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 March 31, 2022 |
For the quarterly period ended March 31, 2021
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)
____________________________
| | | | | | | | | | | | | | | | | | | | | | | |
Massachusetts | 04-2787865 |
(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 class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | PEGA | NASDAQ Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 81,281,72681,818,454 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on April 19, 2021.2022.
PEGASYSTEMS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| Page |
PART I - FINANCIAL INFORMATION |
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Item 1. Financial Statements | |
Unaudited Condensed Consolidated Balance Sheets as of March 31, 20212022 and December 31, 20202021 | |
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 20212022 and 20202021 | |
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three months ended March 31, 20212022 and 20202021 | |
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 20212022 and 20202021 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20212022 and 20202021 | |
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 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 5. Other Information | |
Item 6. Exhibits | |
| |
Signature | |
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) |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 172,708 | | | $ | 171,899 | | Cash and cash equivalents | $ | 132,771 | | | $ | 159,965 | |
Marketable securities | Marketable securities | 269,650 | | | 293,269 | | Marketable securities | 199,401 | | | 202,814 | |
Total cash, cash equivalents, and marketable securities | Total cash, cash equivalents, and marketable securities | 442,358 | | | 465,168 | | Total cash, cash equivalents, and marketable securities | 332,172 | | | 362,779 | |
Accounts receivable | Accounts receivable | 159,324 | | | 215,827 | | Accounts receivable | 171,181 | | | 182,717 | |
Unbilled receivables | Unbilled receivables | 228,603 | | | 207,155 | | Unbilled receivables | 226,052 | | | 226,714 | |
Other current assets | Other current assets | 91,868 | | | 88,760 | | Other current assets | 74,408 | | | 68,008 | |
Total current assets | Total current assets | 922,153 | | | 976,910 | | Total current assets | 803,813 | | | 840,218 | |
Unbilled receivables | Unbilled receivables | 108,048 | | | 113,278 | | Unbilled receivables | 135,975 | | | 129,789 | |
Goodwill | Goodwill | 82,037 | | | 79,231 | | Goodwill | 82,031 | | | 81,923 | |
Other long-term assets | Other long-term assets | 416,265 | | | 434,843 | | Other long-term assets | 516,661 | | | 541,601 | |
Total assets | Total assets | $ | 1,528,503 | | | $ | 1,604,262 | | Total assets | $ | 1,538,480 | | | $ | 1,593,531 | |
Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | | | Liabilities and stockholders’ equity | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 24,426 | | | $ | 24,028 | | Accounts payable | $ | 18,628 | | | $ | 15,281 | |
Accrued expenses | Accrued expenses | 59,765 | | | 59,261 | | Accrued expenses | 63,401 | | | 63,890 | |
Accrued compensation and related expenses | Accrued compensation and related expenses | 59,490 | | | 123,012 | | Accrued compensation and related expenses | 54,804 | | | 120,946 | |
Deferred revenue | Deferred revenue | 244,170 | | | 232,865 | | Deferred revenue | 290,873 | | | 275,844 | |
Other current liabilities | Other current liabilities | 16,599 | | | 20,969 | | Other current liabilities | 7,309 | | | 9,443 | |
Total current liabilities | Total current liabilities | 404,450 | | | 460,135 | | Total current liabilities | 435,015 | | | 485,404 | |
Convertible senior notes, net | Convertible senior notes, net | 588,418 | | | 518,203 | | Convertible senior notes, net | 591,440 | | | 590,722 | |
Operating lease liabilities | Operating lease liabilities | 36,471 | | | 59,053 | | Operating lease liabilities | 90,699 | | | 87,818 | |
Other long-term liabilities | Other long-term liabilities | 20,239 | | | 24,699 | | Other long-term liabilities | 14,658 | | | 13,499 | |
Total liabilities | Total liabilities | 1,049,578 | | | 1,062,090 | | Total liabilities | 1,131,812 | | | 1,177,443 | |
Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | 0 | | 0 |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Preferred stock, 1,000 shares authorized; NaN issued | 0 | | | 0 | | |
Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 812 | | | 809 | | |
Preferred stock, 1,000 shares authorized; none issued | | Preferred stock, 1,000 shares authorized; none issued | — | | | — | |
Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 818 | | | 817 | |
Additional paid-in capital | Additional paid-in capital | 140,558 | | | 204,432 | | Additional paid-in capital | 141,771 | | | 145,810 | |
Retained earnings | Retained earnings | 340,223 | | | 339,879 | | Retained earnings | 273,615 | | | 276,449 | |
Accumulated other comprehensive (loss) | Accumulated other comprehensive (loss) | (2,668) | | | (2,948) | | Accumulated other comprehensive (loss) | (9,536) | | | (6,988) | |
Total stockholders’ equity | Total stockholders’ equity | 478,925 | | | 542,172 | | Total stockholders’ equity | 406,668 | | | 416,088 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 1,528,503 | | | $ | 1,604,262 | | Total liabilities and stockholders’ equity | $ | 1,538,480 | | | $ | 1,593,531 | |
See notes to unaudited condensed consolidated financial statements.
| 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 March 31, | | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Revenue | Revenue | | | | | Revenue | | | | |
Software license | | $ | 116,961 | | | $ | 93,916 | | |
Maintenance | | 75,561 | | | 73,695 | | |
Pega Cloud | | 67,858 | | | 43,466 | | |
Subscription services | | Subscription services | | $ | 170,033 | | | $ | 143,419 | |
Subscription license | | Subscription license | | 137,533 | | | 111,509 | |
Perpetual license | | Perpetual license | | 7,440 | | | 5,452 | |
Consulting | Consulting | | 53,119 | | | 54,514 | | Consulting | | 61,301 | | | 53,119 | |
Total revenue | Total revenue | | 313,499 | | | 265,591 | | Total revenue | | 376,307 | | | 313,499 | |
Cost of revenue | Cost of revenue | | | Cost of revenue | | |
Software license | | 650 | | | 684 | | |
Maintenance | | 5,786 | | | 5,576 | | |
Pega Cloud | | 22,557 | | | 17,533 | | |
Subscription services | | Subscription services | | 32,030 | | | 28,343 | |
Subscription license | | Subscription license | | 622 | | | 620 | |
Perpetual license | | Perpetual license | | 34 | | | 30 | |
Consulting | Consulting | | 53,454 | | | 55,735 | | Consulting | | 55,511 | | | 53,454 | |
Total cost of revenue | Total cost of revenue | | 82,447 | | | 79,528 | | Total cost of revenue | | 88,197 | | | 82,447 | |
Gross profit | Gross profit | | 231,052 | | | 186,063 | | Gross profit | | 288,110 | | | 231,052 | |
Operating expenses | Operating expenses | | | Operating expenses | | |
Selling and marketing | Selling and marketing | | 148,739 | | | 136,024 | | Selling and marketing | | 162,236 | | | 148,739 | |
Research and development | Research and development | | 62,442 | | | 58,727 | | Research and development | | 71,490 | | | 62,442 | |
General and administrative | General and administrative | | 18,270 | | | 15,630 | | General and administrative | | 35,764 | | | 18,270 | |
Total operating expenses | Total operating expenses | | 229,451 | | | 210,381 | | Total operating expenses | | 269,490 | | | 229,451 | |
Income (loss) from operations | | 1,601 | | | (24,318) | | |
Foreign currency transaction (loss) | | (5,098) | | | (5,947) | | |
Income from operations | | Income from operations | | 18,620 | | | 1,601 | |
Foreign currency transaction gain (loss) | | Foreign currency transaction gain (loss) | | 2,876 | | | (5,098) | |
Interest income | Interest income | | 153 | | | 607 | | Interest income | | 207 | | | 153 | |
Interest expense | Interest expense | | (1,880) | | | (2,306) | | Interest expense | | (1,946) | | | (1,880) | |
(Loss) on capped call transactions | (Loss) on capped call transactions | | (19,117) | | | (18,592) | | (Loss) on capped call transactions | | (30,560) | | | (19,117) | |
Other income, net | Other income, net | | 106 | | | 1,374 | | Other income, net | | 2,741 | | | 106 | |
(Loss) before (benefit from) income taxes | (Loss) before (benefit from) income taxes | | (24,235) | | | (49,182) | | (Loss) before (benefit from) income taxes | | (8,062) | | | (24,235) | |
(Benefit from) income taxes | (Benefit from) income taxes | | (17,618) | | | (23,810) | | (Benefit from) income taxes | | (7,683) | | | (17,618) | |
Net (loss) | Net (loss) | | $ | (6,617) | | | $ | (25,372) | | Net (loss) | | $ | (379) | | | $ | (6,617) | |
(Loss) per share | (Loss) per share | | | | | (Loss) per share | | | | |
Basic | Basic | | $ | (0.08) | | | $ | (0.32) | | Basic | | $ | 0.00 | | | $ | (0.08) | |
Diluted | Diluted | | $ | (0.08) | | | $ | (0.32) | | Diluted | | $ | 0.00 | | | $ | (0.08) | |
Weighted-average number of common shares outstanding | Weighted-average number of common shares outstanding | | | Weighted-average number of common shares outstanding | | |
Basic | Basic | | 81,004 | | | 79,808 | | Basic | | 81,680 | | | 81,004 | |
Diluted | Diluted | | 81,004 | | | 79,808 | | Diluted | | 81,680 | | | 81,004 | |
See notes to unaudited condensed consolidated financial statements.
