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 June 30, ~~2022~~2023


☐			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 Main Street, Cambridge, MA 02142

(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

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 ~~81,952,276~~83,247,963 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 19, ~~2022.~~2023.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 30, ~~2022~~2023 and December 31, ~~2021~~2022			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2022~~2023 and ~~2021~~2022			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) ~~Income~~ for the three and six months ended June 30, ~~2022~~2023 and ~~2021~~2022			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, ~~2022~~2023 and ~~2021~~2022			6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2022~~2023 and ~~2021~~2022			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2627
Item 4. Controls and Procedures			2728

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			2829
Item 1A. Risk Factors			2829
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 5. Other Information			29
Item 6. Exhibits			3029

Signature			3130

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	109,275	$	159,965	Cash and cash equivalents	$	186,874	$	145,054
Marketable securities	Marketable securities	187,613		202,814		Marketable securities	125,939		152,167
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	296,888		362,779		Total cash, cash equivalents, and marketable securities	312,813		297,221
Accounts receivable	Accounts receivable	171,556		182,717		Accounts receivable	163,915		255,150
Unbilled receivables	Unbilled receivables	201,130		226,714		Unbilled receivables	182,257		213,719
Other current assets	Other current assets	70,633		68,008		Other current assets	78,526		80,388
Total current assets	Total current assets	740,207		840,218		Total current assets	737,511		846,478
Unbilled receivables	Unbilled receivables	115,901		129,789		Unbilled receivables	70,486		95,806
Goodwill	Goodwill	81,717		81,923		Goodwill	81,593		81,399
Other long-term assets	Other long-term assets	320,557		541,601		Other long-term assets	302,848		333,989
Total assets	Total assets	$	1,258,382	$	1,593,531	Total assets	$	1,192,438	$	1,357,672
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	21,465	$	15,281	Accounts payable	$	8,438	$	18,195
Accrued expenses	Accrued expenses	63,120		63,890		Accrued expenses	53,110		50,355
Accrued compensation and related expenses	Accrued compensation and related expenses	73,945		120,946		Accrued compensation and related expenses	70,965		127,728
Deferred revenue	Deferred revenue	269,121		275,844		Deferred revenue	311,330		325,212
Other current liabilities	Other current liabilities	7,800		9,443		Other current liabilities	17,269		17,450
Total current liabilities	Total current liabilities	435,451		485,404		Total current liabilities	461,112		538,940
Convertible senior notes, net	Convertible senior notes, net	592,161		590,722		Convertible senior notes, net	498,140		593,609
Operating lease liabilities	Operating lease liabilities	84,170		87,818		Operating lease liabilities	72,886		79,152
Other long-term liabilities	Other long-term liabilities	12,821		13,499		Other long-term liabilities	14,904		15,128
Total liabilities	Total liabilities	1,124,603		1,177,443		Total liabilities	1,047,042		1,226,829
Commitments and contingencies (Note 14)		0		0
Commitments and contingencies (Note 15)						Commitments and contingencies (Note 15)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	Preferred stock, 1,000 shares authorized; none issued	—		—		Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		819		817
Common stock, 200,000 shares authorized; 83,212 and 82,436 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively						Common stock, 200,000 shares authorized; 83,212 and 82,436 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	832		824
Additional paid-in capital	Additional paid-in capital	170,251		145,810		Additional paid-in capital	310,016		229,602
(Accumulated deficit) retained earnings		(15,140)		276,449
Accumulated deficit						Accumulated deficit	(144,091)		(76,513)
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(22,151)		(6,988)		Accumulated other comprehensive (loss)	(21,361)		(23,070)
Total stockholders’ equity	Total stockholders’ equity	133,779		416,088		Total stockholders’ equity	145,396		130,843
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,258,382	$	1,593,531	Total liabilities and stockholders’ equity	$	1,192,438	$	1,357,672

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 June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Revenue	Revenue									Revenue
Subscription services	Subscription services	$	171,832	$	152,075	$	341,865	$	295,494	Subscription services	$	197,105	$	171,832	$	384,614	$	341,865
Subscription license	Subscription license	41,600		104,296		179,133		215,805		Subscription license	41,197		41,600		125,724		179,133
Consulting										Consulting	58,387		58,639		111,420		119,940
Perpetual license	Perpetual license	2,266		12,596		9,706		18,048		Perpetual license	1,579		2,266		1,982		9,706
Consulting		58,639		56,735		119,940		109,854
Total revenue	Total revenue	274,337		325,702		650,644		639,201		Total revenue	298,268		274,337		623,740		650,644
Cost of revenue	Cost of revenue									Cost of revenue
Subscription services	Subscription services	36,533		29,046		68,563		57,389		Subscription services	36,783		36,533		73,647		68,563
Subscription license	Subscription license	673		585		1,295		1,205		Subscription license	623		673		1,342		1,295
Consulting										Consulting	58,710		57,873		119,058		113,384
Perpetual license	Perpetual license	36		71		70		101		Perpetual license	24		36		27		70
Consulting		57,873		54,829		113,384		108,283
Total cost of revenue	Total cost of revenue	95,115		84,531		183,312		166,978		Total cost of revenue	96,140		95,115		194,074		183,312
Gross profit	Gross profit	179,222		241,171		467,332		472,223		Gross profit	202,128		179,222		429,666		467,332
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	157,198		156,423		319,434		305,162		Selling and marketing	143,858		157,198		293,655		319,434
Research and development	Research and development	74,341		64,395		145,831		126,837		Research and development	73,931		74,341		149,307		145,831
General and administrative	General and administrative	32,723		19,161		68,487		37,431		General and administrative	23,462		32,723		46,572		68,487
Restructuring										Restructuring	2,167		—		3,628		—
Total operating expenses	Total operating expenses	264,262		239,979		533,752		469,430		Total operating expenses	243,418		264,262		493,162		533,752
(Loss) income from operations		(85,040)		1,192		(66,420)		2,793
Foreign currency transaction gain (loss)		1,713		(403)		4,589		(5,501)
(Loss) from operations										(Loss) from operations	(41,290)		(85,040)		(63,496)		(66,420)
Foreign currency transaction (loss) gain										Foreign currency transaction (loss) gain	(3,290)		1,713		(5,965)		4,589
Interest income	Interest income	309		236		516		389		Interest income	1,814		309		3,299		516
Interest expense	Interest expense	(1,944)		(1,959)		(3,890)		(3,839)		Interest expense	(1,778)		(1,944)		(3,696)		(3,890)
(Loss) income on capped call transactions	(Loss) income on capped call transactions	(18,945)		26,309		(49,505)		7,192		(Loss) income on capped call transactions	(1,361)		(18,945)		1,845		(49,505)
Other income, net	Other income, net	3,785		—		6,526		106		Other income, net	5,702		3,785		12,285		6,526
(Loss) income before provision for (benefit from) income taxes		(100,122)		25,375		(108,184)		1,140
Provision for (benefit from) income taxes		186,174		(11,916)		178,491		(29,534)
Net (loss) income		$	(286,296)	$	37,291	$	(286,675)	$	30,674
(Loss) earnings per share
(Loss) before provision for income taxes										(Loss) before provision for income taxes	(40,203)		(100,122)		(55,728)		(108,184)
Provision for income taxes										Provision for income taxes	6,601		186,174		11,850		178,491
Net (loss)										Net (loss)	$	(46,804)	$	(286,296)	$	(67,578)	$	(286,675)
(Loss) per share										(Loss) per share
Basic	Basic	$	(3.50)	$	0.46	$	(3.51)	$	0.38	Basic	$	(0.56)	$	(3.50)	$	(0.82)	$	(3.51)
Diluted	Diluted	$	(3.50)	$	0.43	$	(3.51)	$	0.36	Diluted	$	(0.56)	$	(3.50)	$	(0.82)	$	(3.51)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	81,847		81,316		81,764		81,161		Basic	83,039		81,847		82,823		81,764
Diluted	Diluted	81,847		90,320		81,764		86,006		Diluted	83,039		81,847		82,823		81,764

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Net (loss) income $ (286,296) $ 37,291 $ (286,675) $ 30,674
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities (1,149) 121 (927) 1,131
Foreign currency translation adjustments (11,466) 1,461 (14,236) 731
Total other comprehensive (loss) income, net of tax $ (12,615) $ 1,582 $ (15,163) $ 1,862
Comprehensive (loss) income $ (298,911) $ 38,873 $ (301,838) $ 32,536


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net (loss)	$	(46,804)	$	(286,296)	$	(67,578)	$	(286,675)
Other comprehensive income (loss), net of tax
Unrealized (loss) on available-for-sale securities	(195)		(1,149)		(241)		(927)
Foreign currency translation adjustments	361		(11,466)		1,950		(14,236)
Total other comprehensive income (loss), net of tax	$	166	$	(12,615)	1,709		(15,163)
Comprehensive (loss)	$	(46,638)	$	(298,911)	$	(65,869)	$	(301,838)

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 Deficit)		Accumulated Other Comprehensive (Loss)				Total Stockholders’ Equity
		Number of Shares	Amount
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)
Repurchase of common stock		(70)	(1)		(9,145)				—		—				(9,146)
Issuance of common stock for stock compensation plans		402	4		(25,513)				—		—				(25,509)
Issuance of common stock under the employee stock purchase plan		24	—		2,288				—		—				2,288
Stock-based compensation		—	—		30,100				—		—				30,100
Cash dividends declared ($0.03 per share)		—	—		—				(2,438)		—				(2,438)
Other comprehensive income		—	—		—				—		280				280
Net (loss)		—	—		—				(6,617)		—				(6,617)
March 31, 2021		81,246	$	812	$	140,558			$	340,223	$	(2,668)			$	478,925
Repurchase of common stock		(81)	(1)		(10,245)				—		—				(10,246)
Issuance of common stock for stock compensation plans		267	3		(16,199)				—		—				(16,196)
Issuance of common stock under the employee stock purchase plan		24	1		2,858				—		—				2,859
Stock-based compensation		—	—		30,698				—		—				30,698
Cash dividends declared ($0.03 per share)		—	—		—				(2,445)		—				(2,445)
Other comprehensive income		—	—		—				—		1,582				1,582
Net income		—	—		—				37,291		—				37,291
June 30, 2021		81,456	$	815	$	147,670			$	375,069	$	(1,086)			$	522,468

