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, 20222023
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859 
____________________________
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter) 
____________________________
Massachusetts04-2787865
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
One 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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨            
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
There were 82,190,95783,555,919 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, 20222023 and December 31, 20212022
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20222023 and 20212022
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 20222023 and 20212022
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 20222023 and 20212022
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20222023 and 20212022
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Signature

2

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2022December 31, 2021September 30, 2023December 31, 2022
AssetsAssetsAssets
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$107,626 $159,965 Cash and cash equivalents$169,023 $145,054 
Marketable securitiesMarketable securities168,085 202,814 Marketable securities167,286 152,167 
Total cash, cash equivalents, and marketable securitiesTotal cash, cash equivalents, and marketable securities275,711 362,779 Total cash, cash equivalents, and marketable securities336,309 297,221 
Accounts receivable139,670 182,717 
Unbilled receivables182,403 226,714 
Accounts receivable, netAccounts receivable, net168,795 255,150 
Unbilled receivables, netUnbilled receivables, net199,948 213,719 
Other current assetsOther current assets62,457 68,008 Other current assets71,438 80,388 
Total current assetsTotal current assets660,241 840,218 Total current assets776,490 846,478 
Unbilled receivables108,285 129,789 
Unbilled receivables, netUnbilled receivables, net73,795 95,806 
GoodwillGoodwill81,201 81,923 Goodwill81,437 81,399 
Other long-term assetsOther long-term assets316,731 541,601 Other long-term assets290,807 333,989 
Total assetsTotal assets$1,166,458 $1,593,531 Total assets$1,222,529 $1,357,672 
Liabilities and stockholders’ equityLiabilities and stockholders’ equityLiabilities and stockholders’ equity
Current liabilities:Current liabilities:Current liabilities:
Accounts payableAccounts payable$13,562 $15,281 Accounts payable$20,541 $18,195 
Accrued expensesAccrued expenses61,012 63,890 Accrued expenses43,624 50,355 
Accrued compensation and related expensesAccrued compensation and related expenses85,999 120,946 Accrued compensation and related expenses93,511 127,728 
Deferred revenueDeferred revenue245,146 275,844 Deferred revenue297,067 325,212 
Other current liabilitiesOther current liabilities8,253 9,443 Other current liabilities18,038 17,450 
Total current liabilitiesTotal current liabilities413,972 485,404 Total current liabilities472,781 538,940 
Convertible senior notes, netConvertible senior notes, net592,884 590,722 Convertible senior notes, net498,753 593,609 
Operating lease liabilitiesOperating lease liabilities82,705 87,818 Operating lease liabilities68,874 79,152 
Other long-term liabilitiesOther long-term liabilities11,936 13,499 Other long-term liabilities14,485 15,128 
Total liabilitiesTotal liabilities1,101,497 1,177,443 Total liabilities1,054,893 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 issuedPreferred 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 capitalAdditional paid-in capital204,189 145,810 Additional paid-in capital343,259 229,602 
(Accumulated deficit) retained earnings(111,126)276,449 
Accumulated deficitAccumulated 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’ equityTotal stockholders’ equity64,961 416,088 Total stockholders’ equity167,636 130,843 
Total liabilities and stockholders’ equityTotal 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.
3


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
September 30,
Nine Months Ended
September 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
20222021202220212023202220232022
RevenueRevenueRevenue
Subscription servicesSubscription services$174,885 $161,557 $516,750 $457,051 Subscription services$201,578 $174,885 $586,192 $516,750 
Subscription licenseSubscription license31,112 35,421 210,245 251,226 Subscription license74,342 31,112 200,066 210,245 
ConsultingConsulting55,976 55,511 167,396 175,451 
Perpetual licensePerpetual license9,223 2,874 18,929 20,922 Perpetual license2,747 9,223 4,729 18,929 
Consulting55,511 56,416 175,451 166,270 
Total revenueTotal revenue270,731 256,268 921,375 895,469 Total revenue334,643 270,731 958,383 921,375 
Cost of revenueCost of revenueCost of revenue
Subscription servicesSubscription services34,541 30,817 103,104 88,206 Subscription services35,906 34,541 109,553 103,104 
Subscription licenseSubscription license628 606 1,923 1,811 Subscription license629 628 1,971 1,923 
ConsultingConsulting57,204 57,778 176,262 171,162 
Perpetual licensePerpetual license103 50 173 151 Perpetual license24 103 51 173 
Consulting57,778 52,749 171,162 161,032 
Total cost of revenueTotal cost of revenue93,050 84,222 276,362 251,200 Total cost of revenue93,763 93,050 287,837 276,362 
Gross profitGross profit177,681 172,046 645,013 644,269 Gross profit240,880 177,681 670,546 645,013 
Operating expensesOperating expensesOperating expenses
Selling and marketingSelling and marketing153,517 152,479 472,951 457,641 Selling and marketing131,598 153,517 425,253 472,951 
Research and developmentResearch and development75,342 64,728 221,173 191,565 Research and development74,955 75,342 224,262 221,173 
General and administrativeGeneral and administrative26,043 20,176 94,530 57,607 General and administrative27,321 26,043 73,893 94,530 
RestructuringRestructuring17,822 — 21,450 — 
Total operating expensesTotal operating expenses254,902 237,383 788,654 706,813 Total operating expenses251,696 254,902 744,858 788,654 
(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 incomeInterest income520 166 1,036 555 Interest income2,532 520 5,831 1,036 
Interest expenseInterest 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)6,497 108 
(Loss) before provision for (benefit from) income taxes(81,772)(81,294)(189,956)(80,154)
Provision for (benefit from) income taxes11,748 (24,826)190,239 (54,360)
Other income (loss), netOther income (loss), net6,383 (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 taxesProvision for income taxes3,545 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)$(380,195)
(Loss) per share(Loss) per share(Loss) per share
BasicBasic$(1.14)$(0.69)$(4.65)$(0.32)Basic$(0.09)$(1.14)$(0.90)$(4.65)
DilutedDiluted$(1.14)$(0.69)$(4.65)$(0.32)Diluted$(0.09)$(1.14)$(0.90)$(4.65)
Weighted-average number of common shares outstandingWeighted-average number of common shares outstandingWeighted-average number of common shares outstanding
BasicBasic81,996 81,526 81,842 81,284 Basic83,336 81,996 82,996 81,842 
DilutedDiluted81,996 81,526 81,842 81,284 Diluted83,336 81,996 82,996 81,842 

