UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended ~~March 31,~~September 30, 2023


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

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________


Massachusetts			04-2787865
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

One Main Street, Cambridge, MA 02142

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~82,961,204~~83,555,919 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~April 19,~~October 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 ~~March 31,~~September 30, 2023 and December 31, 2022			3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022			6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022			78
Notes to Unaudited Condensed Consolidated Financial Statements			89
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2021
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			2829

PART II - OTHER INFORMATION

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

Signature			31

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)
		March 31, 2023		December 31, 2022			September 30, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	168,318	$	145,054	Cash and cash equivalents	$	169,023	$	145,054
Marketable securities	Marketable securities	155,564		152,167		Marketable securities	167,286		152,167
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	323,882		297,221		Total cash, cash equivalents, and marketable securities	336,309		297,221
Accounts receivable		201,585		255,150
Unbilled receivables		196,279		213,719
Accounts receivable, net						Accounts receivable, net	168,795		255,150
Unbilled receivables, net						Unbilled receivables, net	199,948		213,719
Other current assets	Other current assets	73,982		80,388		Other current assets	71,438		80,388
Total current assets	Total current assets	795,728		846,478		Total current assets	776,490		846,478
Unbilled receivables		79,704		95,806
Unbilled receivables, net						Unbilled receivables, net	73,795		95,806
Goodwill	Goodwill	81,434		81,399		Goodwill	81,437		81,399
Other long-term assets	Other long-term assets	324,975		333,989		Other long-term assets	290,807		333,989
Total assets	Total assets	$	1,281,841	$	1,357,672	Total assets	$	1,222,529	$	1,357,672
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	12,565	$	18,195	Accounts payable	$	20,541	$	18,195
Accrued expenses	Accrued expenses	45,432		50,355		Accrued expenses	43,624		50,355
Accrued compensation and related expenses	Accrued compensation and related expenses	56,574		127,728		Accrued compensation and related expenses	93,511		127,728
Deferred revenue	Deferred revenue	342,591		325,212		Deferred revenue	297,067		325,212
Other current liabilities	Other current liabilities	17,802		17,450		Other current liabilities	18,038		17,450
Total current liabilities	Total current liabilities	474,964		538,940		Total current liabilities	472,781		538,940
Convertible senior notes, net	Convertible senior notes, net	561,655		593,609		Convertible senior notes, net	498,753		593,609
Operating lease liabilities	Operating lease liabilities	76,082		79,152		Operating lease liabilities	68,874		79,152
Other long-term liabilities	Other long-term liabilities	14,644		15,128		Other long-term liabilities	14,485		15,128
Total liabilities	Total liabilities	1,127,345		1,226,829		Total liabilities	1,054,893		1,226,829
Commitments and contingencies (Note 15)	Commitments and contingencies (Note 15)					Commitments and contingencies (Note 15)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	Preferred stock, 1,000 shares authorized; none issued	—		—		Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 82,940 and 82,436 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		829		824
Common stock, 200,000 shares authorized; 83,523 and 82,436 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively						Common stock, 200,000 shares authorized; 83,523 and 82,436 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	835		824
Additional paid-in capital	Additional paid-in capital	272,481		229,602		Additional paid-in capital	343,259		229,602
Accumulated deficit	Accumulated deficit	(97,287)		(76,513)		Accumulated deficit	(151,370)		(76,513)
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(21,527)		(23,070)		Accumulated other comprehensive (loss)	(25,088)		(23,070)
Total stockholders’ equity	Total stockholders’ equity	154,496		130,843		Total stockholders’ equity	167,636		130,843
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,281,841	$	1,357,672	Total liabilities and stockholders’ equity	$	1,222,529	$	1,357,672

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
		Three Months Ended March 31,				Three Months Ended September 30,						Nine Months Ended September 30,
				2023			2022			2023		2022		2023		2022
Revenue	Revenue								Revenue
Subscription services	Subscription services			$	187,509		$	170,033	Subscription services	$	201,578	$	174,885	$	586,192	$	516,750
Subscription license	Subscription license			84,527			137,533		Subscription license	74,342		31,112		200,066		210,245
Consulting	Consulting			53,033			61,301		Consulting	55,976		55,511		167,396		175,451
Perpetual license	Perpetual license			403			7,440		Perpetual license	2,747		9,223		4,729		18,929
Total revenue	Total revenue			325,472			376,307		Total revenue	334,643		270,731		958,383		921,375
Cost of revenue	Cost of revenue								Cost of revenue
Subscription services	Subscription services			36,864			32,030		Subscription services	35,906		34,541		109,553		103,104
Subscription license	Subscription license			719			622		Subscription license	629		628		1,971		1,923
Consulting	Consulting			60,348			55,511		Consulting	57,204		57,778		176,262		171,162
Perpetual license	Perpetual license			3			34		Perpetual license	24		103		51		173
Total cost of revenue	Total cost of revenue			97,934			88,197		Total cost of revenue	93,763		93,050		287,837		276,362
Gross profit	Gross profit			227,538			288,110		Gross profit	240,880		177,681		670,546		645,013
Operating expenses	Operating expenses								Operating expenses
Selling and marketing	Selling and marketing			149,797			162,236		Selling and marketing	131,598		153,517		425,253		472,951
Research and development	Research and development			75,376			71,490		Research and development	74,955		75,342		224,262		221,173
General and administrative	General and administrative			23,110			35,764		General and administrative	27,321		26,043		73,893		94,530
Restructuring	Restructuring			1,461			—		Restructuring	17,822		—		21,450		—
Total operating expenses	Total operating expenses			249,744			269,490		Total operating expenses	251,696		254,902		744,858		788,654
(Loss) income from operations				(22,206)			18,620
Foreign currency transaction (loss) gain				(2,675)			2,876
(Loss) from operations									(Loss) from operations	(10,816)		(77,221)		(74,312)		(143,641)
Foreign currency transaction gain (loss)									Foreign currency transaction gain (loss)	1,994		3,826		(3,971)		8,415
Interest income	Interest income			1,485			207		Interest income	2,532		520		5,831		1,036
Interest expense	Interest expense			(1,918)			(1,946)		Interest expense	(1,533)		(1,992)		(5,229)		(5,882)
Gain (loss) on capped call transactions				3,206			(30,560)
Other income, net				6,583			2,741
(Loss) before provision for (benefit from) income taxes				(15,525)			(8,062)
Provision for (benefit from) income taxes				5,249			(7,683)
(Loss) on capped call transactions									(Loss) on capped call transactions	(2,294)		(6,876)		(449)		(56,381)
Other income (loss), net									Other income (loss), net	6,383		(29)		18,668		6,497
(Loss) before provision for income taxes									(Loss) before provision for income taxes	(3,734)		(81,772)		(59,462)		(189,956)
Provision for income taxes									Provision for income taxes	3,545		11,748		15,395		190,239
Net (loss)	Net (loss)			$	(20,774)		$	(379)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
(Loss) per share	(Loss) per share								(Loss) per share
Basic	Basic			$	(0.25)		$	—	Basic	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Diluted	Diluted			$	(0.25)		$	—	Diluted	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding								Weighted-average number of common shares outstanding
Basic	Basic			82,604			81,680		Basic	83,336		81,996		82,996		81,842
Diluted	Diluted			82,604			81,680		Diluted	83,336		81,996		82,996		81,842

