UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended ~~September 30, 2023~~March 31, 2024


☐			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 ~~83,555,919~~85,031,165 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~October~~April 17, ~~2023.~~2024.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023			3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~			6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~			87
Notes to Unaudited Condensed Consolidated Financial Statements			98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2120
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2827
Item 4. Controls and Procedures			2928

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			3029
Item 1A. Risk Factors			3029
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3029
Item 5. Other Information			3029
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)
		September 30, 2023		December 31, 2022
	March 31, 2024						March 31, 2024	December 31, 2023
Assets	Assets
Current assets:	Current assets:
Current assets:
Current assets:
Cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents	Cash and cash equivalents	$	169,023	$	145,054
Marketable securities	Marketable securities	167,286		152,167
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	336,309		297,221
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	71,438		80,388
Total current assets	Total current assets	776,490		846,478
Unbilled receivables, net		73,795		95,806
Long-term unbilled receivables, net
Goodwill	Goodwill	81,437		81,399
Other long-term assets	Other long-term assets	290,807		333,989
Total assets	Total assets	$	1,222,529	$	1,357,672
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:
Current liabilities:
Current liabilities:
Accounts payable
Accounts payable
Accounts payable	Accounts payable	$	20,541	$	18,195
Accrued expenses	Accrued expenses	43,624		50,355
Accrued compensation and related expenses	Accrued compensation and related expenses	93,511		127,728
Deferred revenue	Deferred revenue	297,067		325,212
Convertible senior notes, net
Other current liabilities	Other current liabilities	18,038		17,450
Total current liabilities	Total current liabilities	472,781		538,940
Convertible senior notes, net		498,753		593,609
Operating lease liabilities		68,874		79,152
Long-term convertible senior notes, net
Long-term operating lease liabilities
Other long-term liabilities	Other long-term liabilities	14,485		15,128
Total liabilities	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:
Preferred stock, 1,000 shares authorized; none issued	Preferred stock, 1,000 shares authorized; none issued	—		—
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
Preferred stock, 1,000 shares authorized; none issued
Preferred stock, 1,000 shares authorized; none issued
Common stock, 200,000 shares authorized; 85,011 and 83,840 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
Additional paid-in capital	Additional paid-in capital	343,259		229,602
Accumulated deficit		(151,370)		(76,513)
(Accumulated deficit)
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(25,088)		(23,070)
Total stockholders’ equity	Total stockholders’ equity	167,636		130,843
Total liabilities and stockholders’ equity	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)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022
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,
		2024
		2024
		2024
Revenue
Revenue
Revenue	Revenue
Subscription services	Subscription services	$	201,578	$	174,885	$	586,192	$	516,750
Subscription services
Subscription services
Subscription license
Subscription license
Subscription license	Subscription license	74,342		31,112		200,066		210,245
Consulting	Consulting	55,976		55,511		167,396		175,451
Consulting
Consulting
Perpetual license
Perpetual license
Perpetual license	Perpetual license	2,747		9,223		4,729		18,929
Total revenue	Total revenue	334,643		270,731		958,383		921,375
Total revenue
Total revenue
Cost of revenue
Cost of revenue
Cost of revenue	Cost of revenue
Subscription services	Subscription services	35,906		34,541		109,553		103,104
Subscription services
Subscription services
Subscription license
Subscription license
Subscription license	Subscription license	629		628		1,971		1,923
Consulting	Consulting	57,204		57,778		176,262		171,162
Consulting
Consulting
Perpetual license
Perpetual license
Perpetual license	Perpetual license	24		103		51		173
Total cost of revenue	Total cost of revenue	93,763		93,050		287,837		276,362
Total cost of revenue
Total cost of revenue
Gross profit
Gross profit
Gross profit	Gross profit	240,880		177,681		670,546		645,013
Operating expenses	Operating expenses
Operating expenses
Operating expenses
Selling and marketing
Selling and marketing
Selling and marketing	Selling and marketing	131,598		153,517		425,253		472,951
Research and development	Research and development	74,955		75,342		224,262		221,173
Research and development
Research and development
General and administrative	General and administrative	27,321		26,043		73,893		94,530
General and administrative
General and administrative
Litigation settlement, net of recoveries
Litigation settlement, net of recoveries
Litigation settlement, net of recoveries
Restructuring
Restructuring
Restructuring	Restructuring	17,822		—		21,450		—
Total operating expenses	Total operating expenses	251,696		254,902		744,858		788,654
Total operating expenses
Total operating expenses
(Loss) from operations	(Loss) from operations	(10,816)		(77,221)		(74,312)		(143,641)
Foreign currency transaction gain (loss)		1,994		3,826		(3,971)		8,415
(Loss) from operations
(Loss) from operations
Foreign currency transaction (loss)
Foreign currency transaction (loss)
Foreign currency transaction (loss)
Interest income
Interest income
Interest income	Interest income	2,532		520		5,831		1,036
Interest expense	Interest expense	(1,533)		(1,992)		(5,229)		(5,882)
(Loss) on capped call transactions		(2,294)		(6,876)		(449)		(56,381)
Other income (loss), net		6,383		(29)		18,668		6,497
(Loss) before provision for income taxes		(3,734)		(81,772)		(59,462)		(189,956)
Provision for income taxes		3,545		11,748		15,395		190,239
Interest expense
Interest expense
Gain on capped call transactions
Gain on capped call transactions
Gain on capped call transactions
Other income, net
Other income, net
Other income, net
(Loss) before (benefit from) provision for income taxes
(Loss) before (benefit from) provision for income taxes
(Loss) before (benefit from) provision for income taxes
(Benefit from) provision for income taxes
(Benefit from) provision for income taxes
(Benefit from) provision for income taxes
Net (loss)
Net (loss)
Net (loss)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
(Loss) per share	(Loss) per share
(Loss) per share
(Loss) per share
Basic
Basic
Basic	Basic	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Diluted	Diluted	$	(0.09)	$	(1.14)	$	(0.90)	$	(4.65)
Diluted
Diluted
Weighted-average number of common shares outstanding
Weighted-average number of common shares outstanding
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding
Basic	Basic	83,336		81,996		82,996		81,842
Basic
Basic
Diluted	Diluted	83,336		81,996		82,996		81,842
Diluted
Diluted