See notes to unaudited condensed consolidated financial statements.
4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
20222021202220212023202220232022
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 taxOther comprehensive (loss), net of taxOther 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 securitiesUnrealized (loss) on available-for-sale securities(40)(73)(281)(1,000)
Foreign currency translation adjustmentsForeign 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 taxTotal 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.
5


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common StockAdditional
Paid-In Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Common StockAdditional
Paid-In Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
AmountNumber
of Shares
Amount
December 31, 202080,890 $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 plans402 (25,513)— — (25,509)
Issuance of common stock under the employee stock purchase plan24 — 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, 202181,246 $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 plans267 (16,199)— — (16,196)
Issuance of common stock under the employee stock purchase plan24 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, 202181,456 $815 $147,670 $375,069 $(1,086)$522,468 
December 31, 2021December 31, 202181,712 $817 $145,810 $276,449 $(6,988)$416,088 
Repurchase of common stockRepurchase 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 plansIssuance of common stock for stock compensation plans286 (18,117)— — (18,114)Issuance of common stock for stock compensation plans297 (12,131)— — (12,128)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan24 — 2,639 — — 2,639 Issuance of common stock under the employee stock purchase plan35 — 2,446 — — 2,446 
Stock-based compensationStock-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, 202181,670 $817 $148,098 $316,150 $(5,433)$459,632 
March 31, 2022March 31, 202281,802 $818 $141,771 $273,615 $(9,536)$406,668 
Repurchase of common stockRepurchase of common stock(38)— (1,925)— — (1,925)
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans117 (3,252)— — (3,251)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan59 — 2,357 — — 2,357 
Stock-based compensationStock-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, 2022June 30, 202281,940 $819 $170,251 $(15,140)$(22,151)$133,779 
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans138 (2,198)— — (2,196)
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan86 2,362 — — 2,363 
Stock-based compensationStock-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, 2022September 30, 202282,164 $822 $204,189 $(111,126)$(28,924)$64,961 
6


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common StockAdditional
Paid-In Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Common StockAdditional
Paid-In Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
AmountNumber
of Shares
Amount
December 31, 2022December 31, 202282,436 $824 $229,602 $(76,513)$(23,070)$130,843 
December 31, 202181,712 $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 plansIssuance of common stock for stock compensation plans297 (12,131)— — (12,128)Issuance of common stock for stock compensation plans452 668 — — 672 
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan35 — 2,446 — — 2,446 Issuance of common stock under the employee stock purchase plan52 2,142 — — 2,143 
Stock-based compensationStock-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 incomeOther comprehensive income— — — — 1,543 1,543 
Net (loss)Net (loss)— — — (379)— (379)Net (loss)— — — (20,774)— (20,774)
March 31, 202281,802 $818 $141,771 $273,615 $(9,536)$406,668 
Repurchase of common stock(38)— (1,925)— — (1,925)
March 31, 2023March 31, 202382,940 $829 $272,481 $(97,287)$(21,527)$154,496 
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans117 (3,252)— — (3,251)Issuance of common stock for stock compensation plans225 1,824 — — 1,826 
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan59 — 2,357 — — 2,357 Issuance of common stock under the employee stock purchase plan47 1,980 — — 1,981 
Stock-based compensationStock-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 incomeOther comprehensive income— — — — 166 166 
Net (loss)Net (loss)— — — (286,296)— (286,296)Net (loss)— — — (46,804)— (46,804)
June 30, 202281,940 $819 $170,251 $(15,140)$(22,151)$133,779 
June 30, 2023June 30, 202383,212 $832 $310,016 $(144,091)$(21,361)$145,396 
Issuance of common stock for stock compensation plansIssuance of common stock for stock compensation plans138 (2,198)— — (2,196)Issuance of common stock for stock compensation plans257 2,447 — — 2,450 
Issuance of common stock under the employee stock purchase planIssuance of common stock under the employee stock purchase plan86 2,362 — — 2,363 Issuance of common stock under the employee stock purchase plan54 — 2,003 — — 2,003 
Stock-based compensationStock-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, 202282,164 $822 $204,189 $(111,126)$(28,924)$64,961 
September 30, 2023September 30, 202383,523 $835 $343,259 $(151,370)$(25,088)$167,636 