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended March 31,				Three Months Ended September 30,						Nine Months Ended September 30,
				2023			2022			2023		2022		2023		2022
Net (loss)	Net (loss)			$	(20,774)		$	(379)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on available-for-sale securities				(46)			222
Other comprehensive (loss), net of tax									Other comprehensive (loss), net of tax
Unrealized (loss) on available-for-sale securities									Unrealized (loss) on available-for-sale securities	(40)		(73)		(281)		(1,000)
Foreign currency translation adjustments	Foreign currency translation adjustments			1,589			(2,770)		Foreign currency translation adjustments	(3,687)		(6,700)		(1,737)		(20,936)
Total other comprehensive income (loss), net of tax				1,543			(2,548)
Total other comprehensive (loss), net of tax									Total other comprehensive (loss), net of tax	(3,727)		(6,773)		(2,018)		(21,936)
Comprehensive (loss)	Comprehensive (loss)			$	(19,231)		$	(2,927)	Comprehensive (loss)	$	(11,006)	$	(100,293)	$	(76,875)	$	(402,131)

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common Stock Additional
Paid-In Capital Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares Amount
December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ (6,988) $ 416,088
Repurchase of common stock (242) (2) (22,581) — — (22,583)
Issuance of common stock for stock compensation plans 297 3 (12,131) — — (12,128)
Issuance of common stock under the employee stock purchase plan 35 — 2,446 — — 2,446
Stock-based compensation — — 28,227 — — 28,227
Cash dividends declared ($0.03 per share) — — — (2,455) — (2,455)
Other comprehensive (loss) — — — — (2,548) (2,548)
Net (loss) — — — (379) — (379)
March 31, 2022 81,802 $ 818 $ 141,771 $ 273,615 $ (9,536) $ 406,668
December 31, 2022 82,436 $ 824 $ 229,602 $ (76,513) $ (23,070) $ 130,843
Issuance of common stock for stock compensation plans 452 4 668 — — 672
Issuance of common stock under the employee stock purchase plan 52 1 2,142 — — 2,143
Stock-based compensation — — 42,557 — — 42,557
Cash dividends declared ($0.03 per share) — — (2,488) — — (2,488)
Other comprehensive income — — — — 1,543 1,543
Net (loss) — — — (20,774) — (20,774)
March 31, 2023 82,940 $ 829 $ 272,481 $ (97,287) $ (21,527) $ 154,496

~~See notes to unaudited condensed consolidated financial statements.~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
	Number of Shares	Amount
December 31, 2021	81,712	$	817	$	145,810	$	276,449	$	(6,988)	$	416,088
Repurchase of common stock	(242)	(2)		(22,581)		—		—		(22,583)
Issuance of common stock for stock compensation plans	297	3		(12,131)		—		—		(12,128)
Issuance of common stock under the employee stock purchase plan	35	—		2,446		—		—		2,446
Stock-based compensation	—	—		28,227		—		—		28,227
Cash dividends declared ($0.03 per share)	—	—		—		(2,455)		—		(2,455)
Other comprehensive (loss)	—	—		—		—		(2,548)		(2,548)
Net (loss)	—	—		—		(379)		—		(379)
March 31, 2022	81,802	$	818	$	141,771	$	273,615	$	(9,536)	$	406,668
Repurchase of common stock	(38)	—		(1,925)		—		—		(1,925)
Issuance of common stock for stock compensation plans	117	1		(3,252)		—		—		(3,251)
Issuance of common stock under the employee stock purchase plan	59	—		2,357		—		—		2,357
Stock-based compensation	—	—		31,300		—		—		31,300
Cash dividends declared ($0.03 per share)	—	—		—		(2,459)		—		(2,459)
Other comprehensive (loss)	—	—		—		—		(12,615)		(12,615)
Net (loss)	—	—		—		(286,296)		—		(286,296)
June 30, 2022	81,940	$	819	$	170,251	$	(15,140)	$	(22,151)	$	133,779

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

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
2023 2022
Operating activities
Net (loss) $ (20,774) $ (379)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation 42,557 28,227
Deferred income taxes (126) (9,295)
(Gain) loss on capped call transactions (3,206) 30,560
Amortization of deferred commissions 14,277 17,221
Lease expense 4,594 3,919
Amortization of intangible assets and depreciation 4,724 4,171
Foreign currency transaction loss (gain) 2,675 (2,876)
Other non-cash (5,729) (1,100)
Change in operating assets and liabilities, net 29,115 (55,332)
Cash provided by operating activities 68,107 15,116
Investing activities
Purchases of investments (39,401) (33,690)
Proceeds from maturities and called investments 36,475 20,915
Sales of investments — 13,350
Investment in property and equipment (11,487) (6,657)
Cash (used in) investing activities (14,413) (6,082)
Financing activities
Repurchases of convertible senior notes (29,901) —
Proceeds from settlement of capped calls transactions 188 —
Dividend payments to stockholders (2,474) (2,454)
Proceeds from employee stock purchase plan 2,143 2,446
Proceeds from stock option exercises 1,779 —
Common stock repurchases (1,107) (35,910)
Cash (used in) financing activities (29,372) (35,918)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash 782 (310)
Net increase (decrease) in cash, cash equivalents, and restricted cash 25,104 (27,194)
Cash, cash equivalents, and restricted cash, beginning of period 145,054 159,965
Cash, cash equivalents, and restricted cash, end of period $ 170,158 $ 132,771
Cash and cash equivalents $ 168,318 $ 132,771
Restricted cash included in other long-term assets 1,840 —
Total cash, cash equivalents and restricted cash $ 170,158 $ 132,771


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
	Number of Shares	Amount
December 31, 2022	82,436	$	824	$	229,602	$	(76,513)	$	(23,070)	$	130,843

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

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

Issuance of common stock for stock compensation plans	257	3		2,447		—		—		2,450
Issuance of common stock under the employee stock purchase plan	54	—		2,003		—		—		2,003
Stock-based compensation	—	—		31,299		—		—		31,299
Cash dividends declared ($0.03 per share)	—	—		(2,506)		—		—		(2,506)
Other comprehensive (loss)	—	—		—		—		(3,727)		(3,727)
Net (loss)	—	—		—		(7,279)		—		(7,279)
September 30, 2023	83,523	$	835	$	343,259	$	(151,370)	$	(25,088)	$	167,636

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Nine Months Ended September 30,
	2023		2022
Operating activities
Net (loss)	$	(74,857)	$	(380,195)
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities
Stock-based compensation	110,083		93,301
Deferred income taxes	(188)		169,489
Loss on capped call transactions	449		56,381
Amortization of deferred commissions	43,974		39,752
Lease expense	12,018		11,500
Amortization of intangible assets and depreciation	14,181		12,381
Foreign currency transaction loss (gain)	3,971		(8,415)
Other non-cash	(16,487)		(1,705)
Change in operating assets and liabilities, net	44,776		(5,935)
Cash provided by (used in) operating activities	137,920		(13,446)
Investing activities
Purchases of investments	(190,466)		(39,056)
Proceeds from maturities and called investments	169,836		53,952
Sales of investments	10,725		18,415
Payments for acquisitions, net of cash acquired	—		(922)
Investment in property and equipment	(14,271)		(22,285)
Cash (used in) provided by investing activities	(24,176)		10,104
Financing activities
Repurchases of convertible senior notes	(88,989)		—

Dividend payments to stockholders	(7,458)		(7,368)
Proceeds from employee stock purchase plan	6,127		7,166
Proceeds from stock option exercises	6,602		—


Common stock repurchases	(1,654)		(43,282)
Other	341		—
Cash (used in) financing activities	(85,031)		(43,484)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(1,621)		(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cash	27,092		(52,339)
Cash, cash equivalents, and restricted cash, beginning of period	145,054		159,965
Cash, cash equivalents, and restricted cash, end of period	$	172,146	$	107,626

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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 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~~ 2023.

