UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2021
For the quarterly period ended September 30, 2020
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859 
____________________________

PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter) 
____________________________
Massachusetts04-2787865
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
One RogersMain Street, Cambridge, MA 02142-120902142
(Address of principal executive offices, including zip code)
(617) 374-9600
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ 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 filerxAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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 80,697,69681,675,315 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 19, 2020.2021.


Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 20202021 and December 31, 20192020
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20202021 and 20192020
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 20202021 and 20192020
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 20202021 and 20192020
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20202021 and 20192020
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature

2

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2020December 31, 2019September 30, 2021December 31, 2020
AssetsAssetsAssets
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$281,218 $68,363 Cash and cash equivalents$116,411 $171,899 
Marketable securitiesMarketable securities186,810 Marketable securities235,437 293,269 
Total cash, cash equivalents, and marketable securitiesTotal cash, cash equivalents, and marketable securities468,028 68,363 Total cash, cash equivalents, and marketable securities351,848 465,168 
Accounts receivableAccounts receivable137,953 199,720 Accounts receivable143,445 215,827 
Unbilled receivablesUnbilled receivables208,823 180,219 Unbilled receivables239,774 207,155 
Other current assetsOther current assets89,406 57,308 Other current assets93,819 88,760 
Total current assetsTotal current assets904,210 505,610 Total current assets828,886 976,910 
Unbilled receivablesUnbilled receivables108,456 121,736 Unbilled receivables132,147 113,278 
GoodwillGoodwill78,864 79,039 Goodwill81,954 79,231 
Other long-term assetsOther long-term assets395,797 278,427 Other long-term assets512,410 434,843 
Total assetsTotal assets$1,487,327 $984,812 Total assets$1,555,397 $1,604,262 
Liabilities and stockholders�� equity
Liabilities and stockholders’ equityLiabilities and stockholders’ equity
Current liabilities:Current liabilities:Current liabilities:
Accounts payableAccounts payable$20,443 $17,475 Accounts payable$25,604 $24,028 
Accrued expensesAccrued expenses43,447 48,001 Accrued expenses46,583 59,261 
Accrued compensation and related expensesAccrued compensation and related expenses90,836 104,126 Accrued compensation and related expenses86,018 123,012 
Deferred revenueDeferred revenue181,680 190,080 Deferred revenue229,103 232,865 
Other current liabilitiesOther current liabilities19,916 18,273 Other current liabilities13,118 20,969 
Total current liabilitiesTotal current liabilities356,322 377,955 Total current liabilities400,426 460,135 
Convertible senior notes, netConvertible senior notes, net513,794 Convertible senior notes, net589,769 518,203 
Operating lease liabilitiesOperating lease liabilities62,544 52,610 Operating lease liabilities87,088 59,053 
Other long-term liabilitiesOther long-term liabilities25,345 15,237 Other long-term liabilities18,482 24,699 
Total liabilitiesTotal liabilities958,005 445,802 Total liabilities1,095,765 1,062,090 
Stockholders’ equity:Stockholders’ equity:Stockholders’ equity:
Preferred stock, 1,000 shares authorized; NaN issued
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 issuedPreferred 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 capitalAdditional paid-in capital201,882 140,523 Additional paid-in capital148,098 204,432 
Retained earningsRetained earnings338,300 410,919 Retained earnings316,150 339,879 
Accumulated other comprehensive (loss)Accumulated other comprehensive (loss)(11,667)(13,228)Accumulated other comprehensive (loss)(5,433)(2,948)
Total stockholders’ equityTotal stockholders’ equity529,322 539,010 Total stockholders’ equity459,632 542,172 
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$1,487,327 $984,812 Total liabilities and stockholders’ equity$1,555,397 $1,604,262 

See notes to unaudited condensed consolidated financial statements.
3


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
September 30,
Nine Months Ended
September 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
20202019202020192021202020212020
RevenueRevenueRevenue
Pega CloudPega Cloud$78,369 $54,776 $219,520 $147,080 
MaintenanceMaintenance83,188 74,670 237,531 220,587 
Software licenseSoftware license$39,784 $58,005 $187,023 $165,543 Software license38,295 39,784 272,148 187,023 
Maintenance74,670 70,371 220,587 207,406 
Pega Cloud54,776 35,153 147,080 94,610 
ConsultingConsulting56,721 53,174 164,227 167,282 Consulting56,416 56,721 166,270 164,227 
Total revenueTotal revenue225,951 216,703 718,917 634,841 Total revenue256,268 225,951 895,469 718,917 
Cost of revenueCost of revenueCost of revenue
Pega CloudPega Cloud25,524 19,717 72,132 56,238 
MaintenanceMaintenance5,293 5,478 16,074 16,645 
Software licenseSoftware license691 676 2,354 2,982 Software license656 691 1,962 2,354 
Maintenance5,478 6,688 16,645 19,315 
Pega Cloud19,717 17,824 56,238 47,769 
ConsultingConsulting51,913 55,710 158,781 162,349 Consulting52,749 51,913 161,032 158,781 
Total cost of revenueTotal cost of revenue77,799 80,898 234,018 232,415 Total cost of revenue84,222 77,799 251,200 234,018 
Gross profitGross profit148,152 135,805 484,899 402,426 Gross profit172,046 148,152 644,269 484,899 
Operating expensesOperating expensesOperating expenses
Selling and marketingSelling and marketing132,053 115,237 395,684 341,064 Selling and marketing152,479 132,053 457,641 395,684 
Research and developmentResearch and development60,024 52,492 177,620 152,802 Research and development64,728 60,024 191,565 177,620 
General and administrativeGeneral and administrative17,907 14,843 49,192 41,693 General and administrative20,176 17,907 57,607 49,192 
Total operating expensesTotal operating expenses209,984 182,572 622,496 535,559 Total operating expenses237,383 209,984 706,813 622,496 
(Loss) from operations(Loss) from operations(61,832)(46,767)(137,597)(133,133)(Loss) from operations(65,337)(61,832)(62,544)(137,597)
Foreign currency transaction gain (loss)Foreign currency transaction gain (loss)4,236 (1,970)2,545 (3,577)Foreign currency transaction gain (loss)518 4,236 (4,983)2,545 
Interest incomeInterest income243 598 1,092 1,865 Interest income166 243 555 1,092 
Interest expenseInterest expense(5,956)(42)(13,791)(42)Interest expense(1,908)(5,956)(5,747)(13,791)
Gain on capped call transactions18,989 19,816 
(Loss) income on capped call transactions(Loss) income on capped call transactions(14,735)18,989 (7,543)19,816 
Other income, netOther income, net323 1,374 378 Other income, net— 108 1,374 
(Loss) before (benefit from) income taxes(Loss) before (benefit from) income taxes(44,320)(47,858)(126,561)(134,509)(Loss) before (benefit from) income taxes(81,294)(44,320)(80,154)(126,561)
(Benefit from) income taxes(Benefit from) income taxes(25,053)(17,520)(61,182)(43,158)(Benefit from) income taxes(24,826)(25,053)(54,360)(61,182)
Net (loss)Net (loss)$(19,267)$(30,338)$(65,379)$(91,351)Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
(Loss) per share(Loss) per share(Loss) per share
BasicBasic$(0.24)$(0.38)$(0.82)$(1.16)Basic$(0.69)$(0.24)$(0.32)$(0.82)
DilutedDiluted$(0.24)$(0.38)$(0.82)$(1.16)Diluted$(0.69)$(0.24)$(0.32)$(0.82)
Weighted-average number of common shares outstandingWeighted-average number of common shares outstandingWeighted-average number of common shares outstanding
BasicBasic80,537 79,200 80,191 78,928 Basic81,526 80,537 81,284 80,191 
DilutedDiluted80,537 79,200 80,191 78,928 Diluted81,526 80,537 81,284 80,191 

