UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, ~~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 ~~82,190,957~~83,555,919 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October ~~19, 2022.~~17, 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 September 30, ~~2022~~2023 and December 31, ~~2021~~2022			3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022			6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2728
Item 4. Controls and Procedures			2829

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			2930
Item 1A. Risk Factors			2930
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 5. Other Information			30
Item 6. Exhibits			3130

Signature			3231

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	107,626	$	159,965	Cash and cash equivalents	$	169,023	$	145,054
Marketable securities	Marketable securities	168,085		202,814		Marketable securities	167,286		152,167
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	275,711		362,779		Total cash, cash equivalents, and marketable securities	336,309		297,221
Accounts receivable		139,670		182,717
Unbilled receivables		182,403		226,714
Accounts receivable, net						Accounts receivable, net	168,795		255,150
Unbilled receivables, net						Unbilled receivables, net	199,948		213,719
Other current assets	Other current assets	62,457		68,008		Other current assets	71,438		80,388
Total current assets	Total current assets	660,241		840,218		Total current assets	776,490		846,478
Unbilled receivables		108,285		129,789
Unbilled receivables, net						Unbilled receivables, net	73,795		95,806
Goodwill	Goodwill	81,201		81,923		Goodwill	81,437		81,399
Other long-term assets	Other long-term assets	316,731		541,601		Other long-term assets	290,807		333,989
Total assets	Total assets	$	1,166,458	$	1,593,531	Total assets	$	1,222,529	$	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	$	13,562	$	15,281	Accounts payable	$	20,541	$	18,195
Accrued expenses	Accrued expenses	61,012		63,890		Accrued expenses	43,624		50,355
Accrued compensation and related expenses	Accrued compensation and related expenses	85,999		120,946		Accrued compensation and related expenses	93,511		127,728
Deferred revenue	Deferred revenue	245,146		275,844		Deferred revenue	297,067		325,212
Other current liabilities	Other current liabilities	8,253		9,443		Other current liabilities	18,038		17,450
Total current liabilities	Total current liabilities	413,972		485,404		Total current liabilities	472,781		538,940
Convertible senior notes, net	Convertible senior notes, net	592,884		590,722		Convertible senior notes, net	498,753		593,609
Operating lease liabilities	Operating lease liabilities	82,705		87,818		Operating lease liabilities	68,874		79,152
Other long-term liabilities	Other long-term liabilities	11,936		13,499		Other long-term liabilities	14,485		15,128
Total liabilities	Total liabilities	1,101,497		1,177,443		Total liabilities	1,054,893		1,226,829
Commitments and contingencies (Note 14)
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; 82,164 and 81,712 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		822		817
Common stock, 200,000 shares authorized; 83,523 and 82,436 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively						Common stock, 200,000 shares authorized; 83,523 and 82,436 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	835		824
Additional paid-in capital	Additional paid-in capital	204,189		145,810		Additional paid-in capital	343,259		229,602
(Accumulated deficit) retained earnings		(111,126)		276,449
Accumulated deficit						Accumulated deficit	(151,370)		(76,513)
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(28,924)		(6,988)		Accumulated other comprehensive (loss)	(25,088)		(23,070)
Total stockholders’ equity	Total stockholders’ equity	64,961		416,088		Total stockholders’ equity	167,636		130,843
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,166,458	$	1,593,531	Total liabilities and stockholders’ equity	$	1,222,529	$	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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Revenue	Revenue									Revenue
Subscription services	Subscription services	$	174,885	$	161,557	$	516,750	$	457,051	Subscription services	$	201,578	$	174,885	$	586,192	$	516,750
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license	74,342		31,112		200,066		210,245
Consulting										Consulting	55,976		55,511		167,396		175,451
Perpetual license	Perpetual license	9,223		2,874		18,929		20,922		Perpetual license	2,747		9,223		4,729		18,929
Consulting		55,511		56,416		175,451		166,270
Total revenue	Total revenue	270,731		256,268		921,375		895,469		Total revenue	334,643		270,731		958,383		921,375
Cost of revenue	Cost of revenue									Cost of revenue
Subscription services	Subscription services	34,541		30,817		103,104		88,206		Subscription services	35,906		34,541		109,553		103,104
Subscription license	Subscription license	628		606		1,923		1,811		Subscription license	629		628		1,971		1,923
Consulting										Consulting	57,204		57,778		176,262		171,162
Perpetual license	Perpetual license	103		50		173		151		Perpetual license	24		103		51		173
Consulting		57,778		52,749		171,162		161,032
Total cost of revenue	Total cost of revenue	93,050		84,222		276,362		251,200		Total cost of revenue	93,763		93,050		287,837		276,362
Gross profit	Gross profit	177,681		172,046		645,013		644,269		Gross profit	240,880		177,681		670,546		645,013
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	153,517		152,479		472,951		457,641		Selling and marketing	131,598		153,517		425,253		472,951
Research and development	Research and development	75,342		64,728		221,173		191,565		Research and development	74,955		75,342		224,262		221,173
General and administrative	General and administrative	26,043		20,176		94,530		57,607		General and administrative	27,321		26,043		73,893		94,530
Restructuring										Restructuring	17,822		—		21,450		—
Total operating expenses	Total operating expenses	254,902		237,383		788,654		706,813		Total operating expenses	251,696		254,902		744,858		788,654
(Loss) from operations	(Loss) from operations	(77,221)		(65,337)		(143,641)		(62,544)		(Loss) from operations	(10,816)		(77,221)		(74,312)		(143,641)
Foreign currency transaction gain (loss)	Foreign currency transaction gain (loss)	3,826		518		8,415		(4,983)		Foreign currency transaction gain (loss)	1,994		3,826		(3,971)		8,415
Interest income	Interest income	520		166		1,036		555		Interest income	2,532		520		5,831		1,036
Interest expense	Interest expense	(1,992)		(1,908)		(5,882)		(5,747)		Interest expense	(1,533)		(1,992)		(5,229)		(5,882)
(Loss) on capped call transactions	(Loss) on capped call transactions	(6,876)		(14,735)		(56,381)		(7,543)		(Loss) on capped call transactions	(2,294)		(6,876)		(449)		(56,381)
Other (loss) income, net		(29)		2		6,497		108
(Loss) before provision for (benefit from) income taxes		(81,772)		(81,294)		(189,956)		(80,154)
Provision for (benefit from) income taxes		11,748		(24,826)		190,239		(54,360)
Other income (loss), net										Other income (loss), net	6,383		(29)		18,668		6,497
(Loss) before provision for income taxes										(Loss) before provision for income taxes	(3,734)		(81,772)		(59,462)		(189,956)
Provision for income taxes										Provision for income taxes	3,545		11,748		15,395		190,239
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
(Loss) per share	(Loss) per share									(Loss) per share
Basic	Basic	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	Basic	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Diluted	Diluted	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	Diluted	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	81,996		81,526		81,842		81,284		Basic	83,336		81,996		82,996		81,842
Diluted	Diluted	81,996		81,526		81,842		81,284		Diluted	83,336		81,996		82,996		81,842

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)									PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
Other comprehensive (loss), net of tax	Other comprehensive (loss), net of tax									Other comprehensive (loss), net of tax
Unrealized (loss) gain on available-for-sale securities		(73)		53		(1,000)		1,184
Unrealized (loss) on available-for-sale securities										Unrealized (loss) on available-for-sale securities	(40)		(73)		(281)		(1,000)
Foreign currency translation adjustments	Foreign currency translation adjustments	(6,700)		(4,400)		(20,936)		(3,669)		Foreign currency translation adjustments	(3,687)		(6,700)		(1,737)		(20,936)
Total other comprehensive (loss), net of tax	Total other comprehensive (loss), net of tax	$	(6,773)	$	(4,347)	$	(21,936)	$	(2,485)	Total other comprehensive (loss), net of tax	(3,727)		(6,773)		(2,018)		(21,936)
Comprehensive (loss)	Comprehensive (loss)	$	(100,293)	$	(60,815)	$	(402,131)	$	(28,279)	Comprehensive (loss)	$	(11,006)	$	(100,293)	$	(76,875)	$	(402,131)

