to determine TPE as its sales strategy is customizedalign the client’s payment with the timing of the use of the software license or service.
In certain circumstances, however, there are instances where revenue recognition timing differs from the timing of payment due to extended payment terms or fees that are non-proportional to the needsassociated usage of its clientssoftware licenses. In these instances, the Company evaluates whether a significant financing component exists. This evaluation includes determining the difference between the consideration the client would have paid at the time the performance obligation was satisfied and the amount of consideration actually paid. Contracts that include a significant financing component are adjusted for the time value of money at the rate inherent in the contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing.
During 2020, 2019, and 2018, significant financing components were not material.
Contract modifications
The Company assesses contract modifications to determine:
•if the additional products and services are dissimilar to comparabledistinct from the products orand services in the marketplace. In determining ESP,original arrangement; and
•if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.
A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:
•a prospective basis as a termination of the existing contract and the creation of a new contract; or
•a cumulative catch-up basis.
Deferred commissions
The Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company
applies significant judgment as it weighsprimarily pays sales commissions on the initial contract. As a
varietyresult, there are no commensurate commissions paid on contract renewals. Deferred commissions are allocated to each performance obligation within the contract and amortized according to the transfer of
factors,underlying goods and services within those contracts and expected renewals. The expected benefit period is determined based on the
facts and circumstanceslength of the
arrangement. The Company typically arrivesclient contracts, client attrition rates, the underlying technology life-cycle, and the competitive marketplace’s influence in which the products and services are sold. Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefit period of five years. Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the five years expected benefit period, are amortized at
an ESP for a service without VSOE or TPE by considering company-specific factors such as geographies, competitive landscape, and pricing practices used to establish bundled pricing and discounting.Deferred revenue
Deferredthe point in time control of the software license revenue typically results from client billingsis transferred. Deferred costs allocated to consulting are amortized over a period consistent with the pattern of transfer of control for which all of the criteria to recognize revenue have not been met. Deferred maintenance revenue represents software license updates and product support contracts that are typically billed in advance and are recognized ratably over the support periods. Deferred services revenue represents advanced billings for consulting, hosting, and training services that are recognized as the services are performed.
Fair value of financialrelated services.
The principal financial instruments held by the Company consist of cash equivalents, marketable securities,
derivative instruments, accounts receivable,receivables, capped call transactions, and accounts payable.
See Note 3 “Marketable Securities”, Note 4 “Derivative Instruments”,The Company considers debt securities that are readily convertible to known amounts of cash with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and
Note 5 “Fair Value Measurements” for further discussion of financial instruments that are carried at fair
value onvalue. Unrealized gains and losses considered temporary in nature are recorded as a
recurring basis.Derivative instruments
component of accumulated other comprehensive loss, net of related income taxes. The Company hasreviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the investment cost is adjusted to fair value by recording a loss on investments in the past used, but does not currently use, foreign currency forward contracts (“forward contracts”) to manage its exposures to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, intercompany receivableconsolidated statements of operations. Gains and payables,losses on investments are calculated based upon the specific investment.
See "Note 4. Receivables, Contract Assets, And Deferred Revenue", "Note 10. Debt", and
cash. See Note 4 “Derivative Instruments”"Note 12. Fair Value Measurements" for
further discussion.additional information.
Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for computer equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser of the lease’s term of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
All the Company’s leases are operating leases, primarily composed of office space leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementationpost-implementation activities are expensed as incurred. The Company amortizes capitalized software costs generally over three to five years, commencing on the date the software is placed into service.During 2016, the Company placed into service computer software developed for internal use of $11.3 million, of which $1.1 million was capitalized in 2015 and $10.2 million was capitalized in 2016.
Goodwill represents the residual purchase price paid in a business combination after the fair value of all identified assets and liabilities have been recorded. Goodwill is not amortized. The Company
operates ashas a single reporting unit. The Company performed
itsa qualitative assessment as of November 30,
2017, 2016,2020, 2019, and
2015,2018, and concluded
that there was 0 impairment since it was not more likely than not that the fair value of its reporting unit was less than its carrying value.
Intangible and long-lived assets
All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that thesuch assets’ carrying amount of such assets may not be recoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the long-lived tangible or intangible assetassets to itstheir carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value of the intangible asset to its fair value as determined by discounted expected cash flows. The Company did not record any impairments in 2017, 2016,
Cash equivalents
Cash equivalents include money market funds, time deposits and other investments with original maturities of three months or
2015.less.
The Company uses its best estimates and assumptions to
accurately assign
a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and
tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
Research and development and software development costs
Research and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment of technological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not been material to date, as technological feasibility is established within a short time frame from the software’s general
availability and, asavailability. As a result, no costs were capitalized in
2017, 2016,2020, 2019, or
2015.2018.
The Company recognizes stock-based compensation expense associated with equity awards based on the award’s fair value of these awards at the grant date. Stock-based compensation is recognized over the requisite service
period, which is generally the vesting period of the equity award and is adjusted each period for anticipated forfeitures. See Note 14 “Stock-based Compensation”"Note 14. Stock-Based Compensation" for discussion of the Company’s key assumptions included in determining the fair value of its equity awards at the grant date.
Foreign currency translation
and remeasurement
The translation of assets and liabilities for the Company’s subsidiaries with functional currencies other than the U.S.
Dollardollar are made at
period-end exchange rates. Revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. The resulting translation adjustments are reflected in accumulated other comprehensive income. Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction
lossgain (loss) in the accompanying consolidated statements of operations.
Accounting for income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. Future realization of the Company’s deferred tax assets ultimately depends on
the existence of sufficient taxable income within the available carryback or carryforward periods.
Sources of taxableTaxable income
sources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is
more-likely-than-not to be realized. Changes in the valuation allowance impacts income tax expense in the period of adjustment. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information. The Company recognizes excess tax benefits when they are realized,
throughas a reduction
inof the provision for income
taxes payable using thewith-and-without stock option method.taxes.
The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is
more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not
more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as
non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.
As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. See
Note 15 “Income Taxes”"Note 16. Income Taxes" for
furtheradditional information.
Advertising costs are expensed as incurred. Advertising costs were $6.1$8.7 million, $8.9$6.7 million, and $9.8$6.9 million during 2017, 2016,2020, 2019, and 2015,2018, respectively.
New
accounting pronouncementsStock-Based Compensation
Accounting Standards
Convertible debt
In
May 2017,August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-09 “Stock Compensation (Topic 718)2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06),
Scopewhich simplifies the accounting for certain financial instruments with characteristics of
Modification Accounting” to clarify when toliabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Additionally, the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a
change to the terms or conditions ofconvertible debt instrument wholly as debt unless (1) a
share-based payment awardconvertible instrument contains features that require bifurcation as a
modification. Underderivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, the
new guidance, modification accountingstandard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”). The standard is
required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective
date for
the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.Financial Instruments
In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020,fiscal years beginning after December 15, 2021, with early adoption permitted.permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities andright-of-use assets upon adoption with no material impactelect to its results of operations and cash flows.
Revenue
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition, creating the new ASC Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a client obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with clients.
The Company has elected the full retrospective adoption model, effective January 1, 2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form10-K for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.
The Company has substantially completed the implementation of ASC 606 and has identified the necessary changes to its policies, processes, systems, and controls. However, due to the complex nature of the Company’s arrangements and recent updates to interpretive guidance, which were made as recently as the fall of 2017, the Company has not yet completed all of its internal control procedures.
Based upon the work performed to date, the Company expects to record a cumulative-effect adjustment as of December 31, 2015 to increase retained earnings by approximately $205 million which includes a $30 million increase in retained earnings due to deferred commission expense and a $97 million decrease in retained earnings due to the resulting tax impact. We expect to fully disclose the impacts ofearly adopt the new standard in connection with our 10Q filing for the first quarter of 2018.
The Company expects the following impacts upon adoption of the standard:
2021.Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met, and any corresponding maintenance over the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied, which will typically occur upon delivery. Therefore, revenue from the term and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the client. Any unrecognized license revenue from these arrangements, included in deferred revenue at December 31, 2015, will not be recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016 and 2017 will be recognized in full in the year that control of the license is transferred to the client instead of over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term, consistent with the previous treatment. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the client, the Company expects to recognize a material unbilled receivable on the balance sheet.
Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective Evidence (“VSOE”) for the remaining undelivered elements, which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights under ASC 606, generally allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the client, which is generally upon delivery of the license.
Currently, the Company does not have VSOE, in software bundled arrangements, for fixed price services, time and materials services in certain geographical areas, and unspecified future products, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a stand-alone selling price. Once the transaction price is allocated to each of the performance obligations based on their relative stand-alone selling prices, the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the client, consulting revenue will be recognized over time based on input measures that reflect the Company’s performance on the contract. This will result in the acceleration of consulting revenue when compared to the current practice of ratable recognition for consulting when there is a lack of VSOE.
Sales commissions and other third party acquisition costs resulting directly from securing contracts with clients are currently expensed when incurred. ASC 340-40 “Accounting for Other Assets and Deferred Costs” will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term or estimated client life depending on the nature of the underlying contract. The Company expects this change to impact its commissions related to multi-year cloud offerings and term and perpetual licenses with additional rights of use that extend beyond one year which will require the allocation of a portion of the commission paid for term and perpetual licenses to future maintenance obligations when the commission rates within each arrangement are not commensurate. This change will impact retained earnings as of December 31, 2015 but will not have a significant impact in future periods.
ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract modifications are recognized currently.
There will be a corresponding effect on tax liabilities in relation to all of the above impacts.
3. MARKETABLE SECURITIES
| | | | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2017 | |
| | | Amortized
Cost | | | Unrealized
Gains | | | Unrealized
Losses | | | Fair Value | |
Municipal bonds | | $ | 32,996 | | | $ | — | | | $ | (148 | ) | | $ | 32,848 | |
Corporate bonds | | | 28,757 | | | | 1 | | | | (137 | ) | | | 28,621 | |
| | | | | | | | | | | | | | | | |
| | $ | 61,753 | | | $ | 1 | | | $ | (285 | ) | | $ | 61,469 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2016 | |
| | | Amortized
Cost | | | Unrealized
Gains | | | Unrealized
Losses | | | Fair Value | |
Municipal bonds | | $ | 36,746 | | | $ | — | | | $ | (139 | ) | | $ | 36,607 | |
Corporate bonds | | | 26,610 | | | | 1 | | | | (51 | ) | | | 26,560 | |
| | | | | | | | | | | | | | | | |
| | $ | 63,356 | | | $ | 1 | | | $ | (190 | ) | | $ | 63,167 | |
| | | | | | | | | | | | | | | | |
The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified asavailable-for-sale and are carried at fair value. Unrealized gains and losses considered to be temporary in nature are recorded as a component of accumulated other comprehensive loss, net of related income taxes. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the cost of the investment is adjusted to fair value through recording a loss on investments in the consolidated statements of operations. Gains and losses on investments are calculated on the basis of specific identification.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| Government debt | $ | 39,996 | | | $ | 0 | | | $ | (8) | | | $ | 39,988 | |
| Corporate debt | 253,345 | | | 88 | | | (152) | | | 253,281 | |
| $ | 293,341 | | | $ | 88 | | | $ | (160) | | | $ | 293,269 | |
As of December 31, 2017,2020, marketable securities maturities ranged from January 2021 to December 2023, with a weighted-average remaining maturity of 1.5 years.
As of December 31, 2019, the Company did not hold any investments with unrealized losses consideredmarketable securities.
4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
| | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 |
| Accounts receivable | $ | 215,827 | | | $ | 199,720 | |
| Unbilled receivables | 207,155 | | | 180,219 | |
| Long-term unbilled receivables | 113,278 | | | 121,736 | |
| $ | 536,260 | | | $ | 501,675 | |
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables are expected to be billed in the future as follows:
| | | | | | | | |
| (Dollars in thousands) | December 31, 2020 |
| 1 year or less | $ | 207,155 | | 65 | % |
| 1-2 years | 83,992 | | 26 | % |
| 2-5 years | 29,286 | | 9 | % |
| $ | 320,433 | | 100 | % |
Unbilled receivables based upon contract effective date:
| | | | | | | | |
| (Dollars in thousands) | December 31, 2020 |
| 2020 | $ | 149,867 | | 47 | % |
| 2019 | 87,941 | | 27 | % |
| 2018 | 31,097 | | 10 | % |
| 2017 | 31,668 | | 10 | % |
| 2016 and prior | 19,860 | | 6 | % |
| $ | 320,433 | | 100 | % |
Major clients
No client represented 10% or more of the Company’s total accounts receivable and unbilled receivables as of December 31, 2020 or December 31, 2019.