See notes to unaudited condensed consolidated financial statements.
4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)

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,
20202019202020192021202020212020
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 taxOther comprehensive (loss) income, net of taxOther 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 securitiesUnrealized gain (loss) on available-for-sale securities53 (166)1,184 (66)
Foreign currency translation adjustmentsForeign currency translation adjustments113 (2,201)1,627 (983)Foreign currency translation adjustments(4,400)113 (3,669)1,627 
Total other comprehensive (loss) income, net of taxTotal 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)

See notes to unaudited condensed consolidated financial statements.
5



PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common StockAdditional
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Common StockAdditional
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
AmountNumber
of Shares
Amount
December 31, 201878,526 $785 $123,205 $510,863 $(13,322)$621,531 
December 31, 2019December 31, 201979,599 $796 $140,523 $410,919 $(13,228)$539,010 
Equity component of convertible senior notes, netEquity component of convertible senior notes, net— — 61,604 — — 61,604 
Repurchase of common stockRepurchase of common stock(144)(1)(7,586)— — (7,587)Repurchase of common stock(87)(1)(5,999)— — (6,000)
Issuance of common stock for share-based compensation plans514 (14,843)— — (14,838)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans564 (23,017)— — (23,011)
Stock-based compensationStock-based compensation— — 23,199 — — 23,199 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,405)— (2,405)
Other comprehensive (loss)Other comprehensive (loss)— — — — (414)(414)
Net (loss)Net (loss)— — — (25,372)— (25,372)
March 31, 2020March 31, 202080,076 $801 $196,310 $383,142 $(13,642)$566,611 
Repurchase of common stockRepurchase of common stock(23)— (2,199)— — (2,199)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans349 (14,085)— — (14,082)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan18 — 1,403 — — 1,403 
Stock-based compensationStock-based compensation— — 18,406 — — 18,406 Stock-based compensation— — 25,674 — — 25,674 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,367)— (2,367)Cash dividends declared ($0.03 per share)— — — (2,413)— (2,413)
Other comprehensive incomeOther comprehensive income— — — — 2,001 2,001 Other comprehensive income— — — — 2,028 2,028 
Net (loss)Net (loss)— — — (28,717)— (28,717)Net (loss)— — — (20,740)— (20,740)
March 31, 201978,896 $789 $119,182 $479,779 $(11,321)$588,429 
June 30, 2020June 30, 202080,420 $804 $207,103 $359,989 $(11,614)$556,282 
Repurchase of common stockRepurchase of common stock(88)(1)(6,301)— — (6,302)Repurchase of common stock(94)(1)(10,628)— — (10,629)
Issuance of common stock for share-based compensation plans320 (11,217)— — (11,214)
Issuance of common stock under the employee stock purchase plan16 — 1,103 — — 1,103 
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans371 (22,524)— — (22,520)
Stock-based compensationStock-based compensation— — 20,113 — — 20,113 Stock-based compensation— — 27,931 — — 27,931 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,375)— (2,375)Cash dividends declared ($0.03 per share)— — — (2,422)— (2,422)
Other comprehensive (loss)Other comprehensive (loss)— — — — (171)(171)Other comprehensive (loss)— — — — (53)(53)
Net (loss)Net (loss)— — — (32,296)— (32,296)Net (loss)— — — (19,267)— (19,267)
June 30, 201979,144 $791 $122,880 $445,108 $(11,492)$557,287 
Repurchase of common stock(88)(1)(6,396)— — (6,397)
Issuance of common stock for share-based compensation plans268 (8,804)— — (8,801)
Stock-based compensation— — 21,879 — — 21,879 
Cash dividends declared ($0.03 per share)— — — (2,381)— (2,381)
Other comprehensive (loss)— — — — (2,417)(2,417)
Net (loss)— — — (30,338)— (30,338)
September 30, 201979,324 $793 $129,559 $412,389 $(13,909)$528,832 
See notes to unaudited condensed consolidated financial statements.
September 30, 2020September 30, 202080,697 $807 $201,882 $338,300 $(11,667)$529,322 
6