See notes to unaudited condensed consolidated financial statements.
7


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
Nine Months Ended
September 30,
2022202120232022
Operating activitiesOperating activitiesOperating 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 activitiesAdjustments to reconcile net (loss) to cash provided by (used in) operating activities
Stock-based compensationStock-based compensation93,301 89,483 Stock-based compensation110,083 93,301 
Deferred income taxesDeferred income taxes169,489 (53,638)Deferred income taxes(188)169,489 
Loss on capped call transactionsLoss on capped call transactions56,381 7,543 Loss on capped call transactions449 56,381 
Amortization of deferred commissionsAmortization of deferred commissions39,752 31,388 Amortization of deferred commissions43,974 39,752 
Lease expenseLease expense11,500 9,274 Lease expense12,018 11,500 
Amortization of intangible assets and depreciationAmortization of intangible assets and depreciation12,381 24,030 Amortization of intangible assets and depreciation14,181 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-cashOther non-cash(1,705)5,246 Other non-cash(16,487)(1,705)
Change in operating assets and liabilities, netChange in operating assets and liabilities, net(5,935)(97,836)Change in operating assets and liabilities, net44,776 (5,935)
Cash (used in) operating activities(13,446)(5,321)
Cash provided by (used in) operating activitiesCash provided by (used in) operating activities137,920 (13,446)
Investing activitiesInvesting activitiesInvesting activities
Purchases of investmentsPurchases of investments(39,056)(67,170)Purchases of investments(190,466)(39,056)
Proceeds from maturities and called investmentsProceeds from maturities and called investments53,952 96,859 Proceeds from maturities and called investments169,836 53,952 
Sales of investmentsSales of investments18,415 25,123 Sales of investments10,725 18,415 
Payments for acquisitions, net of cash acquiredPayments for acquisitions, net of cash acquired(922)(4,993)Payments for acquisitions, net of cash acquired— (922)
Investment in property and equipmentInvestment in property and equipment(22,285)(7,089)Investment in property and equipment(14,271)(22,285)
Cash provided by investing activities10,104 42,730 
Cash (used in) provided by investing activitiesCash (used in) provided by investing activities(24,176)10,104 
Financing activitiesFinancing activitiesFinancing activities
Repurchases of convertible senior notesRepurchases of convertible senior notes(88,989)— 
Dividend payments to stockholdersDividend payments to stockholders(7,458)(7,368)
Proceeds from employee stock purchase planProceeds from employee stock purchase plan7,166 7,786 Proceeds from employee stock purchase plan6,127 7,166 
Dividend payments to stockholders(7,368)(7,310)
Proceeds from stock option exercisesProceeds from stock option exercises6,602 — 
Common stock repurchasesCommon stock repurchases(43,282)(91,907)Common stock repurchases(1,654)(43,282)
OtherOther341 — 
Cash (used in) financing activitiesCash (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 period159,965 171,899 
Cash and cash equivalents, end of period$107,626 $116,411 
Effect of exchange rate changes on cash, cash equivalents, and restricted cashEffect of exchange rate changes on cash, cash equivalents, and restricted cash(1,621)(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cashNet increase (decrease) in cash, cash equivalents, and restricted cash27,092 (52,339)
Cash, cash equivalents, and restricted cash, beginning of periodCash, cash equivalents, and restricted cash, beginning of period145,054 159,965 
Cash, cash equivalents, and restricted cash, end of periodCash, cash equivalents, and restricted cash, end of period$172,146 $107,626 
Cash and cash equivalentsCash and cash equivalents$169,023 $107,626 
Restricted cash included in other long-term assetsRestricted cash included in other long-term assets3,123 — 
Total cash, cash equivalents, and restricted cashTotal cash, cash equivalents, and restricted cash$172,146 $107,626 

See notes to unaudited condensed consolidated financial statements.
8

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements 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, 2022December 31, 2021September 30, 2023December 31, 2022
(in thousands)(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debtGovernment debt$2,992 $— $(67)$2,925 $2,000 $— $(10)$1,990 Government debt$17,931 $— $(18)$17,913 $2,960 $— $(52)$2,908 
Corporate debtCorporate debt168,894 — (3,734)165,160 201,659 (837)200,824 Corporate debt149,927 — (554)149,373 151,906 — (2,647)149,259 
$171,886 $— $(3,801)$168,085 $203,659 $$(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 2022October 2023 to November 2024,January 2026, with a weighted-averageweighted average remaining maturity of 0.70.5 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)September 30, 2022December 31, 2021
Accounts receivable$139,670 $182,717 
Unbilled receivables182,403 226,714 
Long-term unbilled receivables108,285 129,789 
$430,358 $539,220 
(in thousands)September 30, 2023December 31, 2022
Accounts receivable, net$168,795 $255,150 
Unbilled receivables, net199,948 213,719 
Long-term unbilled receivables, net73,795 95,806 
$442,538 $564,675 
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billingbilling. Billing is solely subject to the passage of time.
Unbilled receivables by expected billingcollection date:
(Dollars in thousands)(Dollars in thousands)September 30, 2022(Dollars in thousands)September 30, 2023
1 year or less1 year or less$182,403 63 %1 year or less$199,948 73 %
1-2 years1-2 years78,893 27 %1-2 years58,604 21 %
2-5 years2-5 years29,392 10 %2-5 years15,191 %
$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
20232023$90,227 33 %
20222022$87,874 30 %202292,065 34 %
20212021130,196 45 %202162,729 23 %
2020202045,589 16 %202019,820 %
201915,747 %
2018 and prior11,282 %
2019 and prior2019 and prior8,902 %
$290,688 100 %$273,743 100 %
9

