SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, 2021

____________________________

One ~~Rogers~~Main Street, Cambridge, MA ~~02142-1209~~02142

(Address of principal executive offices, including zip code)

____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

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 x No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~80,697,696~~81,675,315 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 19, ~~2020.~~2021.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Common stock, 200,000 shares authorized; 80,697 and 79,599 shares issued and outstanding at

September 30, 2020 and December 31, 2019, respectively

Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at

September 30, 2021 and December 31, 2020, respectively

Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at

September 30, 2021 and December 31, 2020, respectively

See notes to unaudited condensed consolidated financial statements.

Accumulated Other Comprehensive (Loss)

Cumulative-effect adjustment from adoption of ASU 2020-06, net

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. These financial statements ~~and~~ should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances ~~have been~~were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2020.~~2021.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” ~~(ASU 2020-06)~~(“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities 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 stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from separating 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 convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, ~~Derivatives~~“Derivatives and ~~Hedging,~~Hedging”, or (2) a convertible debt instrument was issued at a substantial premium. ~~Additionally,~~The standard also requires the ~~standard requires applying the if-converted method to calculate~~ convertible instruments’ impact on diluted earnings per share (“EPS”). be determined using the if-converted method.

The ~~standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be~~Company adopted ~~on either a full retrospective or~~ASU 2020-06 using the modified retrospective ~~basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures. The Company expects to early adopt the new standard~~approach on January 1, 2021.

~~Financial instruments~~

~~In June 2016,~~ Upon adoption, the ~~FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement~~book value of ~~Credit Losses on Financial Instruments,” which requires measurement~~the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and ~~recognition~~retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of ~~expected credit losses for financial assets measured at~~the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowanceafter adoption.

See "Note 8. Debt" for credit losses when the fair value is below the asset’s amortized cost, removing the concept of “other-than-temporary” impairments. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.additional information.

NOTE 3. MARKETABLE SECURITIES

As of September 30, ~~2020,~~2021, marketable securities’ maturities ~~of marketable securities~~ ranged from October ~~2020~~2021 to September ~~2023,~~2024, with a weighted-average remaining maturity of ~~approximately 1.3~~1.2 years.

~~As of December 31, 2019, the Company did not hold any marketable securities.~~

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	September 30, 2021		December 31, 2020
Accounts receivable	$	143,445	$	215,827
Unbilled receivables	239,774		207,155
Long-term unbilled receivables	132,147		113,278
	$	515,366	$	536,260

(in thousands) September 30, 2020 December 31, 2019
Accounts receivable $ 137,953 $ 199,720
Unbilled receivables 208,823 180,219
Long-term unbilled receivables 108,456 121,736
$ 455,232 $ 501,675
Unbilled receivables

Unbilled receivables are ~~client committed~~client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.

Unbilled receivables ~~are~~by expected ~~to be billed in the future as follows:~~billing date:


(Dollars in thousands)	September 30, 2021
1 year or less	$	239,774	64	%
1-2 years	80,980		22	%
2-5 years	51,167		14	%
	$	371,921	100	%

(Dollars in thousands) September 30, 2020
1 year or less $ 208,823 66 %
1-2 years 91,325 29 %
2-5 years 17,131 5 %
$ 317,279 100 %

Unbilled receivables ~~based upon~~by contract effective date:

(Dollars in thousands) September 30, 2020
2020 $ 105,380 33 %
2019 99,875 32 %
2018 39,281 12 %
2017 37,824 12 %
2016 and prior 34,919 11 %
$ 317,279 100 %


(Dollars in thousands)	September 30, 2021
2021	$	168,237	45	%
2020	109,904		29	%
2019	47,058		13	%
2018	22,169		6	%
2017 and prior	24,553		7	%
	$	371,921	100	%

Clients accounting for 10% or more of the Company’s total receivables:


	September 30, ~~2020~~2021		December 31, ~~2019~~2020
Client A	1112	%	*

* Client accounted for less than 10% of total receivables.

Contract assets ~~and deferred revenue~~

(in thousands) September 30, 2020 December 31, 2019
Contract assets (1)
$ 8,104 $ 5,558
Long-term contract assets (2)
5,579 5,420
13,683 10,978
Deferred revenue 181,680 190,080
Long-term deferred revenue (3)
6,673 5,407
$ 188,353 $ 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~~client-committed amounts for which revenue recognized exceeds the amount billed to the client, and ~~the right to payment~~billing is subject to conditions other than the passage of time, such as ~~the completion of~~completing a related performance obligation.


(in thousands)	September 30, 2021		December 31, 2020
Contract assets (1)	$	11,495	$	15,296
Long-term contract assets (2)	8,485		7,777
	$	19,980	$	23,073

(1) Included in other current assets. (2) Included in other long-term assets.

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.~~


(in thousands)	September 30, 2021		December 31, 2020
Deferred revenue	$	229,103	$	232,865
Long-term deferred revenue (1)	5,682		8,991
	$	234,785	$	241,856

(1) Included in other long-term liabilities.

The change in deferred revenue in the nine months ended September 30, ~~2020~~2021 was primarily due to new billings in advance of revenue recognition, ~~and $170.5~~offset by $212.0 million of revenue recognized ~~during the period~~ that was included in deferred revenue atas of December 31, ~~2019.~~2020.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5. DEFERRED COMMISSIONS

(in thousands) September 30, 2020 December 31, 2019
Deferred commissions (1)
$ 87,992 $ 85,314


(in thousands)	September 30, 2021		December 31, 2020
Deferred commissions (1)	$	114,503	$	108,624

(1) Included in other long-term assets.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Amortization of deferred commissions (1)	$	10,186	$	8,861	$	31,388	$	24,922

(1) Included in selling and marketing expense.

NOTE 6. GOODWILL AND OTHER INTANGIBLES

Change in goodwill:


	Nine Months Ended September 30,
(in thousands)	2021
January 1,	$	79,231
Acquisition	2,701
Currency translation adjustments	22
September 30,	$	81,954

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.


		September 30, 2021
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,163	$	(56,988)	$	6,175
Technology	2-10 years	67,142		(58,273)		8,869
Other	1-5 years	5,361		(5,361)		—
		$	135,666	$	(120,622)	$	15,044

(1) Included in other long-term assets.


		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)		—
		$	133,372	$	(117,624)	$	15,748

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2020 2019 2020 2019
Amortization of deferred commissions (1)
$ 8,861 $ 8,193 $ 24,922 $ 22,372
Amortization of intangible assets:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	629	$	647	$	1,887	$	1,940
Selling and marketing	373		371		1,119		1,111

	$	1,002	$	1,018	$	3,006	$	3,051

Future estimated intangibles assets amortization:


(in thousands)	September 30, 2021
2021	$	981
2022	3,886
2023	3,618
2024	2,849
2025	2,509
2026 and thereafter	1,201
	$	15,044

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was amortized over the remaining lease term. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million and accelerated corporate headquarters-related depreciation. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.

On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3 percent annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.

Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Fixed lease costs (1)	$	(3,108)	$	5,172	$	(6,780)	$	14,933
Short-term lease costs	542		422		1,516		1,248
Variable lease costs	1,099		1,259		3,826		3,506
	$	(1,467)	$	6,853	$	(1,438)	$	19,687

(1) The decrease in fixed lease costs in three and nine months ended September 30, 2021 was due to the modification of the corporate headquarters lease.