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common StockAdditional
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Common StockAdditional
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
AmountNumber
of Shares
Amount
December 31, 201979,599 $796 $140,523 $410,919 $(13,228)$539,010 
Equity component of convertible senior notes, net— — 61,604 — — 61,604 
December 31, 2020December 31, 202080,890 $809 $204,432 $339,879 $(2,948)$542,172 
Cumulative-effect adjustment from adoption of ASU 2020-06, net
Cumulative-effect adjustment from adoption of ASU 2020-06, net
— — (61,604)9,399 — (52,205)
Repurchase of common stockRepurchase of common stock(87)(1)(5,999)— — (6,000)Repurchase of common stock(70)(1)(9,145)— — (9,146)
Issuance of common stock for share-based compensation plans564 (23,017)— — (23,011)
Stock-based compensation— — 23,199 — — 23,199 
Cash dividends declared ($0.03 per share)— — — (2,405)— (2,405)
Other comprehensive (loss)— — — — (414)(414)
Net (loss)— — — (25,372)— (25,372)
March 31, 202080,076 $801 $196,310 $383,142 $(13,642)$566,611 
Repurchase of common stock(23)(2,199)— — (2,199)
Issuance of common stock for share-based compensation plans349 (14,085)— — (14,082)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans402 (25,513)— — (25,509)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan18 — 1,403 — — 1,403 Issuance of common stock under the employee stock purchase plan24 — 2,288 — — 2,288 
Stock-based compensationStock-based compensation— — 25,674 — — 25,674 Stock-based compensation— — 30,100 — — 30,100 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,413)— (2,413)Cash dividends declared ($0.03 per share)— — — (2,438)— (2,438)
Other comprehensive incomeOther comprehensive income— — — — 2,028 2,028 Other comprehensive income— — — — 280 280 
Net (loss)Net (loss)— — — (20,740)— (20,740)Net (loss)— — — (6,617)— (6,617)
June 30, 202080,420 $804 $207,103 $359,989 $(11,614)$556,282 
March 31, 2021March 31, 202181,246 $812 $140,558 $340,223 $(2,668)$478,925 
Repurchase of common stockRepurchase of common stock(94)(1)(10,628)— — (10,629)Repurchase of common stock(81)(1)(10,245)— — (10,246)
Issuance of common stock for share-based compensation plans371 (22,524)— — (22,520)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans267 (16,199)— — (16,196)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan24 2,858 — — 2,859 
Stock-based compensationStock-based compensation— — 30,698 — — 30,698 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,445)— (2,445)
Other comprehensive incomeOther comprehensive income— — — — 1,582 1,582 
Net incomeNet income— — — 37,291 — 37,291 
June 30, 2021June 30, 202181,456 $815 $147,670 $375,069 $(1,086)$522,468 
Repurchase of common stockRepurchase of common stock(96)(1)(12,795)— — (12,796)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans286 (18,117)— — (18,114)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan24 — 2,639 — — 2,639 
Stock-based compensationStock-based compensation— — 27,931 — — 27,931 Stock-based compensation— — 28,701 — — 28,701 
Cash dividends declared ($0.03 per share)Cash dividends declared ($0.03 per share)— — — (2,422)— (2,422)Cash dividends declared ($0.03 per share)— — — (2,451)— (2,451)
Other comprehensive (loss)Other comprehensive (loss)— — — — (53)(53)Other comprehensive (loss)— — — — (4,347)(4,347)
Net (loss)Net (loss)— — — (19,267)— (19,267)Net (loss)— — — (56,468)— (56,468)
September 30, 202080,697 $807 $201,882 $338,300 $(11,667)$529,322 
September 30, 2021September 30, 202181,670 $817 $148,098 $316,150 $(5,433)$459,632 

See notes to unaudited condensed consolidated financial statements.
7


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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,
2020201920212020
Operating activitiesOperating activitiesOperating 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 activitiesAdjustments to reconcile net (loss) to cash (used in) operating activitiesAdjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensationStock-based compensation76,755 60,242 Stock-based compensation89,483 76,755 
(Gain) on capped call transactions(19,816)
Loss (gain) on capped call transactionsLoss (gain) on capped call transactions7,543 (19,816)
Deferred income taxesDeferred income taxes(43,476)(40,531)Deferred income taxes(53,638)(43,476)
Amortization of deferred commissionsAmortization of deferred commissions24,922 22,372 Amortization of deferred commissions31,388 24,922 
Lease expense11,997 10,454 
Amortization of debt discount and issuance costsAmortization of debt discount and issuance costs10,405 Amortization of debt discount and issuance costs2,025 10,405 
Amortization of intangible assets and depreciationAmortization of intangible assets and depreciation15,677 16,998 Amortization of intangible assets and depreciation24,030 15,677 
Amortization of investmentsAmortization of investments252 798 Amortization of investments2,916 252 
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-cashOther non-cash(1,374)(363)Other non-cash(8,421)10,623 
Change in operating assets and liabilities, netChange 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 activitiesCash (used in) operating activities(26,257)(13,462)Cash (used in) operating activities(5,321)(26,257)
Investing activitiesInvesting activitiesInvesting activities
Purchases of investmentsPurchases of investments(190,319)(11,182)Purchases of investments(67,170)(190,319)
Proceeds from maturities and called investmentsProceeds from maturities and called investments13,066 Proceeds from maturities and called investments96,859 — 
Sales of investmentsSales of investments1,424 68,937 Sales of investments25,123 1,424 
Payments for acquisitions, net of cash acquiredPayments for acquisitions, net of cash acquired(10,934)Payments for acquisitions, net of cash acquired(4,993)— 
Investment in property and equipmentInvestment 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 activitiesCash provided by (used in) investing activities42,730 (210,701)
Financing activitiesFinancing activitiesFinancing activities
Proceeds from issuance of convertible senior notesProceeds from issuance of convertible senior notes600,000 Proceeds from issuance of convertible senior notes— 600,000 
Purchase of capped calls related to convertible senior notesPurchase of capped calls related to convertible senior notes(51,900)Purchase of capped calls related to convertible senior notes— (51,900)
Payment of debt issuance costsPayment of debt issuance costs(14,527)Payment of debt issuance costs— (14,527)
Dividend payments to shareholders(7,206)(7,105)
Proceeds from employee stock purchase planProceeds from employee stock purchase plan7,786 1,403 
Dividend payments to stockholdersDividend payments to stockholders(7,310)(7,206)
Common stock repurchasesCommon stock repurchases(76,737)(54,836)Common stock repurchases(91,907)(78,140)
Cash provided by (used in) financing activities449,630 (61,941)
Cash (used in) provided by financing activitiesCash (used in) provided by financing activities(91,431)449,630 
Effect of exchange rate changes on cash and cash equivalentsEffect of exchange rate changes on cash and cash equivalents183 (363)Effect of exchange rate changes on cash and cash equivalents(1,466)183 
Net increase (decrease) in cash and cash equivalents212,855 (22,318)
Net (decrease) increase in cash and cash equivalentsNet (decrease) increase in cash and cash equivalents(55,488)212,855 
Cash and cash equivalents, beginning of periodCash and cash equivalents, beginning of period68,363 114,422 Cash and cash equivalents, beginning of period171,899 68,363 
Cash and cash equivalents, end of periodCash and cash equivalents, end of period$281,218 $92,104 Cash and cash equivalents, end of period$116,411 $281,218 

See notes to unaudited condensed consolidated financial statements.
8

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 beenwere 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
Convertible debt
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 beCompany adopted on either a full retrospective orASU 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 standardapproach on January 1, 2021.
Financial instruments
In June 2016, Upon adoption, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurementbook value of Credit Losses on Financial Instruments,” which requires measurementthe Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and recognitionretained 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 atthe 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