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, 2022December 31, 2021
Client A
Accounts receivable*%
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, 2022December 31, 2021(in thousands)September 30, 2023December 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, 2022December 31, 2021(in thousands)September 30, 2023December 31, 2022
Deferred revenueDeferred 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 deferredDeferred revenue decreased in the nine months ended September 30, 2022 was2023, 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, 2022December 31, 2021(in thousands)September 30, 2023December 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)2022202120222021(in thousands)2023202220232022
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.
10
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)20222021(in thousands)20232022
January 1,January 1,$81,923 $79,231 January 1,$81,399 $81,923 
Acquisition— 2,701 
Currency translation adjustmentsCurrency translation adjustments(722)22 Currency translation adjustments38 (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, 2022September 30, 2023
(in thousands)(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-relatedClient-related4-10 years$63,007 $(58,211)$4,796 Client-related4-10 years$63,086 $(59,661)$3,425 
TechnologyTechnology2-10 years68,038 (60,913)7,125 Technology2-10 years68,103 (63,579)4,524 
OtherOther1-5 years5,361 (5,361)— Other1-5 years5,361 (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 LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,165 $(57,342)$5,823 
Technology2-10 years67,142 (58,902)8,240 
Other1-5 years5,361 (5,361)— 
$135,668 $(121,605)$14,063 
10

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



December 31, 2022
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,076 $(58,623)$4,453 
Technology2-10 years68,056 (61,621)6,435 
Other1-5 years5,361 (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)2022202120222021
Cost of revenue$705 $629 $2,017 $1,887 
Selling and marketing343 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 
20233,917 
Remainder of 2023Remainder of 2023$964 
202420243,147 20243,169 
202520252,608 20252,615 
20262026874 2026874 
20272027327 2027327 
$11,921 
$7,949 
Amortization of intangible assets:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2023202220232022
Cost of revenue$622 $705 $1,949 $2,017 
Selling and marketing343 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, 2022December 31, 2021(in thousands)September 30, 2023December 31, 2022
Income tax receivablesIncome tax receivables$11,948 $25,691 Income tax receivables$19,663 $25,354 
Contract assetsContract assets12,429 12,530 Contract assets13,263 17,546 
OtherOther38,080 29,787 Other38,512 37,488 
$62,457 $68,008 $71,438 $80,388 
Other long-term assets
(in thousands)September 30, 2023December 31, 2022
Deferred commissions$107,399 $130,195 
Right of use assets65,871 76,114 
Property and equipment49,481 55,056 
Venture investments19,348 13,069 
Contract assets10,732 16,470 
Intangible assets7,949 10,888 
Capped call transactions1,792 2,582 
Deferred income taxes5,046 4,795 
Restricted cash3,123 — 
Other20,066 24,820 
$290,807 $333,989 
Other current liabilities
(in thousands)September 30, 2023December 31, 2022
Operating lease liabilities$15,532 $14,976 
Dividends payable2,506 2,474 
$18,038 $17,450 
11

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



Other long-term assets
(in thousands)September 30, 2022December 31, 2021
Deferred income taxes$6,041 $180,656 
Deferred commissions122,673 135,911 
Right of use assets80,163 87,521 
Capped call transactions3,583 59,964 
Property and equipment45,350 26,837 
Venture investments11,910 7,648 
Intangible assets11,921 14,063 
Contract assets10,541 10,643 
Other24,549 18,358 
$316,731 $541,601 
Other current liabilities
(in thousands)September 30, 2022December 31, 2021
Operating lease liabilities$5,787 $6,989 
Dividends payable2,466 2,454 
$8,253 $9,443 
Other long-term liabilities
(in thousands)(in thousands)September 30, 2022December 31, 2021(in thousands)September 30, 2023December 31, 2022
Deferred revenueDeferred revenue$3,949 $5,655 Deferred revenue$2,605 $3,552 
Income taxes payableIncome taxes payable2,017 3,207 
OtherOther7,987 7,844 Other9,863 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)2022202120222021
Fixed lease costs (1)
$4,688 $(3,108)$14,747 $(6,780)
Short-term lease costs916 542 2,510 1,516 
Variable lease costs905 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.
12

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



Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2023202220232022
Fixed lease costs$4,718 $4,688 $14,979 $14,747 
Short-term lease costs660 916 2,137 2,510 
Variable lease costs2,254 905 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, 2022December 31, 2021(in thousands)September 30, 2023December 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 liabilitiesLong-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, 2022December 31, 2021September 30, 2023December 31, 2022
Weighted-average remaining lease termWeighted-average remaining lease term7.4 years7.7 yearsWeighted-average remaining lease term7.0 years7.5 years
Weighted-average discount rate (1)
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)
202318,804 
Remainder of 2023Remainder of 2023$4,775 
2024202416,841 202417,976 
2025202514,778 202514,870 
2026202611,257 202610,853 
2027 and thereafter48,397 
202720279,808 
202820289,245 
ThereafterThereafter30,054 
Total lease paymentsTotal lease payments105,360 Total lease payments97,581 
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)20222021(in thousands)20232022
Cash paid for leases$11,628 $14,403 
Cash paid for operating leases, net of tenant improvement allowancesCash 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 
12

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.
13

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, 2022December 31, 2021(in thousands)September 30, 2023December 31, 2022
PrincipalPrincipal$600,000 $600,000 Principal$502,270 $600,000 
Unamortized issuance costsUnamortized issuance costs(7,116)(9,278)Unamortized issuance costs(3,517)(6,391)
Convertible senior notes, netConvertible 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)2022202120222021(in thousands)2023202220232022
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 costsAmortization of issuance costs724 677 2,163 2,025 Amortization of issuance costs613 724 1,988 2,163 
$1,849 $1,802 $5,538 $5,400 $1,440 $1,849 $4,937 $5,538 
13

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



The effectiveaverage interest rate foron the Notes:
Nine Months Ended
September 30,
20222021
Weighted-average effective interest rate1.2 %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, 2022September 30, 2023
(in thousands)(in thousands)PrincipalInterestTotal(in thousands)PrincipalInterestTotal
2023$— $4,500 $4,500 
20242024— 4,500 4,500 2024$— $3,767 $3,767 
20252025600,000 2,250 602,250 2025502,270 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 covercovered approximately 4.4 million shares (representing the number of shares for which the Notes arewere 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.
14