| 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 March 31, | | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Net (loss) | Net (loss) | | $ | (6,617) | | | $ | (25,372) | | Net (loss) | | $ | (379) | | | $ | (6,617) | |
Other comprehensive income (loss), net of tax | | | |
Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | | |
Unrealized gain on available-for-sale securities | Unrealized gain on available-for-sale securities | | 1,010 | | | 100 | | Unrealized gain on available-for-sale securities | | 222 | | | 1,010 | |
Foreign currency translation adjustments | Foreign currency translation adjustments | | (730) | | | (514) | | Foreign currency translation adjustments | | (2,770) | | | (730) | |
Total other comprehensive income (loss), net of tax | | 280 | | | (414) | | |
Total other comprehensive (loss) income, net of tax | | Total other comprehensive (loss) income, net of tax | | $ | (2,548) | | | $ | 280 | |
Comprehensive (loss) | Comprehensive (loss) | | $ | (6,337) | | | $ | (25,786) | | Comprehensive (loss) | | $ | (2,927) | | | $ | (6,337) | |
See notes to unaudited condensed consolidated financial statements.
| 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 Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Total Stockholders’ Equity |
| | Number of Shares | | Amount | | | Number of Shares | | Amount | |
December 31, 2019 | 79,599 | | | $ | 796 | | | $ | 140,523 | | | $ | 410,919 | | | $ | (13,228) | | | $ | 539,010 | | |
Equity component of convertible senior notes, net | — | | | — | | | 61,604 | | | — | | | — | | | 61,604 | | |
Repurchase of common stock | (87) | | | (1) | | | (5,999) | | | — | | | — | | | (6,000) | | |
Issuance of common stock for stock compensation plans | 564 | | | 6 | | | (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, 2020 | 80,076 | | | $ | 801 | | | $ | 196,310 | | | $ | 383,142 | | | $ | (13,642) | | | $ | 566,611 | | |
| | December 31, 2020 | December 31, 2020 | 80,890 | | | $ | 809 | | | $ | 204,432 | | | $ | 339,879 | | | $ | (2,948) | | | $ | 542,172 | | December 31, 2020 | 80,890 | | | $ | 809 | | | $ | 204,432 | | | $ | 339,879 | | | $ | (2,948) | | | $ | 542,172 | |
Cumulative-effect adjustment from adoption of ASU 2020-06, net | — | | | — | | | (61,604) | | | 9,399 | | | — | | | (52,205) | | |
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 stock | Repurchase of common stock | (70) | | | (1) | | | (9,145) | | | — | | | — | | | (9,146) | | Repurchase of common stock | (70) | | | (1) | | | (9,145) | | | — | | | — | | | (9,146) | |
Issuance of common stock for stock compensation plans | Issuance of common stock for stock compensation plans | 402 | | | 4 | | | (25,513) | | | — | | | — | | | (25,509) | | Issuance of common stock for stock compensation plans | 402 | | | 4 | | | (25,513) | | | — | | | — | | | (25,509) | |
Issuance of common stock under the employee stock purchase plan | Issuance of common stock under the employee stock purchase plan | 24 | | | — | | | 2,288 | | | — | | | — | | | 2,288 | | Issuance of common stock under the employee stock purchase plan | 24 | | | — | | | 2,288 | | | — | | | — | | | 2,288 | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 30,100 | | | — | | | — | | | 30,100 | | Stock-based compensation | — | | | — | | | 30,100 | | | — | | | — | | | 30,100 | |
Cash dividends declared ($0.03 per share) | Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,438) | | | — | | | (2,438) | | Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,438) | | | — | | | (2,438) | |
Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | 280 | | | 280 | | Other comprehensive income | — | | | — | | | — | | | — | | | 280 | | | 280 | |
Net (loss) | Net (loss) | — | | | — | | | — | | | (6,617) | | | — | | | (6,617) | | Net (loss) | — | | | — | | | — | | | (6,617) | | | — | | | (6,617) | |
March 31, 2021 | March 31, 2021 | 81,246 | | | $ | 812 | | | $ | 140,558 | | | $ | 340,223 | | | $ | (2,668) | | | $ | 478,925 | | March 31, 2021 | 81,246 | | | $ | 812 | | | $ | 140,558 | | | $ | 340,223 | | | $ | (2,668) | | | $ | 478,925 | |
| | December 31, 2021 | | December 31, 2021 | 81,712 | | | $ | 817 | | | $ | 145,810 | | | $ | 276,449 | | | $ | (6,988) | | | $ | 416,088 | |
Repurchase of common stock | | Repurchase of common stock | (242) | | | (2) | | | (22,581) | | | — | | | — | | | (22,583) | |
Issuance of common stock for stock compensation plans | | Issuance of common stock for stock compensation plans | 297 | | | 3 | | | (12,131) | | | — | | | — | | | (12,128) | |
Issuance of common stock under the employee stock purchase plan | | Issuance of common stock under the employee stock purchase plan | 35 | | | — | | | 2,446 | | | — | | | — | | | 2,446 | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 28,227 | | | — | | | — | | | 28,227 | |
Cash dividends declared ($0.03 per share) | | Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,455) | | | — | | | (2,455) | |
Other comprehensive (loss) | | Other comprehensive (loss) | — | | | — | | | — | | | — | | | (2,548) | | | (2,548) | |
Net (loss) | | Net (loss) | — | | | — | | | — | | | (379) | | | — | | | (379) | |
March 31, 2022 | | March 31, 2022 | 81,802 | | | $ | 818 | | | $ | 141,771 | | | $ | 273,615 | | | $ | (9,536) | | | $ | 406,668 | |
|
See notes to unaudited condensed consolidated financial statements.
| 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) |
| | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Operating activities | Operating activities | | | | Operating activities | | | |
Net (loss) | Net (loss) | $ | (6,617) | | | $ | (25,372) | | Net (loss) | $ | (379) | | | $ | (6,617) | |
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities | | |
Adjustments to reconcile net (loss) to cash provided by operating activities | | Adjustments to reconcile net (loss) to cash provided by operating activities | |
Stock-based compensation | Stock-based compensation | 30,100 | | | 23,175 | | Stock-based compensation | 28,227 | | | 30,100 | |
Deferred income taxes | | Deferred income taxes | (9,295) | | | (15,068) | |
Loss on capped call transactions | Loss on capped call transactions | 19,117 | | | 18,592 | | Loss on capped call transactions | 30,560 | | | 19,117 | |
Deferred income taxes | (15,068) | | | (9,231) | | |
Amortization of deferred commissions | Amortization of deferred commissions | 11,496 | | | 8,497 | | Amortization of deferred commissions | 17,221 | | | 11,496 | |
Amortization of debt discount and issuance costs | 673 | | | 1,719 | | |
Lease expense | | Lease expense | 3,919 | | | 3,238 | |
Amortization of intangible assets and depreciation | Amortization of intangible assets and depreciation | 7,006 | | | 4,919 | | Amortization of intangible assets and depreciation | 4,171 | | | 7,006 | |
Amortization of investments | 1,019 | | | 0 | | |
Foreign currency transaction loss | 5,098 | | | 5,947 | | |
Foreign currency transaction (gain) loss | | Foreign currency transaction (gain) loss | (2,876) | | | 5,098 | |
Other non-cash | Other non-cash | (556) | | | 2,478 | | Other non-cash | (1,100) | | | 1,634 | |
Change in operating assets and liabilities, net | Change in operating assets and liabilities, net | (30,618) | | | (49,047) | | Change in operating assets and liabilities, net | (55,332) | | | (34,354) | |
Cash provided by (used in) operating activities | 21,650 | | | (18,323) | | |
Cash provided by operating activities | | Cash provided by operating activities | 15,116 | | | 21,650 | |
Investing activities | Investing activities | | Investing activities | |
Purchases of investments | Purchases of investments | (21,051) | | | (1,490) | | Purchases of investments | (33,690) | | | (21,051) | |
Proceeds from maturities and called investments | Proceeds from maturities and called investments | 40,867 | | | 0 | | Proceeds from maturities and called investments | 20,915 | | | 40,867 | |
Sales of investments | Sales of investments | 2,450 | | | 1,424 | | Sales of investments | 13,350 | | | 2,450 | |
Payments for acquisitions, net of cash acquired | Payments for acquisitions, net of cash acquired | (4,993) | | | 0 | | Payments for acquisitions, net of cash acquired | — | | | (4,993) | |
Investment in property and equipment | Investment in property and equipment | (1,784) | | | (12,496) | | Investment in property and equipment | (6,657) | | | (1,784) | |
Cash provided by (used in) investing activities | 15,489 | | | (12,562) | | |
Cash (used in) provided by investing activities | | Cash (used in) provided by investing activities | (6,082) | | | 15,489 | |
Financing activities | Financing activities | | Financing activities | |
Proceeds from issuance of convertible senior notes | 0 | | | 600,000 | | |
Purchase of capped calls related to convertible senior notes | 0 | | | (51,900) | | |
Payment of debt issuance costs | 0 | | | (14,527) | | |
| Proceeds from employee stock purchase plan | Proceeds from employee stock purchase plan | 2,288 | | | 0 | | Proceeds from employee stock purchase plan | 2,446 | | | 2,288 | |
Dividend payments to stockholders | Dividend payments to stockholders | (2,427) | | | (2,388) | | Dividend payments to stockholders | (2,454) | | | (2,427) | |
| Common stock repurchases | Common stock repurchases | (34,655) | | | (29,011) | | Common stock repurchases | (35,910) | | | (34,655) | |
Cash (used in) provided by financing activities | (34,794) | | | 502,174 | | |
Cash (used in) financing activities | | Cash (used in) financing activities | (35,918) | | | (34,794) | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | (1,536) | | | (1,510) | | Effect of exchange rate changes on cash and cash equivalents | (310) | | | (1,536) | |
Net increase in cash and cash equivalents | 809 | | | 469,779 | | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | (27,194) | | | 809 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 171,899 | | | 68,363 | | Cash and cash equivalents, beginning of period | 159,965 | | | 171,899 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 172,708 | | | $ | 538,142 | | Cash and cash equivalents, end of period | $ | 132,771 | | | $ | 172,708 | |
See notes to unaudited condensed consolidated financial statements.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. The 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, 2020.2021.