																		Common Stock						Additional Paid-In Capital				Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
																		Number of Shares			Amount
December 31, 2021	December 31, 2021	81,712	$	817	$	145,810			$	276,449	$	(6,988)			$	416,088	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)		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 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		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		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)		Cash dividends declared ($0.03 per share)	—			—			—				(2,455)		—		(2,455)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—		(2,548)				(2,548)		Other comprehensive (loss)	—			—			—				—		(2,548)		(2,548)
Net (loss)	Net (loss)	—	—		—				(379)		—				(379)		Net (loss)	—			—			—				(379)		—		(379)
March 31, 2022	March 31, 2022	81,802	$	818	$	141,771			$	273,615	$	(9,536)			$	406,668	March 31, 2022	81,802			$	818		$	141,771			$	273,615	$	(9,536)	$	406,668
Repurchase of common stock	Repurchase of common stock	(38)	—		(1,925)				—		—				(1,925)		Repurchase of common stock	(38)			—			(1,925)				—		—		(1,925)
Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	117	1		(3,252)				—		—				(3,251)		Issuance of common stock for stock compensation plans	117			1			(3,252)				—		—		(3,251)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	59	—		2,357				—		—				2,357		Issuance of common stock under the employee stock purchase plan	59			—			2,357				—		—		2,357
Stock-based compensation	Stock-based compensation	—	—		31,300				—		—				31,300		Stock-based compensation	—			—			31,300				—		—		31,300
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,459)		—				(2,459)		Cash dividends declared ($0.03 per share)	—			—			—				(2,459)		—		(2,459)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—		(12,615)				(12,615)		Other comprehensive (loss)	—			—			—				—		(12,615)		(12,615)
Net (loss)	Net (loss)	—	—		—				(286,296)		—				(286,296)		Net (loss)	—			—			—				(286,296)		—		(286,296)
June 30, 2022	June 30, 2022	81,940	$	819	$	170,251			$	(15,140)	$	(22,151)			$	133,779	June 30, 2022	81,940			$	819		$	170,251			$	(15,140)	$	(22,151)	$	133,779

December 31, 2022																	December 31, 2022	82,436			$	824		$	229,602			$	(76,513)	$	(23,070)	$	130,843

Issuance of common stock for stock compensation plans																	Issuance of common stock for stock compensation plans	452			4			668				—		—		672
Issuance of common stock under the employee stock purchase plan																	Issuance of common stock under the employee stock purchase plan	52			1			2,142				—		—		2,143
Stock-based compensation																	Stock-based compensation	—			—			42,557				—		—		42,557
Cash dividends declared ($0.03 per share)																	Cash dividends declared ($0.03 per share)	—			—			(2,488)				—		—		(2,488)
Other comprehensive income																	Other comprehensive income	—			—			—				—		1,543		1,543
Net (loss)																	Net (loss)	—			—			—				(20,774)		—		(20,774)
March 31, 2023																	March 31, 2023	82,940			$	829		$	272,481			$	(97,287)	$	(21,527)	$	154,496

Issuance of common stock for stock compensation plans																	Issuance of common stock for stock compensation plans	225			2			1,824				—		—		1,826
Issuance of common stock under the employee stock purchase plan																	Issuance of common stock under the employee stock purchase plan	47			1			1,980				—		—		1,981
Stock-based compensation																	Stock-based compensation	—			—			36,227				—		—		36,227
Cash dividends declared ($0.03 per share)																	Cash dividends declared ($0.03 per share)	—			—			(2,496)				—		—		(2,496)
Other comprehensive income																	Other comprehensive income	—			—			—				—		166		166
Net (loss)																	Net (loss)	—			—			—				(46,804)		—		(46,804)
June 30, 2023																	June 30, 2023	83,212			$	832		$	310,016			$	(144,091)	$	(21,361)	$	145,396

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)
		Six Months Ended June 30,					Six Months Ended June 30,
		2022		2021			2023		2022
Operating activities	Operating activities					Operating activities
Net (loss) income		$	(286,675)	$	30,674
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Net (loss)						Net (loss)	$	(67,578)	$	(286,675)
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities						Adjustments to reconcile net (loss) to cash provided by (used in) operating activities
Stock-based compensation	Stock-based compensation	59,527		60,788		Stock-based compensation	78,784		59,527
Deferred income taxes	Deferred income taxes	169,105		(28,232)		Deferred income taxes	(136)		169,105
Loss (gain) on capped call transactions		49,505		(7,192)
(Gain) loss on capped call transactions						(Gain) loss on capped call transactions	(1,845)		49,505
Amortization of deferred commissions	Amortization of deferred commissions	28,155		21,202		Amortization of deferred commissions	29,027		28,155
Lease expense	Lease expense	7,832		5,792		Lease expense	8,186		7,832
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	8,175		15,504		Amortization of intangible assets and depreciation	9,553		8,175
Foreign currency transaction (gain) loss		(4,589)		5,501
Foreign currency transaction loss (gain)						Foreign currency transaction loss (gain)	5,965		(4,589)
Other non-cash	Other non-cash	(3,479)		3,543		Other non-cash	(10,163)		(3,479)
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(32,625)		(88,170)		Change in operating assets and liabilities, net	61,959		(32,625)
Cash (used in) provided by operating activities		(5,069)		19,410
Cash provided by (used in) operating activities						Cash provided by (used in) operating activities	113,752		(5,069)
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(38,489)		(51,601)		Purchases of investments	(69,662)		(38,489)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	34,912		68,798		Proceeds from maturities and called investments	88,849		34,912
Sales of investments	Sales of investments	14,839		2,450		Sales of investments	10,725		14,839
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	(922)		(4,993)		Payments for acquisitions, net of cash acquired	—		(922)
Investment in property and equipment	Investment in property and equipment	(11,863)		(4,161)		Investment in property and equipment	(13,933)		(11,863)
Cash (used in) provided by investing activities		(1,523)		10,493
Cash provided by (used in) investing activities						Cash provided by (used in) investing activities	15,979		(1,523)
Financing activities	Financing activities					Financing activities

Repurchases of convertible senior notes						Repurchases of convertible senior notes	(88,989)		—
Proceeds from settlement of capped calls transactions						Proceeds from settlement of capped calls transactions	341		—
Dividend payments to stockholders						Dividend payments to stockholders	(4,962)		(4,908)
Proceeds from employee stock purchase plan	Proceeds from employee stock purchase plan	4,803		5,146		Proceeds from employee stock purchase plan	4,124		4,803
Dividend payments to stockholders		(4,908)		(4,865)

Proceeds from stock option exercises						Proceeds from stock option exercises	3,920		—

Common stock repurchases	Common stock repurchases	(41,086)		(60,998)		Common stock repurchases	(1,422)		(41,086)
Cash (used in) financing activities	Cash (used in) financing activities	(41,191)		(60,717)		Cash (used in) financing activities	(86,988)		(41,191)
Effect of exchange rate changes on cash and cash equivalents		(2,907)		(1,207)
Net (decrease) in cash and cash equivalents		(50,690)		(32,021)
Cash and cash equivalents, beginning of period		159,965		171,899
Cash and cash equivalents, end of period		$	109,275	$	139,878
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						Effect of exchange rate changes on cash, cash equivalents, and restricted cash	1,010		(2,907)
Net increase (decrease) in cash, cash equivalents, and restricted cash						Net increase (decrease) in cash, cash equivalents, and restricted cash	43,753		(50,690)
Cash, cash equivalents, and restricted cash, beginning of period						Cash, cash equivalents, and restricted cash, beginning of period	145,054		159,965
Cash, cash equivalents, and restricted cash, end of period						Cash, cash equivalents, and restricted cash, end of period	$	188,807	$	109,275

Cash and cash equivalents						Cash and cash equivalents	$	186,874	$	109,275
Restricted cash included in other long-term assets						Restricted cash included in other long-term assets	1,933		—
Total cash, cash equivalents, and restricted cash						Total cash, cash equivalents, and restricted cash	$	188,807	$	109,275

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 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, ~~2021.~~2022.

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 do not necessarily indicate the expected results for ~~the full year 2022.~~

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.2023.

NOTE 2. MARKETABLE SECURITIES


		June 30, 2022								December 31, 2021									June 30, 2023								December 31, 2022
(in thousands)	(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	Government debt	$	2,989	$	—	$	(60)	$	2,929	$	2,000	$	—	$	(10)	$	1,990	Government debt	$	16,372	$	—	$	(17)	$	16,355	$	2,960	$	—	$	(52)	$	2,908
Corporate debt	Corporate debt	188,350		—		(3,666)		184,684		201,659		2		(837)		200,824		Corporate debt	110,483		—		(899)		109,584		151,906		—		(2,647)		149,259
		$	191,339	$	—	$	(3,726)	$	187,613	$	203,659	$	2	$	(847)	$	202,814		$	126,855	$	—	$	(916)	$	125,939	$	154,866	$	—	$	(2,699)	$	152,167

As of June 30, ~~2022,~~2023, marketable securities’ maturities ranged from July ~~2022~~2023 to ~~November 2024,~~January 2026, with a ~~weighted-average~~weighted average remaining maturity of ~~0.9~~0.4 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Accounts receivable	Accounts receivable	$	171,556	$	182,717	Accounts receivable	$	163,915	$	255,150
Unbilled receivables	Unbilled receivables	201,130		226,714		Unbilled receivables	182,257		213,719
Long-term unbilled receivables	Long-term unbilled receivables	115,901		129,789		Long-term unbilled receivables	70,486		95,806
		$	488,587	$	539,220		$	416,658	$	564,675

Unbilled receivables

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

Unbilled receivables by expected billing date:


(Dollars in thousands)	(Dollars in thousands)	June 30, 2022				(Dollars in thousands)	June 30, 2023
1 year or less	1 year or less	$	201,130	63	%	1 year or less	$	182,257	72	%
1-2 years	1-2 years	78,813		25	%	1-2 years	58,025		23	%
2-5 years	2-5 years	37,088		12	%	2-5 years	12,461		5	%
		$	317,031	100	%		$	252,743	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	June 30, 2022				(Dollars in thousands)	June 30, 2023
2023						2023	$	62,243	25	%
2022	2022	$	81,887	26	%	2022	88,337		35	%
2021	2021	142,578		45	%	2021	67,852		27	%
2020	2020	56,283		18	%	2020	23,157		9	%
2019		19,928		6	%
2018 and prior		16,355		5	%
2019 and prior						2019 and prior	11,154		4	%
		$	317,031	100	%		$	252,743	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Major clients~~

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


	~~June 30, 2022~~	~~December 31, 2021~~
~~Client A~~
~~Accounts receivable~~	*	1	%
~~Unbilled receivables~~	*	15	%
~~Total receivables~~	*	10	%

* Client accounted for less than 10% of receivables

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 the completion of a related performance obligation.