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				Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive (Loss)			Total Stockholders’ Equity
		Number of Shares	Amount								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
December 31, 2021																			December 31, 2021	81,712			$	817		$	145,810		$	276,449		$	(6,988)		$	416,088
Repurchase of common stock	Repurchase of common stock	(96)	(1)		(12,795)				—			—				(12,796)			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	286	3		(18,117)				—			—				(18,114)			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	24	—		2,639				—			—				2,639			Issuance of common stock under the employee stock purchase plan	35			—		2,446			—			—			2,446
Stock-based compensation	Stock-based compensation	—	—		28,701				—			—				28,701			Stock-based compensation	—			—		28,227			—			—			28,227
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,451)			—				(2,451)			Cash dividends declared ($0.03 per share)	—			—		—			(2,455)			—			(2,455)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—			(4,347)				(4,347)			Other comprehensive (loss)	—			—		—			—			(2,548)			(2,548)
Net (loss)	Net (loss)	—	—		—				(56,468)			—				(56,468)			Net (loss)	—			—		—			(379)			—			(379)
September 30, 2021		81,670	$	817	$	148,098			$	316,150		$	(5,433)			$	459,632
March 31, 2022																			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)
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 under the employee stock purchase plan																			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
Cash dividends declared ($0.03 per share)																			Cash dividends declared ($0.03 per share)	—			—		—			(2,459)			—			(2,459)
Other comprehensive (loss)																			Other comprehensive (loss)	—			—		—			—			(12,615)			(12,615)
Net (loss)																			Net (loss)	—			—		—			(286,296)			—			(286,296)
June 30, 2022																			June 30, 2022	81,940			$	819	$	170,251		$	(15,140)		$	(22,151)		$	133,779

Issuance of common stock for stock compensation plans																			Issuance of common stock for stock compensation plans	138			2		(2,198)			—			—			(2,196)
Issuance of common stock under the employee stock purchase plan																			Issuance of common stock under the employee stock purchase plan	86			1		2,362			—			—			2,363
Stock-based compensation																			Stock-based compensation	—			—		33,774			—			—			33,774
Cash dividends declared ($0.03 per share)																			Cash dividends declared ($0.03 per share)	—			—		—			(2,466)			—			(2,466)
Other comprehensive (loss)																			Other comprehensive (loss)	—			—		—			—			(6,773)			(6,773)
Net (loss)																			Net (loss)	—			—		—			(93,520)			—			(93,520)
September 30, 2022																			September 30, 2022	82,164			$	822	$	204,189		$	(111,126)		$	(28,924)		$	64,961


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				Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive (Loss)			Total Stockholders’ Equity
		Number of Shares	Amount								Number of Shares								Amount
December 31, 2022																			December 31, 2022	82,436			$	824		$	229,602		$	(76,513)		$	(23,070)		$	130,843

December 31, 2021		81,712	$	817			$	145,810						$	276,449			$	(6,988)		$	416,088
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	452			4		668			—			—			672
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	52			1		2,142			—			—			2,143
Stock-based compensation	Stock-based compensation	—	—		28,227				—			—				28,227			Stock-based compensation	—			—		42,557			—			—			42,557
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)	—			—		(2,488)			—			—			(2,488)
Other comprehensive (loss)		—	—		—				—			(2,548)				(2,548)
Other comprehensive income																			Other comprehensive income	—			—		—			—			1,543			1,543
Net (loss)	Net (loss)	—	—		—				(379)			—				(379)			Net (loss)	—			—		—			(20,774)			—			(20,774)
March 31, 2022		81,802	$	818	$	141,771			$	273,615		$	(9,536)			$	406,668
Repurchase of common stock		(38)	—		(1,925)				—			—				(1,925)
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	117	1		(3,252)				—			—				(3,251)			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	59	—		2,357				—			—				2,357			Issuance of common stock under the employee stock purchase plan	47			1		1,980			—			—			1,981
Stock-based compensation	Stock-based compensation	—	—		31,300				—			—				31,300			Stock-based compensation	—			—		36,227			—			—			36,227
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)	—			—		(2,496)			—			—			(2,496)
Other comprehensive (loss)		—	—		—				—			(12,615)				(12,615)
Other comprehensive income																			Other comprehensive income	—			—		—			—			166			166
Net (loss)	Net (loss)	—	—		—				(286,296)			—				(286,296)			Net (loss)	—			—		—			(46,804)			—			(46,804)
June 30, 2022		81,940	$	819	$	170,251			$	(15,140)		$	(22,151)			$	133,779
June 30, 2023																			June 30, 2023	83,212			$	832	$	310,016		$	(144,091)		$	(21,361)		$	145,396

Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	138	2		(2,198)				—			—				(2,196)			Issuance of common stock for stock compensation plans	257			3		2,447			—			—			2,450
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	86	1		2,362				—			—				2,363			Issuance of common stock under the employee stock purchase plan	54			—		2,003			—			—			2,003
Stock-based compensation	Stock-based compensation	—	—		33,774				—			—				33,774			Stock-based compensation	—			—		31,299			—			—			31,299
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,466)			—				(2,466)			Cash dividends declared ($0.03 per share)	—			—		(2,506)			—			—			(2,506)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—			(6,773)				(6,773)			Other comprehensive (loss)	—			—		—			—			(3,727)			(3,727)
Net (loss)	Net (loss)	—	—		—				(93,520)			—				(93,520)			Net (loss)	—			—		—			(7,279)			—			(7,279)
September 30, 2022		82,164	$	822	$	204,189			$	(111,126)		$	(28,924)			$	64,961
September 30, 2023																			September 30, 2023	83,523			$	835	$	343,259		$	(151,370)		$	(25,088)		$	167,636

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)
		Nine Months Ended September 30,					Nine Months Ended September 30,
		2022		2021			2023		2022
Operating activities	Operating activities					Operating activities
Net (loss)	Net (loss)	$	(380,195)	$	(25,794)	Net (loss)	$	(74,857)	$	(380,195)
Adjustments to reconcile net (loss) to cash (used in) operating activities
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	93,301		89,483		Stock-based compensation	110,083		93,301
Deferred income taxes	Deferred income taxes	169,489		(53,638)		Deferred income taxes	(188)		169,489
Loss on capped call transactions	Loss on capped call transactions	56,381		7,543		Loss on capped call transactions	449		56,381
Amortization of deferred commissions	Amortization of deferred commissions	39,752		31,388		Amortization of deferred commissions	43,974		39,752
Lease expense	Lease expense	11,500		9,274		Lease expense	12,018		11,500
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	12,381		24,030		Amortization of intangible assets and depreciation	14,181		12,381
Foreign currency transaction (gain) loss		(8,415)		4,983
Foreign currency transaction loss (gain)						Foreign currency transaction loss (gain)	3,971		(8,415)
Other non-cash	Other non-cash	(1,705)		5,246		Other non-cash	(16,487)		(1,705)
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(5,935)		(97,836)		Change in operating assets and liabilities, net	44,776		(5,935)
Cash (used in) operating activities		(13,446)		(5,321)
Cash provided by (used in) operating activities						Cash provided by (used in) operating activities	137,920		(13,446)
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(39,056)		(67,170)		Purchases of investments	(190,466)		(39,056)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	53,952		96,859		Proceeds from maturities and called investments	169,836		53,952
Sales of investments	Sales of investments	18,415		25,123		Sales of investments	10,725		18,415
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	(22,285)		(7,089)		Investment in property and equipment	(14,271)		(22,285)
Cash provided by investing activities		10,104		42,730
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(24,176)		10,104
Financing activities	Financing activities					Financing activities
Repurchases of convertible senior notes						Repurchases of convertible senior notes	(88,989)		—

Dividend payments to stockholders						Dividend payments to stockholders	(7,458)		(7,368)
Proceeds from employee stock purchase plan	Proceeds from employee stock purchase plan	7,166		7,786		Proceeds from employee stock purchase plan	6,127		7,166
Dividend payments to stockholders		(7,368)		(7,310)

Proceeds from stock option exercises						Proceeds from stock option exercises	6,602		—

Common stock repurchases	Common stock repurchases	(43,282)		(91,907)		Common stock repurchases	(1,654)		(43,282)
Other						Other	341		—
Cash (used in) financing activities	Cash (used in) financing activities	(43,484)		(91,431)		Cash (used in) financing activities	(85,031)		(43,484)
Effect of exchange rate changes on cash and cash equivalents		(5,513)		(1,466)
Net (decrease) in cash and cash equivalents		(52,339)		(55,488)
Cash and cash equivalents, beginning of period		159,965		171,899
Cash and cash equivalents, end of period		$	107,626	$	116,411
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(1,621)		(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cash						Net increase (decrease) in cash, cash equivalents, and restricted cash	27,092		(52,339)
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	$	172,146	$	107,626