Right of use assets and lease liabilities


(in thousands)	September 30, 2021		December 31, 2020
Right of use assets (1)	$	91,349	$	67,651
Operating lease liabilities (2)	$	10,668	$	18,541
Long-term operating lease liabilities	$	87,088	$	59,053

(1) Represents the Company’s right to use the leased asset during the lease term. Included in ~~selling~~other long-term assets.

(2) Included in other current liabilities.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Weighted-average remaining lease term and ~~marketing expense.~~discount rate for the Company’s leases were:


	September 30, 2021		December 31, 2020
Weighted-average remaining lease term	7.8 years		4.7 years
Weighted-average discount rate (1)	4.4	%	5.4	%

(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:


(in thousands)	September 30, 2021
Remainder of 2021	$	961
2022	9,948
2023	19,607
2024	16,482
2025	13,607
2026	9,866
Thereafter	48,515
Total lease payments	118,986
Less: imputed interest (1)	(21,230)
	$	97,756

(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


	Nine Months Ended September 30,
(in thousands)	2021		2020
Cash paid for leases	$	14,403	$	15,503
Right of use assets recognized for new leases and amendments (non-cash)	$	54,716	$	24,276

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~~No principal payments ~~prior to the maturity of the Notes.~~are due before maturity. 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~~

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of ~~approximately~~ $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~~beginning 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%)~~130% of the conversion price for each of at least ~~twenty (20)~~20 trading days (whether or not consecutive) during the ~~thirty (30)~~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~~noteholders 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~~on the redemption date, until the Company pays ~~such~~the redemption ~~price in full)~~price).

As of September 30, ~~2020, no~~2021, the Notes were not eligible for ~~conversion at the noteholders’ election.~~conversion.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common 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~~a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A ~~fundamental change~~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.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~In accounting~~The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for ~~the transaction,~~convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.

Until January 1, 2021, the Notes ~~have been~~were separated into liability and equity components.

•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, iswas 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.~~remeasured.

~~The Company incurred issuance costs~~Upon adoption of ~~$14.5 million related to~~ASU 2020-06, the book value of the Notes ~~allocated~~increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the ~~Notes’ liability and equity components proportionate to the initial carrying amount~~value of the ~~liability~~Notes and ~~equity components.~~the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

•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 termCarrying value of the ~~Notes.~~Notes:


(in thousands)	September 30, 2021		December 31, 2020
Principal	$	600,000	$	600,000
Unamortized debt discount	—		(71,222)
Unamortized issuance costs	(10,231)		(10,575)
Convertible senior notes, net	$	589,769	$	518,203

Conversion options	$	—	$	84,120
Issuance costs	—		(2,037)
Deferred taxes	—		(20,479)
Additional paid-in capital	$	—	$	61,604

•~~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)~~	~~September 30, 2020~~
~~Principal~~	$	~~600,000~~
~~Unamortized debt discount~~	~~(75,061)~~
~~Unamortized issuance costs~~	~~(11,145)~~
	$	~~513,794~~

~~Net carrying amount of the equity component, included in additional paid-in capital:~~


~~(in thousands)~~	~~September 30, 2020~~
~~Conversion options~~ ~~(1)~~	$	~~61,604~~

~~(1) Net of issuance costs and taxes.~~

Interest expense related to the Notes:

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2020 2019 2020 2019
Contractual interest expense (0.75% coupon) $ 1,125 $ 0 $ 2,700 $ 0
Amortization of debt discount (1)
3,807 0 9,060 0
Amortization of issuance costs (1)
565 0 1,345 0
$ 5,497 $ 0 $ 13,105 $ 0

~~(1) Amortized based upon an effective interest rate of 4.31%.~~

~~Future payments of principal and contractual interest:~~

September 30, 2020
(in thousands) Principal Interest Total
2020 $ 0 $ 0 $ 0
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 approximately 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.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	3,375	$	2,700
Amortization of debt discount	—		3,807		—		9,060
Amortization of issuance costs	677		565		2,025		1,345
	$	1,802	$	5,497	$	5,400	$	13,105

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effective interest rate for the Notes:


	Nine Months Ended September 30,
	2021		2020
Weighted-average effective interest rate	1.2	%	4.3	%

Future payments of principal and contractual interest:


	September 30, 2021
(in thousands)	Principal		Interest		Total
Remainder of 2021	$	—	$	—	$	—
2022	—		4,500		4,500
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	14,988	$	614,988

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “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. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative ~~instruments. The Capped Call Transactions~~instruments and 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~~following the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as ~~“other long term assets”~~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)~~	Nine Months Ended September 30, 2020
~~Value at issuance~~	$	~~51,900~~
~~Fair value adjustment~~	~~19,816~~
~~Balance as of September 30,~~	$	~~71,716~~

capped call transactions:


	Nine Months Ended September 30,
(in thousands)	2021		2020
January 1,	$	83,597	$	—
Issuance	—		51,900
Fair value adjustment	(7,543)		19,816
September 30,	$	76,054	$	71,716

In November 2019, and as amended inas of February 2020, July 2020, and ~~October~~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”).~~Association. 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 loans will be payable on such date. The Credit Facility, as 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 September 30, ~~2020~~2021 and December 31, ~~2019, we~~2020, the Company had 0no outstanding borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments 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 - observable inputs such as quoted prices in active markets for identical assets or liabilities;

•Level 2 - significant other inputs that are observable either directly or indirectly; and

•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 minimize unobservable inputs when determining fair value.

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.~~yield. The Company applies judgment ~~in its determination of~~when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity ~~security and, to a lesser extent, historical peer group volatility levels.~~security. The Company’s venture investments are recorded at fair value based on valuation methods, ~~using the~~including observable public companies and transaction ~~price~~prices and ~~other~~ unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

~~The Company’s assets~~Assets and liabilities measured at fair value on a recurring basis:

September 30, 2020 December 31, 2019
(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents (1)
$ 212,917 $ 0 $ 0 $ 212,917 $ 0 $ 0 $ 0 $ 0
Marketable securities $ 0 $ 186,810 $ 0 $ 186,810 $ 0 $ 0 $ 0 $ 0
Capped Call Transactions (2) (3)
$ 0 $ 71,716 $ 0 $ 71,716 $ 0 $ 0 $ 0 $ 0
Venture investments (2) (4)
$ 0 $ 0 $ 7,927 $ 7,927 $ 0 $ 0 $ 4,871 $ 4,871


	September 30, 2021								December 31, 2020
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	11,087	$	—	$	—	$	11,087	$	42,339	$	14,000	$	—	$	56,339
Marketable securities	$	—	$	235,437	$	—	$	235,437	$	—	$	293,269	$	—	$	293,269
Capped Call Transactions (1)	$	—	$	76,054	$	—	$	76,054	$	—	$	83,597	$	—	$	83,597
Venture investments (1) (2)	$	—	$	—	$	9,713	$	9,713	$	—	$	—	$	8,345	$	8,345

(1) ~~Investments in money market funds. (2)~~ Included in other long-term assets. ~~(3) See "6. Debt" for additional information. (4)~~(2) Investments in privately-held companies.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Change~~Changes in venture investments:


~~(in thousands)~~	Nine Months Ended September 30, 2020
~~December 31, 2019~~	$	~~4,871~~
~~New investments~~	~~3,006~~
~~Sales of investments~~	~~(1,424)~~

~~Fair value adjustment~~	~~1,474~~
~~September 30, 2020~~	$	~~7,927~~


	Nine Months Ended September 30,
(in thousands)	2021		2020
January 1,	$	8,345	$	4,871
New investments	500		3,006
Sales of investments	(400)		(1,424)
Changes in foreign exchange rates	(52)		—
Changes in fair value:
included in other income	100		1,374
included in other comprehensive income	1,220		100
September 30,	$	9,713	$	7,927

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to ~~the relatively~~these items’ short ~~maturity of these items.~~maturity.