Contract assets and deferred revenue
| | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 |
Contract assets (1) | $ | 15,296 | | | $ | 5,558 | |
Long-term contract assets (2) | 7,777 | | | 5,420 | |
| $ | 23,073 | | | $ | 10,978 | |
| Deferred revenue | $ | 232,865 | | | $ | 190,080 | |
Long-term deferred revenue (3) | 8,991 | | | 5,407 | |
| $ | 241,856 | | | $ | 195,487 | |
(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.
Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client where the right to payment is subject to conditions other than
temporary.the passage of time, such as completing a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.
The change in deferred revenue in the year ended December 31, 2020 was primarily due to new billings in advance of revenue recognition and $187.6 million of revenue recognized during the period that was included in deferred revenue on December 31, 2019.
5. DEFERRED COMMISSIONS
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2020 | | 2019 |
Deferred commissions (1) | $ | 108,624 | | | $ | 85,314 | |
(1) Included in other long-term assets.
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
Amortization of deferred commissions (1) | $ | 33,302 | | | $ | 29,152 | | | $ | 17,271 | |
(1) Included in selling and marketing expenses.
6. PROPERTY AND EQUIPMENT (1)
| | | | | | | | | | | |
| (in thousands) | December 31, |
| 2020 | | 2019 |
| Leasehold improvements | $ | 52,335 | | | $ | 42,162 | |
| Computer equipment | 30,211 | | | 25,147 | |
| Furniture and fixtures | 10,572 | | | 8,524 | |
| Computer software purchased | 8,415 | | | 7,775 | |
| Computer software developed for internal use | 18,542 | | | 17,606 | |
| Fixed assets in progress | 2,077 | | | 4,044 | |
| 122,152 | | | 105,258 | |
| Less: accumulated depreciation | (81,754) | | | (70,975) | |
| $ | 40,398 | | | $ | 34,283 | |
(1) Included in other long-term assets.
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Depreciation expense | $ | 17,378 | | | $ | 14,771 | | | $ | 13,875 | |
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| January 1, | $ | 79,039 | | | $ | 72,858 | |
| Acquisition | 0 | | | 6,179 | |
| Currency translation adjustments | 192 | | | 2 | |
| December 31, | $ | 79,231 | | | $ | 79,039 | |
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
| Client-related | 4-10 years | | $ | 63,168 | | | $ | (55,877) | | | $ | 7,291 | |
| Technology | 2-10 years | | 64,843 | | | (56,386) | | | 8,457 | |
| Other | 1-5 years | | 5,361 | | | (5,361) | | | 0 | |
| | | $ | 133,372 | | | $ | (117,624) | | | $ | 15,748 | |
(1) Included in other long-term assets.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| (in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
| Client-related | 4-10 years | | $ | 63,140 | | | $ | (54,368) | | | $ | 8,772 | |
| Technology | 2-10 years | | 64,843 | | | (53,898) | | | 10,945 | |
| Other | 1-5 years | | 5,361 | | | (5,361) | | | 0 | |
| | | $ | 133,344 | | | $ | (113,627) | | | $ | 19,717 | |
(1) Included in other long-term assets.
Amortization of intangible assets was:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Cost of revenue | $ | 2,487 | | | $ | 3,500 | | | $ | 5,027 | |
| Selling and marketing | 1,483 | | | 3,125 | | | 6,416 | |
| $ | 3,970 | | | $ | 6,625 | | | $ | 11,443 | |
Future estimated amortization expense related to intangible assets:
| | | | | |
| (in thousands) | December 31, 2020 |
| 2021 | $ | 3,657 | |
| 2022 | 3,557 | |
| 2023 | 3,289 | |
| 2024 | 2,520 | |
| 2025 and after | 2,725 | |
| $ | 15,748 | |
8. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance.
The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides case management, business process management, and real time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has 1 operating segment and 1 reporting unit.
Long-lived assets related to the Company’s U.S. and international operations were:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | December 31, |
| 2020 | | 2019 |
| U.S. | $ | 31,339 | | | 78 | % | | $ | 26,644 | | | 78 | % |
| International | 9,059 | | | 22 | % | | 7,639 | | | 22 | % |
| $ | 40,398 | | | 100 | % | | $ | 34,283 | | | 100 | % |
9. LEASES
Expense
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| Fixed lease costs | $ | 20,235 | | | $ | 18,250 | |
| Short-term lease costs | 1,669 | | | 1,291 | |
| Variable lease costs | 4,470 | | | 5,554 | |
| $ | 26,374 | | | $ | 25,095 | |
Total rent expense under operating leases was $14.9 million for 2018.
Right of use assets and lease liabilities
| | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 |
Right of use assets (1) | $ | 67,651 | | | $ | 58,273 | |
Lease liabilities (2) | $ | 18,541 | | | $ | 15,885 | |
| Long-term lease liabilities | $ | 59,053 | | | $ | 52,610 | |
(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. (2) Included in other current liabilities.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Weighted-average remaining lease term | 4.7 years | | 4.0 years |
Weighted-average discount rate (1) | 5.4 | % | | 5.8 | % |
(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.
Maturities of lease liabilities are:
| | | | | | | |
| (in thousands) | December 31, 2020 | | |
| 1 year or less | $ | 22,164 | | | |
| 1-2 years | 21,747 | | | |
| 2-3 years | 21,599 | | | |
| 3-4 years | 7,683 | | | |
| > 4 years | 14,431 | | | |
| Total lease payments | 87,624 | | | |
| Less: imputed interest (1) | (10,030) | | | |
| Total short and long-term lease liabilities | $ | 77,594 | | | |
(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement, unless the discount rate is updated due to a lease reassessment event.
Cash flow information
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| Cash paid for leases | $ | 20,548 | | | $ | 19,727 | |
| Right of use assets recognized for new leases and amendments (non-cash) | $ | 24,276 | | | $ | 31,155 | |
10. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no required principal payments until the maturity of the Notes. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.
Proceeds from the Notes and Capped Call Transactions:
| | | | | | | | |
| (in thousands) | | Amount |
| Principal | $ | 600,000 | |
| Less: issuance costs | (14,527) | |
| Less: Capped Call Transactions | (51,900) | |
| | $ | 533,573 | |
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
•During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
•During the 5 consecutive business days immediately after any 5 consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
•Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).
As of December 31, 2017, remaining maturities2020, no Notes were eligible for conversion at the noteholders’ election.
Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of
marketable debt securities ranged from January 2018the Notes at a repurchase price equal to
October 2020, with a weighted-average remaining maturity100% of
approximately 12 months.4. DERIVATIVE INSTRUMENTS
The Company historically used, but does not currently use, foreign currency forward contracts (“forward contracts”) to reduce its exposure to fluctuations in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable,the principal amount, plus accrued and intercompany receivables and payables held primarily byunpaid interest, if the U.S. parent company and its United Kingdom (“U.K.”) subsidiary. The cash flows related to these forward contracts are classified as operating activities in the accompanying consolidated statements of cash flows. The Company does not enter into any forward contracts for trading or speculative purposes.
At December 31, 2016, the total notional valuelast reported sale price of the Company’s outstanding forward contractscommon stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental change relates to events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
Impact of the Notes
In accounting for the transaction, the Notes have been separated into liability and equity components.
•The initial carrying amount of the liability component was $128.4 million.calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the Notes’ contractual term.
•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes.
The Company incurred issuance costs of $14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components.
•Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes.
•Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.
Net carrying amount of the liability component:
| | | | | | | |
| (in thousands) | December 31, 2020 | | |
| Principal | $ | 600,000 | | | |
| Unamortized debt discount | (71,222) | | | |
| Unamortized issuance costs | (10,575) | | | |
| $ | 518,203 | | | |
Net carrying amount of the equity component, included in additional paid-in capital:
| | | | | | | |
| (in thousands) | December 31, 2020 | | |
Conversion options (1) | $ | 61,604 | | | |
(1) Net of issuance costs and taxes.
Interest expense related to the Notes:
| | | | | | | | | |
| (in thousands) | 2020 | | | | |
| Contractual interest expense (0.75% coupon) | $ | 3,825 | | | | | |
Amortization of debt discount (1) | 12,898 | | | | | |
Amortization of issuance costs (1) | 1,915 | | | | | |
| $ | 18,638 | | | | | |
(1) Amortized based upon an effective interest rate of 4.31%.
Future payments of principal and contractual interest:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (in thousands) | Principal | | Interest | | Total |
| | | | | |
| 2021 | 0 | | | 4,500 | | | 4,500 | |
| 2022 | 0 | | | 4,500 | | | 4,500 | |
| 2023 | 0 | | | 4,500 | | | 4,500 | |
| 2024 | 0 | | | 4,500 | | | 4,500 | |
| 2025 | 600,000 | | | 1,488 | | | 601,488 | |
| $ | 600,000 | | | $ | 19,488 | | | $ | 619,488 | |
Capped Call Transactions
In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock. They are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is $196.44, subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events and tender offers.
The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
Change in value of Capped Call Transactions:
| | | | | |
| (in thousands) | Year Ended
December 31, 2020 |
| Value at issuance | $ | 51,900 | |
| Fair value adjustment | 31,697 | |
| Balance as of December 31, | $ | 83,597 | |
Credit facility
In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding
forward contracts wasloans will be payable on such date. The Credit Facility, as
follows: | | | | | | | | |
| (in thousands) | | December 31, 2016 | |
| | | Recorded In: | | | Fair Value | |
Asset Derivatives | | | | | | | | |
Foreign currency forward contracts | | | Other current assets | | | $ | 628 | |
Liability Derivatives | | | | | | | | |
Foreign currency forward contracts | | | Accrued expenses | | | $ | 883 | |
amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.
The Company is also required to comply with financial covenants, including:
•Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $200 million in cash and investments held by Pegasystems Inc.
•Beginning with the quarter ended on March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of December 31, 2020 and December 31, 2019, the Company had 0 outstanding borrowings under the Credit Facility.
11. STOCKHOLDERS’ EQUITY
Preferred stock
The Company has 1 million authorized shares of preferred stock, $0.01 par value per share, of which NaN were issued and outstanding at December 31, 2020. The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictions thereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the earnings and assets available for distribution to holders of common stock and may have the effect of delaying, deferring, or defeating a change in control of the Company. The Company had
forward contracts outstanding with total notional values as0t issued any shares of
preferred stock through December 31,
2016 as follows: | | | | |
| (in thousands) | | | |
Euro | | € | 29,820 | |
British pound | | £ | 6,440 | |
Australian dollar | | A$ | 22,010 | |
United States dollar | | $ | 73,125 | |
2020.
Common stock
The income statement impactCompany has 200 million authorized shares of common stock, $0.01 par value per share, of which 80.9 million shares were issued and outstanding at December 31, 2020.
Dividends declared
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Dividends declared (per share) | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | |
| Dividend payments to stockholders (in thousands) | $ | 9,628 | | | $ | 9,486 | | | $ | 9,432 | |
The Company’s paid a quarterly cash dividend of $0.03 per share in 2020, 2019, and 2018, however, the Company’s outstanding forward contractsBoard of Directors may terminate or modify the dividend program at any time without prior notice.
Stock repurchases
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| January 1, | | | $ | 45,484 | | | | | $ | 6,620 | | | | | $ | 34,892 | |
Authorizations (1) | | | $ | 20,516 | | | | | $ | 60,000 | | | | | $ | 27,003 | |
Repurchases (2) | (278) | | | $ | (28,274) | | | (333) | | | $ | (21,136) | | | (1,001) | | | $ | (55,275) | |
| December 31, | | | $ | 37,726 | | | | | $ | 45,484 | | | | | $ | 6,620 | |
(1) On June 15, 2020, the Company announced that the Board of Directors extended the current stock repurchase program’s expiration date to June��30, 2021 and
foreign currency transactions was as follows: | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Gain (loss) from the change in the fair value of forward contracts included in other expense, net | | $ | 286 | | | $ | (5,643 | ) | | $ | (1,047 | ) |
Foreign currency transaction (losses) gains from the remeasurement of foreign currency assets and liabilities | | | (900 | ) | | | 2,247 | | | | (4,168 | ) |
5.increased the remaining stock repurchase authority to $60 million.