Cash and cash equivalents						Cash and cash equivalents	$	169,023	$	107,626
Restricted cash included in other long-term assets						Restricted cash included in other long-term assets	3,123		—
Total cash, cash equivalents, and restricted cash						Total cash, cash equivalents, and restricted cash	$	172,146	$	107,626

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


		September 30, 2022								December 31, 2021									September 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	$	2,992	$	—	$	(67)	$	2,925	$	2,000	$	—	$	(10)	$	1,990	Government debt	$	17,931	$	—	$	(18)	$	17,913	$	2,960	$	—	$	(52)	$	2,908
Corporate debt	Corporate debt	168,894		—		(3,734)		165,160		201,659		2		(837)		200,824		Corporate debt	149,927		—		(554)		149,373		151,906		—		(2,647)		149,259
		$	171,886	$	—	$	(3,801)	$	168,085	$	203,659	$	2	$	(847)	$	202,814		$	167,858	$	—	$	(572)	$	167,286	$	154,866	$	—	$	(2,699)	$	152,167

As of September 30, ~~2022,~~2023, marketable securities’ maturities ranged from ~~November 2022~~October 2023 to ~~November 2024,~~January 2026, with a ~~weighted-average~~weighted average remaining maturity of ~~0.7~~0.5 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables
(in thousands) September 30, 2022 December 31, 2021
Accounts receivable $ 139,670 $ 182,717
Unbilled receivables 182,403 226,714
Long-term unbilled receivables 108,285 129,789
$ 430,358 $ 539,220


(in thousands)	September 30, 2023		December 31, 2022
Accounts receivable, net	$	168,795	$	255,150
Unbilled receivables, net	199,948		213,719
Long-term unbilled receivables, net	73,795		95,806
	$	442,538	$	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~~collection date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2022				(Dollars in thousands)	September 30, 2023
1 year or less	1 year or less	$	182,403	63	%	1 year or less	$	199,948	73	%
1-2 years	1-2 years	78,893		27	%	1-2 years	58,604		21	%
2-5 years	2-5 years	29,392		10	%	2-5 years	15,191		6	%
		$	290,688	100	%		$	273,743	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2022				(Dollars in thousands)	September 30, 2023
2023						2023	$	90,227	33	%
2022	2022	$	87,874	30	%	2022	92,065		34	%
2021	2021	130,196		45	%	2021	62,729		23	%
2020	2020	45,589		16	%	2020	19,820		7	%
2019		15,747		5	%
2018 and prior		11,282		4	%
2019 and prior						2019 and prior	8,902		3	%
		$	290,688	100	%		$	273,743	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:~~


	~~September 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)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Contract assets (1)	Contract assets (1)	$	12,429	$	12,530	Contract assets (1)	$	13,263	$	17,546
Long-term contract assets (2)	Long-term contract assets (2)	10,541		10,643		Long-term contract assets (2)	10,732		16,470
		$	22,970	$	23,173		$	23,995	$	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)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	245,146	$	275,844	Deferred revenue	$	297,067	$	325,212
Long-term deferred revenue (1)	Long-term deferred revenue (1)	3,949		5,655		Long-term deferred revenue (1)	2,605		3,552
		$	249,095	$	281,499		$	299,672	$	328,764

(1) Included in other long-term liabilities.

~~The change in deferred~~Deferred revenue decreased in the nine months ended September 30, ~~2022 was~~2023, primarily due to ~~new billings in advance of revenue recognition offset by $252.8~~$292.3 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)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Deferred commissions (1)	Deferred commissions (1)	$	122,673	$	135,911	Deferred commissions (1)	$	107,399	$	130,195

(1) Included in other long-term assets.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 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)	$	11,597	$	10,186	$	39,752	$	31,388	Amortization of deferred commissions (1)	$	14,947	$	11,597	$	43,974	$	39,752

(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:~~


		Nine Months Ended September 30,					Nine Months Ended September 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	(722)		22		Currency translation adjustments	38		(722)
September 30,	September 30,	$	81,201	$	81,954	September 30,	$	81,437	$	81,201

Intangibles

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


			September 30, 2022								September 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	$	63,007	$	(58,211)	$	4,796	Client-related	4-10 years	$	63,086	$	(59,661)	$	3,425
Technology	Technology	2-10 years	68,038		(60,913)		7,125		Technology	2-10 years	68,103		(63,579)		4,524
Other	Other	1-5 years	5,361		(5,361)		—		Other	1-5 years	5,361		(5,361)		—
			$	136,406	$	(124,485)	$	11,921			$	136,550	$	(128,601)	$	7,949

(1) Included in other long-term assets.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


		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
September 30, Nine Months Ended
September 30,
(in thousands) 2022 2021 2022 2021
Cost of revenue $ 705 $ 629 $ 2,017 $ 1,887
Selling and marketing 343 373 1,028 1,119
$ 1,048 $ 1,002 $ 3,045 $ 3,006

Future estimated intangibles assets amortization:


(in thousands)	(in thousands)	September 30, 2022		(in thousands)	September 30, 2023
Remainder of 2022		$	1,048
2023		3,917
Remainder of 2023				Remainder of 2023	$	964
2024	2024	3,147		2024	3,169
2025	2025	2,608		2025	2,615
2026	2026	874		2026	874
2027	2027	327		2027	327
		$	11,921
					$	7,949

Amortization of intangible assets:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Cost of revenue	$	622	$	705	$	1,949	$	2,017
Selling and marketing	343		343		1,028		1,028

	$	965	$	1,048	$	2,977	$	3,045

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Income tax receivables	Income tax receivables	$	11,948	$	25,691	Income tax receivables	$	19,663	$	25,354
Contract assets	Contract assets	12,429		12,530		Contract assets	13,263		17,546
Other	Other	38,080		29,787		Other	38,512		37,488
		$	62,457	$	68,008		$	71,438	$	80,388

Other long-term assets


(in thousands)	September 30, 2023		December 31, 2022
Deferred commissions	$	107,399	$	130,195
Right of use assets	65,871		76,114
Property and equipment	49,481		55,056
Venture investments	19,348		13,069
Contract assets	10,732		16,470
Intangible assets	7,949		10,888
Capped call transactions	1,792		2,582
Deferred income taxes	5,046		4,795
Restricted cash	3,123		—
Other	20,066		24,820
	$	290,807	$	333,989

Other current liabilities


(in thousands)	September 30, 2023		December 31, 2022
Operating lease liabilities	$	15,532	$	14,976
Dividends payable	2,506		2,474
	$	18,038	$	17,450

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term ~~assets~~

(in thousands) September 30, 2022 December 31, 2021
Deferred income taxes $ 6,041 $ 180,656
Deferred commissions 122,673 135,911
Right of use assets 80,163 87,521
Capped call transactions 3,583 59,964
Property and equipment 45,350 26,837
Venture investments 11,910 7,648
Intangible assets 11,921 14,063
Contract assets 10,541 10,643
Other 24,549 18,358
$ 316,731 $ 541,601

~~Other current~~ liabilities

(in thousands) September 30, 2022 December 31, 2021
Operating lease liabilities $ 5,787 $ 6,989
Dividends payable 2,466 2,454
$ 8,253 $ 9,443

~~Other long-term liabilities~~


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	3,949	$	5,655	Deferred revenue	$	2,605	$	3,552
Income taxes payable						Income taxes payable	2,017		3,207
Other	Other	7,987		7,844		Other	9,863		8,369
		$	11,936	$	13,499		$	14,485	$	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 became 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
September 30, Nine Months Ended
September 30,
(in thousands) 2022 2021 2022 2021
Fixed lease costs (1)
$ 4,688 $ (3,108) $ 14,747 $ (6,780)
Short-term lease costs 916 542 2,510 1,516
Variable lease costs 905 1,099 2,395 3,826
$ 6,509 $ (1,467) $ 19,652 $ (1,438)

~~(1) The lower fixed lease costs in the nine months ended September 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 September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Fixed lease costs	$	4,718	$	4,688	$	14,979	$	14,747
Short-term lease costs	660		916		2,137		2,510
Variable lease costs	2,254		905		6,414		2,395
	$	7,632	$	6,509	$	23,530	$	19,652