September 30, 2020September 30, 2021December 31, 2020
(in thousands)(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair Value(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debtGovernment debt$50,987 $$(11)$50,976 Government debt$2,000 $— $— $2,000 $39,996 $— $(8)$39,988 
Corporate debtCorporate debt136,045 (212)135,834 Corporate debt233,556 25 (144)233,437 253,345 88 (152)253,281 
$187,032 $$(223)$186,810 $235,556 $25 $(144)$235,437 $293,341 $88 $(160)$293,269 
As of September 30, 2020,2021, marketable securities’ maturities of marketable securities ranged from October 20202021 to September 2023,2024, with a weighted-average remaining maturity of approximately 1.31.2 years.
As of December 31, 2019, the Company did not hold any marketable securities.
9

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)September 30, 2021December 31, 2020
Accounts receivable$143,445 $215,827 
Unbilled receivables239,774 207,155 
Long-term unbilled receivables132,147 113,278 
$515,366 $536,260 
(in thousands)September 30, 2020December 31, 2019
Accounts receivable$137,953 $199,720 
Unbilled receivables208,823 180,219 
Long-term unbilled receivables108,456 121,736 
$455,232 $501,675 
Unbilled receivables
Unbilled receivables are client committedclient-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables areby 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 years80,980 22 %
2-5 years51,167 14 %
$371,921 100 %
(Dollars in thousands)September 30, 2020
1 year or less$208,823 66 %
1-2 years91,325 29 %
2-5 years17,131 %
$317,279 100 %
Unbilled receivables based uponby contract effective date:
(Dollars in thousands)September 30, 2020
2020$105,380 33 %
201999,875 32 %
201839,281 12 %
201737,824 12 %
2016 and prior34,919 11 %
$317,279 100 %
(Dollars in thousands)September 30, 2021
2021$168,237 45 %
2020109,904 29 %
201947,058 13 %
201822,169 %
2017 and prior24,553 %
$371,921 100 %
Major clients
Clients accounting for 10% or more of the Company’s total receivables:
September 30, 20202021December 31, 20192020
Client A1112 %*
* Client accounted for less than 10% of total receivables.
Contract assets and deferred revenue
(in thousands)September 30, 2020December 31, 2019
Contract assets (1)
$8,104 $5,558 
Long-term contract assets (2)
5,579 5,420 
13,683 10,978 
Deferred revenue181,680 190,080 
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 committedclient-committed amounts for which revenue recognized exceeds the amount billed to the client, and the right to paymentbilling is subject to conditions other than the passage of time, such as the completion ofcompleting a related performance obligation.
(in thousands)September 30, 2021December 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
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, 2021December 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, 20202021 was primarily due to new billings in advance of revenue recognition, and $170.5offset by $212.0 million of revenue recognized during the period that was included in deferred revenue atas of December 31, 2019.2020.
10

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 5. DEFERRED COMMISSIONS
(in thousands)September 30, 2020December 31, 2019
Deferred commissions (1)
$87,992 $85,314 
(in thousands)September 30, 2021December 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)2021202020212020
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
Goodwill
Change in goodwill:
Nine Months Ended
September 30,
(in thousands)2021
January 1,$79,231 
Acquisition2,701 
Currency translation adjustments22 
September 30,$81,954 
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
September 30, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,163 $(56,988)$6,175 
Technology2-10 years67,142 (58,273)8,869 
Other1-5 years5,361 (5,361)— 
$135,666 $(120,622)$15,044 
(1) Included in other long-term assets.
December 31, 2020
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,168 $(55,877)$7,291 
Technology2-10 years64,843 (56,386)8,457 
Other1-5 years5,361 (5,361)— 
$133,372 $(117,624)$15,748 
(1) Included in other long-term assets.
10
11

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2020201920202019
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)2021202020212020
Cost of revenue$629 $647 $1,887 $1,940 
Selling and marketing373 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 
20223,886 
20233,618 
20242,849 
20252,509 
2026 and thereafter1,201 
$15,044 

NOTE 7. LEASES
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.
New Waltham Office
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)2021202020212020
Fixed lease costs (1)
$(3,108)$5,172 $(6,780)$14,933 
Short-term lease costs542 422 1,516 1,248 
Variable lease costs1,099 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, 2021December 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 sellingother long-term assets.
(2) Included in other current liabilities.
12

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, 2021December 31, 2020
Weighted-average remaining lease term7.8 years4.7 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 
20229,948 
202319,607 
202416,482 
202513,607 
20269,866 
Thereafter48,515 
Total lease payments118,986 
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)20212020
Cash paid for leases$14,403 $15,503 
Right of use assets recognized for new leases and amendments (non-cash)$54,716 $24,276 
6.NOTE 8. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no requiredNo 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 
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of 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 commencingbeginning 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 Notenoteholders 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 timeon the redemption date, until the Company pays suchthe redemption price in full)price).
As of September 30, 2020, no2021, the Notes were not eligible for conversion at the noteholders’ election.conversion.
13

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of 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 integrala multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental changeFundamental 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.
11

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Impact of the Notes
In accountingThe 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 beenwere 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 costsUpon adoption of $14.5 million related toASU 2020-06, the book value of the Notes allocatedincreased 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 amountvalue of the liabilityNotes 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, 2021December 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)2020201920202019
Contractual interest expense (0.75% coupon)$1,125 $$2,700 $
Amortization of debt discount (1)
3,807 9,060 
Amortization of issuance costs (1)
565 1,345 
$5,497 $$13,105 $
(1) Amortized based upon an effective interest rate of 4.31%.
Future payments of principal and contractual interest:
September 30, 2020
(in thousands)PrincipalInterestTotal
2020$$$
20214,500 4,500 
20224,500 4,500 
20234,500 4,500 
20244,500 4,500 
2025600,000 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)2021202020212020
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 costs677 565 2,025 1,345 
$1,802 $5,497 $5,400 $13,105 
1214

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



The effective interest rate for the Notes:
Nine Months Ended
September 30,
20212020
Weighted-average effective interest rate1.2 %4.3 %
Future payments of principal and contractual interest:
September 30, 2021
(in thousands)PrincipalInterestTotal
Remainder of 2021$— $— $— 
2022— 4,500 4,500 
2023— 4,500 4,500 
2024— 4,500 4,500 
2025600,000 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 Transactionsinstruments 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 withfollowing 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 adjustment19,816 
Balance as of September 30,$71,716 
capped call transactions:
Nine Months Ended
September 30,
(in thousands)20212020
January 1,$83,597 $— 
Issuance— 51,900 
Fair value adjustment(7,543)19,816 
September 30,$76,054 $71,716 
Credit facility
In November 2019, and as amended inas of February 2020, July 2020, and OctoberSeptember 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, 20202021 and December 31, 2019, we2020, the Company had 0no outstanding borrowings under the Credit Facility.