Fair value of the Notes

The fair value of the Company’s Notes was recorded at $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 discounted 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 (inclusive of the conversion feature ~~which is~~ embedded in the Notes) was ~~$680~~$676.2 million as of September 30, 2021 and $706.5 million as of December 31, 2020. The fair value was 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 ~~"6.~~"Note 8. Debt" for additional information.

~~Geographic revenue~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands) 2020 2019 2020 2019
U.S. $ 120,971 53 % $ 123,447 57 % $ 436,199 61 % $ 347,120 55 %
Other Americas 10,737 5 % 11,748 5 % 35,009 5 % 49,450 8 %
United Kingdom (“U.K.”) 25,150 11 % 23,034 11 % 68,246 9 % 64,269 10 %
Europe (excluding U.K.), Middle East, and Africa 39,656 18 % 34,761 16 % 106,472 15 % 102,342 16 %
Asia-Pacific 29,437 13 % 23,713 11 % 72,991 10 % 71,660 11 %
$ 225,951 100 % $ 216,703 100 % $ 718,917 100 % $ 634,841 100 %

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2020 2019 2020 2019
Perpetual license $ 3,852 $ 9,016 $ 16,568 $ 43,286
Term license 35,932 48,989 170,455 122,257
Revenue recognized at a point in time 39,784 58,005 187,023 165,543
Maintenance 74,670 70,371 220,587 207,406
Pega Cloud 54,776 35,153 147,080 94,610
Consulting 56,721 53,174 164,227 167,282
Revenue recognized over time 186,167 158,698 531,894 469,298
$ 225,951 $ 216,703 $ 718,917 $ 634,841

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands) Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Pega Cloud $ 54,776 $ 35,153 $ 147,080 $ 94,610
Maintenance 74,670 70,371 220,587 207,406
Term license 35,932 48,989 170,455 122,257
Subscription (1)
165,378 154,513 538,122 424,273
Perpetual license 3,852 9,016 16,568 43,286
Consulting 56,721 53,174 164,227 167,282
$ 225,951 $ 216,703 $ 718,917 $ 634,841
NOTE 10. REVENUE

Geographic revenue


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2021				2020				2021				2020
U.S.	$	132,016	52	%	$	120,971	53	%	$	515,881	58	%	$	436,199	61	%
Other Americas	17,510		7	%	10,737		5	%	43,469		5	%	35,009		5	%
United Kingdom (“U.K.”)	25,982		10	%	25,150		11	%	86,747		10	%	68,246		9	%
Europe (excluding U.K.), Middle East, and Africa	46,306		18	%	39,656		18	%	143,763		15	%	106,472		15	%
Asia-Pacific	34,454		13	%	29,437		13	%	105,609		12	%	72,991		10	%
	$	256,268	100	%	$	225,951	100	%	$	895,469	100	%	$	718,917	100	%

Revenue streams


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Pega Cloud	$	78,369	$	54,776	$	219,520	$	147,080
Maintenance	83,188		74,670		237,531		220,587
Consulting	56,416		56,721		166,270		164,227
Revenue recognized over time	217,973		186,167		623,321		531,894
Perpetual license	2,874		3,852		20,922		16,568
Term license	35,421		35,932		251,226		170,455
Revenue recognized at a point in time	38,295		39,784		272,148		187,023
	$	256,268	$	225,951	$	895,469	$	718,917


(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Pega Cloud	$	78,369	$	54,776	$	219,520	$	147,080
Client Cloud	118,609		110,602		488,757		391,042
Maintenance	83,188		74,670		237,531		220,587
Term license	35,421		35,932		251,226		170,455
Cloud subscription (1)	196,978		165,378		708,277		538,122
Perpetual license	2,874		3,852		20,922		16,568
Consulting	56,416		56,721		166,270		164,227
	$	256,268	$	225,951	$	895,469	$	718,917

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

Remaining performance obligations ("Backlog")

Expected future revenue onfrom existing non-cancellable contracts:

September 30, 2020
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 8,708 $ 50,788 $ 170,643 $ 211,661 $ 14,977 $ 456,777 54 %
1-2 years 1,700 5,341 40,631 157,500 2,042 207,214 25 %
2-3 years 0 7,052 18,277 93,283 770 119,382 14 %
Greater than 3 years 0 4 9,597 44,363 653 54,617 7 %
$ 10,408 $ 63,185 $ 239,148 $ 506,807 $ 18,442 $ 837,990 100 %
As of September 30, 2021:


	Pega Cloud		Client Cloud						Consulting		Total
(Dollars in thousands)			Maintenance		Term license		Perpetual license
1 year or less	$	284,359	$	196,667	$	49,265	$	15,686	$	31,673	$	577,650	56	%
1-2 years	177,214		59,360		16,872		1,064		6,561		261,071		25	%
2-3 years	79,775		37,734		420		4,094		5,165		127,188		12	%
Greater than 3 years	30,113		33,935		245		2,127		1,697		68,117		7	%
	$	571,461	$	327,696	$	66,802	$	22,971	$	45,096	$	1,034,026	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 7,689 $ 25,948 $ 158,220 $ 133,785 $ 13,145 $ 338,787 56 %
1-2 years 853 3,798 18,590 105,081 863 129,185 21 %
2-3 years 1,306 591 8,323 72,915 841 83,976 14 %
Greater than 3 years 0 85 4,959 51,591 0 56,635 9 %
$ 9,848 $ 30,422 $ 190,092 $ 363,372 $ 14,849 $ 608,583 100 %

~~9. STOCK-BASED COMPENSATION~~

~~Expense~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2020 2019 2020 2019
Cost of revenue $ 5,100 $ 4,787 $ 15,636 $ 14,216
Selling and marketing 12,658 8,317 33,968 24,055
Research and development 5,765 4,858 17,066 13,990
General and administrative 4,402 3,884 10,085 7,981
$ 27,925 $ 21,846 $ 76,755 $ 60,242
Income tax benefit $ (5,604) $ (4,430) $ (15,293) $ (12,226)

As of September 30, ~~2020,~~2020:


	Pega Cloud		Client Cloud						Consulting		Total
(Dollars in thousands)			Maintenance		Term license		Perpetual license
1 year or less	$	211,661	$	170,643	$	50,788	$	8,708	$	14,977	$	456,777	54	%
1-2 years	157,500		40,631		5,341		1,700		2,042		207,214		25	%
2-3 years	93,283		18,277		7,052		—		770		119,382		14	%
Greater than 3 years	44,363		9,597		4		—		653		54,617		7	%
	$	506,807	$	239,148	$	63,185	$	10,408	$	18,442	$	837,990	100	%

NOTE 11. STOCK-BASED COMPENSATION

Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	5,114	$	5,100	$	16,889	$	15,636
Selling and marketing	13,376		12,658		41,844		33,968
Research and development	6,231		5,765		19,343		17,066
General and administrative	3,974		4,402		11,407		10,085
	$	28,695	$	27,925	$	89,483	$	76,755
Income tax benefit	$	(5,845)	$	(5,604)	$	(18,028)	$	(15,293)

As of September 30, 2021, the Company had ~~$115.0~~$131.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of ~~2.2~~2.1 years.