Right of use assets and lease liabilities


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Right of use assets (1)	Right of use assets (1)	$	80,163	$	87,521	Right of use assets (1)	$	65,871	$	76,114
Operating lease liabilities (2)	Operating lease liabilities (2)	$	5,787	$	6,989	Operating lease liabilities (2)	$	15,532	$	14,976
Long-term operating lease liabilities	Long-term operating lease liabilities	$	82,705	$	87,818	Long-term operating lease liabilities	$	68,874	$	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:

September 30, 2022

December 31, 2021

September 30, 2023

December 31, 2022

Weighted-average remaining lease term

7.4 years

7.7 years

Weighted-average remaining lease term

7.0 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)	September 30, 2022		(in thousands)	September 30, 2023
Remainder of 2022		$	(4,717)
2023		18,804
Remainder of 2023				Remainder of 2023	$	4,775
2024	2024	16,841		2024	17,976
2025	2025	14,778		2025	14,870
2026	2026	11,257		2026	10,853
2027 and thereafter		48,397
2027				2027	9,808
2028				2028	9,245
Thereafter				Thereafter	30,054
Total lease payments	Total lease payments	105,360		Total lease payments	97,581
Less: imputed interest (1)	Less: imputed interest (1)	(16,868)		Less: imputed interest (1)	(13,175)
		$	88,492		$	84,406

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event.

Cash flow information


		Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash paid for leases		$	11,628	$	14,403
Cash paid for operating leases, net of tenant improvement allowances						Cash paid for operating leases, net of tenant improvement allowances	$	14,378	$	11,628
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	6,618	$	54,716	Right of use assets recognized for new leases and amendments (non-cash)	$	1,782	$	6,618

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 nine months ended September 30, 2023, the Company recognized a gain of $7.9 million in other income (loss), net from repurchases of Notes representing $97.7 million 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 conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. 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 five consecutive business days immediately after any five 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 September 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)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Principal	Principal	$	600,000	$	600,000	Principal	$	502,270	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(7,116)		(9,278)		Unamortized issuance costs	(3,517)		(6,391)
Convertible senior notes, net	Convertible senior notes, net	$	592,884	$	590,722	Convertible senior notes, net	$	498,753	$	593,609

Interest expense related to the Notes:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 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	$	3,375	$	3,375	Contractual interest expense (0.75% coupon)	$	827	$	1,125	$	2,949	$	3,375
Amortization of issuance costs	Amortization of issuance costs	724		677		2,163		2,025		Amortization of issuance costs	613		724		1,988		2,163
		$	1,849	$	1,802	$	5,538	$	5,400		$	1,440	$	1,849	$	4,937	$	5,538

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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


		September 30, 2022							September 30, 2023
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total

2023		$	—	$	4,500	$	4,500
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	$	11,250	$	611,250		$	502,270	$	5,651	$	507,921

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 nine months ended September 30, 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $0.3 million. As of September 30, 2023, Capped Call Transactions covering 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:


		Nine Months Ended September 30,					Nine Months Ended September 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	(56,381)		(7,543)		Fair value adjustment	(449)		(56,381)
September 30,	September 30,	$	3,583	$	76,054	September 30,	$	1,792	$	3,583

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 September 30, ~~2022~~2023 and December 31, ~~2021, the Company had no outstanding cash borrowings under the Credit Facility.~~

~~As of September 30,~~ 2022, the Company had $27.3 million in outstanding letters of credit, which ~~reduce~~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
Employee severance and related benefits and closure of a foreign office	September 30, 2023	$	17,236

Accrued employee severance and related benefits:

Change for all restructuring actions:


	Nine Months Ended September 30,
(in thousands)	2023
January 1,	$	18,573
Costs incurred	19,921
Cash disbursements	(21,576)
Currency translation adjustments	(203)
September 30,	$	16,715

Note: Accrued employee severance and related benefits is included in accrued compensation and related expenses.

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:


	September 30, 2023								December 31, 2022
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	22,686	$	—	$	—	$	22,686	$	2,526	$	—	$	—	$	2,526
Marketable securities	$	—	$	167,286	$	—	$	167,286	$	—	$	152,167	$	—	$	152,167
Capped Call Transactions (1)	$	—	$	1,792	$	—	$	1,792	$	—	$	2,582	$	—	$	2,582
Venture investments (1) (2)	$	—	$	—	$	19,348	$	19,348	$	—	$	—	$	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)

~~Assets and liabilities measured at fair value on a recurring basis:~~
September 30, 2022 December 31, 2021
(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents $ 20,899 $ — $ — $ 20,899 $ 3,216 $ — $ — $ 3,216
Marketable securities $ — $ 168,085 $ — $ 168,085 $ — $ 202,814 $ — $ 202,814
Capped Call Transactions (1)
$ — $ 3,583 $ — $ 3,583 $ — $ 59,964 $ — $ 59,964
Venture investments (1) (2)
$ — $ — $ 11,910 $ 11,910 $ — $ — $ 7,648 $ 7,648

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

Changes in venture investments:


		Nine Months Ended September 30,					Nine Months Ended September 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	(3,954)		(400)		Sales of investments	(2,773)		(3,954)
Changes in foreign exchange rates	Changes in foreign exchange rates	(675)		(52)		Changes in foreign exchange rates	27		(675)
Changes in fair value:	Changes in fair value:					Changes in fair value:
included in other income		5,989		100
included in other comprehensive income		2,502		1,220
included in other income (loss), net						included in other income (loss), net	10,886		5,989
included in other comprehensive (loss)						included in other comprehensive (loss)	(2,261)		2,502
September 30,	September 30,	$	11,910	$	9,713	September 30,	$	19,348	$	11,910

The carrying value of certain ~~other~~ financial instruments, including receivables and accounts payable, approximates fair value due to ~~these items’~~their short 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 ~~$488.3~~$460.3 million as of September 30, ~~2022~~2023 and ~~$642.0~~$521.1 million as of December 31, ~~2021.~~ 2022. In the nine months ended September 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 September 30,								Nine Months Ended September 30,									Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2022				2021				2022				2021				(Dollars in thousands)	2023				2022				2023				2022
U.S.	U.S.	$	148,200	55	%	$	132,016	52	%	$	513,197	56	%	$	515,881	58	%	U.S.	$	154,741	47	%	$	148,200	55	%	$	489,645	51	%	$	513,197	56	%
Other Americas	Other Americas	18,546		7	%	17,510		7	%	80,558		9	%	43,469		5	%	Other Americas	23,497		7	%	18,546		7	%	58,013		6	%	80,558		9	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)	24,074		9	%	25,982		10	%	83,837		9	%	86,747		10	%	United Kingdom (“U.K.”)	41,622		12	%	24,074		9	%	112,751		12	%	83,837		9	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa	46,212		17	%	46,306		18	%	140,586		15	%	143,763		15	%	Europe (excluding U.K.), Middle East, and Africa	67,880		20	%	46,212		17	%	173,551		18	%	140,586		15	%
Asia-Pacific	Asia-Pacific	33,699		12	%	34,454		13	%	103,197		11	%	105,609		12	%	Asia-Pacific	46,903		14	%	33,699		12	%	124,423		13	%	103,197		11	%
		$	270,731	100	%	$	256,268	100	%	$	921,375	100	%	$	895,469	100	%		$	334,643	100	%	$	270,731	100	%	$	958,383	100	%	$	921,375	100	%

Revenue streams


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Perpetual license	Perpetual license	$	9,223	$	2,874	$	18,929	$	20,922	Perpetual license	$	2,747	$	9,223	$	4,729	$	18,929
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license	74,342		31,112		200,066		210,245
Revenue recognized at a point in time	Revenue recognized at a point in time	40,335		38,295		229,174		272,148		Revenue recognized at a point in time	77,089		40,335		204,795		229,174
Maintenance	Maintenance	77,526		83,188		235,568		237,531		Maintenance	83,538		77,526		245,210		235,568
Pega Cloud	Pega Cloud	97,359		78,369		281,182		219,520		Pega Cloud	118,040		97,359		340,982		281,182
Consulting	Consulting	55,511		56,416		175,451		166,270		Consulting	55,976		55,511		167,396		175,451
Revenue recognized over time	Revenue recognized over time	230,396		217,973		692,201		623,321		Revenue recognized over time	257,554		230,396		753,588		692,201
Total revenue	Total revenue	$	270,731	$	256,268	$	921,375	$	895,469	Total revenue	$	334,643	$	270,731	$	958,383	$	921,375