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)20222021(in thousands)20232022
January 1,January 1,$59,964 $83,597 January 1,$2,582 $59,964 
SettlementsSettlements(341)— 
Fair value adjustmentFair 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 allowsagreement of the Company to increasefinancial 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 endedThrough 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, 2023June 30, 2023September 30, 2023December 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, 20222023 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 reducereduced the Company’s available borrowing capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility.
14

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 endedExpense
Employee severance and related benefits and closure of a US officeDecember 31, 2022$21,743 
Office space reductionMarch 31, 2023$1,241 
Employee severance and related benefitsJune 30, 2023$1,581 
Employee severance and related benefits and closure of a foreign officeSeptember 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 incurred19,921 
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 iswith 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 boththe 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, 2023December 31, 2022
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
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.
15

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



Assets and liabilities measured at fair value on a recurring basis:
September 30, 2022December 31, 2021
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
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)20222021(in thousands)20232022
January 1,January 1,$7,648 $8,345 January 1,$13,069 $7,648 
New investmentsNew investments400 500 New investments400 400 
Sales of investmentsSales of investments(3,954)(400)Sales of investments(2,773)(3,954)
Changes in foreign exchange ratesChanges in foreign exchange rates(675)(52)Changes in foreign exchange rates27 (675)
Changes in fair value:Changes in fair value:Changes in fair value:
included in other income5,989 100 
included in other comprehensive income2,502 1,220 
included in other income (loss), netincluded in other income (loss), net10,886 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, 20222023 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)2022202120222021(Dollars in thousands)2023202220232022
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 AmericasOther Americas18,546 %17,510 %80,558 %43,469 %Other Americas23,497 %18,546 %58,013 %80,558 %
United Kingdom (“U.K.”)United Kingdom (“U.K.”)24,074 %25,982 10 %83,837 %86,747 10 %United Kingdom (“U.K.”)41,622 12 %24,074 %112,751 12 %83,837 %
Europe (excluding U.K.), Middle East, and AfricaEurope (excluding U.K.), Middle East, and Africa46,212 17 %46,306 18 %140,586 15 %143,763 15 %Europe (excluding U.K.), Middle East, and Africa67,880 20 %46,212 17 %173,551 18 %140,586 15 %
Asia-PacificAsia-Pacific33,699 12 %34,454 13 %103,197 11 %105,609 12 %Asia-Pacific46,903 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)2022202120222021(in thousands)2023202220232022
Perpetual licensePerpetual license$9,223 $2,874 $18,929 $20,922 Perpetual license$2,747 $9,223 $4,729 $18,929 
Subscription licenseSubscription license31,112 35,421 210,245 251,226 Subscription license74,342 31,112 200,066 210,245 
Revenue recognized at a point in timeRevenue recognized at a point in time40,335 38,295 229,174 272,148 Revenue recognized at a point in time77,089 40,335 204,795 229,174 
MaintenanceMaintenance77,526 83,188 235,568 237,531 Maintenance83,538 77,526 245,210 235,568 
Pega CloudPega Cloud97,359 78,369 281,182 219,520 Pega Cloud118,040 97,359 340,982 281,182 
ConsultingConsulting55,511 56,416 175,451 166,270 Consulting55,976 55,511 167,396 175,451 
Revenue recognized over timeRevenue recognized over time230,396 217,973 692,201 623,321 Revenue recognized over time257,554 230,396 753,588 692,201 
Total revenueTotal revenue$270,731 $256,268 $921,375 $895,469 Total revenue$334,643 $270,731 $958,383 $921,375 
16

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)2022202120222021(in thousands)2023202220232022
Pega CloudPega Cloud$97,359 $78,369 $281,182 $219,520 Pega Cloud$118,040 $97,359 $340,982 $281,182 
MaintenanceMaintenance77,526 83,188 235,568 237,531 Maintenance83,538 77,526 245,210 235,568 
Subscription servicesSubscription services174,885 161,557 516,750 457,051 Subscription services201,578 174,885 586,192 516,750 
Subscription licenseSubscription license31,112 35,421 210,245 251,226 Subscription license74,342 31,112 200,066 210,245 
SubscriptionSubscription205,997 196,978 726,995 708,277 Subscription275,920 205,997 786,258 726,995 
ConsultingConsulting55,976 55,511 167,396 175,451 
Perpetual licensePerpetual license9,223 2,874 18,929 20,922 Perpetual license2,747 9,223 4,729 18,929 
Consulting55,511 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 servicesSubscription licensePerpetual licenseConsultingTotal(Dollars in thousands)Subscription servicesSubscription licensePerpetual licenseConsultingTotal
MaintenancePega CloudMaintenancePega Cloud
1 year or less1 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 years1-2 years55,141 213,304 4,113 4,505 6,699 283,762 25 %1-2 years58,610 239,787 4,356 2,696 3,662 309,111 24 %
2-3 years2-3 years24,496 115,416 1,420 2,252 1,648 145,232 13 %2-3 years28,585 121,778 8,518 — 1,100 159,981 13 %
Greater than 3 yearsGreater than 3 years16,198 82,807 1,734 — 508 101,247 %Greater than 3 years17,478 89,870 2,664 — — 110,012 %
$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 servicesSubscription licensePerpetual licenseConsultingTotal(Dollars in thousands)Subscription servicesSubscription licensePerpetual licenseConsultingTotal
MaintenancePega CloudMaintenancePega Cloud
1 year or less1 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 years1-2 years59,360 177,214 16,872 1,064 6,561 261,071 25 %1-2 years55,141 213,304 4,113 4,505 6,699 283,762 25 %
2-3 years2-3 years37,734 79,775 420 4,094 5,165 127,188 12 %2-3 years24,496 115,416 1,420 2,252 1,648 145,232 13 %
Greater than 3 yearsGreater than 3 years33,935 30,113 245 2,127 1,697 68,117 %Greater than 3 years16,198 82,807 1,734 — 508 101,247 %
$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)2022202120222021(in thousands)2023202220232022
Cost of revenueCost of revenue$6,797 $5,114 $19,754 $16,889 Cost of revenue$6,410 $6,797 $22,497 $19,754 
Selling and marketingSelling and marketing12,933 13,376 36,524 41,844 Selling and marketing10,401 12,933 43,410 36,524 
Research and developmentResearch and development7,724 6,231 22,425 19,343 Research and development7,375 7,724 24,286 22,425 
General and administrativeGeneral and administrative6,320 3,974 14,598 11,407 General and administrative7,113 6,320 19,890 14,598 
$33,774 $28,695 $93,301 $89,483 $31,299 $33,774 $110,083 $93,301 
Income tax benefitIncome tax benefit$(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 2.11.8 years.
Grants
Nine Months Ended
September 30, 2022
(in thousands)SharesTotal Fair Value
Restricted stock units1,436 $112,303 
Non-qualified stock options4,529 $102,332 
Common stock14 $600 
17