7.
15

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 ofwhen 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 theincluding observable public companies and transaction priceprices and other unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
The Company’s assetsAssets and liabilities measured at fair value on a recurring basis:
September 30, 2020December 31, 2019
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents (1)
$212,917 $$$212,917 $$$$
Marketable securities$$186,810 $$186,810 $$$$
Capped Call Transactions (2) (3)
$$71,716 $$71,716 $$$$
Venture investments (2) (4)
$$$7,927 $7,927 $$$4,871 $4,871 
September 30, 2021December 31, 2020
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
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.
13

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



ChangeChanges in venture investments:
(in thousands)Nine Months Ended
September 30, 2020
December 31, 2019$4,871 
New investments3,006 
Sales of investments(1,424)
Fair value adjustment1,474 
September 30, 2020$7,927 

Nine Months Ended
September 30,
(in thousands)20212020
January 1,$8,345 $4,871 
New investments500 3,006 
Sales of investments(400)(1,424)
Changes in foreign exchange rates(52)— 
Changes in fair value:
included in other income100 1,374 
included in other comprehensive income1,220 100 
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 relativelythese 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.
16
8. REVENUE
Geographic revenue
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2020201920202019
U.S.$120,971 53 %$123,447 57 %$436,199 61 %$347,120 55 %
Other Americas10,737 %11,748 %35,009 %49,450 %
United Kingdom (“U.K.”)25,150 11 %23,034 11 %68,246 %64,269 10 %
Europe (excluding U.K.), Middle East, and Africa39,656 18 %34,761 16 %106,472 15 %102,342 16 %
Asia-Pacific29,437 13 %23,713 11 %72,991 10 %71,660 11 %
$225,951 100 %$216,703 100 %$718,917 100 %$634,841 100 %
Revenue streams
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2020201920202019
Perpetual license$3,852 $9,016 $16,568 $43,286 
Term license35,932 48,989 170,455 122,257 
Revenue recognized at a point in time39,784 58,005 187,023 165,543 
Maintenance74,670 70,371 220,587 207,406 
Pega Cloud54,776 35,153 147,080 94,610 
Consulting56,721 53,174 164,227 167,282 
Revenue recognized over time186,167 158,698 531,894 469,298 
$225,951 $216,703 $718,917 $634,841 

14

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



(in thousands)Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Pega Cloud$54,776 $35,153 $147,080 $94,610 
Maintenance74,670 70,371 220,587 207,406 
Term license35,932 48,989 170,455 122,257 
Subscription (1)
165,378 154,513 538,122 424,273 
Perpetual license3,852 9,016 16,568 43,286 
Consulting56,721 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)2021202020212020
U.S.$132,016 52 %$120,971 53 %$515,881 58 %$436,199 61 %
Other Americas17,510 %10,737 %43,469 %35,009 %
United Kingdom (“U.K.”)25,982 10 %25,150 11 %86,747 10 %68,246 %
Europe (excluding U.K.), Middle East, and Africa46,306 18 %39,656 18 %143,763 15 %106,472 15 %
Asia-Pacific34,454 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)2021202020212020
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Maintenance83,188 74,670 237,531 220,587 
Consulting56,416 56,721 166,270 164,227 
Revenue recognized over time217,973 186,167 623,321 531,894 
Perpetual license2,874 3,852 20,922 16,568 
Term license35,421 35,932 251,226 170,455 
Revenue recognized at a point in time38,295 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,
2021202020212020
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Client Cloud118,609 110,602 488,757 391,042 
Maintenance83,18874,670237,531220,587
Term license35,42135,932251,226170,455
Cloud subscription (1)
196,978 165,378 708,277 538,122 
Perpetual license2,874 3,852 20,922 16,568 
Consulting56,416 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 licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$8,708 $50,788 $170,643 $211,661 $14,977 $456,777 54 %
1-2 years1,700 5,341 40,631 157,500 2,042 207,214 25 %
2-3 years7,052 18,277 93,283 770 119,382 14 %
Greater than 3 years9,597 44,363 653 54,617 %
$10,408 $63,185 $239,148 $506,807 $18,442 $837,990 100 %
As of September 30, 2021:
Pega CloudClient CloudConsultingTotal
(Dollars in thousands)MaintenanceTerm licensePerpetual license
1 year or less$284,359 $196,667 $49,265 $15,686 $31,673 $577,650 56 %
1-2 years177,214 59,360 16,872 1,064 6,561 261,071 25 %
2-3 years79,775 37,734 420 4,094 5,165 127,188 12 %
Greater than 3 years30,113 33,935 245 2,127 1,697 68,117 %
$571,461 $327,696 $66,802 $22,971 $45,096 $1,034,026 100 %
17

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019
(Dollars in thousands)Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$7,689 $25,948 $158,220 $133,785 $13,145 $338,787 56 %
1-2 years853 3,798 18,590 105,081 863 129,185 21 %
2-3 years1,306 591 8,323 72,915 841 83,976 14 %
Greater than 3 years85 4,959 51,591 56,635 %
$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)2020201920202019
Cost of revenue$5,100 $4,787 $15,636 $14,216 
Selling and marketing12,658 8,317 33,968 24,055 
Research and development5,765 4,858 17,066 13,990 
General and administrative4,402 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 CloudClient CloudConsultingTotal
(Dollars in thousands)MaintenanceTerm licensePerpetual license
1 year or less$211,661 $170,643 $50,788 $8,708 $14,977 $456,777 54 %
1-2 years157,500 40,631 5,341 1,700 2,042 207,214 25 %
2-3 years93,283 18,277 7,052 — 770 119,382 14 %
Greater than 3 years44,363 9,597 — 653 54,617 %
$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)2021202020212020
Cost of revenue$5,114 $5,100 $16,889 $15,636 
Selling and marketing13,376 12,658 41,844 33,968 
Research and development6,231 5,765 19,343 17,066 
General and administrative3,974 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 2.22.1 years.
Grants
The Company granted the following stock-based compensation awards:
Nine Months Ended
September 30, 2020
(in thousands)SharesTotal Fair Value
RSUs1,026 $92,456 
Non-qualified stock options1,886 $44,505 
Common stock$701 
Nine Months Ended
September 30, 2021
(in thousands)SharesTotal Fair Value
Restricted stock units819 $106,286 
Non-qualified stock options1,472 $55,643 
Common stock$601 

15

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)2021202020212020
(Benefit from) income taxes$(24,826)$(25,053)$(54,360)$(61,182)
Effective income tax benefit rate0068 %48 %

Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2020201920202019
(Benefit from) income taxes$(25,053)$(17,520)$(61,182)$(43,158)
Effective income tax rate48 %32 %
DuringThe 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 the2020. The most significant discrete items were excess tax benefits from stock-based compensation and a carryback claim benefit as a resultthe 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.
18

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)2020201920202019
Net (loss)$(19,267)$(30,338)$(65,379)$(91,351)
Weighted-average common shares outstanding80,537 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)2021202020212020
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
Weighted-average common shares outstanding81,526 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 whichshares underlying the conversion value exceeds the aggregated principal amount of the Notes is includedoptions in the diluted earnings per share computation underCompany’s Notes are included using the treasury stock method. Theif-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) CertainThe 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-lookingForward-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 offrom 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 customersfor tomorrow. Our clients are able to make better decisions and processget 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 roboticintelligent automation technology,on applications built on the low-code, cloud-native Pega Platform™, enabling our unified low-codeclients 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 businessesExpress™ 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.
20


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 tomay experience lower revenue growth and lower operating cash flow growth or negative cash flow. TheOperating performance and the actual mix of perpetual license, term license,revenue and Pega Cloudnew arrangements in a giveneach 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 informationCoronavirus (“COVID-19”)
As of September 30, 2021, COVID-19 has not had a material impact on the transition’s impact can be found below andour 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.
17


Performance metrics
We utilize severaluse 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, 20192020
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. WeACV. ACV is a performance measure that we believe the presentation of ACV on a constant currency basis enhances the understanding ofprovides useful information to our results, as it provides visibility into the impact of changes in foreignmanagement and investors, particularly during our Cloud Transition.
pega-20210930_g1.gif
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.
21


Remaining performance obligations (“Backlog”) | Increased 38%23% since September 30, 20192020
Backlog represents contractedexpected future revenue that has not yet been recognized and includes deferred revenue andfrom 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.
pega-20200930_g1.jpg
18


pega-20200930_g2.jpgpega-20200930_g3.jpgpega-20210930_g2.gif
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 withfollowing 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 regardingabout 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. “SignificantSignificant 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 revenueRevenue growth has been slower because of this transition. Revenue from Pega Cloud and maintenance arrangements is generallytypically recognized over the contract term while revenue from perpetual and term licenseslicense 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,
ChangeNine Months Ended
September 30,
Change
2020201920202019
Pega Cloud$54,776 24 %$35,153 16 %$19,623 56 %$147,080 20 %$94,610 15 %$52,470 55 %
Maintenance74,670 33 %70,371 32 %4,299 %220,587 31 %207,406 33 %13,181 %
Term license35,932 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 %$538,122 75 %$424,273 67 %113,849 27 %
Perpetual license3,852 %9,016 %(5,164)(57)%16,568 %43,286 %(26,718)(62)%
Consulting56,721 25 %53,174 25 %3,547 %164,227 23 %167,282 26 %(3,055)(2)%
$225,951 100 %$216,703 100 %$9,248 %$718,917 100 %$634,841 100 %$84,076 13 %
typically upfront.
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2021202020212020
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 %$488,757 54 %$391,042 55 %$97,715 25 %
Maintenance83,18832%74,67033%8,51811%237,53126%220,58731%16,9448%
Term license35,42114%35,93216%(511)(1)%251,22628%170,45524%80,77147%
Cloud subscription (1)
$196,978 77 %$165,378 73 %$31,600 19 %$708,277 79 %$538,122 75 %$170,155 32 %
Perpetual license2,874 %3,852 %(978)(25)%20,922 %16,568 %4,354 26 %
Consulting56,416 22 %56,721 25 %(305)(1)%166,270 19 %164,227 23 %2,043 %
$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, 20202021 generally reflect our Cloud Transition. Other factors impacting our revenue included:include:
TermThe increases in perpetual and term license revenue was higherwere primarily due to several large software license contracts recognized in revenue in the threenine 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 suchmulti-year committed maintenance arrangements, a greaterlarger portion of the total contract value is recordedrecognized as maintenance revenue which is recognized over the contract term rather than as term revenue, asupon 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, 20202021, 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, 20202021, 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 overof 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,
ChangeNine Months Ended
September 30,
Change
(Dollars in thousands)2020201920202019
Software license$39,093 98 %$57,329 99 %$(18,236)(32)%$184,669 99 %$162,561 98 %$22,108 14 %
Maintenance69,192 93 %63,683 90 %5,509 %203,942 92 %188,091 91 %15,851 %
Pega Cloud35,059 64 %17,329 49 %17,730 102 %90,842 62 %46,841 50 %44,001 94 %
Consulting4,808 %(2,536)(5)%7,344 *5,446 %4,933 %513 10 %
$148,152 66 %$135,805 63 %$12,347 %$484,899 67 %$402,426 63 %$82,473 20 %
* not meaningful
The changes in gross profitconsulting revenue in the three and nine months ended September 30, 20202021 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,
ChangeNine Months Ended
September 30,
Change
(Dollars in thousands)2021202020212020
Pega Cloud$52,845 67 %$35,059 64 %$17,786 51 %$147,388 67 %$90,842 62 %$56,546 62 %
Maintenance77,895 94 %69,192 93 %8,703 13 %221,457 93 %203,942 92 %17,515 %
Software license37,639 98 %39,093 98 %(1,454)(4)%270,186 99 %184,669 99 %85,517 46 %
Consulting3,667 %4,808 %(1,141)(24)%5,238 %5,446 %(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 efficiencycost-efficiency gains as Pega Cloud grows and scales.
The increasedecrease in consulting gross profit percent in the three months ended September 30, 20202021 was primarily due to an increasea 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,
ChangeNine Months Ended
September 30,
Change
2020201920202019
% 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 %$14,843 %$3,064 21 %$49,192 %$41,693 %$7,499 18 %
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2021202020212020
% 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 %$191,565 21 %$177,620 25 %$13,945 %
General and administrative$20,176 %$17,907 %$2,269 13 %$57,607 %$49,192 %$8,415 17 %
The increases in selling and marketing in the three and nine months ended September 30, 20202021 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 increasesincrease in headcount reflectreflects 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, 20202021 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, 20202021 were primarily due to increases in compensation and benefits of $0.8$0.4 million and $3.0$3.8 million, attributedattributable 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,
ChangeNine Months Ended
September 30,
Change
2020201920202019
Foreign currency transaction gain (loss)$4,236 $(1,970)$6,206 *$2,545 $(3,577)$6,122 *
Interest income243 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 transactions18,989 — 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,
ChangeNine Months Ended
September 30,
Change
2021202020212020
Foreign currency transaction gain (loss)$518 $4,236 $(3,718)(88)%$(4,983)$2,545 $(7,528)*
Interest income166 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— *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, 20202021 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 payablesbalances 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, 20202021 were primarily due to the decreasesdeclines in market interest rates.
The increasesdecreases in interest expense in the three and nine months ended September 30, 20202021 were primarily due to our issuanceadoption of $600 million in aggregate principal amount of the NotesASU 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,
ChangeNine Months Ended
September 30,
ChangeThree Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
(in thousands)(in thousands)2020201920202019(in thousands)2021202020212020
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 discountAmortization of debt discount3,807 — 3,807 9,060 — 9,060 Amortization of debt discount— 3,807 (3,807)— 9,060 (9,060)
Amortization of issuance costsAmortization of issuance costs565 — 565 1,345 — 1,345 Amortization of issuance costs677 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 increasesdecreases in the gain(loss) income on capped call transactions in the three and nine months ended September 30, 20202021, were due to fair value adjustments on the Capped Call Transactions entered intodriven 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 increasedecrease in other income, net in the nine months ended September 30, 20202021, was due to a gain fromlarger fair value adjustments on equity securities held in our venture investments portfolio.portfolio in the nine months ended September 30, 2020.
2124