(2) Purchases under this program have been made on the open market.
12. FAIR VALUE MEASUREMENTS
Assets and
Liabilities Measuredliabilities measured at
Fair Valuefair value on a
Recurring Basisrecurring basis
The Company records its cash equivalents, marketable securities, forward contractsCapped Call Transactions, and venture investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1)
•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2)
•Level 2 - significant other inputs that are observable either directly or indirectly; and (Level 3)
•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company’s cash equivalents are composed of money market funds and time deposits which are classified as Level 1 and Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities are classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s foreign currency forward contracts, which are all classified within Level 2 of the fair value hierarchy, are valued based on the notional amounts and rates under the contracts and observable market inputs such as currency exchange rates and credit risk. The Company’s investments in privately-held companies are classified within Level 3 of the fair value hierarchy and are valued using model-based techniques, including option pricing models and discounted cash flow models.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchyCapped Call Transactions at the end of theeach reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. The Company applies judgment in whichits determination of expected volatility. The Company considers both historical and implied volatility levels of the actual event or change in circumstance occurs. There were no transfersunderlying equity security and, to a lesser extent, historical peer group volatility levels. The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs, including the volatility, rights, and obligations of investments between Level 1 and Level 2 during 2017 and 2016.
the securities the Company holds.
The Company’s assets and liabilities measured at fair value on a recurring basis consistedbasis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash equivalents | $ | 42,339 | | | $ | 14,000 | | | $ | 0 | | | $ | 56,339 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Marketable securities | $ | 0 | | | $ | 293,269 | | | $ | 0 | | | $ | 293,269 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Capped Call Transactions (1) (2) | $ | 0 | | | $ | 83,597 | | | $ | 0 | | | $ | 83,597 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Venture investments (1) (3) | $ | 0 | | | $ | 0 | | | $ | 8,345 | | | $ | 8,345 | | | $ | 0 | | | $ | 0 | | | $ | 4,871 | | | $ | 4,871 | |
(1) Included in other long-term assets.
(2) See "Note 10. Debt" for additional information.
(3) Investments in privately-held companies.
Change in venture investments:
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| January 1, | $ | 4,871 | | | $ | 3,390 | |
| New investments | 3,306 | | | 1,444 | |
| Sales of investments | (1,424) | | | 0 | |
| Changes in foreign exchange rates | 118 | | | 37 | |
| Fair value adjustment | 1,474 | | | 0 | |
| December 31, | $ | 8,345 | | | $ | 4,871 | |
The carrying value of
the following: | | | | | | | | | | | | | | | | |
| (in thousands) | | Fair Value Measurements at Reporting Date Using | | | Total | |
| | Level 1 | | | Level 2 | | | Level 3 | | |
December 31, 2017 | | | | | | | | | | | | | | | | |
Fair Value Assets: | | | | | | | | | | | | | | | | |
Cash equivalents(1) | | $ | 2,720 | | | $ | 40,051 | | | $ | — | | | $ | 42,771 | |
Marketable securities: | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | — | | | $ | 32,848 | | | $ | — | | | $ | 32,848 | |
Corporate bonds | | | — | | | | 28,621 | | | | — | | | | 28,621 | |
| | | | | | | | | | | | | | | | |
Total marketable securities | | $ | — | | | $ | 61,469 | | | $ | — | | | $ | 61,469 | |
Investments in privately-held companies(2) | | $ | — | | | $ | — | | | $ | 1,030 | | | $ | 1,030 | |
December 31, 2016 | | | | | | | | | | | | | | | | |
Fair Value Assets: | | | | | | | | | | | | | | | | |
Money market funds(1) | | $ | 458 | | | $ | — | | | $ | — | | | $ | 458 | |
Marketable securities: | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | — | | | $ | 36,607 | | | $ | — | | | $ | 36,607 | |
Corporate bonds | | | — | | | | 26,560 | | | | — | | | | 26,560 | |
| | | | | | | | | | | | | | | | |
Total marketable securities | | $ | — | | | $ | 63,167 | | | $ | — | | | $ | 63,167 | |
Foreign currency forward contracts | | $ | — | | | $ | 628 | | | $ | — | | | $ | 628 | |
Fair Value Liabilities: | | | | | | | | | | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 883 | | | $ | — | | | $ | 883 | |
(1) | Included in cash and cash equivalents in the consolidated balance sheets. |
(2) | Included in other long-term assets in the consolidated balance sheets. |
For certain other financial instruments, including accounts receivablereceivables and accounts payable, the carrying value approximates their fair value due to thethese items’ relatively short maturitymaturity.
Fair value of
these items.Assets Measuredthe Notes
The fair value of the Company’s Notes was recorded at
Fair Value$515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature. The fair value of the debt component was determined based on a
Nonrecurring BasisAssets recorded atdiscounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $600 million.
The Notes’ fair value on a nonrecurring basis, such as property and equipment, and intangible assets are recognized at fair value when they are impaired. During 2017, 2016, and 2015, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.
6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Unbilled trade accounts receivable primarily relate to services earned under time and materials arrangements and to license, maintenance, and cloud arrangements that have commenced or been delivered in excess of scheduled invoicing.
| | | | | | | | |
| (in thousands) | | December 31, | |
| | | 2017 | | | 2016 | |
Trade accounts receivable | | $ | 225,923 | | | $ | 234,473 | |
Unbilled accounts receivable | | | 30,063 | | | | 34,681 | |
| | | | | | | | |
Total accounts receivable | | | 255,986 | | | | 269,154 | |
| | | | | | | | |
Allowance for sales credit memos | | | (7,655 | ) | | | (4,126 | ) |
| | | | | | | | |
| | $ | 248,331 | | | $ | 265,028 | |
| | | | | | | | |
The Company records an allowance for estimates of potential sales credit memos when the related revenue is recorded and reviews this allowance periodically.
The following reflects the activity(inclusive of the allowance for sales credit memos:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Balance at beginning of year | | $ | 4,126 | | | $ | 4,631 | | | $ | 1,540 | |
Provision for credit memos | | | 7,052 | | | | 3,290 | | | | 8,005 | |
Credit memos issued | | | (3,523 | ) | | | (3,795 | ) | | | (4,914 | ) |
| | | | | | | | | | | | |
| | $ | 7,655 | | | $ | 4,126 | | | $ | 4,631 | |
| | | | | | | | | | | | |
7. PROPERTY AND EQUIPMENT
| | | | | | | | |
| (in thousands) | | December 31, | |
| | 2017 | | | 2016 | |
Leasehold improvements | | $ | 38,650 | | | $ | 32,852 | |
Computer equipment | | | 23,783 | | | | 21,522 | |
Furniture and fixtures | | | 8,517 | | | | 6,127 | |
Computer software purchased | | | 6,690 | | | | 6,083 | |
Computer software developed for internal use | | | 12,596 | | | | 12,069 | |
Fixed assets in progress | | | 2,167 | | | | 772 | |
| | | | | | | | |
| | | 92,403 | | | | 79,425 | |
Less: accumulated depreciation and amortization | | | (52,044 | ) | | | (41,144 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 40,359 | | | $ | 38,281 | |
| | | | | | | | |
Depreciation expense was approximately $12.4 million, $11.2 million, and $10.6 million for 2017, 2016, and 2015, respectively.
8. ACQUISITIONS
On April 11, 2016, the Company acquired OpenSpan, Inc. (“OpenSpan”), a privately held software provider of robotic process automation and workforce analytics software for $48.8 million in cash, net of $1.8 million in cash acquired.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 17 “Geographic Information and Major Clients”, the Company operates in one reportable segment and has one reporting unit.
The following table presents the changesconversion feature embedded in the carrying amount of goodwill:
| | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | |
Balance as of January 1, | | $ | 73,164 | | | $ | 46,776 | |
Acquisitions | | | — | | | | 26,689 | |
Purchase price adjustments to goodwill | | | (354 | ) | | | — | |
Translation adjustments | | | 142 | | | | (301 | ) |
| | | | | | | | |
Balance as of December 31, | | $ | 72,952 | | | $ | 73,164 | |
| | | | | | | | |
Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives.
| | | | | | | | | | | | | | | | |
| (in thousands) | | Range of
Useful Lives | | | Cost | | | Accumulated
Amortization | | | Net book
value | |
December 31, 2017 | | | | | | | | | | | | | | | | |
Client related intangibles | | | 9-10 years | | | $ | 63,164 | | | $ | (44,835 | ) | | $ | 18,329 | |
Technology | | | 7-10 years | | | | 58,942 | | | | (45,372 | ) | | | 13,570 | |
Other intangibles | | | — | | | | 5,361 | | | | (5,361 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | | | | $ | 127,467 | | | $ | (95,568 | ) | | $ | 31,899 | |
| | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | |
Client related intangibles | | | 4-10 years | | | $ | 63,091 | | | $ | (37,573 | ) | | $ | 25,518 | |
Technology | | | 3-10 years | | | | 58,942 | | | | (40,269 | ) | | | 18,673 | |
Other intangibles | | | — | | | | 5,361 | | | | (5,361 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | | | | $ | 127,394 | | | $ | (83,203 | ) | | $ | 44,191 | |
| | | | | | | | | | | | | | | | |
Amortization expense of acquired intangiblesNotes) was reflected in the Company’s consolidated statements of operations as follows:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Cost of revenue | | $ | 5,103 | | | $ | 5,986 | | | $ | 5,392 | |
Selling and marketing | | | 7,235 | | | | 7,145 | | | | 6,127 | |
General and administrative | | | — | | | | 277 | | | | 683 | |
| | | | | | | | | | | | |
| | $ | 12,338 | | | $ | 13,408 | | | $ | 12,202 | |
| | | | | | | | | | | | |
Future estimated amortization expense related to intangible assets$706.5 million as of December 31, 20172020. The fair value was as follows:
| | | | |
(in thousands) | | Future estimated
amortization expense | |
2018 | | $ | 11,345 | |
2019 | | | 5,553 | |
2020 | | | 2,657 | |
2021 | | | 2,633 | |
2022 and thereafter | | | 9,711 | |
| | | | |
| | $ | 31,899 | |
| | | | |
determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy. See "Note 10. ACCRUED EXPENSES
| | | | | | | | |
| (in thousands) | | December 31, | |
| | 2017 | | | 2016 | |
Outside professional services | | $ | 14,468 | | | $ | 10,204 | |
Income and other taxes | | | 7,420 | | | | 10,422 | |
Marketing and sales program expenses | | | 6,444 | | | | 3,707 | |
Dividends payable | | | 2,344 | | | | 2,298 | |
Employee related expenses | | | 4,065 | | | | 3,806 | |
Other | | | 10,767 | | | | 6,314 | |
| | | | | | | | |
| | $ | 45,508 | | | $ | 36,751 | |
| | | | | | | | |
11. DEFERRED REVENUE
| | | | | | | | |
| (in thousands) | | December 31,
2017 | | | December 31,
2016 | |
Term license | | $ | 16,853 | | | $ | 15,843 | |
Perpetual license | | | 19,277 | | | | 23,189 | |
Maintenance | | | 126,083 | | | | 112,397 | |
Cloud | | | 23,276 | | | | 13,604 | |
Consulting and Training | | | 9,584 | | | | 10,614 | |
| | | | | | | | |
Current deferred revenue | | | 195,073 | | | | 175,647 | |
Perpetual license | | | 2,568 | | | | 7,909 | |
Maintenance | | | 2,745 | | | | 1,802 | |
Cloud | | | 1,278 | | | | 1,278 | |
| | | | | | | | |
Long-term deferred revenue | | | 6,591 | | | | 10,989 | |
| | | | | | | | |
| | $ | 201,664 | | | $ | 186,636 | |
| | | | | | | | |
12. COMMITMENTS AND CONTINGENCIES
Commitments
TheDebt" for additional information.