See notes to unaudited condensed consolidated financial statements.

										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022
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,
		2024
		2024
		2024
Net (loss)	Net (loss)	$	(7,279)	$	(93,520)	$	(74,857)	$	(380,195)
Other comprehensive (loss), net of tax
Net (loss)
Net (loss)
Other comprehensive (loss) income, net of tax
Other comprehensive (loss) income, net of tax
Other comprehensive (loss) income, net of tax
Unrealized (loss) on available-for-sale securities
Unrealized (loss) on available-for-sale securities
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	(3,687)		(6,700)		(1,737)		(20,936)
Total other comprehensive (loss), net of tax		(3,727)		(6,773)		(2,018)		(21,936)
Foreign currency translation adjustments
Foreign currency translation adjustments
Total other comprehensive (loss) income, net of tax
Total other comprehensive (loss) income, net of tax
Total other comprehensive (loss) income, net of tax
Comprehensive (loss)	Comprehensive (loss)	$	(11,006)	$	(100,293)	$	(76,875)	$	(402,131)
Comprehensive (loss)
Comprehensive (loss)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)														PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock																	Common Stock	Additional paid-in capital	Retained earnings (accumulated deficit)	Accumulated other comprehensive (loss)	Total stockholders’ equity
	Number of shares
December 31, 2022
December 31, 2022
December 31, 2022

Issuance of common stock for stock compensation plans
Issuance of common stock for stock compensation plans
Issuance of common stock for stock compensation plans
Issuance of common stock under the employee stock purchase plan
Stock-based compensation
Cash dividends declared ($0.03 per share)
Other comprehensive income
Net (loss)
March 31, 2023
		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)

December 31, 2023

December 31, 2023

December 31, 2023

Issuance of common stock for stock compensation plans
Issuance of common stock for stock compensation plans
Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	297	3		(12,131)				—		—		(12,128)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	35	—		2,446				—		—		2,446
Stock-based compensation	Stock-based compensation	—	—		28,227				—		—		28,227
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,455)		—		(2,455)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—		(2,548)		(2,548)
Net (loss)	Net (loss)	—	—		—				(379)		—		(379)
March 31, 2022		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
March 31, 2024

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

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, 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