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Contract assets (1)	Contract assets (1)	$	12,149	$	12,530	Contract assets (1)	$	13,850	$	17,546
Long-term contract assets (2)	Long-term contract assets (2)	12,983		10,643		Long-term contract assets (2)	11,126		16,470
		$	25,132	$	23,173		$	24,976	$	34,016

(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)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	269,121	$	275,844	Deferred revenue	$	311,330	$	325,212
Long-term deferred revenue (1)	Long-term deferred revenue (1)	5,417		5,655		Long-term deferred revenue (1)	3,020		3,552
		$	274,538	$	281,499		$	314,350	$	328,764

(1) Included in other long-term liabilities.

~~The change in deferred~~Deferred revenue decreased in the six months ended June 30, ~~2022 was~~2023 primarily due to ~~new billings in advance of revenue recognition offset by $205.0~~$230.3 million of revenue recognized during the period ~~that was~~ included in deferred revenue as of December 31, ~~2021.~~2022 exceeded new billings in advance of revenue recognition.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Deferred commissions (1)	Deferred commissions (1)	$	123,067	$	135,911	Deferred commissions (1)	$	114,406	$	130,195

(1) Included in other long-term assets.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Amortization of deferred commissions (1)	Amortization of deferred commissions (1)	$	10,934	$	9,706	$	28,155	$	21,202	Amortization of deferred commissions (1)	$	14,750	$	10,934	$	29,027	$	28,155

(1) Included in selling and ~~marketing expense.~~

marketing.

~~PEGASYSTEMS INC.~~

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

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill

~~Change in goodwill:~~


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	81,923	$	79,231	January 1,	$	81,399	$	81,923
Acquisition		—		2,701

Currency translation adjustments	Currency translation adjustments	(206)		241		Currency translation adjustments	194		(206)
June 30,	June 30,	$	81,717	$	82,173	June 30,	$	81,593	$	81,717

Intangibles

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


			June 30, 2022								June 30, 2023
(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	$	63,082	$	(57,944)	$	5,138	Client-related	4-10 years	$	63,111	$	(59,344)	$	3,767
Technology	Technology	2-10 years	68,064		(60,211)		7,853		Technology	2-10 years	68,137		(62,972)		5,165
Other	Other	1-5 years	5,361		(5,361)		—		Other	1-5 years	5,361		(5,361)		—
			$	136,507	$	(123,516)	$	12,991			$	136,609	$	(127,677)	$	8,932

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2021
(in thousands) Useful Lives Cost Accumulated Amortization
Net Book Value (1)
Client-related 4-10 years $ 63,165 $ (57,342) $ 5,823
Technology 2-10 years 67,142 (58,902) 8,240
Other 1-5 years 5,361 (5,361) —
$ 135,668 $ (121,605) $ 14,063


		December 31, 2022
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,076	$	(58,623)	$	4,453
Technology	2-10 years	68,056		(61,621)		6,435
Other	1-5 years	5,361		(5,361)		—
		$	136,493	$	(125,605)	$	10,888

(1) Included in other long-term assets.

~~Amortization of intangible assets:~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2022 2021 2022 2021
Cost of revenue $ 683 $ 629 $ 1,312 $ 1,258
Selling and marketing 342 373 685 746
$ 1,025 $ 1,002 $ 1,997 $ 2,004

Future estimated intangibles assets amortization:


(in thousands)	(in thousands)	June 30, 2022		(in thousands)	June 30, 2023
Remainder of 2022		$	2,098
2023		3,925
Remainder of 2023				Remainder of 2023	$	1,932
2024	2024	3,156		2024	3,180
2025	2025	2,611		2025	2,619
2026	2026	874		2026	874
2027	2027	327		2027	327
		$	12,991
					$	8,932

Amortization of intangible assets:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Cost of revenue	$	621	$	683	$	1,327	$	1,312
Selling and marketing	342		342		685		685

	$	963	$	1,025	$	2,012	$	1,997

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Income tax receivables	Income tax receivables	$	22,982	$	25,691	Income tax receivables	$	21,383	$	25,354
Contract assets	Contract assets	12,149		12,530		Contract assets	13,850		17,546
Other	Other	35,502		29,787		Other	43,293		37,488
		$	70,633	$	68,008		$	78,526	$	80,388

Other long-term assets


(in thousands)	June 30, 2023		December 31, 2022
Deferred commissions	$	114,406	$	130,195
Right of use assets	69,839		76,114
Property and equipment	52,698		55,056
Venture investments	13,382		13,069
Contract assets	11,126		16,470
Intangible assets	8,932		10,888
Capped call transactions	4,086		2,582
Deferred income taxes	4,836		4,795
Restricted cash	1,933		—
Other	21,610		24,820
	$	302,848	$	333,989

Other current liabilities


(in thousands)	June 30, 2023		December 31, 2022
Operating lease liabilities	$	14,773	$	14,976
Dividends payable	2,496		2,474
	$	17,269	$	17,450

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term ~~assets~~

(in thousands) June 30, 2022 December 31, 2021
Deferred income taxes $ 6,092 $ 180,656
Deferred commissions 123,067 135,911
Right of use assets 80,646 87,521
Capped call transactions 10,459 59,964
Property and equipment 34,886 26,837
Venture investments 16,073 7,648
Intangible assets 12,991 14,063
Contract assets 12,983 10,643
Other 23,360 18,358
$ 320,557 $ 541,601

~~Other current~~ liabilities

(in thousands) June 30, 2022 December 31, 2021
Operating lease liabilities $ 5,341 $ 6,989
Dividends payable 2,459 2,454
$ 7,800 $ 9,443

~~Other long-term liabilities~~


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	5,417	$	5,655	Deferred revenue	$	3,020	$	3,552
Income taxes payable						Income taxes payable	3,989		3,207
Other	Other	7,404		7,844		Other	7,895		8,369
		$	12,821	$	13,499		$	14,904	$	15,128

NOTE 7. LEASES

~~Corporate headquarters~~

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of 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 real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, 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
June 30, Six Months Ended
June 30,
(in thousands) 2022 2021 2022 2021
Fixed lease costs (1)
$ 4,965 $ (3,972) $ 10,059 $ (3,672)
Short-term lease costs 787 515 1,594 974
Variable lease costs 727 1,340 1,491 2,727
$ 6,479 $ (2,117) $ 13,144 $ 29

~~(1) The lower fixed lease costs in the six months ended June 30, 2021 was due to the modification of the corporate headquarters lease.~~

~~PEGASYSTEMS INC.~~

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


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Fixed lease costs	$	4,495	$	4,965	$	10,261	$	10,059
Short-term lease costs	696		787		1,477		1,594
Variable lease costs	2,186		727		4,160		1,491
	$	7,377	$	6,479	$	15,898	$	13,144

Right of use assets and lease liabilities


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Right of use assets (1)	Right of use assets (1)	$	80,646	$	87,521	Right of use assets (1)	$	69,839	$	76,114
Operating lease liabilities (2)	Operating lease liabilities (2)	$	5,341	$	6,989	Operating lease liabilities (2)	$	14,773	$	14,976
Long-term operating lease liabilities	Long-term operating lease liabilities	$	84,170	$	87,818	Long-term operating lease liabilities	$	72,886	$	79,152

(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:

June 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Weighted-average remaining lease term

7.5 years

7.7 years

Weighted-average remaining lease term

7.1 years

7.5 years

Weighted-average discount rate (1)

4.2

4.4

Weighted-average discount rate (1)

4.0

4.1

(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)	(in thousands)	June 30, 2022		(in thousands)	June 30, 2023
Remainder of 2022		$	(401)
2023		18,837
Remainder of 2023				Remainder of 2023	$	8,596
2024	2024	16,290		2024	18,024
2025	2025	14,118		2025	14,869
2026	2026	10,507		2026	10,940
2027 and thereafter		47,910
2027				2027	9,882
2028				2028	9,312
Thereafter				Thereafter	30,149
Total lease payments	Total lease payments	107,261		Total lease payments	101,772
Less: imputed interest (1)	Less: imputed interest (1)	(17,750)		Less: imputed interest (1)	(14,113)
		$	89,511		$	87,659

(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


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash paid for leases		$	7,296	$	11,605
Cash paid for operating leases, net of tenant improvement allowances						Cash paid for operating leases, net of tenant improvement allowances	$	10,540	$	7,296
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	2,223	$	10,160	Right of use assets recognized for new leases and amendments (non-cash)	$	1,465	$	2,223

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 due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

In the three and six months ended June 30, 2023, the Company recognized gains of $5.1 million and $7.9 million, respectively, in other income, net from repurchases of Notes representing $64.7 million and $97.7 million, respectively, in aggregate principal amount.

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:

•During any calendar quarter beginning 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.

~~PEGASYSTEMS INC.~~

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

•During the 5five consecutive business days immediately after any 5five 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 June 30, ~~2022,~~2023, the Notes were not eligible for 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.