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



Grants
Nine Months Ended
September 30, 2023
(in thousands)SharesTotal Fair Value
Restricted stock units1,514 $70,962 
Non-qualified stock options911 $19,142 
Performance stock options (1)
906 $18,265 
Common stock13 $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)2022202120222021
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)2023202220232022
Provision for income taxes$3,545 $11,748 $15,395 $190,239 
Effective income tax rate(26)%(100)%
The change in theCompany’s effective income tax rate (benefit rate) in the nine months ended September 30, 20222023 was primarily due todriven 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 deferredU.K. and projected taxable income in the U.S., partially offset by available tax assets. As a result of recordingcredits 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’sA 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 considersweighting 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 ofincluding the impact of enacted legislation, tax-planning strategies, and results of recent operations. operating results.
The weight givenCompany 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 $191.9 million in income tax expense during the three months ended June 30, 2022.
The Company intends to continue maintaining a full valuation allowance on our U.S and U.K deferred tax assets until there is sufficient evidence exists to support the realization of these deferred tax assets.
NOTE 13.14. (LOSS) PER SHARE
Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.
Calculation of (loss) per share:
Three Months Ended
September 30,
Nine Months Ended
September 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts)(in thousands, except per share amounts)2022202120222021(in thousands, except per share amounts)2023202220232022
Net (loss)Net (loss)$(93,520)$(56,468)$(380,195)$(25,794)Net (loss)$(7,279)$(93,520)$(74,857)$(380,195)
Weighted-average common shares outstandingWeighted-average common shares outstanding81,996 81,526 81,842 81,284 Weighted-average common shares outstanding83,336 81,996 82,996 81,842 
(Loss) per share, basic(Loss) per share, basic$(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, allAll 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 4.43.7 million shares.
18

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 4.43.7 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.
18

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 ourthe Company’s estimates will change in the near term, and the effect may be material.
As of September 30, 2022 and December 31, 2021, theThe Company hashad 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 part2023 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 ofviolating 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. ThisAppellate 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.
19

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.
19

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.
20


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 pandemicpublic 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”).
ExceptInvestors 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 toas 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-poweredartificial 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.
21


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.
21


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.
pega-20220930_g1.jpgIn 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.
531
Reconciliation of ACV and Constant Currency ACV
(in millions, except percentages)Q3 22Q3 231-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.
22


Cash flow (1)
549755823883549755823884
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,
20232022
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 
Restructuring21,576 — 
Interest on convertible senior notes4,134 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.
23