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Pega Cloud	Pega Cloud	$	97,359	$	78,369	$	281,182	$	219,520	Pega Cloud	$	118,040	$	97,359	$	340,982	$	281,182
Maintenance	Maintenance	77,526		83,188		235,568		237,531		Maintenance	83,538		77,526		245,210		235,568
Subscription services	Subscription services	174,885		161,557		516,750		457,051		Subscription services	201,578		174,885		586,192		516,750
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license	74,342		31,112		200,066		210,245
Subscription	Subscription	205,997		196,978		726,995		708,277		Subscription	275,920		205,997		786,258		726,995
Consulting										Consulting	55,976		55,511		167,396		175,451
Perpetual license	Perpetual license	9,223		2,874		18,929		20,922		Perpetual license	2,747		9,223		4,729		18,929
Consulting		55,511		56,416		175,451		166,270
		$	270,731	$	256,268	$	921,375	$	895,469		$	334,643	$	270,731	$	958,383	$	921,375

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of September 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	$	191,045	$	328,111			$	69,753				$	814	$	27,968			$	617,691		53	%	1 year or less	$	202,610			$	391,324			$	48,427			$	4,567			$	39,335		$	686,263	54	%
1-2 years	1-2 years	55,141		213,304		4,113				4,505			6,699		283,762		25	%	1-2 years		58,610				239,787		4,356				2,696				3,662				309,111		24		%
2-3 years	2-3 years	24,496		115,416		1,420				2,252			1,648		145,232		13	%	2-3 years		28,585				121,778		8,518				—				1,100				159,981		13		%
Greater than 3 years	Greater than 3 years	16,198		82,807		1,734				—			508		101,247		9	%	Greater than 3 years		17,478				89,870		2,664				—				—				110,012		9		%
		$	286,880	$	739,638	$	77,020			$	7,571		$	36,823	$	1,147,932	100	%			$	307,283			$	842,759	$	63,965			$	7,263			$	44,097			$	1,265,367	100		%

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


(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	$	196,667	$	284,359			$	49,265				$	15,686	$	31,673			$	577,650		56	%	1 year or less	$	191,045			$	328,111			$	69,753			$	814			$	27,968		$	617,691	53	%
1-2 years	1-2 years	59,360		177,214		16,872				1,064			6,561		261,071		25	%	1-2 years		55,141				213,304		4,113				4,505				6,699				283,762		25		%
2-3 years	2-3 years	37,734		79,775		420				4,094			5,165		127,188		12	%	2-3 years		24,496				115,416		1,420				2,252				1,648				145,232		13		%
Greater than 3 years	Greater than 3 years	33,935		30,113		245				2,127			1,697		68,117		7	%	Greater than 3 years		16,198				82,807		1,734				—				508				101,247		9		%
		$	327,696	$	571,461	$	66,802			$	22,971		$	45,096	$	1,034,026	100	%			$	286,880			$	739,638	$	77,020			$	7,571			$	36,823			$	1,147,932	100		%

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

Expense


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Cost of revenue	Cost of revenue	$	6,797	$	5,114	$	19,754	$	16,889	Cost of revenue	$	6,410	$	6,797	$	22,497	$	19,754
Selling and marketing	Selling and marketing	12,933		13,376		36,524		41,844		Selling and marketing	10,401		12,933		43,410		36,524
Research and development	Research and development	7,724		6,231		22,425		19,343		Research and development	7,375		7,724		24,286		22,425
General and administrative	General and administrative	6,320		3,974		14,598		11,407		General and administrative	7,113		6,320		19,890		14,598
		$	33,774	$	28,695	$	93,301	$	89,483		$	31,299	$	33,774	$	110,083	$	93,301
Income tax benefit	Income tax benefit	$	(600)	$	(5,845)	$	(1,505)	$	(18,028)	Income tax benefit	$	(316)	$	(600)	$	(1,569)	$	(1,505)

As of September 30, ~~2022,~~2023, the Company had ~~$161.0~~$137.5 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~~1.8 years.

~~Grants~~
Nine Months Ended
September 30, 2022
(in thousands) Shares Total Fair Value
Restricted stock units 1,436 $ 112,303
Non-qualified stock options 4,529 $ 102,332
Common stock 14 $ 600

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Grants


	Nine Months Ended September 30, 2023
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,514	$	70,962
Non-qualified stock options	911	$	19,142
Performance stock options (1)	906	$	18,265
Common stock	13	$	600

(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
September 30, Nine Months Ended
September 30,
(Dollars in thousands) 2022 2021 2022 2021
Provision for (benefit from) income taxes $ 11,748 $ (24,826) $ 190,239 $ (54,360)
Effective income tax rate (benefit rate) 100 % (68) %


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023			2022
Provision for income taxes	$	3,545	$	11,748	$	15,395		$	190,239
Effective income tax rate					(26)		%	(100)		%

The ~~change in the~~Company’s effective income tax rate ~~(benefit rate)~~ in the nine months ended September 30, ~~2022~~2023 was primarily ~~due to~~driven by the ~~recognition of a $191.9 million~~ valuation allowance ~~recognized at June 30, 2022,~~ on the Company’s deferred tax assets in the U.S. and ~~U.K deferred~~U.K. and projected taxable income in the U.S., partially offset by available tax ~~assets. As a result of recording~~credits and losses in the valuation allowance, the Company is no longer recording any income tax benefit on its U.S and U.K losses. The $11.7 million provision for (benefit from) income taxes for the three months ended September 30, 2022 primarily represents non-U.K. foreign income taxes.U.S.

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 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, the Company’s Backlog balance was not sufficient to recover our net deferred tax assets. The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net 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 not sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recovermaintain a valuation allowance on the Company’s U.S. and U.K. 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.~~

~~The Company intends to continue maintaining a full valuation allowance on our U.S and U.K deferred tax~~ assets until ~~there is~~ sufficient evidence exists to support the realization of these deferred tax assets.

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

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

Calculation of (loss) per share:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	(in thousands, except per share amounts)	2022		2021		2022		2021		(in thousands, except per share amounts)	2023		2022		2023		2022
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
Weighted-average common shares outstanding	Weighted-average common shares outstanding	81,996		81,526		81,842		81,284		Weighted-average common shares outstanding	83,336		81,996		82,996		81,842
(Loss) per share, basic	(Loss) per share, basic	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	(Loss) per share, basic	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)

Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,996		81,526		81,842		81,284		Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	83,336		81,996		82,996		81,842
(Loss) per share, diluted	(Loss) per share, diluted	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	(Loss) per share, diluted	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)

Outstanding anti-dilutive stock options and RSUs (4)	Outstanding anti-dilutive stock options and RSUs (4)	3,019		5,815		3,589		6,136		Outstanding anti-dilutive stock options and RSUs (4)	2,255		3,019		1,652		3,589

(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 September 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 September 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Commitments

See "Note 7. Leases" for additional information.

Legal proceedings

In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that ~~our~~the Company’s estimates will change in the near term, and the effect may be material.

~~As of September 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, eachlitigation as of ~~the parties filed motions for summary judgment with the court. On~~ September 30, ~~2022, the court entered an order allowing in part~~2023 and denying in part each party’s motion for summary judgment, thereby narrowing the potential issues for trial. On October 24, 2022, the court entered an order setting a trial date of January 3, 2023. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.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. On September 15, 2022, the circuit court of Fairfax County entered judgment ~~in the amount~~ of $2,060,479,287, consisting of the damages previously awarded by the jury 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 amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. ~~This~~Appellate briefing in the Court of Appeals of Virginia is completed. The Court of Appeals of Virginia has set November 15, 2023 as the date for oral arguments in the appeal. Although it is not possible to predict timing, this appeals process could potentially take years to 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 appellate proceedings and/or any potential new trial resulting from 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 ~~are without merit,~~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 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 October ~~26, 2022.~~25, 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 that these 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. They are not a substitute for financial measures prepared under U.S. GAAP. A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations build agility into their business 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 2023, 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 September 30, 2022, COVID-19 has not had a material impact on our results of operations or financial condition. See “Actual or threatened public health emergencies could harm our business” 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 and 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 our subscription transition.~~investors.