NOTE 2. MARKETABLE SECURITIES


		March 31, 2023								December 31, 2022									September 30, 2023								December 31, 2022
(in thousands)	(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	Government debt	$	2,970	$	—	$	(33)	$	2,937	$	2,960	$	—	$	(52)	$	2,908	Government debt	$	17,931	$	—	$	(18)	$	17,913	$	2,960	$	—	$	(52)	$	2,908
Corporate debt	Corporate debt	154,299		8		(1,680)		152,627		151,906		—		(2,647)		149,259		Corporate debt	149,927		—		(554)		149,373		151,906		—		(2,647)		149,259
		$	157,269	$	8	$	(1,713)	$	155,564	$	154,866	$	—	$	(2,699)	$	152,167		$	167,858	$	—	$	(572)	$	167,286	$	154,866	$	—	$	(2,699)	$	152,167

As of ~~March 31,~~September 30, 2023, marketable securities’ maturities ranged from ~~April~~October 2023 to January 2026, with a ~~weighted-average~~weighted average remaining maturity of 0.5 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables
(in thousands) March 31, 2023 December 31, 2022
Accounts receivable $ 201,585 $ 255,150
Unbilled receivables 196,279 213,719
Long-term unbilled receivables 79,704 95,806
$ 477,568 $ 564,675


(in thousands)	September 30, 2023		December 31, 2022
Accounts receivable, net	$	168,795	$	255,150
Unbilled receivables, net	199,948		213,719
Long-term unbilled receivables, net	73,795		95,806
	$	442,538	$	564,675

Unbilled receivables

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

Unbilled receivables by expected ~~billing~~collection date:


(Dollars in thousands)	(Dollars in thousands)	March 31, 2023				(Dollars in thousands)	September 30, 2023
1 year or less	1 year or less	$	196,279	71	%	1 year or less	$	199,948	73	%
1-2 years	1-2 years	64,812		24	%	1-2 years	58,604		21	%
2-5 years	2-5 years	14,892		5	%	2-5 years	15,191		6	%
		$	275,983	100	%		$	273,743	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	March 31, 2023				(Dollars in thousands)	September 30, 2023
2023	2023	$	51,895	19	%	2023	$	90,227	33	%
2022	2022	96,349		34	%	2022	92,065		34	%
2021	2021	87,278		32	%	2021	62,729		23	%
2020	2020	27,755		10	%	2020	19,820		7	%
2019 and prior	2019 and prior	12,706		5	%	2019 and prior	8,902		3	%
		$	275,983	100	%		$	273,743	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Contract assets (1)	Contract assets (1)	$	14,463	$	17,546	Contract assets (1)	$	13,263	$	17,546
Long-term contract assets (2)	Long-term contract assets (2)	11,323		16,470		Long-term contract assets (2)	10,732		16,470
		$	25,786	$	34,016		$	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)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	342,591	$	325,212	Deferred revenue	$	297,067	$	325,212
Long-term deferred revenue (1)	Long-term deferred revenue (1)	3,323		3,552		Long-term deferred revenue (1)	2,605		3,552
		$	345,914	$	328,764		$	299,672	$	328,764

(1) Included in other long-term liabilities.

~~The increase in deferred~~Deferred revenue decreased in the ~~three~~nine months ended ~~March 31,~~September 30, 2023, ~~was~~ primarily due to ~~new billings in advance of revenue recognition exceeding the $139.7~~$292.3 million of revenue recognized during the period ~~that was~~ included in deferred revenue as of December 31, ~~2022.~~2022 exceeded new billings in advance of revenue recognition.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Deferred commissions (1)	Deferred commissions (1)	$	124,069	$	130,195	Deferred commissions (1)	$	107,399	$	130,195

(1) Included in other long-term assets.


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Amortization of deferred commissions (1)	Amortization of deferred commissions (1)		$	14,277		$	17,221	Amortization of deferred commissions (1)	$	14,947	$	11,597	$	43,974	$	39,752

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

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
January 1,	January 1,	$	81,399	$	81,923	January 1,	$	81,399	$	81,923

Currency translation adjustments	Currency translation adjustments	35		108		Currency translation adjustments	38		(722)
March 31,		$	81,434	$	82,031
September 30,						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.


			March 31, 2023								September 30, 2023
(in thousands)	(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)		(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	Client-related	4-10 years	$	63,094	$	(58,983)	$	4,111	Client-related	4-10 years	$	63,086	$	(59,661)	$	3,425
Technology	Technology	2-10 years	68,085		(62,335)		5,750		Technology	2-10 years	68,103		(63,579)		4,524
Other	Other	1-5 years	5,361		(5,361)		—		Other	1-5 years	5,361		(5,361)		—
			$	136,540	$	(126,679)	$	9,861			$	136,550	$	(128,601)	$	7,949

(1) Included in other long-term assets.

910

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

(1) Included in other long-term assets.

Future estimated intangibles assets amortization:


(in thousands)	(in thousands)	March 31, 2023		(in thousands)	September 30, 2023
Remainder of 2023	Remainder of 2023	$	2,884	Remainder of 2023	$	964
2024	2024	3,163		2024	3,169
2025	2025	2,613		2025	2,615
2026	2026	874		2026	874
2027	2027	327		2027	327

		$	9,861		$	7,949

Amortization of intangible assets:


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Cost of revenue	Cost of revenue		$	706		$	629	Cost of revenue	$	622	$	705	$	1,949	$	2,017
Selling and marketing	Selling and marketing		343			343		Selling and marketing	343		343		1,028		1,028

			$	1,049		$	972		$	965	$	1,048	$	2,977	$	3,045

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Income tax receivables	Income tax receivables	$	22,344	$	25,354	Income tax receivables	$	19,663	$	25,354
Contract assets	Contract assets	14,463		17,546		Contract assets	13,263		17,546
Other	Other	37,175		37,488		Other	38,512		37,488
		$	73,982	$	80,388		$	71,438	$	80,388

Other long-term assets


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Deferred commissions	Deferred commissions	$	124,069	$	130,195	Deferred commissions	$	107,399	$	130,195
Right of use assets	Right of use assets	72,549		76,114		Right of use assets	65,871		76,114
Property and equipment	Property and equipment	55,775		55,056		Property and equipment	49,481		55,056
Venture investments	Venture investments	16,265		13,069		Venture investments	19,348		13,069
Contract assets	Contract assets	11,323		16,470		Contract assets	10,732		16,470
Intangible assets	Intangible assets	9,861		10,888		Intangible assets	7,949		10,888
Capped call transactions	Capped call transactions	5,600		2,582		Capped call transactions	1,792		2,582
Deferred income taxes	Deferred income taxes	4,827		4,795		Deferred income taxes	5,046		4,795
Restricted cash	Restricted cash	1,840		—		Restricted cash	3,123		—
Other	Other	22,866		24,820		Other	20,066		24,820
		$	324,975	$	333,989		$	290,807	$	333,989

Other current liabilities


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Operating lease liabilities	Operating lease liabilities	$	15,314	$	14,976	Operating lease liabilities	$	15,532	$	14,976
Dividends payable	Dividends payable	2,488		2,474		Dividends payable	2,506		2,474
		$	17,802	$	17,450		$	18,038	$	17,450

1011

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term liabilities


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	3,323	$	3,552	Deferred revenue	$	2,605	$	3,552
Income taxes payable	Income taxes payable	3,578		3,207		Income taxes payable	2,017		3,207
Other	Other	7,743		8,369		Other	9,863		8,369
		$	14,644	$	15,128		$	14,485	$	15,128

NOTE 7. LEASES

Expense


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Fixed lease costs	Fixed lease costs		$	5,766		$	5,093	Fixed lease costs	$	4,718	$	4,688	$	14,979	$	14,747
Short-term lease costs	Short-term lease costs		781			806		Short-term lease costs	660		916		2,137		2,510
Variable lease costs	Variable lease costs		1,975			764		Variable lease costs	2,254		905		6,414		2,395
			$	8,522		$	6,663		$	7,632	$	6,509	$	23,530	$	19,652

Right of use assets and lease liabilities


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Right of use assets (1)	Right of use assets (1)	$	72,549	$	76,114	Right of use assets (1)	$	65,871	$	76,114
Operating lease liabilities (2)	Operating lease liabilities (2)	$	15,314	$	14,976	Operating lease liabilities (2)	$	15,532	$	14,976
Long-term operating lease liabilities	Long-term operating lease liabilities	$	76,082	$	79,152	Long-term operating lease liabilities	$	68,874	$	79,152

(1) Included in other long-term assets.