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 were eliminated in consolidation. The operating results for the interim periods presented aredo not necessarily indicative ofindicate the expected results expected for the full year 2021.2022.
Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income, or net income.
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”), 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 the separation of 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 and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.
See "Note 8. Debt" for additional information.
NOTE 3. MARKETABLE SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
(in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Government debt | $ | 13,000 | | | $ | 1 | | | $ | 0 | | | $ | 13,001 | | | $ | 39,996 | | | $ | 0 | | | $ | (8) | | | $ | 39,988 | |
Corporate debt | 257,003 | | | 15 | | | (369) | | | 256,649 | | | 253,345 | | | 88 | | | (152) | | | 253,281 | |
| $ | 270,003 | | | $ | 16 | | | $ | (369) | | | $ | 269,650 | | | $ | 293,341 | | | $ | 88 | | | $ | (160) | | | $ | 293,269 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Government debt | $ | 2,000 | | | $ | — | | | $ | (47) | | | $ | 1,953 | | | $ | 2,000 | | | $ | — | | | $ | (10) | | | $ | 1,990 | |
Corporate debt | 200,371 | | | 7 | | | (2,930) | | | 197,448 | | | 201,659 | | | 2 | | | (837) | | | 200,824 | |
| $ | 202,371 | | | $ | 7 | | | $ | (2,977) | | | $ | 199,401 | | | $ | 203,659 | | | $ | 2 | | | $ | (847) | | | $ | 202,814 | |
As of March 31, 2021,2022, marketable securities’ maturities ranged from April 20212022 to JanuarySeptember 2024, with a weighted-average remaining maturity of approximately 1.41.02 years.
NOTE 4.3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Accounts receivable | $ | 159,324 | | | $ | 215,827 | |
Unbilled receivables | 228,603 | | | 207,155 | |
Long-term unbilled receivables | 108,048 | | | 113,278 | |
| $ | 495,975 | | | $ | 536,260 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Accounts receivable | $ | 171,181 | | | $ | 182,717 | |
Unbilled receivables | 226,052 | | | 226,714 | |
Long-term unbilled receivables | 135,975 | | | 129,789 | |
| $ | 533,208 | | | $ | 539,220 | |
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables by expected billing date: | | | | | | | | |
(Dollars in thousands) | March 31, 2022 |
1 year or less | $ | 226,052 | | 62 | % |
1-2 years | 88,003 | | 25 | % |
2-5 years | 47,972 | | 13 | % |
| $ | 362,027 | | 100 | % |
| | | | | | | | |
(Dollars in thousands) | March 31, 2021 |
1 year or less | $ | 228,603 | | 68 | % |
1-2 years | 80,688 | | 24 | % |
2-5 years | 27,360 | | 8 | % |
| $ | 336,651 | | 100 | % |
Unbilled receivables by contract effective date: | | | | | | | | |
(Dollars in thousands) | March 31, 2022 |
2022 | $ | 72,143 | | 20 | % |
2021 | 163,869 | | 45 | % |
2020 | 77,585 | | 21 | % |
2019 | 27,163 | | 8 | % |
2018 and prior | 21,267 | | 6 | % |
| $ | 362,027 | | 100 | % |
| | | | | | | | |
(Dollars in thousands) | March 31, 2021 |
2021 | $ | 46,625 | | 14 | % |
2020 | 163,226 | | 48 | % |
2019 | 63,600 | | 19 | % |
2018 | 28,885 | | 9 | % |
2017 and prior | 34,315 | | 10 | % |
| $ | 336,651 | | 100 | % |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major clients
No client representedClients accounting for 10% or more of the Company’s total receivables as of March 31, 2021 or December 31, 2020.receivables: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Client A | | | |
Accounts receivable | 4 | % | | 1 | % |
| | | |
| | | |
Unbilled receivables | 15 | % | | 15 | % |
Total receivables | 11 | % | | 10 | % |
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completingthe completion of a related performance obligation.
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Contract assets (1) | $ | 13,454 | | | $ | 15,296 | |
Long-term contract assets (2) | 7,284 | | | 7,777 | |
| $ | 20,738 | | | $ | 23,073 | |
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Contract assets (1) | $ | 11,765 | | | $ | 12,530 | |
Long-term contract assets (2) | 10,292 | | | 10,643 | |
| $ | 22,057 | | | $ | 23,173 | |
(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.
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Deferred revenue | $ | 244,170 | | | $ | 232,865 | |
Long-term deferred revenue (1) | 7,565 | | | 8,991 | |
| $ | 251,735 | | | $ | 241,856 | |
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Deferred revenue | $ | 290,873 | | | $ | 275,844 | |
Long-term deferred revenue (1) | 6,612 | | | 5,655 | |
| $ | 297,485 | | | $ | 281,499 | |
(1) Included in other long-term liabilities.
The change in deferred revenue in the three months ended March 31, 20212022 was primarily due to new billings in advance of revenue recognition offset by $107.0and $124.9 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2020.2021.
NOTE 5.4. DEFERRED COMMISSIONS
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Deferred commissions (1) | $ | 103,474 | | | $ | 108,624 | |
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Deferred commissions (1) | $ | 125,220 | | | $ | 135,911 | |
(1) Included in other long-term assets.
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
(in thousands) | (in thousands) | | 2021 | | 2020 | (in thousands) | | 2022 | | 2021 |
Amortization of deferred commissions (1) | Amortization of deferred commissions (1) | | $ | 11,496 | | | $ | 8,497 | | Amortization of deferred commissions (1) | | $ | 17,221 | | | $ | 11,496 | |
(1) Included in selling and marketing expense.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6.5. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
January 1, | $ | 79,231 | | | $ | 79,039 | |
Acquisition | 2,701 | | | 0 | |
Currency translation adjustments | 105 | | | (541) | |
March 31, | $ | 82,037 | | | $ | 78,498 | |
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | |
January 1, | $ | 81,923 | | | |
Acquisition | — | | | |
Currency translation adjustments | 108 | | | |
March 31, | $ | 82,031 | | | |
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4-10 years | | $ | 63,180 | | | $ | (56,260) | | | $ | 6,920 | |
Technology | 2-10 years | | 67,142 | | | (57,014) | | | 10,128 | |
Other | 1-5 years | | 5,361 | | | (5,361) | | | 0 | |
| | | $ | 135,683 | | | $ | (118,635) | | | $ | 17,048 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4-10 years | | $ | 63,142 | | | $ | (57,662) | | | $ | 5,480 | |
Technology | 2-10 years | | 67,142 | | | (59,531) | | | 7,611 | |
Other | 1-5 years | | 5,361 | | | (5,361) | | | — | |
| | | $ | 135,645 | | | $ | (122,554) | | | $ | 13,091 | |
(1) Included in other long-term assets.
| | | December 31, 2020 | | December 31, 2021 |
(in thousands) | (in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) | (in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | Client-related | 4-10 years | | $ | 63,168 | | | $ | (55,877) | | | $ | 7,291 | | Client-related | 4-10 years | | $ | 63,165 | | | $ | (57,342) | | | $ | 5,823 | |
Technology | Technology | 2-10 years | | 64,843 | | | (56,386) | | | 8,457 | | Technology | 2-10 years | | 67,142 | | | (58,902) | | | 8,240 | |
Other | Other | 1-5 years | | 5,361 | | | (5,361) | | | 0 | | Other | 1-5 years | | 5,361 | | | (5,361) | | | — | |
| | $ | 133,372 | | | $ | (117,624) | | | $ | 15,748 | | | $ | 135,668 | | | $ | (121,605) | | | $ | 14,063 | |
(1) Included in other long-term assets.
Amortization of intangible assets:
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
(in thousands) | (in thousands) | | 2021 | | 2020 | (in thousands) | | 2022 | | 2021 |
Cost of revenue | Cost of revenue | | $ | 629 | | | $ | 647 | | Cost of revenue | | $ | 629 | | | $ | 629 | |
Selling and marketing | Selling and marketing | | 373 | | | 371 | | Selling and marketing | | 343 | | | 373 | |
| | | | $ | 1,002 | | | $ | 1,018 | | | | $ | 972 | | | $ | 1,002 | |
Future estimated intangibles assets amortization: | | | | | |
(in thousands) | March 31, 2022 |
Remainder of 2022 | $ | 2,914 | |
2023 | 3,618 | |
2024 | 2,849 | |
2025 | 2,509 | |
2026 | 874 | |
2027 | 327 | |
| $ | 13,091 | |
| | | | | |
(in thousands) | March 31, 2021 |
2021 | $ | 2,985 | |
2022 | 3,886 | |
2023 | 3,618 | |
2024 | 2,849 | |
2025 | 2,509 | |
2026 and thereafter | 1,201 | |
| $ | 17,048 | |
NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Income tax receivables | $ | 27,679 | | | $ | 25,691 | |
Contract assets | 11,765 | | | 12,530 | |
Other | 34,964 | | | 29,787 | |
| $ | 74,408 | | | $ | 68,008 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other long-term assets
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Deferred income taxes | $ | 188,155 | | | $ | 180,656 | |
Deferred commissions | 125,220 | | | 135,911 | |
Right of use assets | 87,212 | | | 87,521 | |
Capped call transactions | 29,404 | | | 59,964 | |
Property and equipment | 28,603 | | | 26,837 | |
Intangible assets | 13,091 | | | 14,063 | |
Contract assets | 10,292 | | | 10,643 | |
Other | 34,684 | | | 26,006 | |
| $ | 516,661 | | | $ | 541,601 | |
Other current liabilities
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Operating lease liabilities | $ | 4,855 | | | $ | 6,989 | |
Dividends payable | 2,454 | | | 2,454 | |
| $ | 7,309 | | | $ | 9,443 | |
Other long-term liabilities
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Deferred revenue | $ | 6,612 | | | $ | 5,655 | |
Other | 8,046 | | | 7,844 | |
| $ | 14,658 | | | $ | 13,499 | |
NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusettsprevious corporate headquarters to October 1, 2021, in exchange for a one-time payment from the Company’sits landlord of $18 million. Upon modification,million, which was amortized over the Companyremaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced itsthe Company’s future lease liabilities by $21.1 million and accelerated depreciationright of property, plant,use assets by $20.3 million. 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 equipment relatedreal 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, 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 March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Fixed lease costs (1) | | | | | $ | 5,093 | | | $ | 300 | |
Short-term lease costs | | | | | 806 | | | 459 | |
Variable lease costs | | | | | 764 | | | 1,387 | |
| | | | | $ | 6,663 | | | $ | 2,146 | |
(1) The lower fixed lease costs in the three months ended March 31, 2021 was due to the modification of the corporate headquarters.headquarters lease.