Credit risk
In addition to receivables, the Company
leases space for its offices under noncancellable operating leases that expire at various dates through 2023.Asis potentially subject to concentrations of December 31, 2017,credit risk from the Company’s future minimum rental payments required under operating leasescash, cash equivalents, and marketable securities. The Company’s cash and cash equivalents are generally held with noncancellable terms in excess of one year were as follows:
| | | | |
(in thousands) | | Operating Leases (1) | |
2018 | | $ | 15,395 | |
2019 | | | 13,881 | |
2020 | | | 12,737 | |
2021 | | | 11,066 | |
2022 and thereafter | | | 18,896 | |
| | | | |
| | $ | 71,975 | |
| | | | |
(1) | Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the Company has vacated pursuant to its restructuring activities. |
Rent expense under operating leases is recognized on a straight-line basislarge, diverse financial institutions worldwide to account for scheduled rent increases and landlord tenant allowances. In connection withreduce the Company’s amended lease for its office headquarters dated November 11, 2014, the Company has a landlord tenant allowance totaling approximately $9.4 million, all of which was used and reimbursed to the Company as of December 31, 2016 and will be amortized as a reduction to rent expense on a straight-line basis over the term of the lease. Total rent expense under operating leases was approximately $14.7 million, $13.4 million, and $12.3 million for 2017, 2016 and 2015, respectively.
Contingencies
The Company is a party in various contractual disputes, litigation and potential claims arising in the ordinary course of business. The Company does not believe that the resolution of these matters will have a material adverse effect on its financial position or results of operations.
13. STOCKHOLDERS’ EQUITY
Preferred stock
The Company has authorized 1 million shares of preferred stock. The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to fix the designation, powers, preferences and rights of the shares of each series and the qualifications, limitations or restrictions thereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring or defeating a change in control of the Company. The Company had not issued any shares of preferred stock through December 31, 2017.
Common stock
The Company has 200 million authorized shares of common stock, $0.01 par value per share, of which 78.1 million shares were issued and outstanding at December 31, 2017.
Since 2004, the Company’s Board of Directors has approved stock repurchase programs that have authorized the Company to repurchase in the aggregate up to $195 million of its common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2018. Purchases under these programscredit risk exposure. Investment policies have been madeimplemented that limit purchases of marketable debt securities to investment-grade securities.
13. REVENUE
Geographic revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2020 | | 2019 | | 2018 |
| U.S. | $ | 613,844 | | 61 | % | | $ | 525,191 | | 57 | % | | $ | 469,987 | | 52 | % |
| Other Americas | 49,441 | | 5 | % | | 60,536 | | 7 | % | | 53,239 | | 6 | % |
| United Kingdom (“U.K.”) | 91,517 | | 9 | % | | 87,382 | | 10 | % | | 95,628 | | 11 | % |
| Europe (excluding U.K.), Middle East, and Africa | 156,056 | | 15 | % | | 137,946 | | 15 | % | | 147,248 | | 17 | % |
| Asia-Pacific | 106,659 | | 10 | % | | 100,328 | | 11 | % | | 125,479 | | 14 | % |
| $ | 1,017,517 | | 100 | % | | $ | 911,383 | | 100 | % | | $ | 891,581 | | 100 | % |
Revenue streams
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Perpetual license | $ | 28,558 | | | $ | 80,015 | | | $ | 109,863 | |
| Term license | 266,352 | | | 199,433 | | | 178,256 | |
| Revenue recognized at a point in time | 294,910 | | | 279,448 | | | 288,119 | |
| Maintenance | 296,709 | | | 280,580 | | | 263,875 | |
| Pega Cloud | 208,268 | | | 133,746 | | | 82,627 | |
| Consulting | 217,630 | | | 217,609 | | | 256,960 | |
| Revenue recognized over time | 722,607 | | | 631,935 | | | 603,462 | |
| $ | 1,017,517 | | | $ | 911,383 | | | $ | 891,581 | |
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Pega Cloud | 208,268 | | | 133,746 | | | 82,627 | |
| Maintenance | 296,709 | | | 280,580 | | | 263,875 | |
| Term license | $ | 266,352 | | | $ | 199,433 | | | $ | 178,256 | |
Subscription (1) | 771,329 | | | 613,759 | | | 524,758 | |
| Perpetual license | 28,558 | | | 80,015 | | | 109,863 | |
| Consulting | 217,630 | | | 217,609 | | | 256,960 | |
| Total revenue | $ | 1,017,517 | | | $ | 911,383 | | | $ | 891,581 | |
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).
Remaining performance obligations ("Backlog")
Expected future revenue on
the open market. | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
Authorization remaining, beginning of period | | | | | | $ | 39,385 | | | | | | | $ | 40,534 | | | | | | | $ | 13,284 | |
Authorizations | | | | | | | — | | | | | | | | 25,879 | | | | | | | | 50,000 | |
Repurchases paid | | | 96 | | | | (4,335 | ) | | | 1,078 | | | | (27,028 | ) | | | 944 | | | | (22,530 | ) |
Repurchases unsettled | | | 3 | | | | (158 | ) | | | — | | | | — | | | | 8 | | | | (220 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Authorization remaining, end of period | | | | | | $ | 34,892 | | | | | | | $ | 39,385 | | | | | | | $ | 40,534 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Dividends
For 2017, 2016, and 2015, the Company paid cash dividends of $9.3 million, $9.2 million, and $9.2 million, respectively.
| | | | | | | | | | | | |
| (per share) | | 2017 | | | 2016 | | | 2015 | |
Dividends Declared | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | |
It is the Company’s current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (Dollars in thousands) | Perpetual license | | Term license | | Maintenance | | Pega Cloud | | Consulting | | Total |
| 1 year or less | $ | 11,514 | | | $ | 105,920 | | | $ | 227,803 | | | $ | 248,223 | | | $ | 19,226 | | | $ | 612,686 | | 57 | % |
| 1-2 years | 395 | | | 7,962 | | | 54,509 | | | 193,064 | | | 346 | | | 256,276 | | 24 | % |
| 2-3 years | 0 | | | 4,928 | | | 28,320 | | | 104,542 | | | 851 | | | 138,641 | | 13 | % |
| Greater than 3 years | 0 | | | 4 | | | 19,283 | | | 44,308 | | | 1,189 | | | 64,784 | | 6 | % |
| $ | 11,909 | | | $ | 118,814 | | | $ | 329,915 | | | $ | 590,137 | | | $ | 21,612 | | | $ | 1,072,387 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| (Dollars in thousands) | Perpetual license | | Term license | | Maintenance | | Pega Cloud | | Consulting | | Total |
| 1 year or less | $ | 2,305 | | | $ | 97,826 | | | $ | 206,882 | | | $ | 165,571 | | | $ | 20,798 | | | $ | 493,382 | | 58 | % |
| 1-2 years | 2,179 | | | 12,014 | | | 30,291 | | | 128,109 | | | 1,439 | | | 174,032 | | 21 | % |
| 2-3 years | 0 | | | 3,132 | | | 17,844 | | | 84,788 | | | 132 | | | 105,896 | | 13 | % |
| Greater than 3 years | 0 | | | 3,861 | | | 13,277 | | | 43,702 | | | 1,993 | | | 62,833 | | 8 | % |
| $ | 4,484 | | | $ | 116,833 | | | $ | 268,294 | | | $ | 422,170 | | | $ | 24,362 | | | $ | 836,143 | | 100 | % |
14. STOCK-BASED COMPENSATION
The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Cost of revenues | | $ | 14,573 | | | $ | 11,459 | | | $ | 8,772 | |
Selling and marketing | | | 15,720 | | | | 12,464 | | | | 8,911 | |
Research and development | | | 13,618 | | | | 10,043 | | | | 8,116 | |
General and administrative | | | 9,402 | | | | 6,513 | | | | 4,255 | |
Acquisition-related | | | — | | | | 342 | | | | — | |
| | | | | | | | | | | | |
Total stock-based compensation before tax | | $ | 53,313 | | | $ | 40,821 | | | $ | 30,054 | |
| | | | | | | | | | | | |
Income tax benefit | | $ | (12,113 | ) | | $ | (12,198 | ) | | $ | (8,098 | ) |
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Cost of revenue | $ | 20,796 | | | $ | 18,822 | | | $ | 16,862 | |
| Selling and marketing | 46,283 | | | 32,665 | | | 23,237 | |
| Research and development | 22,885 | | | 18,938 | | | 15,274 | |
| General and administrative | 13,104 | | | 10,484 | | | 8,489 | |
| $ | 103,068 | | | $ | 80,909 | | | $ | 63,862 | |
| Income tax benefit | $ | (20,464) | | | $ | (16,392) | | | $ | (13,383) | |
The majorityCompany periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares upon vesting to employees and non-employee Directors. Beginning in 2019, the Company granted Directors awards in the form of common stock and stock options.
Most of the Company’s stock-based compensation arrangements
generally vest over five years, with 20% vesting after one year and the remaining 80% vesting in equal quarterly installments over the remaining four years. The Company’s stock options have a
ten-year term. term of ten years. The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant.
The stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest.
Employees may elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of the employee’s target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee���s target incentive opportunity by 85% of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during the vesting period. If elected, the award vests 100% on the following year’s CICP payout date. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company periodicallyconsiders vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vesting date.
The Company grants awards that allow for the settlement of vested stock options and restricted stock unitsRSUs on a net share basis (“RSUs”net settled awards”) for a fixed. With net settled awards, the employee does not surrender any cash or shares upon exercise. Instead, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon vestingexercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by the Company.
Share-based compensation plans
2004 Long-Term Incentive Plan (as amended and restated)
In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employee Directors, and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. Subsequent amendments to the plan increased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annual compensation to any non-employee Director to $0.5 million.
As of December 31, 2020, 9.9 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.
2006 Employee Stock Purchase Plan
In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which the Company’s employees are entitled to purchase up to an aggregate of 1000000 shares of common stock, at a price equal to at least 85% of the fair market value of the Company’s common stock on the lesser of the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completion date of the offering period. As a result, the 2006 ESPP is non-compensatory and is tax-qualified. Therefore, as of December 31, 2020, 0 compensation expense related to the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.
As of December 31, 2020, 0.5 million shares had been issued thereunder.
Shares issued and available for issuance
During 2020, the Company issued 1.6 million shares to its employees andnon-employee Directors. directors under the Company’s share-based compensation plans.
As of December 31, 2020, there were 11.1 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 10.6 million shares under the 2004 Plan and 0.5 million shares under the 2006 ESPP.
Grant activity
Stock options
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stock options is greater than or equal to the shares’ fair market value of the shares at the grant date.
The following table summarizes the Company’s fair value assumptions for stock options:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Weighted-average grant-date fair value | $ | 24.16 | | | $ | 19.10 | | | $ | 18.03 | |
| Assumptions used in the Black-Scholes option-pricing model: | | | | | |
Expected annual volatility (1) | 31 % | | 32 | % | | 34 | % |
Expected term in years (2) | 4.5 | | 4.5 | | 4.5 |
Risk-free interest rate (3) | 0.7 | % | | 2.4 | % | | 2.6 | % |
Expected annual dividend yield (4) | 0.2 | % | | 0.3 | % | | 0.4 | % |
(1) The expected annual volatility for each grant is determined based on the average of historic daily price changes of the Company’s common stock over a period, which approximates the expected option term.
(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.
(3) The risk-free interest rate is based on the yield of U.S. Treasury securities with a commensurate maturity with the expected option term at the time of grant.
(4) The expected annual dividend yield is based on the weighted-average dividend yield assumptions used for options granted during the applicable period.
The following table summarizes the combined stock option activity under the Company’s stock option plans for 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares
(in thousands) | | Weighted-average Exercise Price | | Weighted-average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value
(in thousands) |
| Options outstanding as of January 1, 2020 | 7,436 | | | $ | 44.76 | | | | | |
| Granted | 2,018 | | | 92.81 | | | | | |
| Exercised | (1,777) | | | 33.52 | | | | | |
| Forfeited | (286) | | | 62.86 | | | | | |
| Options outstanding as of December 31, 2020 | 7,391 | | | $ | 59.88 | | | | | |
| Vested and expected to vest as of December 31, 2020 | 6,225 | | | $ | 57.85 | | | 7.1 | | $ | 469,374 | |
| Exercisable as of December 31, 2020 | 2,935 | | | $ | 38.73 | | | 5.6 | | $ | 277,450 | |
The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2020, 2019, and 2018 was $126.8 million, $63.3 million, and $56.8 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2020 is based on the difference between the closing price of the Company’s stock of $133.26 and the exercise price of the applicable stock options.