Grants

~~The Company granted the following stock-based compensation awards:~~

Nine Months Ended
September 30, 2020
(in thousands) Shares Total Fair Value
RSUs 1,026 $ 92,456
Non-qualified stock options 1,886 $ 44,505
Common stock 6 $ 701


	Nine Months Ended September 30, 2021
(in thousands)	Shares	Total Fair Value
Restricted stock units	819	$	106,286
Non-qualified stock options	1,472	$	55,643
Common stock	5	$	601

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~10.~~NOTE 12. INCOME TAXES

Effective income tax rate


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(24,826)	$	(25,053)	$	(54,360)		$	(61,182)
Effective income tax benefit rate	0		0		68		%	48		%

Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands) 2020 2019 2020 2019
(Benefit from) income taxes $ (25,053) $ (17,520) $ (61,182) $ (43,158)
Effective income tax rate 48 % 32 %

~~During~~The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, ~~2020, the Company’s effective income tax rate benefit increased primarily due to the~~2020. The most significant discrete items were excess tax benefits from stock-based compensation and ~~a carryback claim benefit as a result~~the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

As of September 30, 2021 and December 31, 2020, the ~~Coronavirus Aid, Relief,~~Company’s deferred tax assets were $157.9 million and ~~Economic Security Act (“CARES Act”).~~$88.1 million, respectively.

~~11.~~NOTE 13. (LOSS) PER SHARE

Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and ~~the conversion spread of the Company’s~~ convertible senior notes.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of ~~the basic and diluted earnings~~(loss) per share:

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands, except per share amounts) 2020 2019 2020 2019
Net (loss) $ (19,267) $ (30,338) $ (65,379) $ (91,351)
Weighted-average common shares outstanding 80,537 79,200 80,191 78,928
(Loss) per share, basic $ (0.24) $ (0.38) $ (0.82) $ (1.16)
Net (loss) $ (19,267) $ (30,338) $ (65,379) $ (91,351)
Weighted-average common shares outstanding, assuming dilution (1) (2)
80,537 79,200 80,191 78,928
(Loss) per share, diluted $ (0.24) $ (0.38) $ (0.82) $ (1.16)
Outstanding anti-dilutive stock options and RSUs (3)
6,622 5,953 6,166 5,923


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2021		2020		2021		2020
Net (loss)	$	(56,468)	$	(19,267)	$	(25,794)	$	(65,379)
Weighted-average common shares outstanding	81,526		80,537		81,284		80,191
(Loss) per share, basic	$	(0.69)	$	(0.24)	$	(0.32)	$	(0.82)

Net (loss)	$	(56,468)	$	(19,267)	$	(25,794)	$	(65,379)







Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,526		80,537		81,284		80,191
(Loss) per share, diluted	$	(0.69)	$	(0.24)	$	(0.32)	$	(0.82)

Outstanding anti-dilutive stock options and RSUs (4)	5,815		6,622		6,136		6,166

(1) The ~~Company expects to settle the principal amount of the Notes in cash. As a result, only the amount by which~~shares underlying the conversion ~~value exceeds the aggregated principal amount of the Notes is included~~options in the ~~diluted earnings per share computation under~~Company’s Notes are included using the ~~treasury stock method. The~~if-converted method, if dilutive in the period. If the outstanding conversion spread has a dilutive impact on diluted net income per share when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $135.05 per share for the Notes. In connection with the Notes’ issuance,options were fully exercised, the Company ~~entered into Capped Call Transactions, which were not included in calculating the number of diluted shares outstanding, as their effect~~ would ~~have been anti-dilutive.~~issue an additional 4.4 million shares.

(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

(3) ~~Certain~~The Company’s Capped Call Transactions convert to 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted ~~earnings~~(loss) per ~~share because they were anti-dilutive in the period presented.~~share. These awards may be dilutive in the future.

1619

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, ~~intends to,~~ projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

~~These forward-looking~~Forward-looking statements deal with future events and are subject to ~~various~~ risks and uncertainties that are difficult to predict, including, but not limited ~~to, statements about~~ to:

•our future financial performance and business ~~plans,~~ plans;

•the adequacy of our liquidity and capital ~~resources,~~ resources;

•the continued payment of our quarterly ~~dividends,~~ dividends;

•the timing of revenue ~~recognition,~~ recognition;

•management of our transition to a more subscription-based business ~~model,~~ model;

•variation in demand for our products and services, including among clients in the public ~~sector,~~ sector;

•the impact of actual or threatened public health emergencies, such as the Coronavirus ~~(COVID-19),~~ (“COVID-19”);

•reliance on third-party service ~~providers,~~ providers;

•compliance with our debt obligations and ~~debt covenants,~~ covenants;

•the potential impact of our convertible senior notes and ~~related~~ Capped Call ~~Transactions,~~ Transactions;

•reliance on key ~~personnel,~~ personnel;

•the relocation of our corporate headquarters;

•the continued uncertainties in the global ~~economy,~~ economy;

•foreign currency exchange ~~rates,~~ rates;

•the potential legal and financial liabilities and reputation damage due to ~~cyber-attacks,~~ cyber-attacks;

•security breaches and security ~~flaws,~~ flaws;

•our ability to protect our intellectual property rights and costs associated with defending such ~~rights, maintenance of~~ rights;

•our client retention ~~rate,~~rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and other filings we make with the U.S. Securities and Exchange Commission (“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 publicly, whether ~~as the result of~~from new information, future events, or otherwise.

The forward-looking statements contained in this Quarterly Report represent our views as of October 27, 2021.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity. Our intelligent technology and scalable architecture enable the world’s leading brands and government agencies to solve problems quickly and transform ~~how they engage with their customers~~for tomorrow. Our clients are able to make better decisions and ~~process~~get work across their enterprise. We also license our low-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leveragesdone using real-time artificial intelligence (“AI”)~~, case management,~~ and ~~robotic~~intelligent automation ~~technology,~~on applications built on the low-code, cloud-native Pega Platform™, enabling our ~~unified low-code~~clients to streamline service, increase customer lifetime value, and boost efficiency. Our consulting and client success teams, along with our world-class partners, leverage our Pega ~~Platform, empowering businesses~~Express™ methodology and low code to allow clients to design and deploy critical applications quickly ~~design, extend,~~ and ~~scale their enterprise applications to meet strategic business needs.~~collaboratively.

Our target clients are Global 3000 organizations and government agencies that require 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 ~~primarily~~ sell software primarily through subscription arrangements, particularly Pega ~~Cloud (“Cloud Transition”).~~Cloud. Until we substantially complete our Cloud Transition, which we expect towill occur in ~~early~~ 2023, we ~~expect to continue to~~may experience lower revenue growth and lower operating cash flow growth or negative cash flow. ~~The~~Operating performance and the actual mix of ~~perpetual license, term license,~~revenue and ~~Pega Cloud~~new arrangements in ~~a given~~each period can fluctuate based on client ~~preferences.~~preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

~~Additional information~~Coronavirus (“COVID-19”)

As of September 30, 2021, COVID-19 has not had a material impact on ~~the transition’s impact can be found below and~~our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

~~COVID-19~~

~~As of September 30,~~ 2020 ~~COVID-19 has not had a material impact on our results of operations or financial condition.~~

The ultimate impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, and impact on our partners, vendors, or employees, all of which are uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, our product mix, the fact that many of our clients are well-known and of large size, 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. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.