Remaining performance obligations (“Backlog”)
pega-20220930_g2.jpg549755814123
Reconciliation of GAAP Backlog and Constant Currency Backlog (Non-GAAP)
(in millions, except percentages)(in millions, except percentages)Q3 20221 Year Growth Rate(in millions, except percentages)Q3 22Q3 20231-Year Growth Rate
Backlog$1,148 11 %
Backlog - GAAPBacklog - GAAP$1,148 $1,265 10 %
Impact of changes in foreign exchange ratesImpact of changes in foreign exchange rates74 %Impact of changes in foreign exchange rates— (33)
Backlog - Constant Currency$1,222 18 %
Constant currency backlogConstant currency backlog$1,148 $1,232 %
Note: Constant currency measures areBacklog 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 ofPreparing 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,
ChangeNine Months Ended
September 30,
Change
2023202220232022
Pega Cloud$118,040 35 %$97,359 36 %$20,681 21 %$340,982 36 %$281,182 31 %$59,800 21 %
Maintenance83,538 25 %77,526 29 %6,012 %245,210 25 %235,568 25 %9,642 %
Subscription services201,578 60 %174,885 65 %26,693 15 %586,192 61 %516,750 56 %69,442 13 %
Subscription license74,342 22 %31,112 11 %43,230 139 %200,066 21 %210,245 23 %(10,179)(5)%
Subscription275,920 82 %205,997 76 %69,923 34 %786,258 82 %726,995 79 %59,263 %
Consulting55,976 17 %55,511 21 %465 %167,396 18 %175,451 19 %(8,055)(5)%
Perpetual license2,747 %9,223 %(6,476)(70)%4,729 — %18,929 %(14,200)(75)%
$334,643 100 %$270,731 100 %$63,912 24 %$958,383 100 %$921,375 100 %$37,008 %
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 includesThe 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,
ChangeNine Months Ended
September 30,
Change
2022202120222021
Pega Cloud$97,359 36 %$78,369 31 %$18,990 24 %$281,182 31 %$219,520 25 %$61,662 28 %
Maintenance77,526 29 %83,188 32 %(5,662)(7)%235,568 25 %237,531 26 %(1,963)(1)%
Subscription services174,885 65 %161,557 63 %13,328 %516,750 56 %457,051 51 %59,699 13 %
Subscription license31,112 11 %35,421 14 %(4,309)(12)%210,245 23 %251,226 28 %(40,981)(16)%
Subscription205,997 76 %196,978 77 %9,019 %726,995 79 %708,277 79 %18,718 %
Perpetual license9,223 %2,874 %6,349 221 %18,929 %20,922 %(1,993)(10)%
Consulting55,511 21 %56,416 22 %(905)(2)%175,451 19 %166,270 19 %9,181 %
$270,731 100 %$256,268 100 %$14,463 %$921,375 100 %$895,469 100 %$25,906 %
The revenue changes infor the three and nine months ended September 30, 2022 generally reflect2023 were primarily due to the impactgrowth 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 decreasesincreases in maintenance revenue in the three and nine months ended September 30, 20222023 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, 20222023 was primarily due to an increaselower consultant realization rates in consultant billable hoursthe Americas.
The decreases in North America.
Gross profit
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2022202120222021
Pega Cloud$68,673 71 %$52,845 67 %$15,828 30 %$194,350 69 %$147,388 67 %$46,962 32 %
Maintenance71,671 92 %77,895 94 %(6,224)(8)%219,296 93 %221,457 93 %(2,161)(1)%
Subscription services140,344 80 %130,740 81 %9,604 %413,646 80 %368,845 81 %44,801 12 %
Subscription license30,484 98 %34,815 98 %(4,331)(12)%208,322 99 %249,415 99 %(41,093)(16)%
Subscription170,828 83 %165,555 84 %5,273 %621,968 86 %618,260 87 %3,708 %
Perpetual license9,120 99 %2,824 98 %6,296 223 %18,756 99 %20,771 99 %(2,015)(10)%
Consulting(2,267)(4)%3,667 %(5,934)*4,289 %5,238 %(949)(18)%
$177,681 66 %$172,046 67 %$5,635 %$645,013 70 %$644,269 72 %$744 — %
* not meaningful
The gross profit percent changesperpetual 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,
ChangeNine Months Ended
September 30,
Change
2023202220232022
Pega Cloud$88,553 75 %$68,673 71 %$19,880 29 %$250,943 74 %$194,350 69 %$56,593 29 %
Maintenance77,119 92 %71,671 92 %5,448 %225,696 92 %219,296 93 %6,400 %
Subscription services165,672 82 %140,344 80 %25,328 18 %476,639 81 %413,646 80 %62,993 15 %
Subscription license73,713 99 %30,484 98 %43,229 142 %198,095 99 %208,322 99 %(10,227)(5)%
Subscription239,385 87 %170,828 83 %68,557 40 %674,734 86 %621,968 86 %52,766 %
Consulting(1,228)(2)%(2,267)(4)%1,039 46 %(8,866)(5)%4,289 %(13,155)*
Perpetual license2,723 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 %
* not meaningful
The increases in Pega Cloud gross profit percent in the three and nine months ended September 30, 20222023 were primarily due to cost-efficiency gainsincreased cost efficiency, particularly for hosting services, as Pega Cloud growscontinues to grow and scales.scale.
The decrease in Maintenancemaintenance 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, 20222023 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.
25


Operating expenses
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2023202220232022
Selling and marketing$131,598 $153,517 $(21,919)(14)%$425,253 $472,951 $(47,698)(10)%
% of Revenue39 %57 %44 %51 %
Research and development$74,955 $75,342 $(387)(1)%$224,262 $221,173 $3,089 %
% of Revenue22 %28 %23 %24 %
General and administrative$27,321 $26,043 $1,278 %$73,893 $94,530 $(20,637)(22)%
% of Revenue%10 %%10 %
Restructuring$17,822 $— $17,822 100 %$21,450 $— $21,450 100 %
% of Revenue%— %%— %
The decreases in consulting gross profit percent inselling and marketing during the three and nine months ended September 30, 20222023 were primarily due to decreases in compensation and benefits of $18.6 million and $45.0 million, respectively. The decreases were due to increasesreduced 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.
24


Operating expenses
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2022202120222021
% of Revenue% of Revenue% of Revenue% of Revenue
Selling and marketing$153,517 57 %$152,479 59 %$1,038 %$472,951 51 %$457,641 51 %$15,310 %
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 %$5,867 29 %$94,530 10 %$57,607 %$36,923 64 %
The increase in sellingresearch and marketing indevelopment for the nine months ended September 30, 20222023 was primarily due to an increaseadditional investments in employee travelour 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 increaseschanges in general and administrative in the three and nine months ended September 30, 20222023 were primarily due to increasesan increase of $2.3 million in compensationthe three months ended September 30, 2023 and benefitsa decrease of $2.9$21.4 million and $5.7 million, facilities expenses of $1.1 million and $2.8 million, andin 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 expensescosts 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 Quarterlyour 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,
ChangeNine Months Ended
September 30,
Change(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
20222021202220212023202220232022
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 incomeInterest income520 166 354 213 %1,036 555 481 87 %Interest income2,532 520 2,012 387 %5,831 1,036 4,795 463 %
Interest expenseInterest 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)(31)*6,497 108 6,389 5,916 %
Other income (loss), netOther income (loss), net6,383 (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 increaseschanges in foreign currency transaction gain (loss) in the three and nine months ended September 30, 20222023 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, 20222023 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, 20222023 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 ReportReport.
26