As of December 31, 2020, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $35.9 million that is expected to be recognized as expense over a weighted-average period of 2.3 years.
RSUs
RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expected dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.
Upon vesting of the RSUs, the Company withholds shares of common stock in an amount sufficient to cover the minimum statutory tax withholding obligations and issues shares of its common stock for the remaining amount.Employees may elect to receive 50% of their target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of his or her target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target incentive opportunity by 85% of the closing price of its common stock on the grant date, less the present value of expected dividends during the vesting period. If elected, the award vests 100% on the CICP payout date of the following year for all participants. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the RSU will not vest. The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vesting date.
The Company grants awards that allow for the settlement of vested stock options RSUs on a net share basis (“net settled awards”). With net settled awards, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by the Company.
Share-Based Compensation Plans:
2004 Long-Term Incentive Plan (as amended and restated)
In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees,non-employee Directors, and consultants with opportunities to purchase stock through incentive stock options andnon-qualified stock options. Subsequent amendments to the plan in 2016 and 2011 increased the number of shares authorized for issuance under the plan to 30 million, extended the term of the plan to 2026, and limited annual compensation to anynon-employee Director to $0.5 million.
As of December 31, 2017, approximately 10 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.
2006 Employee Stock Purchase Plan
In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) pursuant to which the Company’s employees are entitled to purchase up to an aggregate of 1 million shares, of common stock at a price equal to at least 85% of the fair market value of the Company’s common stock on either the commencement date or completion date for offerings under the plan, whichever is less, or such higher price as the Company’s Board of Directors may establish from time to time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completion date of the offering period. As a result, the 2006 ESPP isnon-compensatory and is tax qualified. Therefore, as of December 31, 2017, no compensation expense related to shares issued under the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining to be issued under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.
As of December 31, 2017, approximately 0.4 million shares had been issued thereunder.
Shares Available for Issuance
As of December 31, 2017, there were approximately 9.2 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of approximately 8.6 million shares under the 2004 Plan and approximately 0.6 million shares under the 2006 ESPP.
Equity grants, assumptions and activity
During 2017, the Company issued approximately 1.6 million shares to its employees and directors under the Company’s share-based compensation plans.
Stock Options
The Company estimates the fair value of stock options using a Black-Scholes option valuation model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest.
The weighted-average grant-date fair value for stock options granted in 2017, 2016, and 2015, was $13.79, $8.31 and $7.62 per share, respectively.
The weighted-average assumptions used in the Black-Scholes option valuation model are as follows:
| | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Expected annual volatility(1) | | | 35 | % | | | 40 | % | | | 45 | % |
Expected term in years(2) | | | 4.5 | | | | 4.4 | | | | 4.5 | |
Risk-free interest rate(3) | | | 1.85 | % | | | 1.21 | % | | | 1.34 | % |
Expected annual dividend yield(4) | | | 0.53 | % | | | 0.63 | % | | | 0.68 | % |
The expected annual volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period of time which approximates the expected option term.
The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.
The risk-free interest rate is based on the yield of U.S. Treasury securities with a maturity that is commensurate with the expected option term at the time of grant.
The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period.
The following table summarizes the combined stock option activity under the Company’s stock option plans for 2017:
| | | | | | | | | | | | | | | | |
| | | Shares (in thousands) | | | Weighted-average
exercise price | | | Weighted-average
remaining contractual
term (in years) | | | Aggregate intrinsic
value (in thousands) | |
Options outstanding as of January 1, 2017 | | | 7,463 | | | $ | 19.45 | | | | | | | | | |
Granted | | | 1,639 | | | | 45.78 | | | | | | | | | |
Exercised | | | (1,741 | ) | | | 16.25 | | | | | | | | | |
Forfeited | | | (231 | ) | | | 25.30 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Options outstanding as of December 31, 2017 | | | 7,130 | | | $ | 26.10 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest as December 31, 2017 | | | 5,926 | | | $ | 25.20 | | | | 7.2 | | | $ | 131,599 | |
| | | | | | | | | | | | | | | | |
Exercisable as of December 31, 2017 | | | 2,800 | | | $ | 16.98 | | | | 5.8 | | | $ | 84,479 | |
| | | | | | | | | | | | | | | | |
The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2017, 2016, and 2015 was $62.6 million, $19.9 million and $18.6 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2017 is based on the difference between the closing price of the Company’s stock of $47.15 and the exercise price of the applicable stock options.
As of December 31, 2017, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of approximately $16.8 million that is expected to be recognized as expense over a weighted-average period of approximately 2.2 years.
RSUs
The weighted-average grant-date fair value for RSUs granted in 2017, 2016,2020, 2019, and 20152018 was $46.07, $25.54,$93.68, $66.21, and $20.49,$58.52, respectively.
The following table summarizes the combined RSU activity for periodicall grants, andincluding the CICP, under the 2004 Plan for 2017:
| | | | | | | | | | | | |
| | | Shares
(in thousands) | | | Weighted-
Average
Grant-Date
Fair Value | | | Aggregate
Intrinsic
Value
(in thousands) | |
Nonvested as of January 1, 2017 | | | 3,161 | | | $ | 23.39 | | | | | |
Granted | | | 1,148 | | | | 46.07 | | | | | |
Vested | | | (1,188 | ) | | | 23.66 | | | | | |
Forfeited | | | (220 | ) | | | 27.06 | | | | | |
| | | | | | | | | | | | |
Nonvested as of December 31, 2017 | | | 2,901 | | | $ | 31.97 | | | $ | 136,771 | |
| | | | | | | | | | | | |
Expected to vest as of December 31, 2017 | | | 2,113 | | | $ | 32.74 | | | $ | 99,628 | |
| | | | | | | | | | | | |
2020:
| | | | | | | | | | | | | | | | | |
| Shares
(in thousands) | | Weighted- Average Grant-Date
Fair Value | | Aggregate Intrinsic Value
(in thousands) |
| Nonvested as of January 1, 2020 | 2,565 | | | $ | 55.61 | | | |
| Granted | 1,168 | | | 93.68 | | | |
| Vested | (1,059) | | | 51.11 | | | |
| Forfeited | (212) | | | 65.17 | | | |
| Nonvested as of December 31, 2020 | 2,462 | | | $ | 74.78 | | | $ | 328,023 | |
| Expected to vest as of December 31, 2020 | 1,841 | | | $ | 76.05 | | | $ | 245,339 | |
The fair value of RSUs vested in
2017, 2016,2020, 2019, and
20152018 was
$59.0$108.4 million,
$29.2$77.0 million, and
$14.9$66.5 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31,
20172020 is based on the closing price of the Company’s stock of
$47.15$133.26 on December 31,
2017.2020.
As of December 31,
2017,2020, the Company had
approximately $32.4$68.6 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of
approximately 2.1 years.
Common stock
In 2020, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $117.47 per share.
15. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makes discretionary matching contributions.
The following expenses related to defined contribution plans were recorded in the Company’s consolidated statements of operations:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| U.S. 401(k) Plan | $ | 8,109 | | | $ | 6,676 | | | $ | 5,506 | |
| International plans | 16,132 | | | 13,021 | | | 11,101 | |
| $ | 24,241 | | | $ | 19,697 | | | $ | 16,607 | |
16. INCOME TAXES
Effective income tax rate
The components of
income(loss) before
provision for(benefit from) income taxes
are as follows: | | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Domestic | | $ | 18,605 | | | $ | 37,329 | | | $ | 63,124 | |
Foreign | | | 18,495 | | | | (2,127 | ) | | | (2,619 | ) |
| | | | | | | | | | | | |
Income before provision for income taxes | | $ | 37,100 | | | $ | 35,202 | | | $ | 60,505 | |
| | | | | | | | | | | | |
are:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Domestic | $ | (59,281) | | | $ | (51,396) | | | $ | (27,494) | |
| Foreign | (65,608) | | | (83,450) | | | 15,951 | |
| $ | (124,889) | | | $ | (134,846) | | | $ | (11,543) | |
The components of the provision for(benefit from) income taxes areare:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Current: | | | | | |
| Federal | $ | (11,251) | | | $ | 1,050 | | | $ | (1,862) | |
| State | 399 | | | 405 | | | 287 | |
| Foreign | 7,113 | | | 3,449 | | | 10,313 | |
| Total current (benefit from) provision for | (3,739) | | | 4,904 | | | 8,738 | |
| Deferred: | | | | | |
| Federal | (34,573) | | | (25,356) | | | (18,939) | |
| State | (8,119) | | | (5,143) | | | (3,702) | |
| Foreign | (17,085) | | | (18,818) | | | (8,257) | |
| Total deferred (benefit) | (59,777) | | | (49,317) | | | (30,898) | |
| $ | (63,516) | | | $ | (44,413) | | | $ | (22,160) | |
A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate, is as follows:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Current: | | | | | | | | | | | | |
Federal | | $ | (18,205 | ) | | $ | 6,741 | | | $ | 17,864 | |
State | | | 97 | | | | 2,963 | | | | 4,565 | |
Foreign | | | 8,479 | | | | 4,322 | | | | 3,853 | |
| | | | | | | | | | | | |
Total current (benefits)/provision | | | (9,629 | ) | | | 14,026 | | | | 26,282 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | 19,683 | | | | (1,120 | ) | | | 2,075 | |
State | | | (2,158 | ) | | | (480 | ) | | | (466 | ) |
Foreign | | | (3,730 | ) | | | (4,210 | ) | | | (3,708 | ) |
| | | | | | | | | | | | |
Total deferred provision/(benefit) | | | 13,795 | | | | (5,810 | ) | | | (2,099 | ) |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 4,166 | | | $ | 8,216 | | | $ | 24,183 | |
| | | | | | | | | | | | |
The effective income tax rate differed from | | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| U.S. federal income taxes at statutory rates | $ | (26,227) | | | $ | (28,318) | | | $ | (2,424) | |
| Valuation allowance | (5,881) | | | 727 | | | 510 | |
| State income taxes, net of federal benefit and tax credits | (6,994) | | | (4,450) | | | (3,329) | |
| Permanent differences | 1,773 | | | 2,606 | | | 1,302 | |
GILTI, FDII, and BEAT (1) | 0 | | | 0 | | | 399 | |
| Federal research and experimentation credits | (5,716) | | | (4,295) | | | (6,991) | |
| Tax effects of foreign activities | 3,050 | | | 3,056 | | | (399) | |
| Tax-exempt income | 0 | | | (91) | | | (137) | |
| Provision to return adjustments | 3,416 | | | (5,460) | | | 253 | |
| Non-deductible compensation | 1,806 | | | 1,716 | | | 1,025 | |
| Expiration of statutes and changes in estimates | 55 | | | 2,420 | | | (516) | |
| Excess tax benefits related to share-based compensation | (25,797) | | | (14,291) | | | (13,541) | |
| Cares Act | (10,576) | | | — | | | — | |
| Impact of change in tax law | 7,489 | | | 1,908 | | | 1,636 | |
| Other | 86 | | | 59 | | | 52 | |
| $ | (63,516) | | | $ | (44,413) | | | $ | (22,160) | |
(1) Global Intangible Low Taxed Income (“GILTI”), Foreign-Derived Intangible Income (“FDII”), and Base Erosion and Anti-abuse Tax (“BEAT”)
Cares Act
On March 27, 2020, the
statutory federal income tax rate due to the following: | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Statutory federal income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
Valuation allowance | | | 1.2 | | | | 0.3 | | | | 0.7 | |
Transaction costs | | | — | | | | 1.1 | | | | — | |
State income taxes, net of federal benefit and tax credits | | | (4.5 | ) | | | 3.7 | | | | 4.6 | |
Permanent differences | | | 2.7 | | | | 2.2 | | | | 1.1 | |
Domestic production activities | | | — | | | | (3.2 | ) | | | (3.1 | ) |
Federal research and experimentation credits | | | (9.1 | ) | | | (2.3 | ) | | | (1.2 | ) |
Tax effects of foreign activities | | | (1.1 | ) | | | 5.2 | | | | 2.0 | |
Tax-exempt income | | | (0.3 | ) | | | (0.3 | ) | | | (0.1 | ) |
Provision to return adjustments | | | (5.2 | ) | | | 0.3 | | | | 0.3 | |
Non-deductible compensation | | | 5.0 | | | | 6.2 | | | | 3.3 | |
Provision for uncertain tax positions | | | 0.7 | | | | (2.3 | ) | | | (2.6 | ) |
Excess tax benefits related to share-based compensation | | | (66.0 | ) | | | (20.1 | ) | | | — | |
Net deferred tax assetsre-measurement(1) | | | 51.8 | | | | — | | | | — | |
Other | | | 1.0 | | | | (2.5 | ) | | | — | |
| | | | | | | | | | | | |
Effective income tax rate | | | 11.2 | % | | | 23.3 | % | | | 40.0 | % |
| | | | | | | | | | | | |
(1) | Due to the impact of the Tax Reform Act. |
On December 22, 2017, the President of the United States signed into law the Tax CutsCoronavirus Aid, Relief, and JobsEconomic Security Act (the “Tax Reform(“Cares Act”). The Tax Reform Act makes significant changes in the U.S. tax code including the following:
reduction of the corporate federal income tax rate from 35% to 21%;
repeal of the domestic manufacturing deduction;
repeal of the corporate alternative minimum tax;
aone-time transition tax on accumulated foreign earnings (if any);
a move to a territorial tax system; and
acceleration of business asset expensing.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) was enacted to address the applicationeconomic impact of U.S. GAAPthe COVID-19 pandemic in situations whenthe United States. Among other things, the Cares Act allows a registrant does not have the necessary information available, prepared, or analyzed (including computations)five-year carryback period for tax losses generated in reasonable detail to complete the accounting for2019 through 2021.