Performance metrics

We ~~utilize several~~use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased ~~21%~~22% since September 30, ~~2019~~2020

•ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate 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. We~~ACV. ACV is a performance measure that we believe ~~the presentation of ACV on a constant currency basis enhances the understanding of~~provides useful information to our ~~results, as it provides visibility into the impact of changes in foreign~~management and investors, particularly during our Cloud Transition.

Note: Foreign currency exchange ~~rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of September 30, 2020.~~rate changes contributed 1-2% to total ACV growth in 2021.

Remaining performance obligations (“Backlog”) | Increased ~~38%~~23% since September 30, ~~2019~~2020

•Backlog represents ~~contracted~~expected future revenue ~~that has not yet been recognized and includes deferred revenue and~~from existing non-cancellable ~~amounts expected to be invoiced and recognized as revenue in future periods.~~

~~Year to date Pega Cloud revenue | Increased 55% since September 30, 2019~~

•~~Pega Cloud revenue is revenue as reported under U.S. GAAP for cloud~~ contracts.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared ~~in accordance with~~following accounting principles generally accepted in the United States ~~(“U.S.”)~~ and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.

For more information ~~regarding~~about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, ~~2019:~~2020:

•“Critical Accounting Estimates and Significant Judgments” in Item ~~7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;~~7; and

•“Note 2. ~~“Significant~~Significant Accounting Policies” in Item 8. ~~“Financial Statements and Supplementary Data.”~~

There have been no significant changes other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019 other than those listed below.~~

~~Capped Call Transactions~~

In February 2020, we entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 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. 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.

~~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.~~

~~See "6. Debt" and “7. Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.~~2020.

1922

RESULTS OF OPERATIONS

Revenue

~~Our Pega Cloud revenue is derived from our hosted Pega Platform and software applications. Our license revenue is derived from sales of our applications and the Pega Platform.~~

Cloud Transition

We are ~~in the process of~~ transitioning our business to ~~primarily~~ sell software primarily through subscription arrangements, particularly Pega Cloud. ~~As revenue~~Revenue growth has been slower because of this transition. Revenue from Pega Cloud and maintenance arrangements is ~~generally~~typically recognized over the contract term while revenue from ~~perpetual and term licenses~~license sales is ~~generally~~ recognized when the license rights become effective, ~~the shift has and is expected to continue to result in slower revenue growth during the transition.~~

(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2020 2019 2020 2019
Pega Cloud $ 54,776 24 % $ 35,153 16 % $ 19,623 56 % $ 147,080 20 % $ 94,610 15 % $ 52,470 55 %
Maintenance 74,670 33 % 70,371 32 % 4,299 6 % 220,587 31 % 207,406 33 % 13,181 6 %
Term license 35,932 16 % 48,989 23 % (13,057) (27) % 170,455 24 % 122,257 19 % 48,198 39 %
Subscription (1)
$ 165,378 73 % $ 154,513 71 % 10,865 7 % $ 538,122 75 % $ 424,273 67 % 113,849 27 %
Perpetual license 3,852 2 % 9,016 4 % (5,164) (57) % 16,568 2 % 43,286 7 % (26,718) (62) %
Consulting 56,721 25 % 53,174 25 % 3,547 7 % 164,227 23 % 167,282 26 % (3,055) (2) %
$ 225,951 100 % $ 216,703 100 % $ 9,248 4 % $ 718,917 100 % $ 634,841 100 % $ 84,076 13 %
typically upfront.


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2021				2020								2021				2020
Pega Cloud	$	78,369	31	%	$	54,776	24	%	$	23,593	43	%	$	219,520	25	%	$	147,080	20	%	$	72,440	49	%
Client Cloud	$	118,609	46	%	$	110,602	49	%	$	8,007	7	%	$	488,757	54	%	$	391,042	55	%	$	97,715	25	%
Maintenance	83,188		32%		74,670		33%		8,518		11%		237,531		26%		220,587		31%		16,944		8%
Term license	35,421		14%		35,932		16%		(511)		(1)%		251,226		28%		170,455		24%		80,771		47%
Cloud subscription (1)	$	196,978	77	%	$	165,378	73	%	$	31,600	19	%	$	708,277	79	%	$	538,122	75	%	$	170,155	32	%
Perpetual license	2,874		1	%	3,852		2	%	(978)		(25)	%	20,922		2	%	16,568		2	%	4,354		26	%
Consulting	56,416		22	%	56,721		25	%	(305)		(1)	%	166,270		19	%	164,227		23	%	2,043		1	%
	$	256,268	100	%	$	225,951	100	%	$	30,317	13	%	$	895,469	100	%	$	718,917	100	%	$	176,552	25	%

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

The revenue changes ~~in total revenue~~ in the three and nine months ended September 30, ~~2020~~2021 generally reflect our Cloud Transition. Other factors impacting our revenue ~~included:~~include:

•~~Term~~The increases in perpetual and term license revenue ~~was higher~~were primarily due to several large software license contracts recognized in revenue in the ~~three~~nine months ended September 30, ~~2019 primarily due to a greater number of large deals than in the three months ended September 30, 2020.~~2021.

•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance. Under ~~such~~multi-year committed maintenance arrangements, a ~~greater~~larger portion of the total contract value is ~~recorded~~recognized as maintenance revenue ~~which is recognized~~ over the contract term rather than ~~as term revenue, as~~upon the effectiveness of the license rights ~~become effective which is usually shortly after contract execution.~~as term license revenue. In the three ~~and nine~~ months ended September 30, ~~2020~~2021, multi-year committed maintenance contributed ~~$2.9 million and $7.7~~$4.8 million to maintenance revenue ~~growth.~~growth and reduced term revenue growth by $1.0 million. In the nine months ended September 30, ~~2020~~2021, multi-year committed maintenance contributed $12.6 million to maintenance revenue growth and reduced term revenue growth by ~~$10.2~~$22.0 million.

•Maintenance renewal rates ~~remained over~~of higher than 90% ~~in the nine months ended September 30, 2020.~~.

•The decrease in consulting revenue in the nine months ended September 30, 2020 was primarily due to lower billable travel expenses as a result of COVID-19. The increase in consulting revenue in the three months ended September 30, 2020 was primarily due to increased billable hours which more than offset the impact of reduced billable travel expenses due to COVID-19.

~~Gross profit~~

Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
(Dollars in thousands) 2020 2019 2020 2019
Software license $ 39,093 98 % $ 57,329 99 % $ (18,236) (32) % $ 184,669 99 % $ 162,561 98 % $ 22,108 14 %
Maintenance 69,192 93 % 63,683 90 % 5,509 9 % 203,942 92 % 188,091 91 % 15,851 8 %
Pega Cloud 35,059 64 % 17,329 49 % 17,730 102 % 90,842 62 % 46,841 50 % 44,001 94 %
Consulting 4,808 8 % (2,536) (5) % 7,344 * 5,446 3 % 4,933 3 % 513 10 %
$ 148,152 66 % $ 135,805 63 % $ 12,347 9 % $ 484,899 67 % $ 402,426 63 % $ 82,473 20 %

* not meaningful

•The changes in ~~gross profit~~consulting revenue in the three and nine months ended September 30, ~~2020~~2021 were primarily due to changes in billable hours. As part of our long-term strategy, we intend to continue growing and leveraging our ecosystem of partners on implementation projects, potentially reducing our future consulting revenue growth.