(2) Included in other current liabilities.

Weighted-average remaining lease term and discount rate for the Company’s leases were:

March 31, 2023

December 31, 2022

September 30, 2023

December 31, 2022

Weighted-average remaining lease term

7.3 years

7.5 years

Weighted-average remaining lease term

7.0 years

7.5 years

Weighted-average discount rate (1)

4.1

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)	March 31, 2023		(in thousands)	September 30, 2023
Remainder of 2023	Remainder of 2023	$	14,003	Remainder of 2023	$	4,775
2024	2024	17,642		2024	17,976
2025	2025	14,562		2025	14,870
2026	2026	10,917		2026	10,853
2027	2027	9,863		2027	9,808
2028	2028	9,290		2028	9,245
Thereafter	Thereafter	30,090		Thereafter	30,054
Total lease payments	Total lease payments	106,367		Total lease payments	97,581
Less: imputed interest (1)	Less: imputed interest (1)	(14,971)		Less: imputed interest (1)	(13,175)
		$	91,396		$	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


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
Cash paid for operating leases, net of tenant improvement allowances	Cash paid for operating leases, net of tenant improvement allowances	$	5,038	$	3,650	Cash paid for operating leases, net of tenant improvement allowances	$	14,378	$	11,628
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	721	$	3,854	Right of use assets recognized for new leases and amendments (non-cash)	$	1,782	$	6,618

1112

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

In the ~~three~~nine months ended ~~March 31,~~September 30, 2023, the Company ~~recorded~~recognized a gain of ~~$2.8~~$7.9 million in other income (loss), net from ~~the repurchase~~repurchases of Notes representing ~~$33~~$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.

•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 ~~March 31,~~September 30, 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)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Principal	Principal	$	567,000	$	600,000	Principal	$	502,270	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(5,345)		(6,391)		Unamortized issuance costs	(3,517)		(6,391)
Convertible senior notes, net	Convertible senior notes, net	$	561,655	$	593,609	Convertible senior notes, net	$	498,753	$	593,609

Interest expense related to the Notes:


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Contractual interest expense (0.75% coupon)	Contractual interest expense (0.75% coupon)		$	1,125		$	1,125	Contractual interest expense (0.75% coupon)	$	827	$	1,125	$	2,949	$	3,375
Amortization of issuance costs	Amortization of issuance costs		728			719		Amortization of issuance costs	613		724		1,988		2,163
			$	1,853		$	1,844		$	1,440	$	1,849	$	4,937	$	5,538

1213

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The average interest rate on the Notes in the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022 was 1.2%.

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


		March 31, 2023							September 30, 2023
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total
Remainder of 2023		$	—	$	1,772	$	1,772

2024	2024	—		4,253		4,253		2024	$	—	$	3,767	$	3,767
2025	2025	567,000		2,126		569,126		2025	502,270		1,884		504,154
		$	567,000	$	8,151	$	575,151		$	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 covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock.

In the ~~three~~nine months ended ~~March 31,~~September 30, 2023, Capped Call Transactions covering approximately ~~0.2~~0.7 million shares were settled for proceeds of ~~$0.2~~$0.3 million.

As of ~~March 31,~~September 30, 2023, Capped Call Transactions ~~representing~~covering approximately ~~4.2~~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.

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:


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
January 1,	January 1,	$	2,582	$	59,964	January 1,	$	2,582	$	59,964
Settlements	Settlements	(188)		—		Settlements	(341)		—
Fair value adjustment	Fair value adjustment	3,206		(30,560)		Fair value adjustment	(449)		(56,381)
March 31,		$	5,600	$	29,404
September 30,						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 agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is required to comply with financial covenants, including:

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

•~~Beginning with~~Facility and the ~~fiscal quarter ended March 31, 2023 and ending with the fiscal year ended December 31, 2023, maintain~~Company must maintain:


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

•Beginning with the fiscal quarter ended March 31, 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 ~~March 31,~~September 30, 2023 and December 31, 2022, ~~the Company had no outstanding cash borrowings under the Credit Facility.~~

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

1314

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. RESTRUCTURING

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

During the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s target organization go-to-market strategy. The plan resulted in a restructuring expense of $21.7 million, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of the Company’s Salem, New Hampshire office.


	Three months ended	Expense
Employee severance and related benefits and closure of a US office	December 31, 2022	$	21,743
Office space reduction	March 31, 2023	$	1,241
Employee severance and related benefits	June 30, 2023	$	1,581
Employee severance and related benefits and closure of a foreign office	September 30, 2023	$	17,236

Accrued employee severance and related benefits:

Change for all restructuring actions:


	Nine Months Ended September 30,
(in thousands)	2023
January 1,	$	18,573
Costs incurred	~~220~~19,921
Cash disbursements	~~(14,458)~~(21,576)
Currency translation adjustments	~~181~~ (203)
~~March 31,~~September 30,	$	~~4,516~~16,715

~~2023 office space closure~~

~~In the three months ended March 31, 2023, the Company recognized an impairment of $1.2 million on its operating lease right of use assets primarily due to the closure of leased office space~~Note: Accrued employee severance and related benefits is included in ~~Poland.~~accrued compensation and related expenses.

NOTE 10. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

•Level 3 - significant unobservable inputs ~~on which there is~~with little or no market data, which require the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value.

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied volatility 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:


		March 31, 2023								December 31, 2022									September 30, 2023								December 31, 2022
(in thousands)	(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	Cash equivalents	$	41,088	$	—	$	—	$	41,088	$	2,526	$	—	$	—	$	2,526	Cash equivalents	$	22,686	$	—	$	—	$	22,686	$	2,526	$	—	$	—	$	2,526
Marketable securities	Marketable securities	$	—	$	155,564	$	—	$	155,564	$	—	$	152,167	$	—	$	152,167	Marketable securities	$	—	$	167,286	$	—	$	167,286	$	—	$	152,167	$	—	$	152,167
Capped Call Transactions (1)	Capped Call Transactions (1)	$	—	$	5,600	$	—	$	5,600	$	—	$	2,582	$	—	$	2,582	Capped Call Transactions (1)	$	—	$	1,792	$	—	$	1,792	$	—	$	2,582	$	—	$	2,582
Venture investments (1) (2)	Venture investments (1) (2)	$	—	$	—	$	16,265	$	16,265	$	—	$	—	$	13,069	$	13,069	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.