The Company carried back net operating losses generated in 2019, resulting in an income tax
effectsbenefit of $5.7 million. The $5.7 million income tax benefit represents the Federal rate differential between 35% and 21%. In addition, the Company applied the carryback provisions of the
Tax Reform Act. The Company has recognizedCares Act to its net operating losses generated in 2020, which resulted in the
provisional tax impacts in 2017, including $20.4reclassification of $4.8 million
in additionalnet operating losses from a deferred income tax
expense in the fourth quarter of 2017asset to
re-measure its deferred tax assets to the 21% enacted rate. refundable income taxes. The
final amounts may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act.The Tax Reform Act provided for aone-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017. Based on the Company’s provisional analysis performed to date, the Company does not expect to be subject to the one-time transition tax due to our foreign subsidiaries being in a net accumulated deficit position.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes the following new anti-abuse provisions:
The global intangiblelow-taxed income (“GILTI”) provisions require the Company to include in its U.S.other income tax base foreign subsidiary earnings in excess of an allowable return on the foreign
| subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax resulting from GILTI inclusions beginning in 2018. However, our analysis and accounting for the effects of the GILTI provision is incomplete and an accounting policy on whether we will account for impact of GILTI inclusions in the period in which it is incurred or record deferred taxes for anticipated GILTI inclusions has not been made.
|
The base-erosion and anti-abuse tax (“BEAT”) provisions in the Tax Reform Act impose an alternative minimum tax on taxpayers with substantial base-erosion payments. Our preliminary assessment is that the company will not be subject to the BEAT; however, our analysis is incomplete and we will continue to analyze the impact of the BEAT provisionsCares Act to determine if these would behave a material to the company’s effective tax rate.impact on its financial statements.
Significant components of net deferred tax assets and liabilities
are as follows: | | | | | | | | |
| | | December 31, | |
| (in thousands) | | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 52,311 | | | $ | 69,307 | |
Accruals and reserves | | | 22,984 | | | | 34,021 | |
Software revenue | | | 2,686 | | | | 6,559 | |
Depreciation | | | 2,558 | | | | 3,593 | |
Tax credit carryforwards | | | 13,056 | | | | 8,094 | |
Other | | | 52 | | | | 19 | |
| | | | | | | | |
Total deferred tax assets | | | 93,647 | | | | 121,593 | |
Less valuation allowances | | | (27,993 | ) | | | (34,054 | ) |
| | | | | | | | |
Total net deferred tax assets | | | 65,654 | | | | 87,539 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Intangibles | | | (8,527 | ) | | | (17,641 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (8,527 | ) | | | (17,641 | ) |
| | | | | | | | |
Deferred income taxes | | $ | 57,127 | | | $ | 69,898 | |
| | | | | | | | |
Due to the Tax Reform Act U.S. deferred tax assets and liabilities werere-measured from 35% to 21% resulting in an additional $20.4 million income tax expense in the fourth quarter of 2017.
are:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 88,129 | | | $ | 70,960 | |
| Accruals and reserves | 26,309 | | | 24,902 | |
| Interest expense carryforward | 3,464 | | | 0 | |
| Depreciation | 4,795 | | | 2,493 | |
| Tax credit carryforwards | 31,556 | | | 15,307 | |
| Other | 370 | | | 199 | |
| Total deferred tax assets | 154,623 | | | 113,861 | |
| Valuation allowances | (23,409) | | | (28,007) | |
| Total net deferred tax assets | 131,214 | | | 85,854 | |
| Deferred tax liabilities: | | | |
| Capped call transactions | (20,858) | | | 0 | |
| Convertible senior notes | (6,473) | | | 0 | |
| Software revenue | (11,477) | | | (23,859) | |
| Intangibles | (4,338) | | | (6,103) | |
| Total deferred tax liabilities | (43,146) | | | (29,962) | |
| $ | 88,068 | | | $ | 55,892 | |
The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of
realization ofrealizing the deferred tax assets to determine, based on the weight of available evidence, whether it is
more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income
that are based on historical and projected information.
The $6.1 million netIn 2020, the change in
the valuation
allowance during the periodallowances was primarily
relates to a $7.4 million decrease due to the
re-measurement our deferred income taxes to the new U.S. statutory tax rate offset by $0.8 expiration of $5.9 million
increase for movements in
foreign exchange rates and $0.5 millionacquisition-related net operating losses. There were 0 material changes in valuation
allowance recorded against certain state R&D credits generatedallowances in
the period.At2019.
As of December 31, 2017,2020, the Company had $99.2 millionCompany’s net operating losses and $3.3 million incredit carryforwards are:
| | | | | | | | | | | |
| (in thousands) | Federal | | State |
Net operating losses (1) | $ | 124,115 | | | $ | 9,149 | |
Net operating losses due to acquisitions (1) | $ | 76,826 | | | $ | 1,466 | |
Credit carryforwards (2) | $ | 24,372 | | | $ | 1,895 | |
| Credit carryforwards due to acquisitions | $ | 640 | | | $ | 60 | |
(1) Excludes federal and state net operating losses respectively, and $3.4 million and $1.8 million in federal and state credit carryforwards, respectively. These amounts include $99.2 million and $1 million in federal and state net operating losses carryforwards, respectively, from acquisitions and $0.6 million and $0.3 million in federal and state credit carryforwards,
respectively, from acquisitions. The carryforward losses and credits expire between 2018 and 2037, except for $0.6 million in state credits that have unlimited carryforward periods. The federal and state net operating losses exclude $60.2of $29.5 million and $0.8 million, respectively, in net operating losses that the Company expects will expire unutilized, and the federal and state tax credits exclude $0.1 million and $6.7 million, respectively, in tax creditsfrom prior acquisitions that the Company expects will expire unutilized.
As
(2) Excludes federal and state tax credits of December 31, 2017,$0.1 million and $9.0 million, respectively, that the Company had available $33.5expects will expire unutilized.
Carryforward losses and credits expire between 2021 and 2038, except for the 2020 federal net operating loss of $47.3 million and $1.2 million of
foreign NOLSstate credits, which
both have
an unlimited
carryover period.carryforward periods.
The Company’s India subsidiary is a development centerprimarily located in an area designated as a Special Economic ZoneZones (“SEZ”SEZs”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country andIndia. The tax holiday in the Hyderabad SEZ is scheduled to expire in 2024. The tax holiday in the Bangalore SEZ is scheduled to expire in 2022. For 2017, 20162020, 2019, and 2015, the effect of2018, the income tax holiday was to reducereduced the Company’s provision for income taxes by approximately$1.7 million, $1.9 million, and $1.3 million, $1 million, and $0.9 million, respectively. The benefit
Uncertain tax benefits
A rollforward of the
tax holiday on net income per share (diluted) was $0.02 for 2017 and $0.01 for 2016 and 2015.The Company adopted ASU2016-09 in 2016, which required, among other things, excess tax benefits to be recorded as a reduction of the provision for income taxes, whereas they were previously recognized in equity. The Company was required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that included the period of adoption. Upon adoption the Company recorded a $0.3 million increase to retained earnings as of January 1, 2016, with an offsetting increase to long-term deferred income tax assets.
Uncertain tax benefits and other considerations
A reconciliation of the beginning and ending balances of the total amounts ofCompany’s gross unrecognized tax benefits is as follows:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
Balance as of January 1, | | $ | 22,671 | | | $ | 23,972 | | | $ | 43,396 | |
Additions based on tax positions related to the current year | | | 452 | | | | 80 | | | | 817 | |
Additions for tax positions of prior years | | | 238 | | | | 110 | | | | 183 | |
Additions for acquired uncertain tax benefits | | | — | | | | 387 | | | | — | |
Reductions for change in US federal tax rate | | | (2,424 | ) | | | — | | | | — | |
Reductions for tax positions of prior years | | | (1,500 | ) | | | (1,541 | ) | | | (19,855 | ) |
Reductions for a lapse of the applicable statute of limitations | | | (287 | ) | | | (337 | ) | | | (569 | ) |
| | | | | | | | | | | | |
Balance as of December 31, | | $ | 19,150 | | | $ | 22,671 | | | $ | 23,972 | |
| | | | | | | | | | | | |
is:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Balance as of January 1, | $ | 23,271 | | | $ | 18,157 | | | $ | 19,150 | |
| Additions for tax positions related to the current year | 653 | | | 510 | | | 978 | |
| Additions for tax positions of prior years | 962 | | | 4,917 | | | 174 | |
| Reductions for tax positions of prior years | (1,085) | | | (313) | | | (2,145) | |
| | | | | |
| | | | | |
| | | | | |
| Balance as of December 31, | $ | 23,801 | | | $ | 23,271 | | | $ | 18,157 | |
As of December 31,
2017,2020, the Company had
approximately $19.2$23.8 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized.
The $2.4 million reduction for change in U.S. federal tax rate relates to a decrease in the uncertain tax benefits recorded against deferred tax items (e.g., net operating losses) corresponding with there-measurement of the associated deferred tax assets to the new U.S. statutory tax rate. The $1.5 million reduction for tax positions of prior years primarily relates the lapse in the applicable statute of limitations, change in estimates, and the impact of foreign currency exchange rates. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.5 million due to a lapse of applicable statute of limitations.The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For 2017 the Company did not recognize any significant change in net interest expense. For the 2016 and 2015, the Company recognized a decrease of approximately $0.6 million and an increase of $0.3 million, respectively, of interest expense.
As of December 31, 2017, 20162020 and 2015, the company did not recognize any significant penalties. As of December 31, 2017, 2016 and 2015,2019, the Company had accrued approximately $1.5 million, $1.2Company’s income tax receivable was $44.1 million and $1.2$25.9 million, respectively, for interest and penalties.respectively.
The Company files
federal and state income tax returns in the U.S. and in
various foreign jurisdictions.
We have noIn the ordinary course of business, the Company and its subsidiaries are examined by various tax
authorities, including the Internal Revenue Service in the U.S. As of December 31, 2020, the Company’s U.S. federal tax returns
for the years 2014 through 2017 were under examination by the Internal Revenue
Service or state taxing authorities as of December 31, 2017. However,Service. In addition, certain foreign jurisdictions are auditing
ourthe Company’s income tax returns for periods ranging from 2010 through
2014.2018. The Company does not expect the results of these audits to have a material effect on
ourthe Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2014 to the present.
16.