Provision for additional information.income taxes
Nine Months Ended
September 30,
(Dollars in thousands)20232022
Provision for income taxes$15,395 $190,239 
Effective income tax rate(26)%(100)%
The increase in other (loss)effective income nettax 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)2022202120222021
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 recordingdriven by the valuation allowance we are no longer recording any income tax benefit on our U.Sdeferred 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 forin 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.
25


LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands) (in thousands)20222021 (in thousands)20232022
Cash provided by (used in):Cash provided by (used in):Cash provided by (used in):
Operating activitiesOperating activities$(13,446)$(5,321)Operating activities$137,920 $(13,446)
Investing activitiesInvesting activities10,104 42,730 Investing activities(24,176)10,104 
Financing activitiesFinancing activities(43,484)(91,431)Financing activities(85,031)(43,484)
Effect of exchange rates on cash and cash equivalents(5,513)(1,466)
Net (decrease) in cash and cash equivalents$(52,339)$(55,488)
Effect of exchange rate changes on cash, cash equivalents, and restricted cashEffect of exchange rate changes on cash, cash equivalents, and restricted cash(1,621)(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cashNet increase (decrease) in cash, cash equivalents, and restricted cash$27,092 $(52,339)
(in thousands)(in thousands)September 30, 2022December 31, 2021(in thousands)September 30, 2023December 31, 2022
Held by U.S. entitiesHeld by U.S. entities$226,640 $274,813 Held by U.S. entities$217,735 $248,389 
Held by foreign entitiesHeld by foreign entities49,071 87,966 Held by foreign entities118,574 48,832 
Total cash, cash equivalents, and marketable securitiesTotal 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 fromprovided 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, 20222023 was primarily due to our subscription transition and increased costs as we made investmentsgrowth in research and development to support developmentclient collections, the impact of our offerings partially offset by strong client collections. In addition, in the nine months ended September 30, 2022cost-efficiency initiatives, and 2021, we incurred $32.4 million and $8.4 million inlower legal fees and related expensescosts arising from proceedings that originated outside of the ordinary course of business. We expect to continue to incur additional expensescosts for these proceedings. SeeFor 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, 20222023 was primarily driven bydue to our investments in financial instruments and an increasereduced 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 reducereduced the Company’s available borrowing capacity. Seecapacity 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.
27


Stock repurchase program
Changes in the remaining stock repurchase authority:
(in thousands)Nine Months Ended
September 30, 20222023
December 31, 20212022$22,58358,075 
Authorizations (1)
60,0001,925 
Repurchases (2)
(24,508)
September 30, 20222023$58,07560,000 
(1) On June 2, 2022, we announced thatApril 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 on2024, and the open market.
26


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,
2022202120232022
(in thousands)(in thousands)SharesAmountSharesAmount(in thousands)SharesAmountSharesAmount
Repurchases paid279 $24,508 245 $31,788 
Repurchases unpaid at period end— — 400 
Stock repurchase programStock repurchase program279 24,508 248 32,188 Stock repurchase program— — 279 24,508 
Tax withholdings for net settlement of equity awardsTax withholdings for net settlement of equity awards253 17,575 462 59,819 Tax withholdings for net settlement of equity awards39 1,654 253 17,575 
532 $42,083 710 $92,007 39 $1,654 532 $42,083 
DuringIn the nine months ended September 30, 20222023 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)20222021(in thousands)20232022
Dividend payments to stockholdersDividend 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 periodPayments due by period
(in thousands)(in thousands)Remainder of 202220232024202520262027 and thereafterOtherTotal(in thousands)Remainder of 202320242025202620272028 and afterOtherTotal
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 obligationsOperating lease obligations(4,717)18,804 16,841 14,778 11,257 48,397 — 105,360 Operating lease obligations4,775 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 underamount owed for purchase obligations forof 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 tocannot 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 offsetsoffsetting our foreign currency exposure.
28


A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:in the following:
Nine Months Ended
September 30,
20222021
(Decrease) increase in revenue(4)%(4)%
Increase (decrease) in net income%(9)%
Nine Months Ended
September 30,
20232022
(Decrease) in revenue(4)%(4)%
(Decrease) increase in net income(5)%%
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.
27


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)20222021(in thousands)20232022
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, 20222023 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, weWe 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.
29


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, 202214 $48.98 — $58,075 
August 1, 2022 - August 31, 202240.49 — $58,075 
September 1, 2022 - September 30, 2022121 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$55.81 — $60,000 
August 1, 2023 - August 31, 2023— — — $60,000 
September 1, 2023 - September 30, 202348.92 — $60,000 
$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 ReportReport.
(2) Includes shares withheld to cover the option exercise price and tax withholding obligations for additional information.
30
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.Exhibit No.DescriptionIncorporation by ReferenceFiled HerewithExhibit No.DescriptionIncorporation by ReferenceFiled Herewith
FormExhibitFiling DateFormExhibitFiling Date
3.13.110-Q3.1November 4, 20143.110-Q3.1November 4, 2014
3.23.28-K3.2June 15, 20203.28-K3.2June 15, 2020
31.131.1X31.1X
31.231.2X31.2X
32++X
3232+
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104104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X
++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
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, 202225, 2023By:/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)