1415

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in venture investments:


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
January 1,	January 1,	$	13,069	$	7,648	January 1,	$	13,069	$	7,648
New investments	New investments	400		—		New investments	400		400

Sales of investments						Sales of investments	(2,773)		(3,954)
Changes in foreign exchange rates	Changes in foreign exchange rates	58		(61)		Changes in foreign exchange rates	27		(675)
Changes in fair value:	Changes in fair value:					Changes in fair value:
included in other income, net		3,802		2,741
included in other income (loss), net						included in other income (loss), net	10,886		5,989
included in other comprehensive (loss)	included in other comprehensive (loss)	(1,064)		2,502		included in other comprehensive (loss)	(2,261)		2,502
March 31,		$	16,265	$	12,830
September 30,						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 fair value of the Notes outstanding (including the embedded conversion feature) was ~~$507.8~~$460.3 million as of ~~March 31,~~September 30, 2023 and $521.1 million as of December 31, 2022. In the ~~three~~nine months ended ~~March 31,~~September 30, 2023 the Company repurchased Notes representing ~~$33~~$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 11. REVENUE

Geographic revenue


		Three Months Ended March 31,					Three Months Ended September 30,											Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)		2023			2022		(Dollars in thousands)		2023						2022					2023				2022
U.S.	U.S.			$	184,519	56	%	$	217,272		58	%	U.S.	$	154,741	47	%		$	148,200	55	%	$	489,645	51	%	$	513,197	56	%
Other Americas	Other Americas			15,011		5	%	45,751			12	%	Other Americas	23,497		7	%		18,546		7	%	58,013		6	%	80,558		9	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)			42,237		13	%	30,932			8	%	United Kingdom (“U.K.”)	41,622		12	%		24,074		9	%	112,751		12	%	83,837		9	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa			51,318		16	%	49,136			13	%	Europe (excluding U.K.), Middle East, and Africa	67,880		20	%		46,212		17	%	173,551		18	%	140,586		15	%
Asia-Pacific	Asia-Pacific			32,387		10	%	33,216			9	%	Asia-Pacific	46,903		14	%		33,699		12	%	124,423		13	%	103,197		11	%
				$	325,472	100	%	$	376,307		100	%		$	334,643	100	%		$	270,731	100	%	$	958,383	100	%	$	921,375	100	%

Revenue streams


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Perpetual license	Perpetual license		$	403		$	7,440	Perpetual license	$	2,747	$	9,223	$	4,729	$	18,929
Subscription license	Subscription license		84,527			137,533		Subscription license	74,342		31,112		200,066		210,245
Revenue recognized at a point in time	Revenue recognized at a point in time		84,930			144,973		Revenue recognized at a point in time	77,089		40,335		204,795		229,174
Maintenance	Maintenance		79,630			79,716		Maintenance	83,538		77,526		245,210		235,568
Pega Cloud	Pega Cloud		107,879			90,317		Pega Cloud	118,040		97,359		340,982		281,182
Consulting	Consulting		53,033			61,301		Consulting	55,976		55,511		167,396		175,451
Revenue recognized over time	Revenue recognized over time		240,542			231,334		Revenue recognized over time	257,554		230,396		753,588		692,201
Total revenue	Total revenue		$	325,472		$	376,307	Total revenue	$	334,643	$	270,731	$	958,383	$	921,375

1516

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Pega Cloud	Pega Cloud		$	107,879		$	90,317	Pega Cloud	$	118,040	$	97,359	$	340,982	$	281,182
Maintenance	Maintenance		79,630			79,716		Maintenance	83,538		77,526		245,210		235,568
Subscription services	Subscription services		187,509			170,033		Subscription services	201,578		174,885		586,192		516,750
Subscription license	Subscription license		84,527			137,533		Subscription license	74,342		31,112		200,066		210,245
Subscription	Subscription		272,036			307,566		Subscription	275,920		205,997		786,258		726,995
Consulting								Consulting	55,976		55,511		167,396		175,451
Perpetual license	Perpetual license		403			7,440		Perpetual license	2,747		9,223		4,729		18,929
Consulting			53,033			61,301
			$	325,472		$	376,307		$	334,643	$	270,731	$	958,383	$	921,375

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of ~~March 31,~~September 30, 2023:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	235,315	$	389,632			$	35,346				$	5,262	$	41,203			$	706,758		54	%	1 year or less	$	202,610			$	391,324			$	48,427			$	4,567			$	39,335		$	686,263	54	%
1-2 years	1-2 years	66,272		239,228		3,215				2,252			6,653		317,620		24	%	1-2 years		58,610				239,787		4,356				2,696				3,662				309,111		24		%
2-3 years	2-3 years	29,295		131,085		6,777				—			2,292		169,449		13	%	2-3 years		28,585				121,778		8,518				—				1,100				159,981		13		%
Greater than 3 years	Greater than 3 years	7,479		106,778		—				—			—		114,257		9	%	Greater than 3 years		17,478				89,870		2,664				—				—				110,012		9		%
		$	338,361	$	866,723	$	45,338			$	7,514		$	50,148	$	1,308,084	100	%			$	307,283			$	842,759	$	63,965			$	7,263			$	44,097			$	1,265,367	100		%

As of ~~March 31,~~September 30, 2022:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	228,984	$	329,857			$	47,428				$	7,281	$	40,661			$	654,211		55	%	1 year or less	$	191,045			$	328,111			$	69,753			$	814			$	27,968		$	617,691	53	%
1-2 years	1-2 years	63,870		208,875		16,111				4,505			10,955		304,316		26	%	1-2 years		55,141				213,304		4,113				4,505				6,699				283,762		25		%
2-3 years	2-3 years	33,617		106,156		2,422				2,252			3,876		148,323		13	%	2-3 years		24,496				115,416		1,420				2,252				1,648				145,232		13		%
Greater than 3 years	Greater than 3 years	22,611		44,596		1,758				—			522		69,487		6	%	Greater than 3 years		16,198				82,807		1,734				—				508				101,247		9		%
		$	349,082	$	689,484	$	67,719			$	14,038		$	56,014	$	1,176,337	100	%			$	286,880			$	739,638	$	77,020			$	7,571			$	36,823			$	1,147,932	100		%

NOTE 12. STOCK-BASED COMPENSATION

Expense


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	(in thousands)		2023			2022		(in thousands)	2023		2022		2023		2022
Cost of revenue	Cost of revenue		$	8,912		$	6,378	Cost of revenue	$	6,410	$	6,797	$	22,497	$	19,754
Selling and marketing	Selling and marketing		17,661			10,958		Selling and marketing	10,401		12,933		43,410		36,524
Research and development	Research and development		9,060			7,346		Research and development	7,375		7,724		24,286		22,425
General and administrative	General and administrative		6,924			3,545		General and administrative	7,113		6,320		19,890		14,598
			$	42,557		$	28,227		$	31,299	$	33,774	$	110,083	$	93,301
Income tax benefit	Income tax benefit		$	(672)		$	(5,311)	Income tax benefit	$	(316)	$	(600)	$	(1,569)	$	(1,505)

As of ~~March 31,~~September 30, 2023, the Company had ~~$178.6~~$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 21.8 years.

~~Grants~~
Three Months Ended
March 31, 2023
(in thousands) Shares Total Fair Value
Restricted stock units 1,460 $ 68,352
Non-qualified stock options 43 $ 615

1617

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Grants


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

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

NOTE 13. INCOME TAXES

Effective income tax rate


		Three Months Ended March 31,				Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)		2023				2022			(Dollars in thousands)	2023		2022		2023			2022
Provision for (benefit from) income taxes			$	5,249			$	(7,683)
Provision for income taxes										Provision for income taxes	$	3,545	$	11,748	$	15,395		$	190,239
Effective income tax rate	Effective income tax rate		(34)		%		95		%	Effective income tax rate					(26)		%	(100)		%

The Company’s effective income tax rate in the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was ~~impacted~~primarily driven by the valuation allowance on the Company’s deferred tax assets in the U.S. and U.K. ~~deferred tax assets~~ and ~~current taxes payable~~projected taxable income in the U.S. ~~as a result of projecting taxable income that cannot be fully~~, partially offset by ~~net operating losses and~~ available tax ~~credits.~~credits and losses in the U.S.