17. (LOSS) EARNINGS PER SHARE
Basic earnings per share is computedcalculated using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computedcalculated using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock methodmethod. In periods of loss, all stock options and RSUs are excluded from the average market priceweighted-average number of the Company’s common stock during the applicable period.shares, as their inclusion would be anti-dilutive.
| | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | 2020 | | 2019 | | 2018 |
| Net (loss) income | $ | (61,373) | | | $ | (90,433) | | | $ | 10,617 | |
| Weighted-average common shares outstanding | 80,336 | | | 79,055 | | | 78,564 | |
| (Loss) earnings per share, basic | $ | (0.76) | | | $ | (1.14) | | | $ | 0.14 | |
| | | | | |
| Net (loss) income | $ | (61,373) | | | $ | (90,433) | | | $ | 10,617 | |
| Stock options | 0 | | | 0 | | | 2,891 | |
| RSUs | 0 | | | 0 | | | 1,609 | |
| Effect of dilutive securities | 0 | | | 0 | | | 4,500 | |
| Weighted-average common shares outstanding, assuming dilution | 80,336 | | | 79,055 | | | 83,064 | |
| (Loss) earnings per share, diluted | $ | (0.76) | | | $ | (1.14) | | | $ | 0.13 | |
| | | | | |
Outstanding anti-dilutive stock options and RSUs (1) | 6,278 | | | 5,911 | | | 188 | |
(1) Certain
shares related to some of the Company’s outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were
antidilutiveanti-dilutive in the
periods presented, but couldperiod presented. These awards may be dilutive in the future.
| | | | | | | | | | | | |
| (in thousands except per share amounts) | | 2017 | | | 2016 | | | 2015 | |
Basic | | | | | | | | | | | | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 77,431 | | | | 76,343 | | | | 76,507 | |
| | | | | | | | | | | | |
Earnings per share, basic | | $ | 0.43 | | | $ | 0.35 | | | $ | 0.47 | |
| | | | | | | | | | | | |
Diluted | | | | | | | | | | | | |
Net income | | $ | 32,934 | | | $ | 26,986 | | | $ | 36,322 | |
| | | | | | | | | | | | |
Weighted-average effect of dilutive securities: | | | | | | | | | | | | |
Stock options | | | 3,471 | | | | 2,025 | | | | 1,601 | |
RSUs | | | 1,930 | | | | 1,364 | | | | 935 | |
| | | | | | | | | | | | |
Effect of assumed exercise of stock options and RSUs | | | 5,401 | | | | 3,389 | | | | 2,536 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding, assuming dilution | | | 82,832 | | | | 79,732 | | | | 79,043 | |
| | | | | | | | | | | | |
Earnings per share, diluted | | $ | 0.40 | | | $ | 0.34 | | | $ | 0.46 | |
| | | | | | | | | | | | |
Outstanding options and RSUs excluded as impact would be antidilutive | | | 221 | | | | 322 | | | | 182 | |
17. GEOGRAPHIC INFORMATION
18. COMMITMENTS AND
MAJOR CLIENTSGeographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.
CONTINGENCIES
Commitments
See "Note 9. Leases" for additional information.
Contingencies
The Company developsis a party in various contractual disputes, litigation, and licenses its strategic software applications and Pega Platform, and provides consulting services, maintenance, and training related to its offerings.potential claims arising in the ordinary course of business. The Company derives substantially alldoes not believe that the resolution of its revenue from the sale and support of one group of similar products and services—software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment and one reporting unit.
The Company’s international revenue is from clients based outside of the U.S. The Company derived its revenue from the following geographic areas:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
U.S. | | $ | 474,819 | | | | 56 | % | | $ | 430,562 | | | | 57 | % | | $ | 379,936 | | | | 56 | % |
Other Americas | | | 39,490 | | | | 5 | % | | | 59,160 | | | | 8 | % | | | 57,892 | | | | 8 | % |
U.K. | | | 90,817 | | | | 11 | % | | | 101,733 | | | | 14 | % | | | 96,314 | | | | 14 | % |
Other EMEA(1) | | | 130,889 | | | | 16 | % | | | 92,540 | | | | 12 | % | | | 87,240 | | | | 13 | % |
Asia Pacific | | | 104,567 | | | | 12 | % | | | 66,271 | | | | 9 | % | | | 61,313 | | | | 9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 840,582 | | | | 100 | % | | $ | 750,266 | | | | 100 | % | | $ | 682,695 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes the Middle East, Africa, and Europe excluding the U.K. |
Long-lived assets related to the Company’s U.S. and international operations were as follows:
| | | | | | | | | | | | | | | | |
| | | December 31, | |
| (Dollars in thousands) | | 2017 | | | 2016 | |
U.S. | | $ | 27,590 | | | | 68 | % | | $ | 27,993 | | | | 73 | % |
India | | | 6,703 | | | | 17 | % | | | 7,158 | | | | 19 | % |
International, other | | | 6,066 | | | | 15 | % | | | 3,130 | | | | 8 | % |
| | | | | | | | | | | | | | | | |
| | $ | 40,359 | | | | 100 | % | | $ | 38,281 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
Major Clients
Clients accounting for 10% or more of the Company’s total revenue were as follows:
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2017 | | | 2016 | | | 2015 | |
Total revenue | | $ | 840,582 | | | $ | 750,266 | | | $ | 682,695 | |
Client A | | | 10 | % | | | * | | | | * | |
Clients accounting for 10% or more of the Company’s trade accounts receivable were as follows:
| | | | | | | | |
| (Dollars in thousands) | | December 31, | |
| | 2017 | | | 2016 | |
Trade accounts receivable | | $ | 248,331 | | | $ | 265,028 | |
Client A | | | 12 | % | | | * | |
* | Client accounted for less than 10% of total revenue and trade accounts receivable |
The Company’s financial services, healthcare, and insurance clients as a group represent a significant amount of the Company’s revenues and receivables. However, the Company determined this concentration did notthese matters will have a material impactadverse effect on its allowance for sales credit memos asfinancial position or results of December 31, 2017
In addition to accounts receivable,operations.
19. SUBSEQUENT EVENTS
Relocation of Corporate Headquarters
On February 12, 2021, the Company
is potentially subjectexecuted the Lease Termination Agreement with Charles Park Owner LLC to
concentrations of credit risk fromaccelerate the lease termination date for the Company’s
cash, cash equivalents, and marketable securities. The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwidecorporate headquarters in Cambridge, Massachusetts to
reduceOctober 1, 2021. Under the
credit risk exposure. Investment policies have been implemented that limit purchasesterms of
marketable debt securities to investment-grade securities. Note 3 “Marketable Securities” and Note 5 “Fair Value Measurements” for further discussion.18. EMPLOYEE BENEFIT PLANS
the Lease Termination Agreement, the Company will receive a payment of $18 million. The Company sponsors defined contribution plans for quantifying employees, including a 401(k) planis obligated to make rent payments outlined in the United States to whichexisting lease agreements until October 1, 2021, the new lease termination date.
Qurious.io acquisition
In January 2021, the Company makes discretionary matching contributions.
acquired Qurious.io, Inc., a cloud-based real time speech analytics solution for customer service teams. The following expenses related to defined contribution plans were recorded in the Company’s consolidated statements of operations:
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | | 2016 | | | 2015 | |
U.S. 401(k) Plan | | $ | 5,003 | | | $ | 4,510 | | | $ | 4,061 | |
International Plans | | | 9,096 | | | | 7,635 | | | | 6,428 | |
| | | | | | | | | | | | |
| | $ | 14,099 | | | $ | 12,145 | | | $ | 10,489 | |
| | | | | | | | | | | | |
19. SELECTED QUARTERLY INFORMATION (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | 2017 | |
| (in thousands, except per share amounts) | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter | |
Revenue | | $ | 223,247 | | | $ | 197,980 | | | $ | 179,815 | | | $ | 239,540 | |
Gross profit | | | 155,157 | | | | 130,105 | | | | 110,084 | | | | 165,563 | |
Income/(loss) from operations | | | 31,238 | | | | 1,750 | | | | (14,289 | ) | | | 19,961 | |
Income/(loss) before provision for income taxes | | | 31,800 | | | | 1,560 | | | | (14,697 | ) | | | 18,437 | |
Net income/(loss) | | | 27,021 | | | | 11,406 | | | | (1,812 | ) | | | (3,681 | ) |
Net income/(loss) per share, basic | | $ | 0.35 | | | $ | 0.15 | | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | |
Net income/(loss) per share, diluted | | $ | 0.33 | | | $ | 0.14 | | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 2016(1) | |
| (in thousands, except per share amounts) | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter | |
Revenue | | $ | 178,858 | | | $ | 188,996 | | | $ | 182,802 | | | $ | 199,610 | |
Gross profit | | | 122,348 | | | | 128,896 | | | | 122,365 | | | | 137,401 | |
Income from operations | | | 14,125 | | | | 6,360 | | | | 5,498 | | | | 11,776 | |
Income before provision for income taxes | | | 13,493 | | | | 5,498 | | | | 5,515 | | | | 10,696 | |
Net income | | | 10,400 | | | | 4,536 | | | | 3,301 | | | | 8,749 | |
Net income per share, basic | | $ | 0.14 | | | $ | 0.06 | | | $ | 0.04 | | | $ | 0.11 | |
| | | | | | | | | | | | | | | | |
Net income per share, diluted | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.04 | | | $ | 0.11 | |
| | | | | | | | | | | | | | | | |
(1) | The Company elected to early adopt ASU2016-09 in the fourth quarter of 2016, which requires, among other things, excess tax benefits to be recorded as a reduction of the provision for income taxes in the consolidated statement of operations, whereas they were previously recognized in equity. The Company is required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that includes the period of adoption. As such, certain information above includes the impact of the ASU2016-09 adoption. |
acquisition was immaterial.
ITEM 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. | Controls and Procedures |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controlsdisclosure controls and
Proceduresprocedures
Our management, with the participation of our Chief Executive Officer or CEO,(“CEO”) and Chief Financial Officer or CFO,(“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act) as of December 31, 2017.2020. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31,
2017.2020.
Management’s
Reportreport on and
Changeschanges in
Internal Controlinternal control over
Financial Reportingfinancial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules13a-15(f) and15d-15(f) under the Securities Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172020 based on the framework in the updatedInternal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14, 2013.
Based on this evaluation, management has concluded that (i) our internal control over financial reporting was effective as of December 31,
20172020 and (ii) no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and
15d-15(f) under the Securities Exchange Act) occurred during the quarter ended December 31,
20172020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Deloitte & Touche LLP, our independent registered public accounting firm which also audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting, which is included in Item 8 “Financial Statements and Supplementary Data”
.ITEM 9B. | Other Information |
None.
ITEM 9B. OTHER INFORMATION
On February 12, 2021, Pegasystems Inc. (the “Company”) executed the Lease Termination Agreement with Charles Park Owner LLC to accelerate the lease termination date for the Company’s corporate headquarters in Cambridge, Massachusetts to October 1, 2021. Under the terms of the Lease Termination Agreement, the Company will receive a payment of $18 million. The Company is obligated to make rent payments outlined in the existing lease agreements until October 1, 2021, the new lease termination date.
The foregoing description of the Lease Termination Agreement does not purport to be complete and is qualified in its entirety by reference to the Lease Termination Agreement, a copy of which is attached as Exhibit 10.17 hereto.
ITEM 10. | Directors, Executive Officers, and Corporate Governance |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Except as set forth below,
the information required by this
Itemitem is
incorporated herein by reference from the information contained in our proxy statement for our
20182021 annual stockholders meeting (the
2018“2021 proxy statement”) under the
heading “Electionheadings Executive Compensation, Election of Directors,
” Corporate Governance, Executive Officers, and
is incorporated herein by reference. Information relating to certain filings on Forms 3, 4,Delinquent Section 16(a) Reports, which will be filed with the Securities and
5 is contained in our 2018 proxy statement underExchange Commission within 120 days after the
heading “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference. Information required by this item pursuant to Items 407(c) (3), 407(d) (4), and 407(d) (5) of RegulationS-K relating to an audit committee financial expert, the identificationclose of the
audit committee of our Board of Directors and procedures of security holders to recommend nominees to our Board of Directors is contained in the 2018 proxy statement under the heading “Corporate Governance” and is incorporated herein by reference.fiscal year.
We have adopted a written code of conduct that applies to our Board of Directors and
all of our employees, including our principal executive officer, principal financial officer, principal accounting officer,
orand persons performing similar functions. A copy of our code of conduct can be found on our website, www.pega.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form
8-K and
under the applicable the NASDAQ Global Select Market rules by posting such information on our website in accordance with such requirements.