Carrying value of the Notes:


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Principal	Principal	$	600,000	$	600,000	Principal	$	502,270	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(7,839)		(9,278)		Unamortized issuance costs	(4,130)		(6,391)
Convertible senior notes, net	Convertible senior notes, net	$	592,161	$	590,722	Convertible senior notes, net	$	498,140	$	593,609

Interest expense related to the Notes:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Contractual interest expense (0.75% coupon)	Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	2,250	$	2,250	Contractual interest expense (0.75% coupon)	$	997	$	1,125	$	2,122	$	2,250
Amortization of issuance costs	Amortization of issuance costs	720		675		1,439		1,348		Amortization of issuance costs	647		720		1,375		1,439
		$	1,845	$	1,800	$	3,689	$	3,598		$	1,644	$	1,845	$	3,497	$	3,689

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The ~~effective~~average interest rate ~~for~~on the ~~Notes:~~
Six Months Ended
June 30,
2022 2021
Weighted-average effective interest rate 1.2 % 1.2 %
Notes in the six months ended June 30, 2023 and 2022 was 1.2%.

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


		June 30, 2022							June 30, 2023
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total
Remainder of 2022		$	—	$	2,250	$	2,250
2023		—		4,500		4,500
Remainder of 2023								Remainder of 2023	$	—	$	1,998	$	1,998
2024	2024	—		4,500		4,500		2024	—		3,767		3,767
2025	2025	600,000		2,250		602,250		2025	502,270		1,884		504,154
		$	600,000	$	13,500	$	613,500		$	502,270	$	7,649	$	509,919

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions ~~cover~~covered approximately 4.4 million shares (representing the number of shares for which the Notes ~~are~~were initially convertible) of the Company’s common stock.

In the three and six months ended June 30, 2023, Capped Call Transactions covering approximately 0.5 million and 0.7 million shares, respectively, were settled for proceeds of $0.1 million and $0.3 million, respectively.

As of June 30, 2023, Capped Call Transactions representing approximately 3.7 million shares were outstanding.

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

~~PEGASYSTEMS INC.~~

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

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 following the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as other long-term assets and remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	59,964	$	83,597	January 1,	$	2,582	$	59,964
Settlements						Settlements	(341)		—
Fair value adjustment	Fair value adjustment	(49,505)		7,192		Fair value adjustment	1,845		(49,505)
June 30,	June 30,	$	10,459	$	90,789	June 30,	$	4,086	$	10,459

Credit facility

In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the ~~Credit Facility allows~~agreement of the ~~Company to increase~~financial institutions lending the additional amount, the aggregate commitment may be increased 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 required to comply with financial covenants, including:

•~~Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended~~Through December 31, ~~2022, Pegasystems Inc.~~2023, the parent company must maintain at least $200 million in cash, investments, and availability under the ~~Revolving~~ Credit ~~Loan.~~Facility and the Company must maintain:


	Year to Date
(in thousands)	March 31, 2023		June 30, 2023		September 30, 2023		December 31, 2023
Minimum Consolidated EBITDA (as defined in the Credit Facility)	$	38,862	$	59,894	$	95,597	$	214,590

•Beginning with the fiscal quarter ended March 31, ~~2023,~~2024, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had $27.3 million in outstanding letters of credit, which reduced the Company’s available borrowing capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. RESTRUCTURING

The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:


	Three months ended	Expense
Employee severance and related benefits and closure of a US office	December 31, 2022	$	21,743
Office space reduction	March 31, 2023	$	1,241
Employee severance and related benefits	June 30, 2023	$	1,581

Accrued employee severance and related benefits:

Change for all restructuring actions:


	Six Months Ended June 30,
(in thousands)	2023
January 1,	$	18,573
Costs incurred	2,387
Cash disbursements	(17,521)
Currency translation adjustments	185
June 30,	$	3,624

NOTE 9.10. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

•Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities;

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

•Level 3 - significant unobservable inputs ~~on which there is~~with 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 model uses 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~~the underlying equity security’s historical and implied volatility ~~levels of the underlying equity security.~~levels. 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:


		June 30, 2022								December 31, 2021									June 30, 2023								December 31, 2022
(in thousands)	(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	Cash equivalents	$	1,127	$	—	$	—	$	1,127	$	3,216	$	—	$	—	$	3,216	Cash equivalents	$	16,733	$	—	$	—	$	16,733	$	2,526	$	—	$	—	$	2,526
Marketable securities	Marketable securities	$	—	$	187,613	$	—	$	187,613	$	—	$	202,814	$	—	$	202,814	Marketable securities	$	—	$	125,939	$	—	$	125,939	$	—	$	152,167	$	—	$	152,167
Capped Call Transactions (1)	Capped Call Transactions (1)	$	—	$	10,459	$	—	$	10,459	$	—	$	59,964	$	—	$	59,964	Capped Call Transactions (1)	$	—	$	4,086	$	—	$	4,086	$	—	$	2,582	$	—	$	2,582
Venture investments (1) (2)	Venture investments (1) (2)	$	—	$	—	$	16,073	$	16,073	$	—	$	—	$	7,648	$	7,648	Venture investments (1) (2)	$	—	$	—	$	13,382	$	13,382	$	—	$	—	$	13,069	$	13,069

(1) Included in other long-term assets. (2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in venture investments:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	7,648	$	8,345	January 1,	$	13,069	$	7,648
New investments	New investments	400		500		New investments	400		400
Sales of investments	Sales of investments	(165)		(400)		Sales of investments	(2,773)		(165)
Changes in foreign exchange rates	Changes in foreign exchange rates	(290)		14		Changes in foreign exchange rates	119		(290)
Changes in fair value:	Changes in fair value:					Changes in fair value:
included in other income		5,978		100
included in other comprehensive income		2,502		1,220
included in other income, net						included in other income, net	4,475		5,978
included in other comprehensive (loss)						included in other comprehensive (loss)	(1,908)		2,502
June 30,	June 30,	$	16,073	$	9,779	June 30,	$	13,382	$	16,073

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

Fair value of the Notes

The ~~Notes’~~ fair value of the Notes outstanding (including the embedded conversion ~~feature embedded in the Notes)~~feature) was ~~$482.5~~$460.8 million as of June 30, ~~2022~~2023 and ~~$642.0~~$521.1 million as of December 31, ~~2021.~~ 2022. In the six months ended June 30, 2023 the Company repurchased Notes representing $97.7 million in aggregate principal amount.

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.

NOTE ~~10.~~11. REVENUE

Geographic revenue


		Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2022				2021					2022				2021				(Dollars in thousands)	2023				2022					2023				2022
U.S.	U.S.	$	147,725	54	%	$	189,297	58	%		$	364,997	55	%	$	383,865	60	%	U.S.	$	150,385	50	%	$	147,725	54	%		$	334,904	54	%	$	364,997	55	%
Other Americas	Other Americas	16,261		6	%	14,058		4	%		62,012		10	%	25,959		4	%	Other Americas	19,505		7	%	16,261		6	%		34,516		6	%	62,012		10	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)	28,831		11	%	32,553		10	%		59,763		9	%	60,765		10	%	United Kingdom (“U.K.”)	28,892		10	%	28,831		11	%		71,129		11	%	59,763		9	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa	45,238		16	%	45,798		14	%		94,374		15	%	97,457		15	%	Europe (excluding U.K.), Middle East, and Africa	54,353		18	%	45,238		16	%		105,671		17	%	94,374		15	%
Asia-Pacific	Asia-Pacific	36,282		13	%	43,996		14	%		69,498		11	%	71,155		11	%	Asia-Pacific	45,133		15	%	36,282		13	%		77,520		12	%	69,498		11	%
		$	274,337	100	%	$	325,702	100	%		$	650,644	100	%	$	639,201	100	%		$	298,268	100	%	$	274,337	100	%		$	623,740	100	%	$	650,644	100	%

Revenue streams

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2022 2021 2022 2021
Perpetual license 2,266 12,596 $ 9,706 $ 18,048
Subscription license 41,600 104,296 179,133 215,805
Revenue recognized at a point in time 43,866 116,892 188,839 233,853
Maintenance 78,326 78,782 158,042 154,343
Pega Cloud 93,506 73,293 183,823 141,151
Consulting 58,639 56,735 119,940 109,854
Revenue recognized over time 230,471 208,810 461,805 405,348
Total revenue $ 274,337 $ 325,702 $ 650,644 $ 639,201


		Three Months Ended June 30,			Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022	2021		2022		2021		(in thousands)	2023		2022		2023		2022
Perpetual license									Perpetual license	$	1,579	$	2,266	$	1,982	$	9,706
Subscription license									Subscription license	41,197		41,600		125,724		179,133
Revenue recognized at a point in time									Revenue recognized at a point in time	42,776		43,866		127,706		188,839
Maintenance									Maintenance	82,042		78,326		161,672		158,042
Pega Cloud	Pega Cloud	93,506		73,293	$	183,823	$	141,151	Pega Cloud	115,063		93,506		222,942		183,823
Maintenance		78,326		78,782	158,042		154,343
Subscription services		171,832		152,075	341,865		295,494
Subscription license		41,600		104,296	179,133		215,805
Subscription		213,432		256,371	520,998		511,299
Perpetual license		2,266		12,596	9,706		18,048
Consulting	Consulting	58,639		56,735	119,940		109,854		Consulting	58,387		58,639		111,420		119,940
		274,337		325,702	$	650,644	$	639,201
Revenue recognized over time									Revenue recognized over time	255,492		230,471		496,034		461,805
Total revenue									Total revenue	$	298,268	$	274,337	$	623,740	$	650,644

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Pega Cloud	$	115,063	$	93,506	$	222,942	$	183,823
Maintenance	82,042		78,326		161,672		158,042
Subscription services	197,105		171,832		384,614		341,865
Subscription license	41,197		41,600		125,724		179,133
Subscription	238,302		213,432		510,338		520,998
Consulting	58,387		58,639		111,420		119,940
Perpetual license	1,579		2,266		1,982		9,706
	$	298,268	$	274,337	$	623,740	$	650,644