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Three Months Ended March 31,
	2024		2023
Operating activities
Net (loss)	$	(12,124)	$	(20,774)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation	34,781		42,557
Amortization of deferred commissions	17,282		14,277
Amortization of intangible assets and depreciation	4,254		4,724
Lease expense	3,472		4,594
Foreign currency transaction (loss)	3,262		2,675
(Gain) on capped call transactions	(3,299)		(3,206)
Deferred income taxes	(646)		(126)
(Gain) on investments	(1,628)		(3,802)
(Gain) on repurchases of convertible senior notes	—		(2,781)
Other non-cash	(1,886)		854
Change in operating assets and liabilities, net	136,678		29,115
Cash provided by operating activities	180,146		68,107
Investing activities
Purchases of investments	(161,438)		(39,401)
Proceeds from maturities and called investments	29,643		36,475


Investment in property and equipment	(604)		(11,487)
Cash (used in) investing activities	(132,399)		(14,413)
Financing activities
Repurchases of convertible senior notes	—		(29,901)
Dividend payments to stockholders	(2,515)		(2,474)


Proceeds from employee stock plans	22,419		3,922
Common stock repurchases for tax withholdings for net settlement of equity awards	(2,005)		(1,107)


Other	—		188
Cash provided by (used in) financing activities	17,899		(29,372)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(2,803)		782
Net increase in cash, cash equivalents, and restricted cash	62,843		25,104
Cash, cash equivalents, and restricted cash, beginning of period	232,827		145,054
Cash, cash equivalents, and restricted cash, end of period	$	295,670	$	170,158

Cash and cash equivalents	$	291,905	$	168,318
Restricted cash included in other current assets	775		—
Restricted cash included in other long-term assets	2,990		1,840
Total cash, cash equivalents, and restricted cash	$	295,670	$	170,158

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.~~2023.

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 ~~2023.~~2024.

NOTE 2. MARKETABLE SECURITIES


		September 30, 2023								December 31, 2022
	March 31, 2024																					March 31, 2024				December 31, 2023
(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	$	17,931	$	—	$	(18)	$	17,913	$	2,960	$	—	$	(52)	$	2,908
Corporate debt	Corporate debt	149,927		—		(554)		149,373		151,906		—		(2,647)		149,259
		$	167,858	$	—	$	(572)	$	167,286	$	154,866	$	—	$	(2,699)	$	152,167
	$

As of ~~September 30, 2023,~~March 31, 2024, marketable securities’ maturities ranged from ~~October 2023~~April 2024 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)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Accounts receivable, net	Accounts receivable, net	$	168,795	$	255,150
Unbilled receivables, net	Unbilled receivables, net	199,948		213,719
Long-term unbilled receivables, net	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. Billing is solely subject to the passage of time.

Unbilled receivables by expected collection date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2023				(Dollars in thousands)	March 31, 2024
1 year or less	1 year or less	$	199,948	73	%	1 year or less	$	170,458	70	70	%
1-2 years	1-2 years	58,604		21	%	1-2 years	54,111		22	22	%
2-5 years	2-5 years	15,191		6	%	2-5 years	18,703		8	8	%
		$	273,743	100	%
	$								$	243,272		100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2023				(Dollars in thousands)	March 31, 2024
2024						2024	$	19,018	8		%
2023	2023	$	90,227	33	%	2023	144,525		59	59	%
2022	2022	92,065		34	%	2022	38,025		16	16	%
2021	2021	62,729		23	%	2021	35,988		15	15	%
2020		19,820		7	%
2019 and prior		8,902		3	%
		$	273,743	100	%
2020 and prior						2020 and prior	5,716		2		%
	$								$	243,272		100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:


	March 31, 2024		December 31, 2023
Client A
Accounts receivable	10	%	*
Unbilled receivables	12	%	*
Total receivables	11	%	*

* Client accounted for less than 10% of receivables.

Contract assets

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation.


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Contract assets (1)	Contract assets (1)	$	13,263	$	17,546
Long-term contract assets (2)	Long-term contract assets (2)	10,732		16,470
		$	23,995	$	34,016
	$

(1) Included in other current assets.

(2) Included in other long-term assets.

Deferred revenue

Deferred revenue consists of billings and payments received in advance of revenue recognition.