PEGASYSTEMS INC.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2021 | | 2020 |
Fixed lease costs | | | | | $ | 300 | | | $ | 4,818 | |
Short-term lease costs | | | | | 459 | | | 455 | |
Variable lease costs | | | | | 1,387 | | | 1,278 | |
| | | | | $ | 2,146 | | | $ | 6,551 | |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Right of use assets and lease liabilities
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Right of use assets (1) | $ | 44,330 | | | $ | 67,651 | |
Lease liabilities (2) | $ | 14,161 | | | $ | 18,541 | |
Long-term lease liabilities | $ | 36,471 | | | $ | 59,053 | |
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Right of use assets (1) | $ | 87,212 | | | $ | 87,521 | |
Operating lease liabilities (2) | $ | 4,855 | | | $ | 6,989 | |
Long-term operating lease liabilities | $ | 90,699 | | | $ | 87,818 | |
(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.
(2) Included in other current liabilities.
Weighted-average remaining lease term and discount rate for the Company’s leases were:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Weighted-average remaining lease term | 5.1 years | | 4.7 years |
Weighted-average discount rate (1) | 4.7 | % | | 5.4 | % |
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term | 7.5 years | | 7.7 years |
Weighted-average discount rate (1) | 4.3 | % | | 4.4 | % |
(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) | March 31, 2021 |
1 year or less | $ | 13,216 | |
1-2 years | 11,538 | |
2-3 years | 10,896 | |
3-4 years | 7,571 | |
Greater than 4 years | 14,274 | |
Total lease payments | 57,495 | |
Less: imputed interest (1)
| (6,863) | |
| $ | 50,632 | |
| | | | | |
(in thousands) | March 31, 2022 |
Remainder of 2022 | $ | 3,887 | |
2023 | 20,317 | |
2024 | 17,141 | |
2025 | 14,352 | |
2026 | 10,664 | |
2027 and thereafter | 48,381 | |
Total lease payments | 114,742 | |
Less: imputed interest (1) | (19,188) | |
| $ | 95,554 | |
(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 | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Cash paid for leases | $ | 3,650 | | | $ | 6,716 | |
Right of use assets recognized for new leases and amendments (non-cash) | $ | 3,854 | | | $ | 714 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
Cash paid for leases | $ | 6,716 | | | $ | 5,520 | |
Right of use assets recognized for new leases and amendments (non-cash) | $ | 714 | | | $ | 551 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 of $600 million, due March 1, 2025, in a private placement. No principal payments are requireddue 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.
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering 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 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:
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
•During any calendar quarter commencingbeginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 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 certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert 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 in full on the redemption date, until the Company pays the redemption price).
As of March 31, 2021,2022, the Notes were not eligible for conversion at the noteholders’ election.conversion.
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” occur, each noteholder will have the right 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 a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
Impact of the Notes
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.
Until January 1, 2021, the Notes were separated into liability and equity components.
•The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.
•The equity component was recorded as an increase to additional paid-in capital and not remeasured.
Upon adoption of ASU 2020-06, the bookCarrying value of the
Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 millionNotes: | | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Principal | $ | 600,000 | | | $ | 600,000 | |
Unamortized issuance costs | (8,560) | | | (9,278) | |
Convertible senior notes, net | $ | 591,440 | | | $ | 590,722 | |
Interest expense related to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.Notes: | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Contractual interest expense (0.75% coupon) | | | | | $ | 1,125 | | | $ | 1,125 | |
Amortization of issuance costs | | | | | 719 | | | 673 | |
| | | | | $ | 1,844 | | | $ | 1,798 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Carrying value ofThe effective interest rate for the Notes:
| | | | | | | | | | | |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Principal | $ | 600,000 | | | $ | 600,000 | |
Unamortized debt discount | 0 | | | (71,222) | |
Unamortized issuance costs | (11,582) | | | (10,575) | |
Convertible senior notes, net | $ | 588,418 | | | $ | 518,203 | |
| | | |
Conversion options | $ | 0 | | | $ | 84,120 | |
Issuance costs | 0 | | | (2,037) | |
Deferred taxes | 0 | | | (20,479) | |
Additional paid-in capital | $ | 0 | | | $ | 61,604 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Weighted-average effective interest rate | 1.2 | % | | 1.2 | % |
Interest expense related to the Notes:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2021 | | 2020 |
Contractual interest expense (0.75% coupon) | | | | | $ | 1,125 | | | $ | 450 | |
Amortization of debt discount | | | | | 0 | | | 1,497 | |
Amortization of issuance costs | | | | | 673 | | | 222 | |
| | | | | $ | 1,798 | | | $ | 2,169 | |
Weighted-average effective interest rate | | | | | 1.2 | % | | 4.3 | % |
Future payments of principal and contractual interest:
| | | | | | | | | | | | | | | | | |
| March 31, 2021 |
(in thousands) | Principal | | Interest | | Total |
2021 | $ | 0 | | | $ | 2,250 | | | $ | 2,250 | |
2022 | 0 | | | 4,500 | | | 4,500 | |
2023 | 0 | | | 4,500 | | | 4,500 | |
2024 | 0 | | | 4,500 | | | 4,500 | |
2025 | 600,000 | | | 1,488 | | | 601,488 | |
| $ | 600,000 | | | $ | 17,238 | | | $ | 617,238 | |
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
(in thousands) | Principal | | Interest | | Total |
Remainder of 2022 | $ | — | | | $ | 2,250 | | | $ | 2,250 | |
2023 | — | | | 4,500 | | | 4,500 | |
2024 | — | | | 4,500 | | | 4,500 | |
2025 | 600,000 | | | 2,250 | | | 602,250 | |
| $ | 600,000 | | | $ | 13,500 | | | $ | 613,500 | |
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (“Capped(the “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. The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required tomust 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 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 “otherother long-term assets”assets and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Change in capped call transactions:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
January 1, | $ | 83,597 | | | $ | 0 | |
Issuance | 0 | | | 51,900 | |
Fair value adjustment | (19,117) | | | (18,592) | |
March 31, | $ | 64,480 | | | $ | 33,308 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
January 1, | $ | 59,964 | | | $ | 83,597 | |
Fair value adjustment | (30,560) | | | (19,117) | |
March 31, | $ | 29,404 | | | $ | 64,480 | |
Credit facility
In November 2019, and as since amended, as of February 2020, July 2020, and September 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”).Association. The Company may use borrowings for general corporate purposes and to finance working capital needs and for general corporate purposes.needs. 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, 2020March 31, 2022 and ending with the fiscal quarter ended December 31, 20212022, Pegasystems Inc. must maintain at least $200 million in cash, investments, and investments held by Pegasystems Inc.availability under the Revolving Credit Loan.
•Beginning with the quarter ended on March 31, 20222023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event offor certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of March 31, 20212022 and December 31, 2020,2021, the Company had 0no outstanding borrowings under the Credit Facility.
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.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 modelsmodel use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
Assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents | $ | 26,657 | | | $ | 0 | | | $ | 0 | | | $ | 26,657 | | | $ | 42,339 | | | $ | 14,000 | | | $ | 0 | | | $ | 56,339 | |
Marketable securities | $ | 0 | | | $ | 269,650 | | | $ | 0 | | | $ | 269,650 | | | $ | 0 | | | $ | 293,269 | | | $ | 0 | | | $ | 293,269 | |
Capped Call Transactions (1) | $ | 0 | | | $ | 64,480 | | | $ | 0 | | | $ | 64,480 | | | $ | 0 | | | $ | 83,597 | | | $ | 0 | | | $ | 83,597 | |
Venture investments (1) (2) | $ | 0 | | | $ | 0 | | | $ | 9,756 | | | $ | 9,756 | | | $ | 0 | | | $ | 0 | | | $ | 8,345 | | | $ | 8,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents | $ | 19,626 | | | $ | — | | | $ | — | | | $ | 19,626 | | | $ | 3,216 | | | $ | — | | | $ | — | | | $ | 3,216 | |
Marketable securities | $ | — | | | $ | 199,401 | | | $ | — | | | $ | 199,401 | | | $ | — | | | $ | 202,814 | | | $ | — | | | $ | 202,814 | |
Capped Call Transactions (1) | $ | — | | | $ | 29,404 | | | $ | — | | | $ | 29,404 | | | $ | — | | | $ | 59,964 | | | $ | — | | | $ | 59,964 | |
Venture investments (1) (2) | $ | — | | | $ | — | | | $ | 12,830 | | | $ | 12,830 | | | $ | — | | | $ | — | | | $ | 7,648 | | | $ | 7,648 | |
(1) Included in other long-term assets. (2) Investments in privately-held companies.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
ChangeChanges in venture investments:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
January 1, | $ | 8,345 | | | $ | 4,871 | |
New investments | 500 | | | 1,490 | |
Sales of investments | (400) | | | (1,424) | |
Changes in foreign exchange rates | (9) | | | (73) | |
Changes in fair value: | | | |
included in other income | 100 | | | 1,374 | |
included in other comprehensive income | 1,220 | | | 100 | |
March 31, | $ | 9,756 | | | $ | 6,338 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
January 1, | $ | 7,648 | | | $ | 8,345 | |
New investments | — | | | 500 | |
Sales of investments | — | | | (400) | |
Changes in foreign exchange rates | (61) | | | (9) | |
Changes in fair value: | | | |
included in other income | 2,741 | | | 100 | |
included in other comprehensive income | 2,502 | | | 1,220 | |
March 31, | $ | 12,830 | | | $ | 9,756 | |
The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ relatively short maturity.