Gross profit


	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
(Dollars in thousands)	2021				2020								2021				2020
Pega Cloud	$	52,845	67	%	$	35,059	64	%	$	17,786	51	%	$	147,388	67	%	$	90,842	62	%	$	56,546	62	%
Maintenance	77,895		94	%	69,192		93	%	8,703		13	%	221,457		93	%	203,942		92	%	17,515		9	%
Software license	37,639		98	%	39,093		98	%	(1,454)		(4)	%	270,186		99	%	184,669		99	%	85,517		46	%
Consulting	3,667		6	%	4,808		8	%	(1,141)		(24)	%	5,238		3	%	5,446		3	%	(208)		(4)	%
	$	172,046	67	%	$	148,152	66	%	$	23,894	16	%	$	644,269	72	%	$	484,899	67	%	$	159,370	33	%

•The changes in gross profit and gross profit percent in the three and nine months ended September 30, 2021 were primarily due to our Cloud Transition, revenue growth, and ~~cost efficiency~~cost-efficiency gains as Pega Cloud grows and scales.

•The ~~increase~~decrease in consulting gross profit percent in the three months ended September 30, ~~2020~~2021 was ~~primarily~~ due to ~~an increase~~a decrease in consultant ~~utilization. Consultant~~ utilization ~~is impacted by several factors, including the scope and timing of new implementation projects and our level of involvement~~ in implementation projects compared to our consulting partners and enabled clients. To support our long-term strategy, we intend to grow and increasingly leverage our partners and enabled clients for future implementation projects, which may reduce the future growth rate.North America.

2023

Operating expenses

(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2020 2019 2020 2019
% of Revenue % of Revenue % of Revenue % of Revenue
Selling and marketing $ 132,053 58 % $ 115,237 53 % $ 16,816 15 % $ 395,684 55 % $ 341,064 54 % $ 54,620 16 %
Research and development $ 60,024 27 % $ 52,492 24 % $ 7,532 14 % $ 177,620 25 % $ 152,802 24 % $ 24,818 16 %
General and administrative $ 17,907 8 % $ 14,843 7 % $ 3,064 21 % $ 49,192 7 % $ 41,693 7 % $ 7,499 18 %


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2021				2020								2021				2020
			% of Revenue				% of Revenue								% of Revenue				% of Revenue
Selling and marketing	$	152,479	59	%	$	132,053	58	%	$	20,426	15	%	$	457,641	51	%	$	395,684	55	%	$	61,957	16	%
Research and development	$	64,728	25	%	$	60,024	27	%	$	4,704	8	%	$	191,565	21	%	$	177,620	25	%	$	13,945	8	%
General and administrative	$	20,176	8	%	$	17,907	8	%	$	2,269	13	%	$	57,607	6	%	$	49,192	7	%	$	8,415	17	%

•The increases in selling and marketing in the three and nine months ended September 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$24.4~~$15.8 million and ~~$76.0~~$63.8 million, attributable to increases in headcount, sales commissions, and equity compensation. The ~~increases~~increase in headcount ~~reflect~~reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts. ~~These increases were partially offset by decreases in travel and entertainment of $8.5 million and $17.4 million as a result of COVID-19.~~

•The increases in research and development in the three and nine months ended September 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$7.8~~$5.1 million and ~~$23.6~~$16.9 million, attributable to increases in ~~headcount and equity compensation.~~headcount.

•The increases in general and administrative in the three and nine months ended September 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$0.8~~$0.4 million and ~~$3.0~~$3.8 million, ~~attributed~~attributable to increases in headcount and equity compensation, and increases in legal and other professional services fees of ~~$1.5~~$2.7 million and ~~$4.2~~$6.1 million.

•In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to decreases in facilities expenses of $2.1 million and $5.5 million in selling and marketing, $2.0 million and $5.6 million in research and development, and $1.0 million and $2.8 million in general and administrative, in the three and nine months ended September 30, 2021.

Other income (expense), net

(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2020 2019 2020 2019
Foreign currency transaction gain (loss) $ 4,236 $ (1,970) $ 6,206 * $ 2,545 $ (3,577) $ 6,122 *
Interest income 243 598 (355) (59) % 1,092 1,865 (773) (41) %
Interest expense (5,956) (42) (5,914) (14,081) % (13,791) (42) (13,749) (32,736) %
Gain on capped call transactions 18,989 — 18,989 * 19,816 — 19,816 *
Other income, net — 323 (323) (100) % 1,374 378 996 263 %

$ 17,512 $ (1,091) $ 18,603 * $ 11,036 $ (1,376) $ 12,412 *


(Dollars in thousands)	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020						2021		2020
Foreign currency transaction gain (loss)	$	518	$	4,236	$	(3,718)	(88)	%	$	(4,983)	$	2,545	$	(7,528)	*
Interest income	166		243		(77)		(32)	%	555		1,092		(537)		(49)	%
Interest expense	(1,908)		(5,956)		4,048		68	%	(5,747)		(13,791)		8,044		58	%
(Loss) income on capped call transactions	(14,735)		18,989		(33,724)		*		(7,543)		19,816		(27,359)		*
Other income, net	2		—		2		*		108		1,374		(1,266)		(92)	%
	$	(15,957)	$	17,512	$	(33,469)	*		$	(17,610)	$	11,036	$	(28,646)	*

* not meaningful

•The changes in foreign currency transaction gain (loss) in the three and nine months ended September 30, ~~2020~~2021 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, ~~accounts receivable,~~receivables, and intercompany ~~receivables and payables~~balances held by our subsidiary in the United ~~Kingdom (“U.K.”) subsidiary.~~Kingdom.

•The decreases in interest income in the three and nine months ended September 30, ~~2020~~2021 were primarily due to ~~the decreases~~declines in market interest rates.

•The ~~increases~~decreases in interest expense in the three and nine months ended September 30, ~~2020~~2021 were primarily due to our ~~issuance~~adoption of ~~$600 million in aggregate principal amount of the Notes~~ASU 2020-06 on ~~February 24, 2020.~~January 1, 2021. See ~~"6. Debt"~~"Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.

Interest expense related to the Notes:


		Three Months Ended September 30,				Change				Nine Months Ended September 30,									Change			Three Months Ended September 30,								Change		Nine Months Ended September 30,				Change
(in thousands)	(in thousands)	2020		2019				2020				2019				(in thousands)		2021					2020					2021				2020
Contractual interest expense (0.75% coupon)	Contractual interest expense (0.75% coupon)	$	1,125	$	—			$	1,125			$	2,700			$	—					$	2,700	Contractual interest expense (0.75% coupon)	$	1,125			$		1,125	$	—	$	3,375	$	2,700	$	675
Amortization of debt discount	Amortization of debt discount	3,807		—		3,807				9,060				—					9,060		Amortization of debt discount	—				3,807				(3,807)		—		9,060		(9,060)
Amortization of issuance costs	Amortization of issuance costs	565		—		565				1,345				—					1,345		Amortization of issuance costs	677				565				112		2,025		1,345		680
		$	5,497	$	—	$	5,497			$	13,105			$	—				$	13,105		$	1,802			$	5,497			$	(3,695)	$	5,400	$	13,105	$	(7,705)

•The ~~increases~~decreases in the ~~gain~~(loss) income on capped call transactions in the three and nine months ended September 30, ~~2020~~2021, were due to fair value adjustments ~~on the Capped Call Transactions entered into~~driven by changes in ~~connection with~~ our ~~issuance of the Notes. See "6. Debt" in Item 1 of this Quarterly Report for additional information.~~stock price.