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

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

NOTE 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 March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	(in thousands, except per share amounts)		2023			2022		(in thousands, except per share amounts)	2023		2022		2023		2022
Net (loss)	Net (loss)		$	(20,774)		$	(379)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
Weighted-average common shares outstanding	Weighted-average common shares outstanding		82,604			81,680		Weighted-average common shares outstanding	83,336		81,996		82,996		81,842
(Loss) per share, basic	(Loss) per share, basic		$	(0.25)		$	—	(Loss) per share, basic	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)

Net (loss)	Net (loss)		$	(20,774)		$	(379)	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)		82,604			81,680		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		$	(0.25)		$	—	(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)		1,348			4,178		Outstanding anti-dilutive stock options and RSUs (4)	2,255		3,019		1,652		3,589

(1) ~~In periods of loss, all~~All dilutive securities are excluded in periods of loss as their inclusion would be anti-dilutive.

(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue approximately ~~4.2~~3.7 million shares as of ~~March 31,~~September 30, 2023.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately ~~4.2~~3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are ~~initially~~ convertible) as of ~~March 31,~~September 30, 2023. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

NOTE 15. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. Leases" for additional information.

~~PEGASYSTEMS INC.~~

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

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

The Company had no accrued losses for litigation as of ~~March 31,~~September 30, 2023 and 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 of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded by the jury 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. Appellate briefing in the Court of Appeals of Virginia is ~~currently~~completed. The Court of Appeals of Virginia has set November 15, 2023 as the date for oral arguments in ~~process.~~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.

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 ~~is scheduled for~~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 defend against these 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.

1819

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, andIn re Pegasystems Inc., ~~nominal defendant~~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 ~~January 10,~~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 ~~Court entered an order staying the matter until after~~Larkin and Sagfors cases were consolidated and a ~~final judgment dismissing the~~ ~~City of Fort Lauderdale~~ ~~matter referenced above, the denial of a~~joint motion to ~~dismiss~~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 ~~City~~foregoing derivative complaints. On April 12, 2023, the Company’s board of ~~Fort Lauderdale~~ ~~action, or if any related derivative complaint is filed~~directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and ~~not stayed for~~investigate the ~~same or longer duration. 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 ~~believes~~in response to the ~~claims brought against the defendants are without merit and intends to defend against these claims vigorously.~~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 ~~the Company’s belief that the claims are without merit,~~ 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.

1920

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 impacts from public health emergencies and the war in Ukraine;

•reliance on third-party service providers, including hosting providers;

•compliance with our debt obligations and covenants;

•the potential impact of our convertible senior notes and Capped Call Transactions;

•foreign currency exchange rates;

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

•security breaches and security flaws;

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

•our ongoing litigation with Appian Corp.;

•our client retention rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

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

The forward-looking statements in this Quarterly Report represent our views as of ~~April 26,~~October 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 artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

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

~~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, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.

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. ACV is a performance measure that we believe provides useful information to our management and investors.

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

Reconciliation of ACV and Constant Currency ACV


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

Note: Constant currency ACV is calculated by applying the Q1Q3 2022 foreign exchange rates to all periods shown.

~~Remaining performance obligations (“Backlog”)~~

~~Reconciliation of GAAP Backlog and Constant Currency Backlog~~

(in millions, except percentages) Q1 2023 1 Year Growth Rate
Backlog $ 1,308 11 %
Impact of changes in foreign exchange rates 28 3 %
Backlog - Constant Currency $ 1,336 14 %

~~Constant currency Backlog is calculated by applying the Q1 2022 foreign exchange rates to all periods shown.~~

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.

~~Free~~Cash flow (1)

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


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



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

~~(1)~~

(in thousands, except percentages) Three Months Ended
March 31,
2023 2022 Change
Cash provided by operating activities $ 68,107 $ 15,116 351 %
Investment in property and equipment (11,487) (6,657)
Legal fees 1,515 6,887
Restructuring 14,458 —
Interest on convertible senior notes 2,250 2,250
Free cash flow $ 74,843 $ 17,596 325 %
Total revenue $ 325,472 $ 376,307
Free cash flow margin 23 % 5 %

(1) 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. Our non-GAAP free cash flow ~~measures reflect the following adjustments:~~

•~~Investment~~is defined as cash provided by (used in) operating activities less investment in property and ~~equipment~~:equipment. Investment in property and equipment fluctuates in amount and frequency and isare significantly affected by the timing and size of investments in our facilities. We ~~believe excluding these amounts provides~~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 ~~useful comparison~~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 in different periods.~~performance.

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

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

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. ~~We believe excluding the~~The Notes accrue interest ~~payments provides a useful comparison~~at an annual rate of ~~our operational performance~~0.75%, payable semi-annually in ~~different periods.~~arrears on March 1 and September 1, beginning September 1, 2020.

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

Remaining performance obligations (“Backlog”)

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


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

Note: Constant currency Backlog is calculated by applying the Q3 2022 foreign exchange rates to all 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. Preparing these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future, given the available information.

For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2022:

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

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

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, 2022.

RESULTS OF OPERATIONS

Revenue

~~Subscription transition~~

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

This transition has impacted revenue growth as revenue from subscription service arrangements, which includes 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
March 31, Change
2023 2022
Pega Cloud $ 107,879 33 % $ 90,317 24 % $ 17,562 19 %
Maintenance 79,630 25 % 79,716 21 % (86) — %
Subscription services 187,509 58 % 170,033 45 % 17,476 10 %
Subscription license 84,527 26 % 137,533 37 % (53,006) (39) %
Subscription 272,036 84 % 307,566 82 % (35,530) (12) %
Perpetual license 403 — % 7,440 2 % (7,037) (95) %
Consulting 53,033 16 % 61,301 16 % (8,268) (13) %
$ 325,472 100 % $ 376,307 100 % $ (50,835) (14) %

~~The revenue changes in the three months ended March 31, 2023 generally reflect the impact of our subscription transition. Other factors impacting our revenue include:~~


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

•The ~~decrease~~increases in Pega Cloud revenue for the three and nine months ended September 30, 2023 were primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud.

•The increases in maintenance revenue in the three and nine months ended September 30, 2023 were primarily due to continued demand for our subscription license offerings which are generally bundled with maintenance.

•The increase in subscription license revenue in the three months ended ~~March 31,~~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 ~~software license~~multi-year contracts recognized in revenue in the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

•The decrease in consulting revenue in the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was primarily due to ~~a decrease~~lower consultant realization rates in ~~billable hours~~the Americas.

•The decreases in perpetual license revenue in the three and ~~realization rates.~~nine months ended September 30, 2023 reflects our strategy of promoting subscription-based arrangements.

Gross profit


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,					Change		(Dollars in thousands)		Three Months Ended September 30,										Change				Nine Months Ended September 30,										Change
			2023	2022								(Dollars in thousands)	2023				2022						Change				2023					2022					Change
Pega Cloud	Pega Cloud				$	77,629	72	%	$	63,418			%	$	14,211	22	%	Pega Cloud	$	88,553	75	%			71	%		$	19,880	29	%		$	250,943	74	%			69	%	$	56,593	29	%
Maintenance	Maintenance				73,016		92	%	74,585			94	%	(1,569)		(2)	%	Maintenance	77,119		92	%	71,671		92	%		5,448		8	%		225,696		92	%	219,296		93	%	6,400		3	%
Subscription services	Subscription services				150,645		80	%	138,003			81	%	12,642		9	%	Subscription services	165,672		82	%	140,344		80	%		25,328		18	%		476,639		81	%	413,646		80	%	62,993		15	%
Subscription license	Subscription license				83,808		99	%	136,911			100	%	(53,103)		(39)	%	Subscription license	73,713		99	%	30,484		98	%		43,229		142	%		198,095		99	%	208,322		99	%	(10,227)		(5)	%
Subscription	Subscription				234,453		86	%	274,914			89	%	(40,461)		(15)	%	Subscription	239,385		87	%	170,828		83	%		68,557		40	%		674,734		86	%	621,968		86	%	52,766		8	%
Consulting																		Consulting	(1,228)		(2)	%	(2,267)		(4)	%		1,039		46	%		(8,866)		(5)	%	4,289		2	%	(13,155)		*
Perpetual license	Perpetual license				400		99	%	7,406			100	%	(7,006)		(95)	%	Perpetual license	2,723		99	%	9,120		99	%		(6,397)		(70)	%		4,678		99	%	18,756		99	%	(14,078)		(75)	%
Consulting					(7,315)		(14)	%	5,790			9	%	(13,105)		*
					$	227,538	70	%	$	288,110		77	%	$	(60,572)	(21)	%		$	240,880	72	%	$	177,681	66	%		$	63,199	36	%		$	670,546	70	%	$	645,013	70	%	$	25,533	4	%

* not meaningful

~~The gross profit percent changes in the three months ended March 31, 2023 were primarily due to a shift in the revenue mix.~~

•The ~~increase~~increases in Pega Cloud gross profit percent in the three and nine months ended ~~March 31,~~September 30, 2023 ~~was~~were primarily due to ~~cost-efficiency gains~~increased cost efficiency, particularly for hosting services, as Pega Cloud continues to grow and scale.