Fair value of the Notes
The Notes’ fair value (inclusive of(including the conversion feature embedded in the Notes) was $665.9$573.0 million as of March 31, 2022 and $642.0 million as of December 31, 2021. 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 "Note 8. Debt" for additional information.
NOTE 10. REVENUE
Geographic revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | | | 2021 | | 2020 |
U.S. | | | | | | | $ | 194,568 | | 62 | % | | $ | 172,417 | | 65 | % |
Other Americas | | | | | | | 11,901 | | 4 | % | | 15,342 | | 6 | % |
United Kingdom (“U.K.”) | | | | | | | 28,212 | | 9 | % | | 21,837 | | 8 | % |
Europe (excluding U.K.), Middle East, and Africa | | | | | | | 51,659 | | 16 | % | | 31,938 | | 12 | % |
Asia-Pacific | | | | | | | 27,159 | | 9 | % | | 24,057 | | 9 | % |
| | | | | | | $ | 313,499 | | 100 | % | | $ | 265,591 | | 100 | % |
Revenue streams
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2021 | | 2020 |
Perpetual license | | | | | $ | 5,452 | | | $ | 3,659 | |
Term license | | | | | 111,509 | | | 90,257 | |
Revenue recognized at a point in time | | | | | 116,961 | | | 93,916 | |
Maintenance | | | | | 75,561 | | | 73,695 | |
Pega Cloud | | | | | 67,858 | | | 43,466 | |
Consulting | | | | | 53,119 | | | 54,514 | |
Revenue recognized over time | | | | | 196,538 | | | 171,675 | |
| | | | | $ | 313,499 | | | $ | 265,591 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | | | 2022 | | 2021 |
U.S. | | | | | | | $ | 217,272 | | 58 | % | | $ | 194,568 | | 62 | % |
Other Americas | | | | | | | 45,751 | | 12 | % | | 11,901 | | 4 | % |
United Kingdom (“U.K.”) | | | | | | | 30,932 | | 8 | % | | 28,212 | | 9 | % |
Europe (excluding U.K.), Middle East, and Africa | | | | | | | 49,136 | | 13 | % | | 51,659 | | 16 | % |
Asia-Pacific | | | | | | | 33,216 | | 9 | % | | 27,159 | | 9 | % |
| | | | | | | $ | 376,307 | | 100 | % | | $ | 313,499 | | 100 | % |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | |
(in thousands) | | | Three Months Ended March 31, |
| | | | 2021 | | 2020 |
Pega Cloud | | | | | $ | 67,858 | | | $ | 43,466 | |
Maintenance | | | | | 75,561 | | | 73,695 | |
Term license | | | | | 111,509 | | | 90,257 | |
Subscription (1) | | | | | 254,928 | | | 207,418 | |
Perpetual license | | | | | 5,452 | | | 3,659 | |
Consulting | | | | | 53,119 | | | 54,514 | |
| | | | | $ | 313,499 | | | $ | 265,591 | |
Revenue streams | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Perpetual license | | | | | $ | 7,440 | | | $ | 5,452 | |
Subscription license | | | | | 137,533 | | | 111,509 | |
Revenue recognized at a point in time | | | | | 144,973 | | | 116,961 | |
Maintenance | | | | | 79,716 | | | 75,561 | |
Pega Cloud | | | | | 90,317 | | | 67,858 | |
Consulting | | | | | 61,301 | | | 53,119 | |
Revenue recognized over time | | | | | 231,334 | | | 196,538 | |
Total revenue | | | | | $ | 376,307 | | | $ | 313,499 | |
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license). | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | 2022 | 2021 |
Pega Cloud | | | | | $ | 90,317 | | | $ | 67,858 | |
Maintenance | | | | | 79,716 | | | 75,561 | |
Subscription services | | | | | 170,033 | | | 143,419 | |
Subscription license | | | | | 137,533 | | | 111,509 | |
Subscription | | | | | 307,566 | | | 254,928 | |
Perpetual license | | | | | 7,440 | | | 5,452 | |
Consulting | | | | | 61,301 | | | 53,119 | |
| | | | | $ | 376,307 | | | $ | 313,499 | |
Remaining performance obligations ("Backlog")
Expected future revenue onfrom existing non-cancellable contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
(Dollars in thousands) | Perpetual license | | Term license | | Maintenance | | Pega Cloud | | Consulting | | Total |
1 year or less | $ | 9,649 | | | $ | 41,025 | | | $ | 220,100 | | | $ | 252,104 | | | $ | 21,068 | | | $ | 543,946 | | 55 | % |
1-2 years | 629 | | | 9,874 | | | 52,366 | | | 187,456 | | | 914 | | | 251,239 | | 26 | % |
2-3 years | 0 | | | 7,055 | | | 33,337 | | | 91,861 | | | 1,756 | | | 134,009 | | 14 | % |
Greater than 3 years | 0 | | | 377 | | | 16,834 | | | 32,895 | | | 510 | | | 50,616 | | 5 | % |
| $ | 10,278 | | | $ | 58,331 | | | $ | 322,637 | | | $ | 564,316 | | | $ | 24,248 | | | $ | 979,810 | | 100 | % |
As of March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Subscription services | | Subscription license | | Perpetual license | | Consulting | | Total |
Maintenance | | Pega Cloud | | | | |
1 year or less | $ | 228,984 | | | $ | 329,857 | | | $ | 47,428 | | | $ | 7,281 | | | $ | 40,661 | | | $ | 654,211 | | 55 | % |
1-2 years | 63,870 | | | 208,875 | | | 16,111 | | | 4,505 | | | 10,955 | | | 304,316 | | 26 | % |
2-3 years | 33,617 | | | 106,156 | | | 2,422 | | | 2,252 | | | 3,876 | | | 148,323 | | 13 | % |
Greater than 3 years | 22,611 | | | 44,596 | | | 1,758 | | | — | | | 522 | | | 69,487 | | 6 | % |
| $ | 349,082 | | | $ | 689,484 | | | $ | 67,719 | | | $ | 14,038 | | | $ | 56,014 | | | $ | 1,176,337 | | 100 | % |
As of March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Subscription services | | Subscription license | | Perpetual license | | Consulting | | Total |
Maintenance | | Pega Cloud | | | | |
1 year or less | $ | 220,100 | | | $ | 252,104 | | | $ | 41,025 | | | $ | 9,649 | | | $ | 21,068 | | | $ | 543,946 | | 55 | % |
1-2 years | 52,366 | | | 187,456 | | | 9,874 | | | 629 | | | 914 | | | 251,239 | | 26 | % |
2-3 years | 33,337 | | | 91,861 | | | 7,055 | | | — | | | 1,756 | | | 134,009 | | 14 | % |
Greater than 3 years | 16,834 | | | 32,895 | | | 377 | | | — | | | 510 | | | 50,616 | | 5 | % |
| $ | 322,637 | | | $ | 564,316 | | | $ | 58,331 | | | $ | 10,278 | | | $ | 24,248 | | | $ | 979,810 | | 100 | % |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 |
(Dollars in thousands) | Perpetual license | | Term license | | Maintenance | | Pega Cloud | | Consulting | | Total |
1 year or less | $ | 3,995 | | | $ | 30,962 | | | $ | 205,083 | | | $ | 174,277 | | | $ | 18,945 | | | $ | 433,262 | | 58 | % |
1-2 years | 2,168 | | | 5,088 | | | 34,633 | | | 125,473 | | | 1,215 | | | 168,577 | | 22 | % |
2-3 years | 0 | | | 6,504 | | | 19,411 | | | 81,187 | | | 107 | | | 107,209 | | 14 | % |
Greater than 3 years | 0 | | | 635 | | | 10,596 | | | 33,537 | | | 10 | | | 44,778 | | 6 | % |
| $ | 6,163 | | | $ | 43,189 | | | $ | 269,723 | | | $ | 414,474 | | | $ | 20,277 | | | $ | 753,826 | | 100 | % |
NOTE 11. STOCK-BASED COMPENSATION
Expense
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2021 | | 2020 |
Cost of revenue | | | | | $ | 5,925 | | | $ | 5,152 | |
Selling and marketing | | | | | 13,720 | | | 9,718 | |
Research and development | | | | | 6,770 | | | 5,496 | |
General and administrative | | | | | 3,685 | | | 2,809 | |
| | | | | $ | 30,100 | | | $ | 23,175 | |
Income tax benefit | | | | | $ | (5,991) | | | $ | (4,582) | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Cost of revenue | | | | | $ | 6,378 | | | $ | 5,925 | |
Selling and marketing | | | | | 10,958 | | | 13,720 | |
Research and development | | | | | 7,346 | | | 6,770 | |
General and administrative | | | | | 3,545 | | | 3,685 | |
| | | | | $ | 28,227 | | | $ | 30,100 | |
Income tax benefit | | | | | $ | (5,311) | | | $ | (5,991) | |
As of March 31, 2021,2022, the Company had $183.4$200.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.