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of June 30, ~~2022:~~2023:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	204,974	$	320,102			$	46,810				$	6,681	$	32,159			$	610,726		54	%	1 year or less	$	214,579			$	397,183			$	35,616			$	4,979			$	37,355		$	689,712	55	%
1-2 years	1-2 years	57,862		200,135		10,711				4,505			7,919		281,132		25	%	1-2 years		58,551				238,691		3,026				2,252				6,772				309,292		24		%
2-3 years	2-3 years	28,403		96,861		2,126				2,252			2,574		132,216		12	%	2-3 years		25,103				124,616		6,764				—				1,523				158,006		12		%
Greater than 3 years	Greater than 3 years	18,447		81,069		1,680				—			424		101,620		9	%	Greater than 3 years		7,592				101,494		—				—				—				109,086		9		%
		$	309,686	$	698,167	$	61,327			$	13,438		$	43,076	$	1,125,694	100	%			$	305,825			$	861,984	$	45,406			$	7,231			$	45,650			$	1,266,096	100		%

As of June 30, ~~2021:~~2022:

(Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total
Maintenance Pega Cloud
1 year or less $ 214,645 $ 281,793 $ 46,146 $ 6,707 $ 17,863 $ 567,154 56 %
1-2 years 59,164 194,841 15,708 234 2,675 272,622 26 %
2-3 years 36,076 88,855 909 — 762 126,602 12 %
Greater than 3 years 26,564 37,246 255 — 693 64,758 6 %
$ 336,449 $ 602,735 $ 63,018 $ 6,941 $ 21,993 $ 1,031,136 100 %

~~Major clients~~

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

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2022 2021 2022 2021
Total revenue $ 274,337 $ 325,702 $ 650,644 $ 639,201
Client A * 13 % * *


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Maintenance		Pega Cloud
1 year or less	$	204,974	$	320,102	$	46,810	$	6,681	$	32,159	$	610,726	54	%
1-2 years	57,862		200,135		10,711		4,505		7,919		281,132		25	%
2-3 years	28,403		96,861		2,126		2,252		2,574		132,216		12	%
Greater than 3 years	18,447		81,069		1,680		—		424		101,620		9	%
	$	309,686	$	698,167	$	61,327	$	13,438	$	43,076	$	1,125,694	100	%

NOTE ~~11.~~12. STOCK-BASED COMPENSATION

Expense


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Cost of revenue	Cost of revenue	$	6,579	$	5,849	$	12,957	$	11,774	Cost of revenue	$	7,174	$	6,579	$	16,087	$	12,957
Selling and marketing	Selling and marketing	12,633		14,748		23,591		28,468		Selling and marketing	15,349		12,633		33,009		23,591
Research and development	Research and development	7,355		6,343		14,701		13,113		Research and development	7,851		7,355		16,911		14,701
General and administrative	General and administrative	4,733		3,748		8,278		7,433		General and administrative	5,853		4,733		12,777		8,278
		$	31,300	$	30,688	$	59,527	$	60,788		$	36,227	$	31,300	$	78,784	$	59,527
Income tax benefit	Income tax benefit	$	(543)	$	(6,192)	$	(905)	$	(12,183)	Income tax benefit	$	(581)	$	(543)	$	(1,253)	$	(905)

As of June 30, ~~2022,~~2023, the Company had ~~$195.7~~$171.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of ~~2.1~~1.9 years.

~~Grants~~
Six Months Ended
June 30, 2022
(in thousands) Shares Total Fair Value
Restricted stock units 1,237 $ 104,059
Non-qualified stock options 4,351 $ 99,506

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Grants


	Six Months Ended June 30, 2023
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,489	$	69,704
Non-qualified stock options	870	$	18,289
Performance stock options (1)	906	$	18,265

(1) Performance stock options allow the holder to purchase a specified number of common stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date. The options usually vest over two years and expire ten years from the grant date, subject to specific performance conditions.

NOTE ~~12.~~13. INCOME TAXES

Effective income tax rate

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2022 2021 2022 2021
Provision for (benefit from) income taxes $ 186,174 $ (11,916) $ 178,491 $ (29,534)
Effective income tax rate (benefit rate) 0 0 165 % (2,591) %


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2023		2022		2023			2022
Provision for income taxes	$	6,601	$	186,174	$	11,850		$	178,491
Effective income tax rate					(21)		%	(165)		%

The ~~change in the~~Company’s effective income tax rate ~~(benefit rate)~~ in the six months ended June 30, ~~2022~~2023 was ~~primarily due to~~impacted by the ~~recognition of a $191.9 million~~ valuation allowance on the Company’s deferred tax ~~assets.~~assets in the U.S. and U.K. Also, impacted by current taxes payable in the U.S. due to projected taxable income partially offset by net operating losses and available tax credits.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. ~~Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s~~A deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable ~~income based on historical and projected information. On a quarterly basis,~~income. Quarterly, the Company ~~reassess~~reassesses the need for a valuation allowance on its ~~existing~~ net deferred tax assets by ~~tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers~~weighting all available and objectively verifiable negative and positive evidence, including projected future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income, ~~inclusive of~~including the impact of enacted legislation, tax-planning strategies, and ~~results of~~ recent ~~operations.~~ operating results.

The ~~weight given~~Company intends to ~~the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.~~

~~As of June 30, 2022,~~maintain a valuation allowance on the Company’s ~~Backlog balance was not sufficient to recover our~~U.S. and U.K. net deferred tax ~~assets. The Backlog balance and other unsettled circumstances, impacting~~assets until sufficient evidence exists to support the ~~Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net~~realization of these deferred tax assets. ~~These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.~~

As of June 30, 2022 the combination of the above factors caused the Company to conclude there is no longer sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s net deferred tax assets. Accordingly, the Company recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022.

NOTE ~~13.~~14. (LOSS) ~~EARNINGS~~ PER SHARE

Basic (loss) ~~earnings~~ per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) ~~earnings~~ 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) ~~earnings~~ per share:
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands, except per share amounts) 2022 2021 2022 2021
Net (loss) income $ (286,296) $ 37,291 $ (286,675) $ 30,674
Weighted-average common shares outstanding 81,847 81,316 81,764 81,161
(Loss) earnings per share, basic $ (3.50) $ 0.46 $ (3.51) $ 0.38
Net (loss) income $ (286,296) $ 37,291 $ (286,675) $ 30,674
Interest expense associated with convertible debt instruments, net of tax — 1,351 — —
Numerator for diluted EPS $ (286,296) $ 38,642 $ (286,675) $ 30,674
Weighted-average effect of dilutive securities:
Convertible debt — 4,443 — —
Stock options — 3,266 — 3,416
RSUs — 1,295 — 1,429
Effect of dilutive securities — 9,004 — 4,845
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
81,847 90,320 81,764 86,006
(Loss) earnings per share, diluted $ (3.50) $ 0.43 $ (3.51) $ 0.36
Outstanding anti-dilutive stock options and RSUs (4)
3,569 19 3,873 22


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2023		2022		2023		2022
Net (loss)	$	(46,804)	$	(286,296)	$	(67,578)	$	(286,675)
Weighted-average common shares outstanding	83,039		81,847		82,823		81,764
(Loss) per share, basic	$	(0.56)	$	(3.50)	$	(0.82)	$	(3.51)

Net (loss)	$	(46,804)	$	(286,296)	$	(67,578)	$	(286,675)







Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	83,039		81,847		82,823		81,764
(Loss) per share, diluted	$	(0.56)	$	(3.50)	$	(0.82)	$	(3.51)

Outstanding anti-dilutive stock options and RSUs (4)	1,354		3,569		1,351		3,873

(1) ~~In periods of loss, all~~All dilutive securities are excluded in periods of loss 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~~3.7 million ~~shares.~~

~~PEGASYSTEMS INC.~~

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

shares as of June 30, 2023.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately ~~4.4~~3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). as of June 30, 2023. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE ~~14.~~15. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. Leases" for additional information.

Legal ~~Proceedings~~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~~the Company’s estimates will change in the near term, and the effect may be material.

~~As of June 30, 2022 and December 31, 2021, the~~The Company ~~has~~had 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~~. These motions were heard on July 15, 2022 and no decision has been rendered~~litigation as of ~~the date of this filing. The Company continues to believe the counterclaims brought by Appian against the Company are without merit,~~June 30, 2023 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.December 31, 2022.

Appian Corp. v. Pegasystems Inc. & Youyong Zou

As previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages ~~in the amount~~ of $2,036,860,045 for trade secret misappropriation and $1.00 for ~~the violation of~~violating the Virginia Computer Crimes Act. ~~Since~~On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded by the jury ~~rendering its~~plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the date of the jury verdict (May 9, 2022) as to the ~~Company~~amount of the jury verdict and ~~Appian have filed post-trial motions with~~from September 15, 2022 as to the ~~court.~~amount of the award of attorneys’ fees and costs. On ~~May 26,~~September 15, 2022, the Company filed a ~~motion for judicial investigation~~notice of ~~juror misconduct. Appian filed its opposition on June 17, 2022. A hearing on that motion is scheduled for July 28, 2022.~~appeal from the judgment. On ~~June 8,~~September 29, 2022, the ~~Company filed~~circuit court of Fairfax County approved a ~~motion to set aside the verdict, Appian filed a response with the court on July 8, 2022, and~~$25,000,000 letter of credit obtained by the Company ~~filed a reply~~ to ~~Appian’s filing on July 22, 2022. Also on June 8, 2022, Appian filed a motion for attorneys’ fees~~secure the judgment and ~~costs and for post-judgment interest, seeking~~entered an ~~award~~order suspending the judgment during the pendency of ~~attorneys’ fees~~the Company’s appeal. Appellate briefing in the ~~amount~~Court of ~~approximately $22.6 million, costs in the amount~~Appeals of ~~approximately $4.2 million, and post-judgment interest at the rate~~Virginia is completed. The Court of ~~6% per annum. The Company filed its opposition to that motion on July 8, 2022. Appian filed a reply brief on July 22, 2022. The Court~~Appeals of Virginia has not yet set a date for ~~a hearing on~~oral arguments in the ~~motions filed on June 8, 2022. As of the date of~~appeal. Although it is not possible to predict timing, this ~~Quarterly Report on Form 10-Q, the court has not yet ruled on the post-trial motions or entered a judgment in this matter. The Company intends~~appeals process could potentially take years to ~~appeal any judgment against it, if such a judgment is entered.~~complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of ~~post-trial motions, any~~ appellate proceedings and/or any potential new trial resulting from the ~~post-trial motions or the~~ appellate proceedings.