(Benefit from) income taxes
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2020201920202019
(Benefit from) income taxes$(25,053)$(17,520)$(61,182)$(43,158)
Effective income tax rate48 %32 %
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)2021202020212020
(Benefit from) income taxes$(24,826)$(25,053)$(54,360)$(61,182)
Effective income tax benefit rate68 %48 %
During the nine months ended September 30, 2020,2021, the change in our effective income tax benefit rate benefit increasedwas 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 resultthe 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)20212020
Cash provided by (used in):
Operating activities$(5,321)$(26,257)
Investing activities42,730 (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)$212,855 
Nine Months Ended
September 30,
 (in thousands)20202019
Cash provided by (used in):
Operating activities$(26,257)$(13,462)
Investing activities(210,701)53,448 
Financing activities449,630 (61,941)
Effect of exchange rates on cash and cash equivalents183 (363)
Net increase (decrease) in cash and cash equivalents$212,855 $(22,318)

(in thousands)(in thousands)September 30, 2020December 31, 2019(in thousands)September 30, 2021December 31, 2020
Held by U.S. entitiesHeld by U.S. entities$415,358 $23,437 Held by U.S. entities$267,378 $399,138 
Held by foreign entitiesHeld by foreign entities52,670 44,926 Held by foreign entities84,470 66,030 
Total cash, cash equivalents, and marketable securitiesTotal cash, cash equivalents, and marketable securities$468,028 $68,363 Total cash, cash equivalents, and marketable securities$351,848 $465,168 
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 requiredneeded to respond to the possible increased demand forsupport our services.operations. If we require additional capital resources to grow our business, we may seek to finance our operations fromutilize available funds or additional external financing.
If it becamebecomes necessary to repatriate foreign funds, we may be requiredhave 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) operatingOperating 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, 20202021 was primarily due to a significant increase in client collections.
Corporate headquarters
In February 2021, we agreed to accelerate our Cloud Transitionexit 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.
New Waltham Office
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 offeringlease liabilities and selling and marketing activities to support future growth.

lease-related right of use assets by $42.1 million on August 1, 2021.
2225


Cash (used in) provided by investingInvesting activities
The change in cash provided by (used in) provided by investing activities in the nine months ended September 30, 20202021 was primarily driven by purchases ofinvestments in financial instruments, an acquisition,and investmentsa decrease in property and equipment at several of our office locations.space related capital expenditures.
Cash provided by (used in) financingFinancing activities
Convertible senior notesDebt financing
In February 2020, we issued $600 million in aggregate principal amount of our convertible senior notes (“Notes”) duewhich mature on March 1, 2025, which provided proceeds as follows:
(in thousands)Amount
Principal$600,000 
Less: issuance costs(14,527)
Less: Capped Call Transactions(51,900)
$533,573 
A portion of the proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes. See "6. Debt" in Item 1 of this Quarterly Report for additional information.
Credit facility
2025. In November 2019, and as amended inas of February 2020, July 2020, and OctoberSeptember 2020, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”).Association. As of September 30, 2020,2021, we had no outstanding borrowings under the Credit Facility. See "6."Note 8. Debt" in Item 1 of this Quarterly Report for additional information.
Stock repurchase program(1)
Changes in the remaining stock repurchase authority:
(in thousands)Nine Months Ended
September 30, 20202021
December 31, 20192020$45,48437,726 
Authorizations (2)(1)
20,51638,467 
Repurchases(2)
(18,828)(32,188)
September 30, 20202021$47,17244,005 
(1) Purchases under this program have been made on the open market. (2) On June 15, 2020,8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 20212022 and increased the remaining common stock repurchase authority to $60 million.
(2) All purchases under this program have been made on the open market.
Common stock repurchases
Nine Months Ended
September 30,
20202019
(in thousands)SharesAmountSharesAmount
Tax withholdings for net settlement of equity awards599 $59,613 514 $34,871 
Stock repurchase program204 18,828 321 20,286 
803 $78,441 835 $55,157 

Nine Months Ended
September 30,
20212020
(in thousands)SharesAmountSharesAmount
Tax withholdings for net settlement of equity awards462 $59,819 599 $59,613 
Stock repurchase program248 32,188 204 18,828 
710 $92,007 803 $78,441 
During the nine months ended September 30, 20202021 and 2019,2020, instead of receiving cash from the equity holders, we withheld shares with a value of $49.5$47.1 million and $31.6$49.5 million, respectively, for the exercise price of options. These amounts have been excluded fromare not included in the table above.
Dividends
Nine Months Ended
September 30,
(in thousands)20202019
Dividend payments to shareholders$7,206 $7,105 
We currently intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program at any time without prior notice.
Nine Months Ended
September 30,
(in thousands)20212020
Dividend payments to stockholders$7,310 $7,206 
23