Grants | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(in thousands) | Shares | | Total Fair Value |
Restricted stock units | 1,096 | | | $ | 94,538 | |
Non-qualified stock options | 2,212 | | | $ | 60,514 | |
| | | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
(in thousands) | Shares | | Total Fair Value |
RSUs | 684 | | | $ | 89,291 | |
Non-qualified stock options | 1,248 | | | $ | 47,380 | |
| | | |
| | | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12. INCOME TAXES
Effective income tax rate
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
(Dollars in thousands) | (Dollars in thousands) | | 2021 | | 2020 | (Dollars in thousands) | | 2022 | | 2021 |
(Benefit from) income taxes | (Benefit from) income taxes | | $ | (17,618) | | | $ | (23,810) | | (Benefit from) income taxes | | $ | (7,683) | | | $ | (17,618) | |
Effective income tax benefit rate | Effective income tax benefit rate | | 73 | % | | 48 | % | Effective income tax benefit rate | | 95 | % | | 73 | % |
The increasechange in the Company’s effective income tax benefit rate was primarily due to excessthe impact of discrete tax benefits from stock-based compensation and fair value adjustments for the capped call transactions,items which were proportionallyproportionately larger on a lower loss before income taxes.
Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a given period depends on our profitability, the attributes of the stock compensation awards the Company grants, and award holders' exercise behavior.
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 convertible senior notes.
Calculation of (loss) per share:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands, except per share amounts) | | | | | 2021 | | 2020 |
Net (loss) | | | | | $ | (6,617) | | | $ | (25,372) | |
Weighted-average common shares outstanding | | | | | 81,004 | | | 79,808 | |
(Loss) per share, basic | | | | | $ | (0.08) | | | $ | (0.32) | |
| | | | | | | |
Net (loss) | | | | | $ | (6,617) | | | $ | (25,372) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average common shares outstanding, assuming dilution (1) (2) (3) | | | | | 81,004 | | | 79,808 | |
(Loss) per share, diluted | | | | | $ | (0.08) | | | $ | (0.32) | |
| | | | | | | |
Outstanding anti-dilutive stock options and RSUs (4) | | | | | 6,465 | | | 5,948 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands, except per share amounts) | | | | | 2022 | | 2021 |
Net (loss) | | | | | $ | (379) | | | $ | (6,617) | |
Weighted-average common shares outstanding | | | | | 81,680 | | | 81,004 | |
(Loss) per share, basic | | | | | $ | 0.00 | | | $ | (0.08) | |
| | | | | | | |
Net (loss) | | | | | $ | (379) | | | $ | (6,617) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
Weighted-average common shares outstanding, assuming dilution (1) (2) (3) | | | | | 81,680 | | | 81,004 | |
(Loss) per share, diluted | | | | | $ | 0.00 | | | $ | (0.08) | |
| | | | | | | |
Outstanding anti-dilutive stock options and RSUs (4) | | | | | 4,178 | | | 6,465 | |
(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(3) The Company’s Capped Call Transactions coverrepresent the equivalent of approximately 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 generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required tomust 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 (loss) per share. These awards may be dilutive in the future.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Commitments
See "Note 7. Leases" for additional information.
Legal Proceedings
In addition to the matters below, the Company is, or may become, involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.
In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that our estimates will change in the near term and the effect may be material.
As of March 31, 2022 and December 31, 2021, the Company has no accrued losses for litigation.
Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.
On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). The jury trial began on March 21, 2022. On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets. This legal standard has not previously been adopted by the Virginia courts. The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect. The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.
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, 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.
Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:
•our future financial performance and business plans;
•the adequacy of our liquidity and capital resources;
•the continued payment of our quarterly dividends;
•the timing of revenue recognition;
•management of our transition to a more subscription-based business model;
•variation in demand for our products and services, including among clients in the public sector;
•reliance on key personnel;
•global economic and political conditions and uncertainty, including continued impacts from the impact of actual or threatened public health emergencies, such asongoing COVID-19 pandemic and the Coronavirus (“COVID-19”);war in Ukraine;
•reliance on third-party service providers, including hosting providers;
•compliance with our debt obligations and covenants;
•the potential impact of our convertible senior notes and Capped Call Transactions;
•reliance on key personnel;
•the relocation of our corporate headquarters;
•the continued uncertainties in the global economy;
•foreign currency exchange rates;
•the potential legal and financial liabilities and damage to our reputation damage due to cyber-attacks;
•security breaches and security flaws;
•our ability to protect our intellectual property rights, and costs associated with defending such rights;rights, as well as intellectual property rights claims and other related claims by third parties;
•our client retention 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, 2020,2021, Part II of this Quarterly Report on Form 10-Q, 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 update or revise these forward-looking statements publicly, whether as the result ofdue to new information, future events, or otherwise.
The forward-looking statements contained in this Quarterly Report represent our views as of April 28, 2021.2022.
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software applications that helphelps organizations simplify business complexity. Our intelligent technologypowerful low-code platform for workflow automation and scalable architectureAI-powered decisioning enables the world’s leading brands and government agencies to solve problems quicklyhyper-personalize customer experiences, streamline customer service, and transform for tomorrow. Our clients are able to make better decisionsautomate mission-critical business processes and get work done using real-time artificial intelligence (“AI”) and intelligent automation on applications built on the low-code, cloud-nativeworkflows. With Pega, Platform™, enabling our clients can leverage our intelligent technology and scalable architecture to streamline service, increase customer lifetime value, and boost efficiency. Our consulting andaccelerate their digital transformation. In addition, our client success teams, along with our world-class partners, and clients themselves leverage our Pega Express™ methodology and low code to allow clients to design and deploy criticalmission-critical applications quickly and collaboratively.
Our target clients are Global 3000 organizations and government agencies that require applicationssolutions to differentiatedistinguish themselves in the markets they serve. Our applicationssolutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. WeAlong with our partners, we deliver applicationssolutions tailored to our clients’ specific industry needs.
Cloud TransitionSubscription transition
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud.arrangements. Until we substantiallyfully complete our Cloud Transition,subscription transition, which we anticipateexpect will occur in late 2022 or early 2023, we may experience lowerour revenue growth and lower operating cash flow growth or negative cash flow.may be impacted. Operating performance and the actual mix of revenue and new arrangements in a giveneach period can fluctuate based on client 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, 20202021 for additional information.
Coronavirus (“COVID-19”)
As of March 31, 2021,2022, COVID-19 has not had a material impact on our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 20202021 for additional information.
Ukraine
Our direct financial exposure to Ukraine, Russia, and Belarus is not material.
In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office. For the year ended December 31, 2021 total revenue from clients located in Ukraine, Russia, and Belarus was less than $4.0 million. However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict, the impact on our people, partners, clients, and vendors in neighboring countries, and globally, all of which are uncertain and unpredictable.
Performance metrics
We utilizeuse 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 20%21% since March 31, 20202021
•ACV as reported, 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 termsubscription 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 term license ACV. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates. subscription transition.
Foreign currency exchange rate changes contributed 3%were a 1% to total2% headwind to ACV growth insince March 31, 2021.
Remaining performance obligations (“Backlog”) | Increased 30%20% since March 31, 20202021
•Backlog represents expectedExpected future revenue onfrom existing non-cancellable contracts.contracts:
Year to date Pega Cloud revenue | Increased 56% since the three months ended March 31, 2020
•Pega Cloud revenue is revenue under U.S. GAAP for cloud contracts.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States 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, 2020:
•“Critical Accounting Estimates and Significant Judgments” in Item 7; and
•“Note 2. “SignificantSignificant Accounting Policies” in Item 8.
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, 2020.2021.
RESULTS OF OPERATIONS
Revenue
Cloud TransitionSubscription transition
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Revenuearrangements. This transition has impacted revenue growth has been slower because of this transition.as revenue is recognized differently for subscription services than license sales. Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract term. In contrast,term, while revenue from license sales is recognized when the license rights become effective, typically upfront.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | Three Months Ended March 31, | | Change |
| | | | | 2021 | | 2020 | |
Pega Cloud | | | | | | | | | | $ | 67,858 | | 22 | % | | $ | 43,466 | | 16 | % | | $ | 24,392 | | 56 | % |
Maintenance | | | | | | | | | | 75,561 | | 23 | % | | 73,695 | | 28 | % | | 1,866 | | 3 | % |
Term license | | | | | | | | | | 111,509 | | 36 | % | | 90,257 | | 34 | % | | 21,252 | | 24 | % |
Subscription (1) | | | | | | | | | | 254,928 | | 81 | % | | 207,418 | | 78 | % | | 47,510 | | 23 | % |
Perpetual license | | | | | | | | | | 5,452 | | 2 | % | | 3,659 | | 1 | % | | 1,793 | | 49 | % |
Consulting | | | | | | | | | | 53,119 | | 17 | % | | 54,514 | | 21 | % | | (1,395) | | (3) | % |
| | | | | | | | | | $ | 313,499 | | 100 | % | | $ | 265,591 | | 100 | % | | $ | 47,908 | | 18 | % |
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | Three Months Ended March 31, | | Change |
| | | | | 2022 | | 2021 | |
Pega Cloud | | | | | | | | | | $ | 90,317 | | 24 | % | | $ | 67,858 | | 22 | % | | $ | 22,459 | | 33 | % |
Maintenance | | | | | | | | | | 79,716 | | 21 | % | | 75,561 | | 23 | % | | 4,155 | | 5 | % |
Subscription services | | | | | | | | | | 170,033 | | 45 | % | | 143,419 | | 45 | % | | 26,614 | | 19 | % |
Subscription license | | | | | | | | | | 137,533 | | 37 | % | | 111,509 | | 36 | % | | 26,024 | | 23 | % |
Subscription | | | | | | | | | | 307,566 | | 82 | % | | 254,928 | | 81 | % | | 52,638 | | 21 | % |
Perpetual license | | | | | | | | | | 7,440 | | 2 | % | | 5,452 | | 2 | % | | 1,988 | | 36 | % |
Consulting | | | | | | | | | | 61,301 | | 16 | % | | 53,119 | | 17 | % | | 8,182 | | 15 | % |
| | | | | | | | | | $ | 376,307 | | 100 | % | | $ | 313,499 | | 100 | % | | $ | 62,808 | | 20 | % |
The total revenue changechanges in the three months ended March 31, 20212022 generally reflectsreflect the impact of our Cloud Transition.subscription transition. Other factors impacting our revenue include:
•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance periods. Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenanceThe increase in perpetual revenue over the contract term rather than as term license revenue upon the effectiveness of the license rights. Inin the three months ended March 31, 2021, multi-year committed maintenance contributed $3.4 million2022 was primarily due to maintenance revenue growth and reduced term revenue growth by $5.5 million.