•The ~~increase~~decrease in other income, net in the nine months ended September 30, ~~2020~~2021, was due to ~~a gain from~~larger fair value adjustments on equity securities held in our venture investments ~~portfolio.~~portfolio in the nine months ended September 30, 2020.

(Benefit from) income taxes

The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, depending on our future stock price in relation to the fair value of awards, the timing of the vestings of RSU awards, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(24,826)	$	(25,053)	$	(54,360)		$	(61,182)
Effective income tax benefit rate					68		%	48		%

During the nine months ended September 30, ~~2020,~~2021, the change in our effective income tax benefit rate ~~benefit increased~~was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, 2020. The most significant discrete items were excess tax benefits from stock-based compensation and ~~a carryback claim benefit as a result~~the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

Stock-based compensation increases the ~~Coronavirus Aid, Relief,~~variability of our effective tax rates. The impact on our effective tax rate in each period depends on our profitability and ~~Economic Security Act (“CARES Act”).~~the tax deductions from our stock compensation activity, which depend upon our stock price and the award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


	Nine Months Ended September 30,
(in thousands)	2021		2020
Cash provided by (used in):
Operating activities	$	(5,321)	$	(26,257)
Investing activities	42,730		(210,701)
Financing activities	(91,431)		449,630
Effect of exchange rates on cash and cash equivalents	(1,466)		183
Net (decrease) increase in cash and cash equivalents	$	(55,488)	$	212,855

Nine Months Ended
September 30,
(in thousands) 2020 2019
Cash provided by (used in):
Operating activities $ (26,257) $ (13,462)
Investing activities (210,701) 53,448
Financing activities 449,630 (61,941)
Effect of exchange rates on cash and cash equivalents 183 (363)
Net increase (decrease) in cash and cash equivalents $ 212,855 $ (22,318)

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly 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 future growth, operating results, and the investments ~~required~~needed to ~~respond to the possible increased demand for~~support our ~~services.~~operations. If we require additional capital resources to grow our business, we may ~~seek to finance our operations from~~utilize available funds or additional external financing.

If it ~~became~~becomes necessary to repatriate foreign funds, we may ~~be required~~have to pay U.S. and foreign taxes upon repatriation. Due to the complexity of income tax laws and regulations, ~~and the Tax Reform Act’s effects,~~ it is impracticable to estimate the amount of taxes we would have to pay.

~~Cash (used in) operating~~Operating activities

We are ~~in the process of~~ transitioning our business to ~~primarily~~ sell software primarily through subscription arrangements, particularly Pega Cloud. As cash from Pega Cloud and term arrangements is generally collected over the contract term while cash from perpetual licenses is generally collected when the license rights become effective, the shiftThis transition has impacted and is expected to continue to impact the timing of our billings and cash collections. Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed 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 the nine months ended September 30, 2020, COVID-19 did not have a material impact on our cash flows from operations. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.

The change in cash (used in) operating activities in the nine months ended September 30, ~~2020~~2021 was primarily due to a significant increase in client collections.

Corporate headquarters

In February 2021, we agreed to accelerate our ~~Cloud Transition~~exit from our previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was paid in October 2021. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million. On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.

On July 6, 2021, we entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, we will receive an improvement allowance from the landlord of up to $11.8 million as part of the lease. This lease increased ~~costs as we accelerated investments in~~ our ~~Pega Cloud offering~~lease liabilities and ~~selling and marketing activities to support future growth.~~

lease-related right of use assets by $42.1 million on August 1, 2021.

~~Cash (used in) provided by investing~~Investing activities


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020			3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020			6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1720
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2427
Item 4. Controls and Procedures			2427

PART II - OTHER INFORMATION

Item 1A. Risk Factors			2628
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 6. Exhibits			2928

Signature			3029


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	281,218	$	68,363	Cash and cash equivalents	$	116,411	$	171,899
Marketable securities	Marketable securities	186,810		0		Marketable securities	235,437		293,269
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	468,028		68,363		Total cash, cash equivalents, and marketable securities	351,848		465,168
Accounts receivable	Accounts receivable	137,953		199,720		Accounts receivable	143,445		215,827
Unbilled receivables	Unbilled receivables	208,823		180,219		Unbilled receivables	239,774		207,155
Other current assets	Other current assets	89,406		57,308		Other current assets	93,819		88,760
Total current assets	Total current assets	904,210		505,610		Total current assets	828,886		976,910
Unbilled receivables	Unbilled receivables	108,456		121,736		Unbilled receivables	132,147		113,278
Goodwill	Goodwill	78,864		79,039		Goodwill	81,954		79,231
Other long-term assets	Other long-term assets	395,797		278,427		Other long-term assets	512,410		434,843
Total assets	Total assets	$	1,487,327	$	984,812	Total assets	$	1,555,397	$	1,604,262
Liabilities and stockholders�� equity
Liabilities and stockholders’ equity						Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	20,443	$	17,475	Accounts payable	$	25,604	$	24,028
Accrued expenses	Accrued expenses	43,447		48,001		Accrued expenses	46,583		59,261
Accrued compensation and related expenses	Accrued compensation and related expenses	90,836		104,126		Accrued compensation and related expenses	86,018		123,012
Deferred revenue	Deferred revenue	181,680		190,080		Deferred revenue	229,103		232,865
Other current liabilities	Other current liabilities	19,916		18,273		Other current liabilities	13,118		20,969
Total current liabilities	Total current liabilities	356,322		377,955		Total current liabilities	400,426		460,135
Convertible senior notes, net	Convertible senior notes, net	513,794		0		Convertible senior notes, net	589,769		518,203
Operating lease liabilities	Operating lease liabilities	62,544		52,610		Operating lease liabilities	87,088		59,053
Other long-term liabilities	Other long-term liabilities	25,345		15,237		Other long-term liabilities	18,482		24,699
Total liabilities	Total liabilities	958,005		445,802		Total liabilities	1,095,765		1,062,090
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; NaN issued		0		0
Common stock, 200,000 shares authorized; 80,697 and 79,599 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		807		796
Preferred stock, 1,000 shares authorized; none issued						Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively						Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	817		809
Additional paid-in capital	Additional paid-in capital	201,882		140,523		Additional paid-in capital	148,098		204,432
Retained earnings	Retained earnings	338,300		410,919		Retained earnings	316,150		339,879
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(11,667)		(13,228)		Accumulated other comprehensive (loss)	(5,433)		(2,948)
Total stockholders’ equity	Total stockholders’ equity	529,322		539,010		Total stockholders’ equity	459,632		542,172
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,487,327	$	984,812	Total liabilities and stockholders’ equity	$	1,555,397	$	1,604,262


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Net (loss)	Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)	Net (loss)	$	(56,468)	$	(19,267)	$	(25,794)	$	(65,379)
Other comprehensive (loss) income, net of tax	Other comprehensive (loss) income, net of tax									Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities		(166)		(216)		(66)		396
Unrealized gain (loss) on available-for-sale securities										Unrealized gain (loss) on available-for-sale securities	53		(166)		1,184		(66)
Foreign currency translation adjustments	Foreign currency translation adjustments	113		(2,201)		1,627		(983)		Foreign currency translation adjustments	(4,400)		113		(3,669)		1,627
Total other comprehensive (loss) income, net of tax	Total other comprehensive (loss) income, net of tax	$	(53)	$	(2,417)	$	1,561	$	(587)	Total other comprehensive (loss) income, net of tax	$	(4,347)	$	(53)	$	(2,485)	$	1,561
Comprehensive (loss)	Comprehensive (loss)	$	(19,320)	$	(32,755)	$	(63,818)	$	(91,938)	Comprehensive (loss)	$	(60,815)	$	(19,320)	$	(28,279)	$	(63,818)