In 2023, the Company revised its ACV methodology for maintenance and all contracts less than 12 months as its overall client renewal rate exceeds 90%. The impact of the change was $3 million and 0.3% of Total ACV or less for all quarters in 2022. Previously disclosed ACV amounts have been updated to allow for comparability. This simplification, made possible by improvements to the Company’s financial systems, ensures that ACV for all contract types and lengths is consistently calculated as the total contract value divided by the duration in years. Previously, ACV for maintenance was calculated as the maintenance revenue for the quarter then ended, multiplied by four, and ACV for contracts less than 12 months was equal to the contract’s total value. The Company believes the simplified methodology better represents the current value of its contracts and better aligns its definition with comparable companies.

Reconciliation of ACV and Constant Currency ACV


(in millions, except percentages)	Q3 22		Q3 23		1-Year Change
ACV	$	1,040	$	1,169	12	%
Impact of changes in foreign exchange rates	—		(22)
Constant Currency ACV	$	1,040	$	1,147	10	%

Note: Constant currency ACV is calculated by applying the Q3 2022 foreign exchange rates to all periods shown.

Cash flow (1)

Note: Starting in the third quarter of 2023, the Company has calculated free cash flow as cash provided by (used in) operating activities less investments in property and equipment. To ensure comparability, previously disclosed amounts have been updated.


(Dollars in thousands)	Nine Months Ended September 30,
	2023				2022
			Margin (2)				Margin (2)
Cash provided by (used in) operating activities	$	137,920	14	%	$	(13,446)	(1)	%
Investment in property and equipment	(14,271)				(22,285)
Free cash flow	$	123,649	13	%	$	(35,731)	(4)	%



Additional information (3)
Legal fees	$	5,867			$	37,944
Restructuring	21,576				—
Interest on convertible senior notes	4,134				4,500
Other	—				3,266
	$	31,577			$	45,710

(1) Our non-GAAP free cash flow is defined as cash provided by (used in) operating activities less investment in property and equipment. Investment in property and equipment fluctuates in amount and frequency and are significantly affected by the timing and size of investments in our facilities. We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP.

(2) Operating and Free Cash Flow Margin are calculated by comparing the respective cash flow to Total Revenue.

(3) The additional information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance.

•Legal fees: Includes legal and related fees arising from proceedings outside the ordinary course of business.

•Restructuring: Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning September 1, 2020.

•Other: Includes fees related to capital advisory services, canceled in-person sales and marketing events, and incremental costs incurred integrating acquisitions.

Remaining performance obligations (“Backlog”)

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


(in millions, except percentages)	(in millions, except percentages)	Q3 2022		1 Year Growth Rate		(in millions, except percentages)	Q3 22		Q3 2023		1-Year Growth Rate
Backlog		$	1,148	11	%
Backlog - GAAP						Backlog - GAAP	$	1,148	$	1,265	10	%
Impact of changes in foreign exchange rates	Impact of changes in foreign exchange rates	74		7	%	Impact of changes in foreign exchange rates	—		(33)
Backlog - Constant Currency		$	1,222	18	%
Constant currency backlog						Constant currency backlog	$	1,148	$	1,232	7	%

Note: Constant currency ~~measures are~~Backlog is calculated by applying the Q3 2022 foreign exchange rates ~~for the earliest period shown~~ to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q3 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.

2324

RESULTS OF OPERATIONS

Revenue

~~Subscription transition~~


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2023				2022								2023				2022
Pega Cloud	$	118,040	35	%	$	97,359	36	%	$	20,681	21	%	$	340,982	36	%	$	281,182	31	%	$	59,800	21	%
Maintenance	83,538		25	%	77,526		29	%	6,012		8	%	245,210		25	%	235,568		25	%	9,642		4	%
Subscription services	201,578		60	%	174,885		65	%	26,693		15	%	586,192		61	%	516,750		56	%	69,442		13	%
Subscription license	74,342		22	%	31,112		11	%	43,230		139	%	200,066		21	%	210,245		23	%	(10,179)		(5)	%
Subscription	275,920		82	%	205,997		76	%	69,923		34	%	786,258		82	%	726,995		79	%	59,263		8	%
Consulting	55,976		17	%	55,511		21	%	465		1	%	167,396		18	%	175,451		19	%	(8,055)		(5)	%
Perpetual license	2,747		1	%	9,223		3	%	(6,476)		(70)	%	4,729		—	%	18,929		2	%	(14,200)		(75)	%
	$	334,643	100	%	$	270,731	100	%	$	63,912	24	%	$	958,383	100	%	$	921,375	100	%	$	37,008	4	%

~~We are transitioning our business to sell software primarily through subscription arrangements.~~

~~This transition has impacted the optics of revenue growth as revenue from subscription service arrangements, which includes~~•The increases in Pega Cloud ~~and maintenance, 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
September 30, Change Nine Months Ended
September 30, Change
2022 2021 2022 2021
Pega Cloud $ 97,359 36 % $ 78,369 31 % $ 18,990 24 % $ 281,182 31 % $ 219,520 25 % $ 61,662 28 %
Maintenance 77,526 29 % 83,188 32 % (5,662) (7) % 235,568 25 % 237,531 26 % (1,963) (1) %
Subscription services 174,885 65 % 161,557 63 % 13,328 8 % 516,750 56 % 457,051 51 % 59,699 13 %
Subscription license 31,112 11 % 35,421 14 % (4,309) (12) % 210,245 23 % 251,226 28 % (40,981) (16) %
Subscription 205,997 76 % 196,978 77 % 9,019 5 % 726,995 79 % 708,277 79 % 18,718 3 %
Perpetual license 9,223 3 % 2,874 1 % 6,349 221 % 18,929 2 % 20,922 2 % (1,993) (10) %
Consulting 55,511 21 % 56,416 22 % (905) (2) % 175,451 19 % 166,270 19 % 9,181 6 %
$ 270,731 100 % $ 256,268 100 % $ 14,463 6 % $ 921,375 100 % $ 895,469 100 % $ 25,906 3 %

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

•The United States Dollar has strengthened against foreign currencies in the markets we operate, which reduced total revenue growth in the three and nine months ended September 30, 2022 by approximately 5 percent.clients continued to expand their use of Pega Cloud.

•The decreases in subscription license revenue in the three and nine months ended September 30, 2022 were primarily due to several large software license contracts recognized in revenue in the three and nine months ended September 30, 2021.

•~~The decreases~~increases in maintenance revenue in the three and nine months ended September 30, ~~2022~~2023 were primarily due to ~~changes in foreign currency exchange rates and the continuing shift to Pega Cloud.~~continued demand for our subscription license offerings which are generally bundled with maintenance.

•The increase in subscription license revenue in the three months ended September 30, 2023 was primarily due to increased license deliveries in the three months ended September 30, 2023. The decrease in subscription license revenue in the nine months ended September 30, 2023 was primarily due to several large multi-year contracts recognized in revenue in the nine months ended September 30, 2022.

•The decrease in consulting revenue in the nine months ended September 30, ~~2022~~2023 was primarily due to ~~an increase~~lower consultant realization rates in ~~consultant billable hours~~the Americas.

•The decreases in ~~North America.~~

~~Gross profit~~

(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2022 2021 2022 2021
Pega Cloud $ 68,673 71 % $ 52,845 67 % $ 15,828 30 % $ 194,350 69 % $ 147,388 67 % $ 46,962 32 %
Maintenance 71,671 92 % 77,895 94 % (6,224) (8) % 219,296 93 % 221,457 93 % (2,161) (1) %
Subscription services 140,344 80 % 130,740 81 % 9,604 7 % 413,646 80 % 368,845 81 % 44,801 12 %
Subscription license 30,484 98 % 34,815 98 % (4,331) (12) % 208,322 99 % 249,415 99 % (41,093) (16) %
Subscription 170,828 83 % 165,555 84 % 5,273 3 % 621,968 86 % 618,260 87 % 3,708 1 %
Perpetual license 9,120 99 % 2,824 98 % 6,296 223 % 18,756 99 % 20,771 99 % (2,015) (10) %
Consulting (2,267) (4) % 3,667 6 % (5,934) * 4,289 2 % 5,238 3 % (949) (18) %
$ 177,681 66 % $ 172,046 67 % $ 5,635 3 % $ 645,013 70 % $ 644,269 72 % $ 744 — %

* not meaningful

~~The gross profit percent changes~~perpetual license revenue in the three and nine months ended September 30, ~~2022 were primarily due to a shift in the revenue mix.~~2023 reflects our strategy of promoting subscription-based arrangements.