•Maintenance renewal rates of higher than 90%.license rights becoming effective in the three months ended March 31, 2022 related to software license contracts entered into in prior years.
•The decreaseincrease in consulting revenue in the three months ended March 31, 20212022 was primarily due to a decreasean increase in consultant billable travel expenses as a result of COVID-19. 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.hours in North America.
Gross profit
| | | | Three Months Ended March 31, | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | (Dollars in thousands) | | 2021 | | 2020 | | (Dollars in thousands) | | Three Months Ended March 31, | | Change |
Software license | | $ | 116,311 | | 99 | % | | $ | 93,232 | | % | | $ | 23,079 | | 25 | % | |
(Dollars in thousands) | | (Dollars in thousands) | | 2022 | | 2021 | Change | |
| | $ | 63,418 | | $ | 45,301 | | 67 | % | | $ | 18,117 | | 40 | % |
Maintenance | Maintenance | | 69,775 | | 92 | % | | 68,119 | | 92 | % | | 1,656 | | 2 | % | Maintenance | | 74,585 | | 94 | % | | 69,775 | | 92 | % | | 4,810 | | 7 | % |
Pega Cloud | | 45,301 | | 67 | % | | 25,933 | | 60 | % | | 19,368 | | 75 | % | |
Subscription services | | Subscription services | | 138,003 | | 81 | % | | 115,076 | | 80 | % | | 22,927 | | 20 | % |
Subscription license | | Subscription license | | 136,911 | | 100 | % | | 110,889 | | 99 | % | | 26,022 | | 23 | % |
Subscription | | Subscription | | 274,914 | | 89 | % | | 225,965 | | 89 | % | | 48,949 | | 22 | % |
Perpetual license | | Perpetual license | | 7,406 | | 100 | % | | 5,422 | | 99 | % | | 1,984 | | 37 | % |
Consulting | Consulting | | (335) | | (1) | % | | (1,221) | | (2) | % | | 886 | | 73 | % | Consulting | | 5,790 | | 9 | % | | (335) | | (1) | % | | 6,125 | | * |
| | | $ | 231,052 | | 74 | % | | $ | 186,063 | | 70 | % | | $ | 44,989 | | 24 | % | | | $ | 288,110 | | 77 | % | | $ | 231,052 | | 74 | % | | $ | 57,058 | | 25 | % |
* not meaningful
•The changesincreases in gross profit and gross profit percent in the three months ended March 31, 20212022 were primarily due to the impact of our Cloud Transition,subscription transition, revenue growth, and cost-efficiency gains as Pega Cloud grows and scales.
•The increase in consulting gross profit percent in the three months ended March 31, 20212022 was primarily due to an increase in consultant utilization. Consultant utilization is impacted by several factors, including the timing and scope of new implementation projects and the extent of our involvement compared to our consulting partners and enabled clients.realization rates in North America.
Operating expenses
| (Dollars in thousands) | (Dollars in thousands) | | Three Months Ended March 31, | | Change | (Dollars in thousands) | | Three Months Ended March 31, | | Change |
| 2021 | | 2020 | | (Dollars in thousands) | | 2022 | | 2021 | Change | |
| | | | % of Revenue | | | % of Revenue | | | | | | % of Revenue | | | % of Revenue | | |
Selling and marketing | Selling and marketing | | $ | 148,739 | | 47 | % | | $ | 136,024 | | 51 | % | | $ | 12,715 | | 9 | % | Selling and marketing | | $ | 162,236 | | 43 | % | | $ | 148,739 | | 47 | % | | $ | 13,497 | | 9 | % |
Research and development | Research and development | | $ | 62,442 | | 20 | % | | $ | 58,727 | | 22 | % | | $ | 3,715 | | 6 | % | Research and development | | $ | 71,490 | | 19 | % | | $ | 62,442 | | 20 | % | | $ | 9,048 | | 14 | % |
General and administrative | General and administrative | | $ | 18,270 | | 6 | % | | $ | 15,630 | | 6 | % | | $ | 2,640 | | 17 | % | General and administrative | | $ | 35,764 | | 10 | % | | $ | 18,270 | | 6 | % | | $ | 17,494 | | 96 | % |
•The increase in selling and marketing in the three months ended March 31, 20212022 was primarily due to an increase in compensation and benefits of $25.4$8.9 million attributable to increasesand an increase in headcount and equity compensation, partially offset by decreases inemployee travel and entertainment of $6.0 million and sales and marketing events of $7.9 million due to COVID-19. The increase in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.$2.6 million.
•The increase in research and development in the three months ended March 31, 20212022 was primarily due to an increase in compensation and benefits of $4.6$5.7 million, attributable to increases in headcount and equityincentive compensation. The increase in headcount reflects additional investments in developing our solutions, particularly for Pega Cloud.
•The increase in general and administrative in the three months ended March 31, 20212022 was primarily due to an increase in compensation and benefits of $1.1 million, attributable to increases in headcount and equity compensation, and an increase in professional services fees of $1.6 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 a decrease in facilities expense of $2.1$15.4 million in sellinglegal fees and marketing, $1.7 millionrelated expenses arising from proceedings outside the ordinary course of business. We have incurred and expect to continue to incur additional expenses for these proceedings in research2022. See "Note 14. Commitments and development,Contingencies" in Part I, Item 1 and $0.3 million“Risk Factors” in general and administrative in the three months ended March 31, 2021.Part II, Item 1A of this Quarterly Report for additional information.
Other income (expense), netand expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | Three Months Ended March 31, | | Change |
| | | | | 2022 | | 2021 | |
Foreign currency transaction gain (loss) | | | | | | | | $ | 2,876 | | | $ | (5,098) | | | $ | 7,974 | | * |
Interest income | | | | | | | | 207 | | | 153 | | | 54 | | 35 | % |
Interest expense | | | | | | | | (1,946) | | | (1,880) | | | (66) | | (4) | % |
(Loss) on capped call transactions | | | | | | | | (30,560) | | | (19,117) | | | (11,443) | | (60) | % |
Other income, net | | | | | | | | 2,741 | | | 106 | | | 2,635 | | 2,486 | % |
| | | | | | | | $ | (26,682) | | | $ | (25,836) | | | $ | (846) | | (3) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | Three Months Ended March 31, | | Change |
| | | | | 2021 | | 2020 | |
Foreign currency transaction (loss) | | | | | | | | $ | (5,098) | | | $ | (5,947) | | | $ | 849 | | 14 | % |
Interest income | | | | | | | | 153 | | | 607 | | | (454) | | (75) | % |
Interest expense | | | | | | | | (1,880) | | | (2,306) | | | 426 | | 18 | % |
(Loss) on capped call transactions | | | | | | | | (19,117) | | | (18,592) | | | (525) | | (3) | % |
Other income, net | | | | | | | | 106 | | | 1,374 | | | (1,268) | | (92) | % |
| | | | | | | | $ | (25,836) | | | $ | (24,864) | | | $ | (972) | | (4) | % |
* not meaningful•The changeincrease in foreign currency transaction gain (loss) in the three months ended March 31, 20212022 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.
•The decreaseincrease in interest income in the three months ended March 31, 20212022 was primarily due to a decreaseincreases in market interest rates.
•The decrease in interest expense in the three months ended March 31, 2021 was primarily due to our adoption of ASU 2020-06 on January 1, 2021. See "Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.
Interest expense related to the Notes:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
(in thousands) | | | | | | 2021 | | 2020 | |
Contractual interest expense (0.75% coupon) | | | | | | | $ | 1,125 | | | $ | 450 | | | $ | 675 | |
Amortization of debt discount | | | | | | | — | | | 1,497 | | | (1,497) | |
Amortization of issuance costs | | | | | | | 673 | | | 222 | | | 451 | |
| | | | | | | $ | 1,798 | | | $ | 2,169 | | | $ | (371) | |
•The increase in the (loss) on capped call transactions in the three months ended March 31, 20212022, was due to fair value adjustments.adjustments for our capped call transactions. See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.
•The decreaseincrease in other income, net in the three months ended March 31, 20212022, was due to an increasefair value adjustments on equity securities held in the value of our venture investments portfolio in the three months ended March 31, 2020.2021.
(Benefit from) income taxes
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | | | 2021 | | 2020 |
(Benefit from) income taxes | | | | | $ | (17,618) | | | $ | (23,810) | |
Effective income tax benefit rate | | | | | 73 | % | | 48 | % |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | | | 2022 | | 2021 |
(Benefit from) income taxes | | | | | $ | (7,683) | | | $ | (17,618) | |
Effective income tax benefit rate | | | | | 95 | % | | 73 | % |
During the three months ended March 31, 2021,2022, the increasechange in our effective income tax benefit rate was primarily due to excessthe impact of discrete tax benefits from stock-based compensation and fair value adjustments for the capped call transactions,items which were proportionallyproportionately larger on a lower loss before income taxes.
Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a givenour effective tax rate in each period depends on our profitability and the attributes oftax deductions from our stock compensation awards we grant,activity, which depend upon our stock price and the award holders' exercise behavior.