•The decrease in maintenance gross profit percent in the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was primarily due to an increase in compensation and benefits ~~due to~~as a result of increased headcount.

•The ~~decrease~~increase in consulting gross profit percent in the three months ended ~~March 31, 2023 was due to a decrease in realization rates and consultant utilization.~~

~~Operating expenses~~

(Dollars in thousands) Three Months Ended
March 31, Change
2023 2022
% of Revenue % of Revenue
Selling and marketing $ 149,797 46 % $ 162,236 43 % $ (12,439) (8) %
Research and development $ 75,376 23 % $ 71,490 19 % $ 3,886 5 %
General and administrative $ 23,110 7 % $ 35,764 10 % $ (12,654) (35) %
Restructuring $ 1,461 — $ — — $ 1,461 100 %

•~~The decrease in selling and marketing in the three months ended March 31,~~September 30, 2023 was primarily due to ahigher consultant utilization in the Americas. The decrease in consulting profit percent in the nine months ended September 30, 2023, was primarily due to lower consultant realization rates in the Americas.

Operating expenses


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

•The decreases in selling and marketing during the three and nine months ended September 30, 2023 were primarily due to decreases in compensation and benefits of ~~$12.2 million.~~$18.6 million and $45.0 million, respectively. The decreases were due to reduced headcount as we optimize our go-to-market strategy. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

•The increase in research and development infor the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was primarily due to ~~an increase in compensation and benefits of $2.5 million, attributable to increases in headcount and incentive compensation. The increase in headcount reflects~~ additional investments in ~~developing~~ our ~~solutions.~~products and services.

•The ~~decrease~~changes in general and administrative in the three and nine months ended ~~March 31,~~September 30, 2023 ~~was~~were primarily due to an increase of $2.3 million in the three months ended September 30, 2023 and a decrease of $21.4 million in the nine months ended September 30, 2023 in legal fees and related expenses arising from ~~litigation~~ proceedings outside the ordinary course of ~~business of $15.9 million.~~business. We expect to continue to incur additional costs for these proceedings. See "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part I, Item 1A of our Annual Report for the year ended December 31, ~~2022.~~2022 for additional information.

•The ~~increase~~increases in restructuring inexpenses during the three and nine months ended ~~March 31,~~September 30, 2023 ~~was~~were primarily due to ~~an impairment~~our efforts to optimize our go-to-market organization. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of ~~$1.2 million on our operating lease right of use assets primarily due to the closure of leased office space in Poland.~~this Quarterly Report.

Other income and expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,				Change			(Dollars in thousands)	Three Months Ended September 30,									Change				Nine Months Ended September 30,									Change
			2023	2022							(Dollars in thousands)		2023				2022					Change			2023					2022						Change
Foreign currency transaction (loss) gain				$	(2,675)		$	2,876						*
Foreign currency transaction gain (loss)																Foreign currency transaction gain (loss)	$	1,994		$	3,826				$	(1,832)		(48)	%			$	(3,971)				$	8,415			$	(12,386)	*
Interest income	Interest income			1,485			207				1,278			617	%	Interest income	2,532			520			2,012		387		%			5,831				1,036			4,795		463	%
Interest expense	Interest expense			(1,918)			(1,946)				28			1	%	Interest expense	(1,533)			(1,992)			459		23		%			(5,229)				(5,882)			653		11	%
Gain (loss) on capped call transactions				3,206			(30,560)				33,766			*
Other income, net				6,583			2,741				3,842			140	%
(Loss) on capped call transactions																(Loss) on capped call transactions	(2,294)			(6,876)			4,582		67		%			(449)				(56,381)			55,932		99	%
Other income (loss), net																Other income (loss), net	6,383			(29)			6,412		*					18,668				6,497			12,171		187	%
				$	6,681		$	(26,682)			$	33,363		*			$	7,082		$	(4,551)		$	11,633	*					$	14,850			$	(46,315)		$	61,165	*

* not meaningful

•The ~~decrease~~changes in foreign currency transaction gain (loss) ~~gain~~ in the three and nine months ended ~~March 31,~~September 30, 2023 ~~was~~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 ~~increase~~increases in interest income in the three and nine months ended ~~March 31,~~September 30, 2023 ~~was~~were primarily due to ~~an increase~~increases in market interest rates.

•The ~~change~~decreases in ~~gain~~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 ~~March 31,~~September 30, 2023 ~~was~~were due to fair value adjustments for our capped call transactions.

•The increase in other income (loss), net in the three months ended ~~March 31,~~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 ~~the repurchase~~repurchases of our convertible senior notes and ~~from~~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 10. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report.

2526

Provision for ~~(benefit from)~~ income taxes


		Three Months Ended March 31,								Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)		2023			2022			(Dollars in thousands)		2023			2022
Provision for (benefit from) income taxes			$	5,249		$	(7,683)
Provision for income taxes									Provision for income taxes		$	15,395		$	190,239
Effective income tax rate	Effective income tax rate		(34)		%	95		%	Effective income tax rate		(26)		%	(100)		%

The effective income tax rate in the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was ~~impacted~~primarily driven by the valuation allowance on our deferred tax assets in the U.S. and U.K. ~~deferred tax assets~~ and ~~current taxes payable~~projected taxable income in the U.S. ~~as a result of projecting taxable income that cannot be fully~~, partially offset by ~~net operating losses and~~ available tax ~~credits.~~credits and losses in the U.S.

LIQUIDITY AND CAPITAL RESOURCES


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	68,107	$	15,116	Operating activities	$	137,920	$	(13,446)
Investing activities	Investing activities	(14,413)		(6,082)		Investing activities	(24,176)		10,104
Financing activities	Financing activities	(29,372)		(35,918)		Financing activities	(85,031)		(43,484)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	Effect of exchange rate changes on cash, cash equivalents, and restricted cash	782		(310)		Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(1,621)		(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cash	Net increase (decrease) in cash, cash equivalents, and restricted cash	$	25,104	$	(27,194)	Net increase (decrease) in cash, cash equivalents, and restricted cash	$	27,092	$	(52,339)


(in thousands)	(in thousands)	March 31, 2023		December 31, 2022		(in thousands)	September 30, 2023		December 31, 2022
Held by U.S. entities	Held by U.S. entities	$	229,214	$	248,389	Held by U.S. entities	$	217,735	$	248,389
Held by foreign entities	Held by foreign entities	94,668		48,832		Held by foreign entities	118,574		48,832
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	323,882	$	297,221	Total cash, cash equivalents, and marketable securities	$	336,309	$	297,221

We believe that our current cash, cash flow ~~from~~provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. We may utilize available funds or seek external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate foreign funds, we may ~~be required~~have to pay federal, state, and local income ~~and~~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. Subscription licenses and services are typically 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 ~~three~~nine months ended ~~March 31,~~September 30, 2023 was primarily due to growth in client collections, the impact of our ~~subscription transition~~cost-efficiency initiatives, and ~~improved client collections. In addition, in the three months ended March 31, 2023 and 2022, we paid $1.5 million and $6.9 million in~~lower legal fees and related ~~expenses~~costs arising from proceedings ~~that originated~~ outside of the ordinary course of business. We expect to continue to incur additional costs for these proceedings. ~~See~~For additional information, see “Note 9. Restructuring” and "Note 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 ~~three~~nine months ended ~~March 31,~~September 30, 2023 was primarily ~~driven by an increase~~due to our investments in financial instruments and reduced investment in property and equipment as we optimize our office ~~space-related capital expenditures.~~

space.