Gross profit


(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2023				2022								2023				2022
Pega Cloud	$	88,553	75	%	$	68,673	71	%	$	19,880	29	%	$	250,943	74	%	$	194,350	69	%	$	56,593	29	%
Maintenance	77,119		92	%	71,671		92	%	5,448		8	%	225,696		92	%	219,296		93	%	6,400		3	%
Subscription services	165,672		82	%	140,344		80	%	25,328		18	%	476,639		81	%	413,646		80	%	62,993		15	%
Subscription license	73,713		99	%	30,484		98	%	43,229		142	%	198,095		99	%	208,322		99	%	(10,227)		(5)	%
Subscription	239,385		87	%	170,828		83	%	68,557		40	%	674,734		86	%	621,968		86	%	52,766		8	%
Consulting	(1,228)		(2)	%	(2,267)		(4)	%	1,039		46	%	(8,866)		(5)	%	4,289		2	%	(13,155)		*
Perpetual license	2,723		99	%	9,120		99	%	(6,397)		(70)	%	4,678		99	%	18,756		99	%	(14,078)		(75)	%
	$	240,880	72	%	$	177,681	66	%	$	63,199	36	%	$	670,546	70	%	$	645,013	70	%	$	25,533	4	%

* not meaningful

•The increases in Pega Cloud gross profit percent in the three and nine months ended September 30, ~~2022~~2023 were primarily due to ~~cost-efficiency gains~~increased cost efficiency, particularly for hosting services, as Pega Cloud ~~grows~~continues to grow and ~~scales.~~scale.

•The decrease in ~~Maintenance~~maintenance gross profit percent in the nine months ended September 30, 2023 was primarily due to an increase in compensation and benefits as a result of increased headcount.

•The increase in consulting gross profit percent in the three months ended September 30, ~~2022~~2023 was primarily due to ahigher consultant utilization in the Americas. The decrease in ~~maintenance revenue.~~consulting profit percent in the nine months ended September 30, 2023, was primarily due to lower consultant realization rates in the Americas.

Operating expenses


(Dollars in thousands)	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2023			2022							2023			2022
Selling and marketing	$	131,598		$	153,517		$	(21,919)	(14)	%	$	425,253		$	472,951		$	(47,698)	(10)	%
% of Revenue	39		%	57		%					44		%	51		%
Research and development	$	74,955		$	75,342		$	(387)	(1)	%	$	224,262		$	221,173		$	3,089	1	%
% of Revenue	22		%	28		%					23		%	24		%
General and administrative	$	27,321		$	26,043		$	1,278	5	%	$	73,893		$	94,530		$	(20,637)	(22)	%
% of Revenue	8		%	10		%					8		%	10		%
Restructuring	$	17,822		$	—		$	17,822	100	%	$	21,450		$	—		$	21,450	100	%
% of Revenue	5		%	—		%					2		%	—		%

•The decreases in ~~consulting gross profit percent in~~selling and marketing during the three and nine months ended September 30, ~~2022~~2023 were primarily due to decreases in compensation and benefits of $18.6 million and $45.0 million, respectively. The decreases were due to ~~increases~~reduced headcount as we optimize our go-to-market strategy. For additional information, see "Note 9. Restructuring" in ~~consultant availability.~~Part I, Item 1 of this Quarterly Report.

~~Operating expenses~~

(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2022 2021 2022 2021
% of Revenue % of Revenue % of Revenue % of Revenue
Selling and marketing $ 153,517 57 % $ 152,479 59 % $ 1,038 1 % $ 472,951 51 % $ 457,641 51 % $ 15,310 3 %
Research and development $ 75,342 28 % $ 64,728 25 % $ 10,614 16 % $ 221,173 24 % $ 191,565 21 % $ 29,608 15 %
General and administrative $ 26,043 10 % $ 20,176 8 % $ 5,867 29 % $ 94,530 10 % $ 57,607 6 % $ 36,923 64 %

•The increase in ~~selling~~research and ~~marketing in~~development for the nine months ended September 30, ~~2022~~2023 was primarily due to ~~an increase~~additional investments in ~~employee travel~~our products and ~~entertainment and marketing events of $10.7 million.~~services.

•The increases in research and development in the three and nine months ended September 30, 2022 were primarily due to increases in compensation and benefits of $7.5 million and $19.6 million, attributable to increases in headcount and incentive compensation. The increases in headcount reflects additional investments in developing our solutions.

•~~The increases~~changes in general and administrative in the three and nine months ended September 30, ~~2022~~2023 were primarily due to ~~increases~~an increase of $2.3 million in ~~compensation~~the three months ended September 30, 2023 and ~~benefits~~a decrease of ~~$2.9~~$21.4 million ~~and $5.7 million, facilities expenses of $1.1 million and $2.8 million, and~~in the nine months ended September 30, 2023 in legal fees and related expenses arising from ~~litigation~~ proceedings outside the ordinary course of ~~business of $0.4 million and $24.0 million.~~business. 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 the year ended December 31, 2022 for additional information.

•The increases in restructuring expenses during the three and nine months ended September 30, 2023 were primarily due to our efforts to optimize our go-to-market organization. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

Other income and expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,				Change							Nine Months Ended September 30,								Change					(Dollars in thousands)	Three Months Ended September 30,								Change							Nine Months Ended September 30,								Change
		2022		2021							2022				2021				2023										2022											2023				2022
Foreign currency transaction gain (loss)	Foreign currency transaction gain (loss)	$	3,826	$	518			$	3,308		639	%			$	8,415			$	(4,983)			$	13,398		*		Foreign currency transaction gain (loss)	$	1,994			$	3,826			$	(1,832)		(48)	%			$	(3,971)			$	8,415			$	(12,386)		*
Interest income	Interest income	520		166		354		213		%			1,036				555				481		87		%	Interest income	2,532				520				2,012		387		%			5,831				1,036				4,795		463		%
Interest expense	Interest expense	(1,992)		(1,908)		(84)		(4)		%			(5,882)				(5,747)				(135)		(2)		%	Interest expense	(1,533)				(1,992)				459		23		%			(5,229)				(5,882)				653		11		%
(Loss) on capped call transactions	(Loss) on capped call transactions	(6,876)		(14,735)		7,859		53		%			(56,381)				(7,543)				(48,838)		(647)		%	(Loss) on capped call transactions	(2,294)				(6,876)				4,582		67		%			(449)				(56,381)				55,932		99		%
Other (loss) income, net		(29)		2		(31)		*					6,497				108				6,389		5,916		%
Other income (loss), net																										Other income (loss), net	6,383				(29)				6,412		*					18,668				6,497				12,171		187		%
		$	(4,551)	$	(15,957)	$	11,406	71		%			$	(46,315)			$	(17,610)			$	(28,705)	(163)		%		$	7,082			$	(4,551)			$	11,633	*					$	14,850			$	(46,315)			$	61,165	*

* not meaningful

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

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

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

•The changes in (loss) on capped call transactions in the three and nine months ended September 30, ~~2022~~2023 were due to fair value adjustments for our capped call transactions. ~~See~~

•The increase in other income (loss), net in the three months ended September 30, 2023 was due to a $6.4 million increase in the value of equity securities held in our venture investments portfolio. The increase in other income (loss), net in the nine months ended September 30, 2023, was due to a $7.9 million gain from repurchases of our convertible senior notes and a $10.9 million increase in the value of equity securities held in our venture investments portfolio. For additional information, see “Note 8. Debt” and "Note 9.10. Fair Value Measurements" in Part I, Item 1 of this Quarterly ~~Report~~Report.

Provision for ~~additional information.~~income taxes


	Nine Months Ended September 30,
(Dollars in thousands)		2023			2022
Provision for income taxes		$	15,395		$	190,239
Effective income tax rate		(26)		%	(100)		%

•The ~~increase in other (loss)~~effective income ~~net~~tax rate in the nine months ended September 30, ~~2022 was due to gains on our venture investments portfolio.~~

~~Provision for (benefit from) income taxes~~
Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands) 2022 2021 2022 2021
Provision for (benefit from) income taxes $ 11,748 $ (24,826) $ 190,239 $ (54,360)
Effective income tax rate (benefit rate) 100 % (68) %

~~During the nine months ended September 30, 2022, the change in our effective income tax rate (benefit rate)~~2023 was primarily ~~due to the recognition of a $191.9 million valuation allowance recognized at June 30, 2022, on our U.S. and U.K deferred tax assets. As a result of recording~~driven by the valuation allowance ~~we are no longer recording any income tax benefit~~ on our ~~U.S~~deferred tax assets in the U.S. and ~~U.K losses. The $11.7 million provision for (benefit from)~~U.K. and projected taxable income ~~taxes for~~in the ~~three months ended September 30, 2022 primarily represents non-U.K. foreign income taxes.~~U.S., partially offset by available tax credits and losses in the U.S.