~~PEGASYSTEMS INC.~~

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

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company moved to dismiss the consolidated amended complaint on December 19, 2022. The hearing on the Company’s motion to dismiss took place on May 17, 2023. After hearing argument from both sides, the Court denied the Company’s motion from the bench and stated that a written opinion would follow. On June 30, 2023, the Company filed its Answer to the complaint. On July 24, 2023, the Court issued its written opinion denying the motion to dismiss as to the Company and Defendant Trefler but granting the motion without prejudice as to Mr. Stillwell. The Company believes it has strong defenses to the claims brought against the defendants ~~are without merit,~~ and intends to ~~vigorously~~ defend against these ~~claims.~~claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that it has strong defenses to the claims asserted, its intent to defend against these claims, and there being no specified quantum of damages sought in the complaint.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In re Pegasystems Inc., Derivative Litigation

On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc. asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court. The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are ~~without merit,~~reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit and there being no specified quantum of damages sought in the complaint.

SEC Inquiry

Beginning in March 2023, the U.S. Securities and Exchange Commission (“SEC”) has requested certain information relating to, among other things, the accounting treatment of the Company’s above-described litigation with Appian Corporation. The Company is fully cooperating with the SEC’s requests.

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

FORWARD-LOOKING STATEMENTS

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

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words and other similar expressions identify forward-looking statements, which speak only as of the date the statement was made and 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 ongoing COVID-19 pandemic~~public health emergencies and the 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;

•foreign currency exchange rates;

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

•security breaches and security flaws;

•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;

•our ongoing litigation with Appian Corp.;

•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, ~~2021,~~2022, 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~~Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results included in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements ~~publicly,~~ whether ~~due to~~as the result of new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of July ~~27, 2022.~~26, 2023.

NON-GAAP MEASURES

Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. We believe these measures help investors understand our core operating results without the effect of often one-time charges and other items outside normal operations. They are not a substitute for financial measures prepared under U.S. GAAP.

A reconciliation of our GAAP to non-GAAP measures is located with each non-GAAP measure.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations ~~simplify~~build agility into their business ~~complexity.~~so they can adapt to change. Our powerful low-code platform for workflow automation and ~~AI-powered~~artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients ~~themselves~~ leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to ~~our clients’~~the specific industry ~~needs.~~

~~Subscription transition~~

We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in 2024, our operating results may be impacted. Operating performance and the actual mix of revenue and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” sectionneeds of our ~~Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.~~

~~Coronavirus (“COVID-19”)~~

As of June 30, 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, 2021 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.clients.

Performance metrics

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

Annual contract value (“ACV”)

ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ~~ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.~~ACV. ACV is a performance measure that we believe provides useful information to our management and ~~investors, particularly during~~investors. In 2023, we changed our ~~subscription transition.~~ACV calculation methodology for maintenance and all contracts less than 12 months to align with other contract types. Previously disclosed ACV amounts have been updated to allow for comparability.

Reconciliation of ACV and Constant Currency ACV


(in millions, except percentages)	Q2 22		Q3 22		Q4 22		Q1 23		Q2 23		1 Year Change
ACV	$	1,026	$	1,040	$	1,126	$	1,174	$	1,164	13	%
Impact of changes in foreign exchange rates	$	—	$	24	$	(1)	$	(5)	$	(5)
Constant Currency ACV	$	1,026	$	1,064	$	1,125	$	1,169	$	1,159	13	%

Note: Constant currency ACV is calculated by applying the Q2 2022 foreign exchange rates to all periods shown.

Cash flow


(in thousands, except percentages)	Six Months Ended June 30,
	2023			2022			Change
Cash provided by (used in) operating activities	$	113,752		$	(5,069)		*
Investment in property and equipment	(13,933)			(11,863)
Legal fees	2,950			26,437
Restructuring	17,521			—
Interest on convertible senior notes	2,250			2,250
Other	—			167
Free cash flow	$	122,540		$	11,922		928	%

Total revenue	$	623,740		$	650,644
Free cash flow margin	20		%	2		%

* not meaningful

Our non-GAAP free cash flow measures reflect the following adjustments:

•Investment in property and equipment: Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

•Legal fees: Includes legal and related fees arising from proceedings outside the ordinary course of business. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operational performance.

•Restructuring: We have excluded restructuring from our non-GAAP financial measures. Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities. We believe excluding the impact from our non-GAAP financial measures is useful to investors as these amounts are not representative of our core business operations and ongoing operational performance.

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. We believe excluding the interest payments provides a useful comparison of our operational performance in different periods.

•Other: We have excluded fees incurred due to the cancellation of in-person sales and marketing events, and incremental expenses incurred from the integration of acquisitions. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

Remaining performance obligations (“Backlog”)

Reconciliation of ~~GAAP~~ Backlog and Constant Currency Backlog (Non-GAAP)


(in millions)		Q2 2022		1 Year Growth Rate
Backlog - GAAP		$	1,126	9	%
(in millions, except percentages)						(in millions, except percentages)	Q2 2023		1 Year Growth Rate
Backlog						Backlog	$	1,266	12	%
Impact of changes in foreign exchange rates	Impact of changes in foreign exchange rates	57		6	%	Impact of changes in foreign exchange rates	(8)		—	%
Backlog - Constant Currency	Backlog - Constant Currency	$	1,183	15	%	Backlog - Constant Currency	$	1,258	12	%

Note: Constant currency Backlog is calculated by applying the Q2 2022 foreign exchange rates ~~for the earliest period shown~~ to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q2 2021. We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.periods shown.

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 of America (“U.S.”) and the rules and regulations of the SEC for interim financial reporting. ~~The preparation of~~Preparing 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 about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, ~~2021:~~2022:

•“Critical Accounting Estimates and Significant Judgments” in Item 7; and

•“Note 2. Significant Accounting Policies” in Item 8.

We recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information. There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~

2022.

2223

RESULTS OF OPERATIONS

Revenue

~~Subscription transition~~


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2023				2022								2023				2022
Pega Cloud	$	115,063	39	%	$	93,506	34	%	$	21,557	23	%	$	222,942	36	%	$	183,823	28	%	$	39,119	21	%
Maintenance	82,042		27	%	78,326		29	%	3,716		5	%	161,672		26	%	158,042		24	%	3,630		2	%
Subscription services	197,105		66	%	171,832		63	%	25,273		15	%	384,614		62	%	341,865		52	%	42,749		13	%
Subscription license	41,197		14	%	41,600		15	%	(403)		(1)	%	125,724		20	%	179,133		28	%	(53,409)		(30)	%
Subscription	238,302		80	%	213,432		78	%	24,870		12	%	510,338		82	%	520,998		80	%	(10,660)		(2)	%
Consulting	58,387		19	%	58,639		21	%	(252)		—	%	111,420		18	%	119,940		19	%	(8,520)		(7)	%
Perpetual license	1,579		1	%	2,266		1	%	(687)		(30)	%	1,982		—	%	9,706		1	%	(7,724)		(80)	%
	$	298,268	100	%	$	274,337	100	%	$	23,931	9	%	$	623,740	100	%	$	650,644	100	%	$	(26,904)	(4)	%

We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted revenue growth as revenue is recognized differently for subscription services, which includes•The increases in Pega Cloud ~~and maintenance, than license sales. Revenue from subscription service arrangements is typically recognized over the contract term, while~~ revenue ~~from license sales is recognized when the license rights become effective, typically upfront.~~

(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2022 2021 2022 2021
Pega Cloud $ 93,506 34 % $ 73,293 23 % $ 20,213 28 % $ 183,823 28 % $ 141,151 22 % $ 42,672 30 %
Maintenance 78,326 29 % 78,782 24 % (456) (1) % 158,042 24 % 154,343 24 % 3,699 2 %
Subscription services 171,832 63 % 152,075 47 % 19,757 13 % 341,865 52 % 295,494 46 % 46,371 16 %
Subscription license 41,600 15 % 104,296 32 % (62,696) (60) % 179,133 28 % 215,805 34 % (36,672) (17) %
Subscription 213,432 78 % 256,371 79 % (42,939) (17) % 520,998 80 % 511,299 80 % 9,699 2 %
Perpetual license 2,266 1 % 12,596 4 % (10,330) (82) % 9,706 1 % 18,048 3 % (8,342) (46) %
Consulting 58,639 21 % 56,735 17 % 1,904 3 % 119,940 19 % 109,854 17 % 10,086 9 %
$ 274,337 100 % $ 325,702 100 % $ (51,365) (16) % $ 650,644 100 % $ 639,201 100 % $ 11,443 2 %

~~The revenue changes in~~for the three and six months ended June 30, ~~2022 generally reflect~~2023, were primarily due to continued growth of the ~~impact of our subscription transition. Other factors impacting our revenue include:~~installed client base.

•The ~~decreases~~decrease in subscription license revenue in the ~~three and~~ six months ended June 30, ~~2022 were~~2023 was primarily due to several large software license contracts recognized in revenue in the six months ended June 30, 2022.

•The decreases in perpetual license revenue in the three and six months ended June 30, ~~2021.~~2023 were primarily due to our strategy of promoting subscription-based arrangements.

•The ~~increases~~decreases in consulting revenue in the three and six months ended June 30, ~~2022~~2023 were primarily due to ~~increases in consultant billable hours in North America.~~lower realization rates.