EXECUTIVE OFFICERS
The names of our executive officers and certain information about them are set forth below as of February 1, 2018:
Alan Trefler, age 61, a founder of Pegasystems, has served as Chief Executive Officer and Chairman of the Board of Directors since the Company was organized in 1983. Prior to 1983, he managed an electronic funds transfer product for TMI Systems Corporation, a software and services company. Mr. Trefler holds a B.A. degree in economics and computer science from Dartmouth College.
Kenneth Stillwell, age 47, joined Pegasystems in July 2016 as SVP, Chief Financial Officer and Chief Administrative Officer. Mr. Stillwell served as Senior Vice President and Chief Financial Officer of Dynatrace, a digital performance management solutions provider. Mr. Stillwell served as Executive Vice President and Chief Financial Officer of SOVOS, a financial compliance software as a service company. Prior to SOVOS, Mr. Stillwell spent time at PTC, a publicly traded software provider, where he served as the divisional CFO of two major segments. Mr. Stillwell holds a B.S. in business/economics from the University of Pittsburgh and a M.S. in accounting and finance from the University of South Carolina, and he is a certified public accountant.
Efstathios Kouninis, age 56,joined Pegasystems in April 2008 as Vice President of Finance. The Board of Directors appointed Mr. Kouninis as the Company’s Chief Accounting Officer in May 2008 and Treasurer in January 2014. From February 2006 to April 2008, Mr. Kouninis served as Chief Financial Officer and Treasurer of Tasker Products Corporation, a publicly traded manufacturer of antimicrobial chemicals. From November 2004 to February 2006, Mr. Kouninis served on the Staff of the Division of Corporation Finance of the U. S. Securities and Exchange Commission. Mr. Kouninis holds a B.S. from the University of Massachusetts, a Post Baccalaureate in accounting, and a M.S. in taxation from Bentley College.
Douglas Kra,age 55, joined Pegasystems in November 2004 as Vice President of Global Services. In January 2010, Mr. Kra was promoted to Senior Vice President of Global Services. In July 2014, the Companyre-organized its sales and consulting services functions under one responsibility for specific geographic regions, and Mr. Kra was promoted to Senior Vice President of Global Customer Success for international regions. From 2002 to 2004, Mr. Kra served as Vice President at eLoyalty Corp., a consulting company specializing in customer relationship management. From 2000 to 2001, Mr. Kra served as President of Zefer Corp., an internet consulting firm. Prior to Zefer, Mr. Kra spent ten years at Cambridge Technology Partners Inc. in a variety of senior roles. Mr. Kra holds a B.A. in computer science from Brandeis University and an M.B.A. in finance from the New York University Stern School of Business.
Michael Pyle, age 63, joined Pegasystems in 1985 and has served as Senior Vice President of Engineering since August 2000. Including his positions with Pegasystems, Mr. Pyle’s professional background encompasses more than forty years of software development and managerial experience throughout Europe and the U.S. Mr. Pyle completed his B.C.S. specializing in computer science and systems programming at the Civil Service College in London.
Leon Trefler,age 57, joined Pegasystems in April 1998 as an Account Executive for Strategic Business Development. Since then he has held various senior sales management positions across the Company and in Channel Sales. In 2002, he launched the commercialization of PegaRULES Process Commander, the predecessor to the Pega Platform. From April 2007 to January 2010, Mr. Trefler served as Vice President of Sales, North America and in January 2010, Mr. Trefler was promoted to Senior Vice President of Sales. In July 2014, the Companyre-organized its sales and consulting services functions under one responsibility for specific geographic regions, and Mr. Trefler was promoted to Senior Vice President of Global Customer Success for the Americas region. Mr. Trefler holds a B.A. degree from Dartmouth College.
Alan Trefler and Leon Trefler are brothers. There are no other family relationships among any of our executive officers or Directors.
ITEM 11. | Executive Compensation |
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is
incorporated herein by reference from the information contained in the
20182021 proxy statement under the headings “Director Compensation”, “Compensation Discussion and Analysis”, and “Executive Compensation” and is incorporated herein by reference.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item
with respect to stock ownership of certain beneficial owners and management is
incorporated herein by reference from the information contained in the
20182021 proxy statement under the
headingheadings “Executive Compensation”, “Equity Compensation Plan Information”, and “Security Ownership of Certain Beneficial Owners and Management”
, and is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2017:
| | | | | | | | | | | | |
| (In thousands, except per share amounts) | | Number of shares of
common stock to be
issued upon exercise
of outstanding
stock options and
vesting of RSUs(3) | | | Weighted-average
exercise price per share of
outstanding
stock options(4) | | | Number of shares of
common stock
remaining available
for future issuance
(excluding those in
column (a))(5) | |
Equity compensation plans approved by stockholders(1) | | | 10,010 | | | $ | 26.14 | | | | 9,234 | |
Equity compensation plans not approved by stockholders(2) | | | 21 | | | $ | 11.99 | | | | — | |
(1) | We currently maintain two equity compensation plans: the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) and the 2006 Employee Stock Purchase Plan as amended, (the “2006 ESPP”). In addition to the issuance of stock options, the 2004 Plan allows for the issuance of stock purchase rights and other stock-based awards, including RSUs. Since 2006, the Company has granted unrestricted shares of its common stock to itsnon-employee directors under the 2004 Plan. Our stockholders previously approved each of these plans and all amendments that were subject to stockholder approval. See Note 14 “Stock-Based Compensation” in Item 8 of this Annual Report for further information and description of our equity compensation plans. |
(2) | These stock options were assumed in connection with our acquisition of Chordiant in 2010 and were originally granted under the Chordiant Software, Inc. 2005 Equity Incentive Plan (the “2005 Plan”). No additional awards were or may be granted under the 2005 Plan following the date of acquisition. This plan was not approved by our stockholders since it was adopted on the date of acquisition. In connection with our acquisition of Chordiant, all outstanding equity awards issued under the 2005 Plan with an exercise price of $3.00, on a post-split basis, or lower were assumed by us and converted into the right to receive 0.13 shares of Pegasystems common stock for every one share of Chordiant common stock covered by such awards. All other outstanding equity awards issued under the 2005 Plan were cancelled. The 2005 Plan was approved by Chordiant’s stockholders and provided for the grant of incentive stock options, nonstatutory stock options, stock purchase awards, RSAs, RSUs, and other forms of equity compensation. Awards granted under the 2005 Plan generally expire four to ten years after the grant date and generally become exercisable over a period of two to four years, with either yearly or monthly vesting. |
(3) | The number of shares of common stock issued upon exercise of vested stock options and vesting of RSUs will be less than 10 million because of the “net settlement” feature of most of these stock options and RSUs. This feature enables the Company to withhold shares to cover the cost to exercise (in the case of stock options) and, if applicable, taxes due (in the case of stock options and RSUs) based on the fair value of the shares at the exercise date (in the case of stock options) or vesting date (in the case of RSUs), instead of selling all of the shares on the open market to satisfy these obligations. The settlement of exercised stock options and vested RSUs on a net share basis will result in fewer shares issued by the Company. During 2017, stock option and RSU holders net settled stock options and RSUs representing the right to purchase a total of 2.9 million shares, of which only 1.5 million were issued to the stock option and RSU holders and the balance of the shares were surrendered to the Company to pay for the exercise price and the applicable taxes. |
(4) | The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price. |
(5) | Includes approximately 0.6 million shares remaining available for issuance as of December 31, 2017 under the 2006 ESPP. |
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is
incorporated herein by reference from the information contained in the
20182021 proxy statement under the headings “Certain Relationships and Related Transactions” and “Determination of Independence” and is incorporated herein by reference.
ITEM 14. | Principal Accounting Fees and Services |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from the information contained in the 20182021 proxy statement under the heading “Independent Registered Public Accounting Firm Fees and Services” and is incorporated herein by reference.
PART IV
ITEM 15. | Exhibits, Financial Statement Schedules |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as part of this Annual Report:
The following consolidated financial statements are included in Item 8:
| | | | | |
| | Page | |
Report of Independent Registered Public Accounting Firm | | | 42 | |
Consolidated Balance Sheets as of December 31, 20172020 and 2016 2019 | | | 44 | |
Consolidated Statements of Operations for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 45 | |
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 46 | |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 47 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2020, 2019, and 2015 2018 | | | 48 | |
| 10.18 | | |
Exhibit No.
| | Description
|
| |
10.10++ | | 2006 Employee Stock Purchase Plan, as amended on October 25, 2013. (Filed as Exhibit 10.24 to the Registrant’s 2012 Form10-K and incorporated herein by reference.) |
| |
10.11++ | | 2016 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s February 24, 2016 Form8-K and incorporated herein by reference.) |
| |
10.12++ | | 2016 Section 16 Executive Officers Base Salaries and Target Bonus Payments. (Filed as Exhibit 99.1 to the Registrant’s March 15, 2016 Form8-K and incorporated herein by reference.) |
| |
10.13++ | | Compensation program fornon-employee members of the Registrant’s Board of Directors. (Filed as Exhibit 10.1 to the Registrant’s June 30, 2014 Form10-Q and incorporated herein by reference.) |
| |
10.14++ | | 2017 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s March 8, 2017 Form8-K and incorporated herein by reference.) |
| |
10.15++ | | 2015 Section 16 Executive Officers Base Salaries and Target Bonus Payments. (Filed as Exhibit 99.2 to the Registrant’s February 3, 2015 Form8-K and incorporated herein by reference.) |
| |
10.16++ | | Compensation program fornon-employee members of the Registrant’s Board of Directors, effective August 6, 2015. (Filed as Exhibit 10.1 to the Registrant’s September 30, 2015 Form10-Q and incorporated herein by reference.) |
| |
10.17 | | |
++ | Management contractsCover Page Interactive Data File (formatted as Inline XBRL and compensatory plan or arrangements required to be filed pursuant to Item 15(b) of Form10-K. |
** | Submitted electronically herewithcontained in Exhibit 101) |
++ Management contracts and compensatory plan or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.
(c) Financial Statement Schedules
All financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission of the schedule or because the information is reflected in the consolidated financial statements or notes thereto.
ITEM 16. FORM 10-K SUMMARY
Omitted at registrant’s optionRegistrant’s option.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | | Pegasystems Inc. |
| Date: | February 17, 2021 | By: | /s/ KENNETH STILLWELL |
| | | |
Date: February 26, 2018 | | | | By: | | /s/ KENNETH STILLWELL
Kenneth Stillwell |
| | | | | | Kenneth Stillwell |
| | | | | | Chief Financial Officer and Chief Administrative Officer
|
| | | (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed below on February
26, 201817, 2021 by the following persons on behalf of the Registrant and in the capacities indicated.
| | | | | |
Signature | | Title |
| |
/S/s/ ALAN TREFLER | | Chairman and Chief Executive Officer (Principal Executive Officer) |
| Alan Trefler | |
| |
/S/s/ KENNETH STILLWELL | | Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer) |
| Kenneth Stillwell | |
| |
/S/s/ EFSTATHIOS KOUNINIS | | Chief Accounting Officer, Vice President of Finance, Chief Accounting Officer and Treasurer (Principal Accounting Officer) |
| Efstathios Kouninis | |
| |
/S/ RICHARD JONES s/ PETER GYENES | | Director |
Richard Jones | Peter Gyenes |
| |
/S/ PETER GYENES s/ RONALD HOVSEPIAN | | Director |
Peter Gyenes | Ronald Hovsepian |
| |
/S/ STEVEN KAPLAN s/ RICHARD JONES | | Director |
Steven Kaplan | Richard Jones |
| |
/S/ DIANNE LEDINGHAM s/ CHRISTOPHER LAFOND | | Director |
Dianne Ledingham | Christopher Lafond |
| |
/S/ JAMES O’HALLORAN s/ DIANNE LEDINGHAM | | Director |
James O’Halloran | Dianne Ledingham |
| |
/S/s/ SHARON ROWLANDS | | Director |
| Sharon Rowlands | |
| |
/S/s/ LARRY WEBER | | Director |
Larry Weber | |
| |
/S/ WILLIAM WYMAN
| | Director |
William Wyman | |
80