Contractual obligations
As of September 30, 2020,2021, our contractual obligations were:
Payments due by period
(in thousands)202020212022-20232024-20252026 and thereafterOtherTotal
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 obligations5,490 22,887 43,888 13,187 9,959 — 95,411 
$27,417 $80,076 $105,005 $13,360 $9,959 $5,441 $241,258 
Payments due by period
(in thousands)Remainder of 202120222023202420252026 and thereafterOtherTotal
Convertible senior notes (1)
$— $4,500 $4,500 $4,500 $601,488 $— $— $614,988 
Purchase obligations (2)
7,386 64,810 18,361 5,271 429 — — 96,257 
Operating lease obligations961 9,948 19,607 16,482 13,607 58,381 — 118,986 
Liability for uncertain tax positions (3)
— — — — — — 1,677 1,677 
$8,347 $79,258 $42,468 $26,253 $615,524 $58,381 $1,677 $831,908 
(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(2) Represents the maximum funding that would be expected under existing venture investment agreements. Our investment agreements generally allow us to withhold unpaid committed funds at our discretion.
(3) We are unable to reasonably estimate the timing of thethis cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
26


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk representsis the risk of loss that may affect us due tofrom adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our foreigninternational operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in the following impact:
Nine Months Ended
September 30,
20202019
(Decrease) increase in revenue(4)%(4)%
(Decrease) increase in net (loss)(13)%(6)%
have resulted in:
Nine Months Ended
September 30,
20212020
(Decrease) increase in revenue(4)%(4)%
(Decrease) increase in net (loss)(9)%(13)%
Remeasurement risk
We experience fluctuations in transaction gains orand losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, and cash equivalents, accounts receivable, unbilled receivables, and intercompany receivables and payablesbalances held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would resulthave resulted in the following impact:
Nine Months Ended
September 30,
(in thousands)20202019
Foreign currency gain (loss)$(6,326)$1,099 

Nine Months Ended
September 30,
(in thousands)20212020
Foreign currency gain (loss)$(4,480)$(6,326)
ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2020.2021. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2020.
24


2021.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 20202021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
COVID-19
In response to COVID-19, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures. However, those changes have so far not been material.
2527


PART II - OTHER INFORMATION
ITEM 1A.     RISK FACTORS
We encourage you to carefully consider the risk factors identified below and in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the U.S. Securities and Exchange Commission on February 12, 2020.Commission. These risk factors could materially affect our business, financial condition, and future results, and they couldmay cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.
Coronavirus (“COVID-19”)
Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.
The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemics pose the risk that our employees, partners, and clients may be prevented from conducting business activities at full capacity for an indefinite period, including due to the spread of the disease within these groups or due to the shutdowns that are requested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending and may adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of their contracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.
We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorld conference and encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implement them without adversely affecting our business operations.
We continue to monitor the situation, and adjust our policies as more information and public health guidance become available. Precautionary measures that have been adopted, or may be adopted in the future, could negatively affect our client success efforts, sales, and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 may disrupt our clients’, vendors’, and partners’ operations for an indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.
At this time, it is not possible to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods. The extent to which COVID-19 impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to predict accurately, including:
the duration and scope of the pandemic;
governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;
the actions taken in response to economic disruption;
the impact of business disruptions and reductions in our clients’ business and the resulting impact on their demand for our services and solutions; and
our ability to provide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of offices and facilities.
Risks related to our Convertible Senior Notes
We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results.
As of September 30, 2020, we had $600 million aggregate principal amount of indebtedness under our Convertible Senior Notes due 2025 (the “Notes”).
Our indebtedness may:
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other business purposes;
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general business purposes;
require us to use a substantial portion of our cash flow from operations to make debt service payments;
limit our flexibility to plan for, or react to, changes in our business and industry;
place us at a competitive disadvantage compared to our less leveraged competitors;
dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and
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increase our vulnerability to the impact of adverse economic and industry conditions.
Our ability to pay our debt when due or refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, result in that and our other indebtedness becoming immediately payable in full. In addition, we may incur additional debt to meet future financing needs. If we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness will increase.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
Under certain circumstances, the noteholders may convert their Notes at their option prior to the scheduled maturities. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020, between U.S. Bank National Association, as trustee (the “Trustee”) and us (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and we currently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Notes when the Indenture requires the repurchase or to pay any cash payable on future conversions of the Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material impact on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record non-cash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock, and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, the number of common stock shares that would be necessary to settle such excess, if we elected to settle such excess in shares, is included in the denominator to calculate diluted earnings per share. We cannot be sure that the accounting standards will continue to permit the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, our diluted earnings per share could be adversely affected.
The Capped Call Transactions may affect the value of the Notes and our common stock.
In connection with the Notes’ issuance, we entered into Capped Call Transactions with certain financial institutions (“option counterparties”). The Capped Call Transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the option counterparties that are parties to the Capped Call Transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
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We are subject to counterparty risk with respect to the Capped Call Transactions.
The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure depends on many factors, but our exposure will generally increase if the market price or the volatility of our common stock increases. In addition, upon default or other failures to perform, or termination of obligations, by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Provisions in the Notes’ Indenture may deter or prevent a business combination that may be favorable to our stockholders.
If a fundamental change occurs prior to the Notes’ maturity date, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.
Conversion of the Notes may dilute the ownership interest of existing stockholders.
The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect our common stock’s prevailing market prices. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of equity securities
Common stock repurchased in the three months ended September 30, 2020 was:
(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, 2020135$109.36 42$53,470 
August 1, 2020 - August 31, 2020162$120.08 26$50,321 
September 1, 2020 - September 30, 2020138$124.88 26$47,172 
435$118.29 94
2021:
(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, 2021 - July 31, 202146$135.62 31$52,603 
August 1, 2021 - August 31, 2021167130.67 34$48,204 
September 1, 2021 - September 30, 2021160138.24 31$44,005 
373$134.52 96
(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2) On June 15, 2020,8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 20212022 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report for additional information.
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ITEM 6.     EXHIBITS
Exhibit No.Description
3.1
3.2
31.1+
31.2+
32++
10.1+
10.2+
10.3+
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Label Linkbase Document.
101.PREInline XBRL Taxonomy Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
+ Filed herewith.
Exhibit No.DescriptionIncorporation by ReferenceFiled Herewith
FormExhibitFiling Date
3.110-Q3.1November 4, 2014
3.28-K3.2June 15, 2020
10.110-Q10.1July 28, 2021
10.2**8-K10.1July 9, 2021
31.1X
31.2X
32++X
101.INSInline 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.X
101.SCHInline XBRL Taxonomy Extension Schema Document.X
101.CALInline XBRL Taxonomy Calculation Linkbase Document.X
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.X
101.LABInline XBRL Taxonomy Label Linkbase Document.X
101.PREInline XBRL Taxonomy Presentation Linkbase Document.X
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X
++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations.
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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pegasystems Inc.
Dated:October 28, 202027, 2021By:/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief FinancialOperating Officer and Chief AdministrativeFinancial Officer
(Principal Financial Officer)

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