Gross profit


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended June 30,								Change							Six Months Ended June 30,														Change				(Dollars in thousands)		Three Months Ended June 30,														Change				Six Months Ended June 30,								Change
		2022				2021									2022							2021							2023										2022										2023						2022
Pega Cloud	Pega Cloud	$	62,259	67	%	$	49,242	67	%			$	13,017		26	%			$	125,677		68	%			$	94,543		67	%					$	31,134		33	%	Pega Cloud		$	84,761	74		%			$	62,259			67	%	$	22,502	36	%	$	162,390	73	%	$	125,677	68	%	$	36,713	29	%
Maintenance	Maintenance	73,040		93	%	73,787		94	%	(747)		(1)		%			147,625		93		%			143,562		93		%			4,063		3	%	Maintenance		75,561		92		%			73,040			93	%			2,521		3	%	148,577		92	%	147,625		93	%	952		1	%
Subscription services	Subscription services	135,299		79	%	123,029		81	%	12,270		10		%			273,302		80		%			238,105		81		%			35,197		15	%	Subscription services		160,322		81		%			135,299			79	%			25,023		18	%	310,967		81	%	273,302		80	%	37,665		14	%
Subscription license	Subscription license	40,927		98	%	103,711		99	%	(62,784)		(61)		%			177,838		99		%			214,600		99		%			(36,762)		(17)	%	Subscription license		40,574		98		%			40,927			98	%			(353)		(1)	%	124,382		99	%	177,838		99	%	(53,456)		(30)	%
Subscription	Subscription	176,226		83	%	226,740		88	%	(50,514)		(22)		%			451,140		87		%			452,705		89		%			(1,565)		—	%	Subscription		200,896		84		%			176,226			83	%			24,670		14	%	435,349		85	%	451,140		87	%	(15,791)		(4)	%
Consulting																																			Consulting		(323)		(1)		%			766			1	%			(1,089)		*		(7,638)		(7)	%	6,556		5	%	(14,194)		*
Perpetual license	Perpetual license	2,230		98	%	12,525		99	%	(10,295)		(82)		%			9,636		99		%			17,947		99		%			(8,311)		(46)	%	Perpetual license		1,555		98		%			2,230			98	%			(675)		(30)	%	1,955		99	%	9,636		99	%	(7,681)		(80)	%
Consulting		766		1	%	1,906		3	%	(1,140)		(60)		%			6,556		5		%			1,571		1		%			4,985		317	%
		$	179,222	65	%	$	241,171	74	%	$	(61,949)	(26)		%			$	467,332	72		%			$	472,223	74		%			$	(4,891)	(1)	%			$	202,128	68		%			$	179,222		65	%			$	22,906	13	%	$	429,666	69	%	$	467,332	72	%	$	(37,666)	(8)	%

* not meaningful

•The ~~decreases~~increases in ~~gross profit and~~Pega Cloud gross profit percent in the three and six months ended June 30, ~~2022~~2023 were primarily due to ~~decreases in subscription license revenue.~~increased cost efficiency, particularly for hosting services, as Pega Cloud continues to grow and scale.

•The ~~increase~~decrease in ~~Pega Cloud~~maintenance gross profit percent in the ~~six~~three months ended June 30, ~~2022~~2023 was primarily due to ~~cost-efficiency gains as Pega Cloud grows~~an increase in compensation and ~~scales.~~benefits due to an increase in headcount.

•The decrease in consulting gross profit percent in the three months ended June 30, ~~2022~~2023 was primarily due to alower consultant realization rates. The decrease in ~~consultant utilization rates. The increase in~~ consulting ~~gross profit percent~~revenue in the six months ended June 30, ~~2022~~2023 was primarily due to ~~an increase in~~lower consultant realization ~~rates in North America.~~and utilization rates.

2324

Operating expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended June 30,								Change					Six Months Ended June 30,										Change				(Dollars in thousands)	Three Months Ended June 30,							Change					Six Months Ended June 30,							Change
		2022				2021								2022					2021					2023									2022								2023				2022
				% of Revenue				% of Revenue											% of Revenue					% of Revenue
Selling and marketing	Selling and marketing	$	157,198	57	%	$	156,423	48	%	$	775	—	%		$	319,434	49	%		$	305,162	48	%		$	14,272	5	%	Selling and marketing	$	143,858			$	157,198		$	(13,340)	(8)	%		$	293,655			$	319,434		$	(25,779)	(8)	%
% of Revenue																													% of Revenue	48		%		57		%						47		%		49		%
Research and development	Research and development	$	74,341	27	%	$	64,395	20	%	$	9,946	15	%		$	145,831	22	%		$	126,837	20	%		$	18,994	15	%	Research and development	$	73,931			$	74,341		$	(410)	(1)	%		$	149,307			$	145,831		$	3,476	2	%
% of Revenue																													% of Revenue	25		%		27		%						24		%		22		%
General and administrative	General and administrative	$	32,723	12	%	$	19,161	6	%	$	13,562	71	%		$	68,487	11	%		$	37,431	6	%		$	31,056	83	%	General and administrative	$	23,462			$	32,723		$	(9,261)	(28)	%		$	46,572			$	68,487		$	(21,915)	(32)	%
% of Revenue																													% of Revenue	8		%		12		%						7		%		11		%
Restructuring																													Restructuring	$	2,167			$	—		$	2,167	100	%		$	3,628			$	—		$	3,628	100	%
% of Revenue																													% of Revenue	1		%		—		%						1		%		—		%

•The ~~increase~~decreases in selling and marketing ~~in the six months ended June 30, 2022 was primarily due to an increase in employee travel and entertainment of $5.6 million and an increase in compensation and benefits of $3.8 million.~~

•~~The increases in research and development in~~during the three and six months ended June 30, ~~2022~~2023, were primarily due to ~~increases~~decreases in compensation and benefits ~~of $6.4~~totaling $14.2 million and ~~$12.1~~$26.4 million, ~~attributable~~respectively. The decreases are due to ~~increases~~reduced headcount associated with the optimization of our go-to-market strategy. For additional information, see "Note 9. Restructuring" in ~~headcount and incentive compensation. The increases in headcount reflects additional investments in developing our solutions.~~Part I, Item 1 of this Quarterly Report.

•The ~~increases~~decrease in research and development for the three months ended June 30, 2023, was primarily due to a $1.2 million decrease in hosting services costs from cost-efficiency gains as the Company’s use of hosting services grows.

•The increase in research and development for the six months ended June 30, 2023, was primarily due to additional investments in our products and services.

•The decreases in general and administrative in the three and six months ended June 30, ~~2022~~2023 were primarily due to ~~increases~~decreases of ~~$8.2~~$7.7 million and $23.6 million, in legal fees and related expenses arising from ~~litigation~~ proceedings outside the ordinary course of business. In the six months ended June 30, 2023 the decrease was partially offset by a $4.2 million increase in compensation and benefits due to an increase in equity compensation. We ~~have incurred and~~ expect to continue to incur additional ~~expenses~~costs for these ~~proceedings in 2022.~~proceedings. See "Note ~~14.~~15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part ~~II,~~I, Item 1A of ~~this Quarterly~~our Annual Report for ~~additional information.~~the year ended December 31, 2022.

•The increases in restructuring expenses during the three and six months ended June 30, 2023, were primarily due to a $1.6 million restructuring expense related to the optimization of our go-to-market organization in the U.S. in the three months ended June 30, 2023 and $1.2 million primarily due to the closure of leased office space in Poland in the three months ended March 31, 2023.

Other income and expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended June 30,				Change						Six Months Ended June 30,								Change					(Dollars in thousands)	Three Months Ended June 30,					Change					Six Months Ended June 30,					Change
		2022		2021							2022			2021				2023										2022							2023			2022
Foreign currency transaction gain (loss)		$	1,713	$	(403)			$	2,116		*			$	4,589			$	(5,501)			$	10,090		*
Foreign currency transaction (loss) gain																									Foreign currency transaction (loss) gain	$	(3,290)		$	1,713	$	(5,003)	*			$	(5,965)		$	4,589	$	(10,554)	*
Interest income	Interest income	309		236		73		31		%		516				389				127		33		%	Interest income	1,814			309		1,505		487	%		3,299			516		2,783		539	%
Interest expense	Interest expense	(1,944)		(1,959)		15		1		%		(3,890)				(3,839)				(51)		(1)		%	Interest expense	(1,778)			(1,944)		166		9	%		(3,696)			(3,890)		194		5	%
(Loss) income on capped call transactions	(Loss) income on capped call transactions	(18,945)		26,309		(45,254)		*				(49,505)				7,192				(56,697)		*			(Loss) income on capped call transactions	(1,361)			(18,945)		17,584		93	%		1,845			(49,505)		51,350		*
Other income, net	Other income, net	3,785		—		3,785		*				6,526				106				6,420		6,057		%	Other income, net	5,702			3,785		1,917		51	%		12,285			6,526		5,759		88	%
		$	(15,082)	$	24,183	$	(39,265)	*				$	(41,764)			$	(1,653)			$	(40,111)	(2,427)		%		$	1,087		$	(15,082)	$	16,169	*			$	7,768		$	(41,764)	$	49,532	*

* not meaningful

•The ~~increases~~changes in foreign currency transaction (loss) gain ~~(loss)~~ in the three and six months ended June 30, ~~2022~~2023 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with ~~our~~ foreign currency-denominated cash ~~receivables,~~ and ~~intercompany balances~~receivables held by our subsidiary in the United Kingdom.

•The increases in interest income in the three and six months ended June 30, ~~2022 were~~2023 was primarily due to increases in market interest rates.

•The decreases in interest expense in the three and six months ended June 30, 2023 were due to our repurchases of our Convertible Senior Notes. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

•The changes in (loss) income on capped call transactions in the three and six months ended June 30, ~~2022,~~2023 were due to fair value 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 increases in other income, net in the three and six months ended June 30, ~~2022~~2023 were due to gains onfrom repurchases of our convertible senior notes and our venture investments portfolio.

Provision for ~~(benefit from)~~ income taxes
Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2022 2021 2022 2021
Provision for (benefit from) income taxes $ 186,174 $ (11,916) $ 178,491 $ (29,534)
Effective income tax rate (benefit rate) 165 % (2,591) %


	Six Months Ended June 30,
(Dollars in thousands)		2023			2022
Provision for income taxes		$	11,850		$	178,491
Effective income tax rate		(21)		%	(165)		%

~~During~~The effective income tax rate in the six months ended June 30, ~~2022,~~2023 was impacted by the ~~change in our effective income tax rate (benefit rate) was primarily due to the recognition of a $191.9 million~~ valuation allowance on our deferred tax ~~assets. See "Note 12. Income Taxes"~~assets in ~~Part I, Item 1 of this Quarterly Report for additional information.~~the U.S. and U.K. Also, impacted by current taxes payable in the U.S. due to projected taxable income partially offset by net operating losses and available tax credits.