LIQUIDITY AND CAPITAL RESOURCES | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Cash provided by (used in): | | | |
Operating activities | $ | 15,116 | | | $ | 21,650 | |
Investing activities | (6,082) | | | 15,489 | |
Financing activities | (35,918) | | | (34,794) | |
Effect of exchange rates on cash and cash equivalents | (310) | | | (1,536) | |
Net (decrease) increase in cash and cash equivalents | $ | (27,194) | | | $ | 809 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
Cash provided by (used in): | | | |
Operating activities | $ | 21,650 | | | $ | (18,323) | |
Investing activities | 15,489 | | | (12,562) | |
Financing activities | (34,794) | | | 502,174 | |
Effect of exchange rates on cash and cash equivalents | (1,536) | | | (1,510) | |
Net increase in cash and cash equivalents | $ | 809 | | | $ | 469,779 | |
| (in thousands) | (in thousands) | March 31, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
Held by U.S. entities | Held by U.S. entities | $ | 342,016 | | | $ | 399,138 | | Held by U.S. entities | $ | 251,554 | | | $ | 274,813 | |
Held by foreign entities | Held by foreign entities | 100,342 | | | 66,030 | | Held by foreign entities | 80,618 | | | 87,966 | |
Total cash, cash equivalents, and marketable securities | Total cash, cash equivalents, and marketable securities | $ | 442,358 | | | $ | 465,168 | | Total cash, cash equivalents, and marketable securities | $ | 332,172 | | | $ | 362,779 | |
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.months and to meet our known long-term cash requirements. 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 support our operations. IfWe may utilize available funds or seek additional external financing if we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.resources.
If it becamebecomes necessary to repatriate foreign funds, we may be requiredhave to pay U.S. and foreign taxes upon repatriation. DueHowever, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.
Operating activities
We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud.arrangements. This transition has impacted and is expected to continue to impactimpacting our billings and cash collections, as the timing of billings and cash collections. Pega Cloud, termcollections generally differs between our subscription and perpetual license arrangements. Subscription licenses and maintenance arrangementsservices are generally billed and collected over the contract term, while perpetual license arrangements usually are generally billed and collected upfront when the license rights become effective. As client preferences shift in favor of Pega Cloud arrangements, we could experience slower operating cash flow growth, or negative cash flow, in the near term.
The change in cash provided by (used in) operating activities in the three months ended March 31, 20212022 was primarily due to a significant increaseour subscription transition and increased costs as we made investments in client collections.our Pega Cloud offering and selling and marketing activities to support future growth. 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, which is expected to be paidaddition, in the last quarterthree months ended March 31, 2022 we incurred $17.4 million in legal fees and related expenses arising from proceedings that originated outside of 2021. The accelerated exit fromthe ordinary course of business. We expect to continue to incur additional expenses for these proceedings. See "Note 14. Commitments and Contingencies" in Part I, Item 1 of this lease reduced our future lease liabilities by $21.1 million.Quarterly Report for additional information.
Investing activities
The change in cash (used in) provided by (used in) investing activities in the three months ended March 31, 20212022 was primarily driven by our investments in financial instruments and an acquisition and a decrease in office space related capital expenditures.2021.
Financing activities
Debt financing
In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, duewhich mature on March 1, 2025.
| | | | | | | | |
(in thousands) | | Amount |
Principal | $ | 600,000 | |
Less: issuance costs | (14,527) | |
Less: Capped Call Transactions | (51,900) | |
| | $ | 533,573 | |
In November 2019, and as since amended, as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of March 31, 2021,2022, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.
Stock repurchase program
Changes in the remaining stock repurchase authority:
| | | | | |
(in thousands) | Three Months Ended March 31, 20212022 |
December 31, 20202021 | $ | 37,72622,583 | |
Authorizations (1) | — | |
Repurchases (1)(2) | (9,146)(22,583) | |
March 31, 20212022 | $ | 28,580— | |
(1) PurchasesOn June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 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
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
(in thousands) | Shares | | Amount | | Shares | | Amount |
Tax withholdings for net settlement of equity awards | 197 | | | $ | 25,509 | | | 257 | | | $ | 23,011 | |
Stock repurchase program | 70 | | | 9,146 | | | 87 | | | 6,000 | |
| 267 | | | $ | 34,655 | | | 344 | | | $ | 29,011 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
(in thousands) | Shares | | Amount | | Shares | | Amount |
Repurchases paid | 242 | | | $ | 22,583 | | | 67 | | | $ | 8,846 | |
Repurchases unpaid at period end | — | | | — | | | 3 | | | 300 | |
Stock repurchase program | 242 | | | 22,583 | | | 70 | | | 9,146 | |
Tax withholdings for net settlement of equity awards | 141 | | | 12,128 | | | 197 | | | 25,509 | |
| 383 | | | $ | 34,711 | | | 267 | | | $ | 34,655 | |
During the three months ended March 31, 20212022 and 2020,2021, instead of receiving cash from the equity holders, we withheld shares with a value of $10.1$6.1 million and $15.3$10.1 million, respectively, for the exercise price of options. These amounts have been excluded fromare not included in the table above.
Dividends
We 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. | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Dividend payments to stockholders | $ | 2,454 | | | $ | 2,427 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
Dividend payments to stockholders | $ | 2,427 | | | $ | 2,388 | |
Contractual obligations
As of March 31, 2022, our contractual obligations were: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period | | |
(in thousands) | Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 and thereafter | | Other | | Total |
Convertible senior notes (1) | $ | 2,250 | | | $ | 4,500 | | | $ | 4,500 | | | $ | 602,250 | | | $ | — | | | $ | — | | | $ | — | | | $ | 613,500 | |
Purchase obligations (2) | 49,936 | | | 14,311 | | | 9,198 | | | 13,072 | | | 13,750 | | | — | | | — | | | 100,267 | |
Operating lease obligations | 3,887 | | | 20,317 | | | 17,141 | | | 14,352 | | | 10,664 | | | 48,381 | | | — | | | 114,742 | |
Liability for uncertain tax positions (3) | — | | | — | | | — | | | — | | | — | | | — | | | 1,705 | | | 1,705 | |
| $ | 56,073 | | | $ | 39,128 | | | $ | 30,839 | | | $ | 629,674 | | | $ | 24,414 | | | $ | 48,381 | | | $ | 1,705 | | | $ | 830,214 | |
(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(3) We are unable to reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk representsis the risk of loss from 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 have resulted in:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
(Decrease) increase in revenue | (4) | % | | (3) | % |
(Decrease) increase in net income | 20 | % | | (14) | % |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
(Decrease) increase in revenue | (3) | % | | (4) | % |
Increase (decrease) in net income | 186 | % | | 20 | % |
Remeasurement risk
We experience fluctuations inincur transaction gains and 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, 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 have resulted in the following impact:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2021 | | 2020 |
Foreign currency gain (loss) | $ | (7,522) | | | $ | 7,190 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Foreign currency gain (loss) | $ | (7,937) | | | $ | (7,522) | |
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 March 31, 2021.2022. 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 March 31, 2021.2022.
(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 March 31, 20212022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information contains an update to the description of our pending legal proceedings with Appian Corp., as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022.
Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.
On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). The jury trial began on March 21, 2022. On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets. This legal standard has not previously been adopted by the Virginia courts. The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect. The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.
ITEM 1A. RISK FACTORS
WeThe risk factors set forth below update the risk factors in our Annual Report on Form 10-K filed with the SEC on February 16, 2022.
In addition to the risk factors set forth below, we encourage you to carefully consider carefully the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and may 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.
We face risks related to intellectual property claims or appropriation of our intellectual property rights.
We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents in strategically important global markets relating to the architecture of our systems. We cannot be certain that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.
Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.
Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.
Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of equity securities
Common stock repurchased in the three months ended March 31, 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) |
January 1, 2021 - January 31, 2021 | 29 | | $ | 134.92 | | | 21 | | $ | 34,877 | |
February 1, 2021 - February 28, 2021 | 81 | | 140.75 | | | 20 | | $ | 32,028 | |
March 1, 2021 - March 31, 2021 | 234 | | 125.62 | | | 29 | | $ | 28,580 | |
| 344 | | $ | 129.95 | | | 70 | | |
2022: | | | | | | | | | | | | | | | | | | | | | | | |
(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) |
January 1, 2022 - January 31, 2022 | 118 | | | $ | 99.46 | | | 101 | | | $ | 12,584 | |
February 1, 2022 - February 28, 2022 | 141 | | | 90.97 | | | 103 | | | $ | 3,085 | |
March 1, 2022 - March 31, 2022 | 196 | | | 82.52 | | | 38 | | | $ | — | |
| 455 | | | $ | 89.54 | | | 242 | | | |
(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 Part I, Item 2 of this Quarterly Report for additional information.
ITEM 5. OTHER INFORMATION
Effective on March 31, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Amendment modifies the financial covenants as reflected in Note 8. Debt of Part I, Item 1 of this Quarterly Report on Form 10-Q and transitions the Credit Agreement from the U.S. dollar London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) for floating rate loan commitments under the Credit Agreement.
The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
| | | | | | | | |
Exhibit No. | | Description |
3.1 | | |
3.2 | | |
31.1+ | | |
31.2+ | | |
32++ | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
+ Filed herewith. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit No. | | Description | | Incorporation by Reference | | Filed Herewith |
| | Form | | Exhibit | | Filing Date | |
3.1 | | | | 10-Q | | 3.1 | | November 4, 2014 | | |
3.2 | | | | 8-K | | 3.2 | | June 15, 2020 | | |
10.1** | | | | | | | | | | X |
31.1 | | | | | | | | | | X |
31.2 | | | | | | | | | | X |
32++ | | | | | | | | | | X |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | X |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | X |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document. | | | | | | | | X |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | X |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document. | | | | | | | | X |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document. | | | | | | | | X |
104 | | Cover 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.
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: | April 28, 20212022 | By: | /s/ KENNETH STILLWELL |
| | | Kenneth Stillwell |
| | | Chief Operating Officer and Chief Financial Officer |
| | | (Principal Financial Officer) |