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In the ~~three~~nine months ended ~~March 31,~~September 30, 2023, we paid ~~$29.9~~$89 million to repurchase ~~$33~~$97.7 million in aggregate principal amount of convertible senior notes. As of ~~March 31,~~September 30, 2023, we had ~~$567~~$502 million in aggregate principal amount of convertible senior notes ~~outstanding.~~

~~See~~outstanding due on March 1, 2025. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly ~~Report for additional information.~~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 ~~March~~September 30, 2023 and December 31, ~~2023,~~2022, we ~~had no outstanding cash borrowings under the Credit Facility but~~ had $27.3 million in outstanding letters of credit, which ~~reduces our~~reduced the Company’s available borrowing ~~capacity. See~~capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly ~~Report for additional information.~~Report.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	~~Three~~Nine Months Ended ~~March 31,~~September 30, 2023
December 31, 2022	$	58,075
Authorizations (1)	—1,925

~~March 31,~~September 30, 2023	$	~~58,075~~60,000

(1) On April 25, 2023, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2023 to June 30, 2024, and the amount of stock we are authorized to repurchase ~~has been~~was increased to $60 million.

Common stock repurchases


		Three Months Ended March 31,							Nine Months Ended September 30,
		2023			2022				2023			2022
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid		—	$	—	242	$	22,583

Stock repurchase program	Stock repurchase program	—	—		242	22,583		Stock repurchase program	—	—		279	24,508
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	27	1,107		141	12,128		Tax withholdings for net settlement of equity awards	39	1,654		253	17,575
		27	$	1,107	383	$	34,711		39	$	1,654	532	$	42,083

In the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$0.6~~$1.0 million and ~~$6.1~~$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.


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
Dividend payments to stockholders	Dividend payments to stockholders	$	2,474	$	2,454	Dividend payments to stockholders	$	7,458	$	7,368

Contractual obligations

As of ~~March 31,~~September 30, 2023, our contractual obligations were:


		Payments due by period																	Payments due by period
(in thousands)	(in thousands)	Remainder of 2023		2024		2025		2026		2027		2028 and after		Other		Total		(in thousands)	Remainder of 2023		2024		2025		2026		2027		2028 and after		Other		Total
Convertible senior notes (1)	Convertible senior notes (1)	$	1,772	$	4,253	$	569,126	$	—	$	—	$	—	$	—	$	575,151	Convertible senior notes (1)	$	—	$	3,767	$	504,154	$	—	$	—	$	—	$	—	$	507,921
Purchase obligations (2)	Purchase obligations (2)	98,303		117,729		127,367		131,146		133,500		14		—		608,059		Purchase obligations (2)	43,491		134,122		126,065		120,745		134,060		177		—		558,660
Operating lease obligations	Operating lease obligations	14,003		17,642		14,562		10,917		9,863		39,380		—		106,367		Operating lease obligations	4,775		17,976		14,870		10,853		9,808		39,299		—		97,581
Investment commitments		1,000		—		—		—		—		—		—		1,000
Venture investment commitments (3)																		Venture investment commitments (3)	500		500		—		—		—		—		—		1,000
Liability for uncertain tax positions ~~(3)~~(4)	Liability for uncertain tax positions ~~(3)~~(4)	—		—		—		—		—		—		3,578		3,578		Liability for uncertain tax positions ~~(3)~~(4)	—		—		—		—		—		—		2,017		2,017
		$	115,078	$	139,624	$	711,055	$	142,063	$	143,363	$	39,394	$	3,578	$	1,294,155		$	48,766	$	156,365	$	645,089	$	131,598	$	143,868	$	39,476	$	2,017	$	1,167,179

(1) Includes principal and interest.

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

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

(4) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

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

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted ~~in:~~in the following:
Three Months Ended
March 31,
2023 2022
(Decrease) increase in revenue (4) % (3) %
Increase (decrease) in net income 1 % 186 %


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

Remeasurement risk

We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:


		Three Months Ended March 31,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2023		2022
Foreign currency gain (loss)		$	(9,251)	$	(7,937)
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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2829

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in “Note 15. Commitments and Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.

ITEM 1A. RISK FACTORS

We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 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.

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 ~~March 31,~~September 30, 2023:
(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
January 1, 2023 - January 31, 2023 23 $ 36.52 — $ 58,075
February 1, 2023 - February 28, 2023 11 39.60 — $ 58,075
March 1, 2023 - March 31, 2023 9 46.49 — $ 58,075
43 $ 39.40 —


(in thousands, except per share amounts)	Total Number of Shares Purchased (2)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs
July 1, 2023 - July 31, 2023	3	$	55.81	—	$	60,000
August 1, 2023 - August 31, 2023	—	—		—	$	60,000
September 1, 2023 - September 30, 2023	4	48.92		—	$	60,000
	7	$	51.65	—

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

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

ITEM 5. OTHER INFORMATION

~~Credit Facility~~Rule 10b5-1 and non-rule 10b5-1 trading arrangements

On April 21, 2023 and effective on March 31, 2023, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”), among other changes. The Amendment modifiesDuring the ~~financial covenants as reflected in “Note 8. Debt” of Part I, Item 1 of this Quarterly Report on Form 10-Q.~~

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

~~Share Repurchase Program~~

~~On April 25, 2023, our Board of Directors extended the expiration date of our current share repurchase program from June~~three months ended September 30, 2023, ~~to June 30, 2024, and~~no director or officer of the ~~amount~~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 stock we are authorized to repurchase has been increased to $60 million. Any actual repurchases under the current repurchase program will be disclosed in the Company’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for the annual and applicable quarterly periods ending between June 30, 2023 and December 31, 2024.Regulation S-K.

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1

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

10.2

Fee Letter for Senior Secured Credit Facility , dated Mar ch 31, 2023

10.3

Offer Letter between the Registrant and John Higgins executed December 13, 2020++**

31.1

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

31.1

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

31.2

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

31.2

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

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

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

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

104

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

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

~~++ Management contracts and compensatory plans or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.~~

** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations

SIGNATURE

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


		Pegasystems Inc.

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


	Three Months Ended March 31, 2023
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,460	$	68,352
Non-qualified stock options	43	$	615


(in millions, except percentages)	Q1 2023		1 Year Growth Rate
Backlog	$	1,308	11	%
Impact of changes in foreign exchange rates	28		3	%
Backlog - Constant Currency	$	1,336	14	%


(in thousands, except percentages)	Three Months Ended March 31,
	2023			2022			Change
Cash provided by operating activities	$	68,107		$	15,116		351	%
Investment in property and equipment	(11,487)			(6,657)
Legal fees	1,515			6,887
Restructuring	14,458			—
Interest on convertible senior notes	2,250			2,250

Free cash flow	$	74,843		$	17,596		325	%

Total revenue	$	325,472		$	376,307
Free cash flow margin	23		%	5		%