LIQUIDITY AND CAPITAL RESOURCES


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	(5,069)	$	19,410	Operating activities	$	113,752	$	(5,069)
Investing activities	Investing activities	(1,523)		10,493		Investing activities	15,979		(1,523)
Financing activities	Financing activities	(41,191)		(60,717)		Financing activities	(86,988)		(41,191)
Effect of exchange rates on cash and cash equivalents		(2,907)		(1,207)
Net (decrease) in cash and cash equivalents		$	(50,690)	$	(32,021)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						Effect of exchange rate changes on cash, cash equivalents, and restricted cash	1,010		(2,907)
Net increase (decrease) in cash, cash equivalents, and restricted cash						Net increase (decrease) in cash, cash equivalents, and restricted cash	$	43,753	$	(50,690)


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Held by U.S. entities	Held by U.S. entities	$	223,116	$	274,813	Held by U.S. entities	$	232,524	$	248,389
Held by foreign entities	Held by foreign entities	73,772		87,966		Held by foreign entities	80,289		48,832
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	296,888	$	362,779	Total cash, cash equivalents, and marketable securities	$	312,813	$	297,221

We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 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 needed to support our operations. We may utilize available funds or seek ~~additional~~ external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate foreign funds, we may ~~have~~be required to pay ~~U.S.~~federal, state, and local income and foreign withholding taxes upon repatriation. However, due to the complexity of income tax laws and regulations, ~~it is impracticable to estimate~~estimating the amount of taxes we would have to ~~pay.~~pay is impracticable.

Operating activities

We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continue impacting our billings and cash collections, as the timing of billings and cash collections generally differs between our subscription and perpetual license arrangements. Subscription licenses and services are generally billed and collected over the contract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.

The change in cash provided by (used in) ~~provided by~~ operating activities in the six months ended June 30, ~~2022~~2023 was primarily due to growth in client collections and the impact of our ~~subscription transition and increased costs as we made investments in research and development and selling and marketing activities to support future growth.~~cost-efficiency initiatives. In addition, in the six months ended June 30, 2023 and 2022, we ~~incurred $28.0~~paid $3.0 million and $26.4 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business. We expect to continue to incur additional ~~expenses~~costs for these proceedings. ~~See~~For additional information, see "Note ~~14.~~15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly ~~Report for additional information.~~Report.

Investing activities

The change in cash provided by (used in) ~~provided by~~ investing activities in the six months ended June 30, ~~2022~~2023 was primarily ~~driven by~~due to our investments in

financial instruments ~~an increase in office space related capital expenditures, and an acquisition in 2021.~~

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In the six months ended June 30, 2023, we paid $89 million to repurchase $97.7 million in aggregate principal amount of convertible senior notes. As of June 30, 2023, we had $502 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. As of June 30, 2023 and December 31, 2022, we had $27.3 million in outstanding letters of credit, which reduced the Company’s available borrowing capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility. ~~See~~For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly ~~Report for additional information.~~Report.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	Six Months Ended June 30, ~~2022~~2023
December 31, ~~2021~~2022	$	~~22,583~~58,075
Authorizations (1)	~~60,000~~1,925
~~Repurchases~~ ~~(2)~~	~~(24,508)~~
June 30, ~~2022~~2023	$	~~58,075~~60,000

(1) On ~~June 2, 2022, we announced that~~April 25, 2023, our Board of Directors extended the ~~current stock repurchase program’s~~ expiration date of our current share repurchase program from June 30, 2023 to June 30, ~~2023.~~

~~(2) All purchases under this program have~~2024, and the amount of stock we are authorized to repurchase has been ~~made on the open market.~~

increased to $60 million.

Common stock repurchases


		Six Months Ended June 30,							Six Months Ended June 30,
		2022			2021				2023			2022
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid		279	$	24,508	148	$	18,992
Repurchases unpaid at period end		—	—		3	400

Stock repurchase program	Stock repurchase program	279	24,508		151	19,392		Stock repurchase program	—	—		279	24,508
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	196	15,379		328	41,706		Tax withholdings for net settlement of equity awards	34	1,422		196	15,379
		475	$	39,887	479	$	61,098		34	$	1,422	475	$	39,887

~~During~~In the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$8.3~~$0.9 million and ~~$27.8~~$8.3 million, respectively, for the exercise price of options. These amounts are 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 without prior notice.


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Dividend payments to stockholders	Dividend payments to stockholders	$	4,908	$	4,865	Dividend payments to stockholders	$	4,962	$	4,908

Contractual obligations

As of June 30, ~~2022,~~2023, our contractual obligations were:


		Payments due by period																	Payments due by period
(in thousands)	(in thousands)	Remainder of 2022		2023		2024		2025		2026		2027 and thereafter		Other		Total		(in thousands)	Remainder of 2023		2024		2025		2026		2027		2028 and after		Other		Total
Convertible senior notes (1)	Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	613,500	Convertible senior notes (1)	$	1,998	$	3,767	$	504,154	$	—	$	—	$	—	$	—	$	509,919
Purchase obligations (2)	Purchase obligations (2)	16,741		15,822		10,507		13,511		13,750		—		—		70,331		Purchase obligations (2)	68,729		135,345		123,104		117,550		133,500		14		—		578,242
Operating lease obligations	Operating lease obligations	(401)		18,837		16,290		14,118		10,507		47,910		—		107,261		Operating lease obligations	8,596		18,024		14,869		10,940		9,882		39,461		—		101,772
Investment commitments																		Investment commitments	1,000		—		—		—		—		—		—		1,000
Liability for uncertain tax positions (3)	Liability for uncertain tax positions (3)	—		—		—		—		—		—		1,269		1,269		Liability for uncertain tax positions (3)	—		—		—		—		—		—		3,989		3,989
		$	18,590	$	39,159	$	31,297	$	629,879	$	24,257	$	47,910	$	1,269	$	792,361		$	80,323	$	157,136	$	642,127	$	128,490	$	143,382	$	39,475	$	3,989	$	1,194,922

(1) Includes principal and interest.

(2) Represents the fixed ~~or minimum amounts due under~~amount owed for purchase obligations ~~for~~of software licenses, hosting services, and sales and marketing programs.

(3) We ~~are unable to~~cannot 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 is the risk of loss from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, ~~which~~ partially ~~offsets~~offsetting our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted ~~in:~~in the following:


		Six Months Ended June 30,					Six Months Ended June 30,
		2022		2021			2023		2022
(Decrease) increase in revenue		(3)	%	(4)	%
(Decrease) in revenue						(Decrease) in revenue	(4)	%	(3)	%
Increase (decrease) in net income	Increase (decrease) in net income	3	%	(1)	%	Increase (decrease) in net income	(1)	%	3	%

Remeasurement risk

We incur 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, cash equivalents, receivables, and intercompany balances 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:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Foreign currency gain (loss)		$	(7,185)	$	(5,676)
Foreign currency (loss)						Foreign currency (loss)	$	(9,869)	$	(7,185)

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 June 30, ~~2022.~~2023. 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 June 30, ~~2022.~~2023.

(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 June 30, ~~2022~~2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2728

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in ~~Note 14.~~“Note 15. Commitments and ~~Contingencies,~~Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference and updates the description of our pending legal proceedings, as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022 and in our Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on April 28, 2022.reference.

ITEM 1A. RISK FACTORS

The 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 and in our Quarterly Report on Form 10-Q filed with the SEC on April 28, 2022.

~~In addition to the risk factors set forth below, we~~We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, 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, 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 our Quarterly Report filed with the SEC on April 28, 2022, 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.

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.

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, 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 our Quarterly Report filed with the SEC on April 28, 2022, 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. Notwithstanding the jury having rendered a verdict in the litigation pending in Virginia, we are unable to reasonably estimate possible damages in that matter because, among other things, of the uncertainty as to the outcome of post-trial motions, appellate proceedings, and/or any potential new trial resulting from the post-trial motions and appellate proceedings. If we are ultimately unsuccessful in prevailing in the matter in the entirety or having the ultimate verdict be substantially reduced, we may be required to incur debt or otherwise engage in capital market transactions to finance the final judgment, together with interest and any awards of attorneys’ fees and costs. In addition, if we do not timely satisfy the judgment within 60 days following the expiration of the right to appeal, there may be an acceleration of liabilities under our Convertible Senior Notes and our credit facility. While we continue to believe that we have the financial strength to pay these amounts if it ever becomes necessary, it is possible that we may not be able to engage in these activities on desirable terms, which could have a material adverse effect on our business, financial condition, and operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of equity securities(1)

Common stock repurchased in the three months ended June 30, ~~2022:~~2023:
(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)
April 1, 2022 - April 30, 2022 22 $ 77.42 — $ —
May 1, 2022 - May 31, 2022 24 65.46 — $ —
June 1, 2022 - June 30, 2022 81 51.31 38 $ 58,075
127 $ 58.43 38


(in thousands, except per share amounts)	Total Number of Shares Purchased (2)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs
April 1, 2023 - April 30, 2023	—	$	—	—	$	60,000
May 1, 2023 - May 31, 2023	8	45.29		—	$	60,000
June 1, 2023 - June 30, 2023	5	48.79		—	$	60,000
	13	$	46.54	—

(1) For additional information, see "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report.

(2) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

(2) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023 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

On July 25, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement with PNC Bank, National Association (“PNC”). The Amendment increased certain sub-limits to provide additional flexibility underRule 10b5-1 and non-rule 10b5-1 trading arrangements

During the ~~Credit Agreement, amongst other changes.~~three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

~~The description contained herein is qualified in its entirety by reference to the Amendment, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.~~

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1

Fifth Amendment to Loan Documents between Pegasystems Inc. and PNC Bank, National Association.

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

32++

Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

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.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.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation 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)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

3029

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:	July ~~27, 2022~~26, 2023	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)


	Six Months Ended June 30, 2022
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,237	$	104,059
Non-qualified stock options	4,351	$	99,506


(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)
April 1, 2022 - April 30, 2022	22	$	77.42	—	$	—
May 1, 2022 - May 31, 2022	24	65.46		—	$	—
June 1, 2022 - June 30, 2022	81	51.31		38	$	58,075
	127	$	58.43	38