LIQUIDITY AND CAPITAL RESOURCES


		Nine Months Ended September 30,					Nine Months Ended September 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	$	(13,446)	$	(5,321)	Operating activities	$	137,920	$	(13,446)
Investing activities	Investing activities	10,104		42,730		Investing activities	(24,176)		10,104
Financing activities	Financing activities	(43,484)		(91,431)		Financing activities	(85,031)		(43,484)
Effect of exchange rates on cash and cash equivalents		(5,513)		(1,466)
Net (decrease) in cash and cash equivalents		$	(52,339)	$	(55,488)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(1,621)		(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cash						Net increase (decrease) in cash, cash equivalents, and restricted cash	$	27,092	$	(52,339)


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	September 30, 2023		December 31, 2022
Held by U.S. entities	Held by U.S. entities	$	226,640	$	274,813	Held by U.S. entities	$	217,735	$	248,389
Held by foreign entities	Held by foreign entities	49,071		87,966		Held by foreign entities	118,574		48,832
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	275,711	$	362,779	Total cash, cash equivalents, and marketable securities	$	336,309	$	297,221

We believe that our current cash, cash flow ~~from~~provided by 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 to pay ~~U.S.~~federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and ~~regulations, it is impracticable to estimate the amount of taxes we would have to pay.~~regulations.

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 subscription licenses and services are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.

The change in cash provided by (used in) operating activities in the nine months ended September 30, ~~2022~~2023 was primarily due to ~~our subscription transition and increased costs as we made investments~~growth in ~~research and development to support development~~client collections, the impact of our ~~offerings partially offset by strong client collections. In addition, in the nine months ended September 30, 2022~~cost-efficiency initiatives, and ~~2021, we incurred $32.4 million and $8.4 million in~~lower legal fees and related ~~expenses~~costs 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 9. Restructuring” and "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 (used in) provided by investing activities in the nine months ended September 30, ~~2022~~2023 was primarily ~~driven by~~due to our investments in financial instruments and ~~an increase~~reduced investment in property and equipment as we optimize our office ~~space related capital expenditures.~~space.

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 nine months ended September 30, 2023, we paid $89 million to repurchase $97.7 million in aggregate principal amount of convertible senior notes. As of September 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 September 30, 2023 and December 31, 2022, we ~~had no outstanding cash borrowings under the Credit Facility but~~ had $27.3 million in outstanding letters of credit, which ~~reduce~~reduced the Company’s available borrowing ~~capacity. See~~capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility. 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)	Nine Months Ended September 30, ~~2022~~2023
December 31, ~~2021~~2022	$	~~22,583~~58,075
Authorizations (1)	~~60,000~~1,925
~~Repurchases~~ ~~(2)~~	~~(24,508)~~
September 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 been made on~~2024, and the ~~open market.~~

amount of stock we are authorized to repurchase was increased to $60 million.

Common stock repurchases


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2022			2021				2023			2022
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid		279	$	24,508	245	$	31,788
Repurchases unpaid at period end		—	—		3	400

Stock repurchase program	Stock repurchase program	279	24,508		248	32,188		Stock repurchase program	—	—		279	24,508
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	253	17,575		462	59,819		Tax withholdings for net settlement of equity awards	39	1,654		253	17,575
		532	$	42,083	710	$	92,007		39	$	1,654	532	$	42,083

~~During~~In the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$11.5~~$1.0 million and ~~$47.1~~$11.5 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.


		Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Dividend payments to stockholders	Dividend payments to stockholders	$	7,368	$	7,310	Dividend payments to stockholders	$	7,458	$	7,368

Contractual obligations

As of September 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)	$	—	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	611,250	Convertible senior notes (1)	$	—	$	3,767	$	504,154	$	—	$	—	$	—	$	—	$	507,921
Purchase obligations (2)	Purchase obligations (2)	7,925		14,802		15,479		17,594		14,492		14		—		70,306		Purchase obligations (2)	43,491		134,122		126,065		120,745		134,060		177		—		558,660
Operating lease obligations	Operating lease obligations	(4,717)		18,804		16,841		14,778		11,257		48,397		—		105,360		Operating lease obligations	4,775		17,976		14,870		10,853		9,808		39,299		—		97,581
Liability for uncertain tax positions (3)		—		—		—		—		—		—		1,242		1,242
Venture investment commitments (3)																		Venture investment commitments (3)	500		500		—		—		—		—		—		1,000
Liability for uncertain tax positions (4)																		Liability for uncertain tax positions (4)	—		—		—		—		—		—		2,017		2,017
		$	3,208	$	38,106	$	36,820	$	634,622	$	25,749	$	48,411	$	1,242	$	788,158		$	48,766	$	156,365	$	645,089	$	131,598	$	143,868	$	39,476	$	2,017	$	1,167,179

(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) Represents the maximum funding under existing venture investment agreements. Our venture investment agreements generally allow us to withhold unpaid funds at our discretion.

(4) 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:
Nine Months Ended
September 30,
2022 2021
(Decrease) increase in revenue (4) % (4) %
Increase (decrease) in net income 2 % (9) %


	Nine Months Ended September 30,
	2023		2022
(Decrease) in revenue	(4)	%	(4)	%
(Decrease) increase in net income	(5)	%	2	%

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:


		Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Foreign currency gain (loss)		$	(6,335)	$	(4,480)
Foreign currency (loss)						Foreign currency (loss)	$	(11,351)	$	(6,335)

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, ~~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 September 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 September 30, ~~2022~~2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2829

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in “Note ~~14.~~15. Commitments and 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 (“SEC”) on February 16, 2022 and in our Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission on April 28, 2022 and July 27, 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 Reports on Form 10-Q filed with the SEC on April 28, 2022 and July 27, 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 July 27, 2022; 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 July 27, 2022; 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. On September 15, 2022, the circuit court of Fairfax County entered judgment in the amount of $2,060,479,287, consisting of the jury verdict and the Court’s award of attorneys’ fees and costs to Appian, and stating that Appian will be entitled to post-judgment interest at the rate of 6% per annum from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the portion of the judgment that is attributable to the Court’s award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved of the $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. This appeals process could potentially take years to complete. Notwithstanding the circuit court of Fairfax County having entered this judgment, we are unable to reasonably estimate possible damages in that matter because, among other things, of the uncertainty as to the outcome of appellate proceedings, and/or any potential new trial resulting from the appellate proceedings. If we are ultimately unsuccessful in prevailing in the matter in its entirety or in obtaining a substantially smaller jury verdict, 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 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 September 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)
July 1, 2022 - July 31, 2022 14 $ 48.98 — $ 58,075
August 1, 2022 - August 31, 2022 7 40.49 — $ 58,075
September 1, 2022 - September 30, 2022 121 36.81 — $ 58,075
142 $ 38.20 —


(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
July 1, 2023 - July 31, 2023	3	$	55.81	—	$	60,000
August 1, 2023 - August 31, 2023	—	—		—	$	60,000
September 1, 2023 - September 30, 2023	4	48.92		—	$	60,000
	7	$	51.65	—

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

(2) On June 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. SeeFor additional information, see "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly ~~Report~~Report.

(2) Includes shares withheld to cover the option exercise price and tax withholding obligations for ~~additional information.~~

stock compensation awards subject to net settlement provisions.

ITEM 5. OTHER INFORMATION

Rule 10b5-1 and non-rule 10b5-1 trading arrangements

During the three months ended September 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.

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

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.

3130

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Pegasystems Inc.

Dated:	October ~~26, 2022~~25, 2023	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)


	Nine Months Ended September 30, 2022
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,436	$	112,303
Non-qualified stock options	4,529	$	102,332
Common stock	14	$	600


(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2022 - July 31, 2022	14	$	48.98	—	$	58,075
August 1, 2022 - August 31, 2022	7	40.49		—	$	58,075
September 1, 2022 - September 30, 2022	121	36.81		—	$	58,075
	142	$	38.20	—