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
		Nine Months Ended September 30,					Nine Months Ended September 30,
		2020		2019			2021		2020
Operating activities	Operating activities					Operating activities
Net (loss)	Net (loss)	$	(65,379)	$	(91,351)	Net (loss)	$	(25,794)	$	(65,379)
Adjustments to reconcile net (loss) to cash (used in) operating activities	Adjustments to reconcile net (loss) to cash (used in) operating activities					Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation	Stock-based compensation	76,755		60,242		Stock-based compensation	89,483		76,755
(Gain) on capped call transactions		(19,816)		0
Loss (gain) on capped call transactions						Loss (gain) on capped call transactions	7,543		(19,816)
Deferred income taxes	Deferred income taxes	(43,476)		(40,531)		Deferred income taxes	(53,638)		(43,476)
Amortization of deferred commissions	Amortization of deferred commissions	24,922		22,372		Amortization of deferred commissions	31,388		24,922
Lease expense		11,997		10,454
Amortization of debt discount and issuance costs	Amortization of debt discount and issuance costs	10,405		0		Amortization of debt discount and issuance costs	2,025		10,405
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	15,677		16,998		Amortization of intangible assets and depreciation	24,030		15,677
Amortization of investments	Amortization of investments	252		798		Amortization of investments	2,916		252
Foreign currency transaction (gain) loss		(2,545)		3,577
Foreign currency transaction loss (gain)						Foreign currency transaction loss (gain)	4,983		(2,545)
Other non-cash	Other non-cash	(1,374)		(363)		Other non-cash	(8,421)		10,623
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(33,675)		4,342		Change in operating assets and liabilities, net	(79,836)		(33,675)
Cash (used in) operating activities	Cash (used in) operating activities	(26,257)		(13,462)		Cash (used in) operating activities	(5,321)		(26,257)
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(190,319)		(11,182)		Purchases of investments	(67,170)		(190,319)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	0		13,066		Proceeds from maturities and called investments	96,859		—
Sales of investments	Sales of investments	1,424		68,937		Sales of investments	25,123		1,424
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	0		(10,934)		Payments for acquisitions, net of cash acquired	(4,993)		—
Investment in property and equipment	Investment in property and equipment	(21,806)		(6,439)		Investment in property and equipment	(7,089)		(21,806)
Cash (used in) provided by investing activities		(210,701)		53,448
Cash provided by (used in) investing activities						Cash provided by (used in) investing activities	42,730		(210,701)
Financing activities	Financing activities					Financing activities
Proceeds from issuance of convertible senior notes	Proceeds from issuance of convertible senior notes	600,000		0		Proceeds from issuance of convertible senior notes	—		600,000
Purchase of capped calls related to convertible senior notes	Purchase of capped calls related to convertible senior notes	(51,900)		0		Purchase of capped calls related to convertible senior notes	—		(51,900)
Payment of debt issuance costs	Payment of debt issuance costs	(14,527)		0		Payment of debt issuance costs	—		(14,527)
Dividend payments to shareholders		(7,206)		(7,105)
Proceeds from employee stock purchase plan						Proceeds from employee stock purchase plan	7,786		1,403
Dividend payments to stockholders						Dividend payments to stockholders	(7,310)		(7,206)

Common stock repurchases	Common stock repurchases	(76,737)		(54,836)		Common stock repurchases	(91,907)		(78,140)
Cash provided by (used in) financing activities		449,630		(61,941)
Cash (used in) provided by financing activities						Cash (used in) provided by financing activities	(91,431)		449,630
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	183		(363)		Effect of exchange rate changes on cash and cash equivalents	(1,466)		183
Net increase (decrease) in cash and cash equivalents		212,855		(22,318)
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(55,488)		212,855
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	68,363		114,422		Cash and cash equivalents, beginning of period	171,899		68,363
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	281,218	$	92,104	Cash and cash equivalents, end of period	$	116,411	$	281,218


		September 30, 2020									September 30, 2021								December 31, 2020
(in thousands)	(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	Government debt	$	50,987	$	0	$	(11)	$	50,976	Government debt	$	2,000	$	—	$	—	$	2,000	$	39,996	$	—	$	(8)	$	39,988
Corporate debt	Corporate debt	136,045		1		(212)		135,834		Corporate debt	233,556		25		(144)		233,437		253,345		88		(152)		253,281
		$	187,032	$	1	$	(223)	$	186,810		$	235,556	$	25	$	(144)	$	235,437	$	293,341	$	88	$	(160)	$	293,269


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56	%
1-2 years	853		3,798		18,590		105,081		863		129,185		21	%
2-3 years	1,306		591		8,323		72,915		841		83,976		14	%
Greater than 3 years	0		85		4,959		51,591		0		56,635		9	%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100	%


(in thousands)	Nine Months Ended September 30, ~~2020~~2021
December 31, ~~2019~~2020	$	~~45,484~~37,726
Authorizations ~~(2)~~(1)	~~20,516~~38,467
Repurchases(2)	~~(18,828)~~(32,188)
September 30, ~~2020~~2021	$	~~47,172~~44,005


	Payments due by period
(in thousands)	2020		2021		2022-2023		2024-2025		2026 and thereafter		Other		Total
Purchase obligations (1)	$	21,627	$	56,689	$	61,117	$	173	$	—	$	—	$	139,606
Investment commitments (2)	300		500		—		—		—		—		800
Liability for uncertain tax positions (3)	—		—		—		—		—		5,441		5,441
Operating lease obligations	5,490		22,887		43,888		13,187		9,959		—		95,411
	$	27,417	$	80,076	$	105,005	$	13,360	$	9,959	$	5,441	$	241,258


(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2020 - July 31, 2020	135	$	109.36	42	$	53,470
August 1, 2020 - August 31, 2020	162	$	120.08	26	$	50,321
September 1, 2020 - September 30, 2020	138	$	124.88	26	$	47,172
	435	$	118.29	94


~~Exhibit No.~~						~~Description~~
~~3.1~~						~~Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)~~
~~3.2~~						~~Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s June 15, 2020 Form 8-K and incorporated herein by reference.)~~
~~31.1+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.~~
~~31.2+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.~~
~~32++~~						~~Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.~~
~~10.1+~~						~~Form of Side Letter to Base Call Option Transaction~~
~~10.2+~~						~~Form of Side Letter to Additional Call Option Transaction~~
~~10.3+~~						~~Amendment to Loan Documents,~~ ~~dated~~ ~~as ofSeptember 30, 2020, between Pegasystems Inc. and PNC Bank, National Association~~
~~101.INS~~						~~Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~
~~101.SCH~~						~~Inline XBRL Taxonomy Extension Schema Document.~~
~~101.CAL~~						~~Inline XBRL Taxonomy Calculation Linkbase Document.~~
~~101.DEF~~						~~Inline XBRL Taxonomy Extension Definition Linkbase Document.~~
~~101.LAB~~						~~Inline XBRL Taxonomy Label Linkbase Document.~~
~~101.PRE~~						~~Inline XBRL Taxonomy Presentation Linkbase Document.~~
~~104~~						~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)~~


		Pegasystems Inc.

Dated:	October ~~28, 2020~~27, 2021	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief ~~Financial~~Operating Officer and Chief ~~Administrative~~Financial Officer
			(Principal Financial Officer)