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Deferred revenue	Deferred revenue	$	297,067	$	325,212
Long-term deferred revenue (1)	Long-term deferred revenue (1)	2,605		3,552
		$	299,672	$	328,764
	$

(1) Included in other long-term liabilities.

~~Deferred~~The increase in deferred revenue ~~decreased~~ in the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, was primarily due to ~~$292.3 million~~new billings in advance of revenue recognized. In the three months ended March 31, 2024, $168.3 million in revenue was recognized ~~during the period included in~~from deferred revenue as of December 31, ~~2022 exceeded new billings in advance of revenue recognition.~~2023.

NOTE 4. DEFERRED COMMISSIONS

(in thousands)

September 30, 2023

December 31, 2022

(in thousands)

March 31, 2024

December 31, 2023

Deferred commissions (1)

107,399

130,195

(1) Included in other long-term assets.


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

(1) Included in selling and marketing.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
January 1,	January 1,	$	81,399	$	81,923

Currency translation adjustments	Currency translation adjustments	38		(722)
September 30,		$	81,437	$	81,201
Currency translation adjustments
Currency translation adjustments
March 31,

Intangibles

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


				September 30, 2023
			March 31, 2024												March 31, 2024
(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		$	63,086	$	(59,661)	$	3,425
Technology	Technology	2-10 years		68,103		(63,579)		4,524
Other	Other	1-5 years		5,361		(5,361)		—
				$	136,550	$	(128,601)	$	7,949
			$

(1) Included in other long-term assets.

~~PEGASYSTEMS INC.~~

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


				December 31, 2022
			December 31, 2023												December 31, 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		$	63,076	$	(58,623)	$	4,453
Technology	Technology	2-10 years		68,056		(61,621)		6,435
Other	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:~~amortization of intangible assets:
(in thousands) September 30, 2023
Remainder of 2023 $ 964
2024 3,169
2025 2,615
2026 874
2027 327
$ 7,949


(in thousands)	March 31, 2024
Remainder of 2024	$	2,208
2025	2,616
2026	874
2027	327


	$	6,025

Amortization of intangible assets:


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

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

		$

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Income tax receivables	Income tax receivables	$	19,663	$	25,354
Contract assets	Contract assets	13,263		17,546
Insurance receivable

Capped call transactions
Capped call transactions
Capped call transactions
Restricted cash
Other	Other	38,512		37,488
		$	71,438	$	80,388
	$

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Deferred commissions	Deferred commissions	$	107,399	$	130,195
Right of use assets	Right of use assets	65,871		76,114
Property and equipment	Property and equipment	49,481		55,056
Venture investments	Venture investments	19,348		13,069
Contract assets	Contract assets	10,732		16,470
Intangible assets	Intangible assets	7,949		10,888
Capped call transactions	Capped call transactions	1,792		2,582
Deferred income taxes	Deferred income taxes	5,046		4,795
Restricted cash	Restricted cash	3,123		—
Other	Other	20,066		24,820
		$	290,807	$	333,989
	$

Accrued expenses


(in thousands)	March 31, 2024		December 31, 2023
Litigation settlements	$	35,000	$	—
Cloud hosting	12,736		1,358
Outside professional services	13,352		10,419
Marketing and sales program	3,888		2,557
Income and other taxes	6,676		15,428
Employee related	4,466		4,486
Other	4,524		5,693
	$	80,642	$	39,941

Other current liabilities


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Operating lease liabilities	Operating lease liabilities	$	15,532	$	14,976
Dividends payable	Dividends payable	2,506		2,474
		$	18,038	$	17,450
Other
	$

Other long-term liabilities


(in thousands)	March 31, 2024		December 31, 2023
Deferred revenue	$	1,784	$	2,478
Income taxes payable	2,175		859
Other	9,659		10,233
	$	13,618	$	13,570

NOTE 7. LEASES

Expense


	Three Months Ended March 31,
(in thousands)	2024		2023
Fixed lease costs	$	4,262	$	5,766
Short-term lease costs	543		781
Variable lease costs	1,609		1,975
	$	6,414	$	8,522

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Other long-term liabilities~~

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

~~NOTE 7. LEASES~~

~~Expense~~

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

Right of use assets and lease liabilities


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Right of use assets (1)	Right of use assets (1)	$	65,871	$	76,114
Operating lease liabilities (2)	Operating lease liabilities (2)	$	15,532	$	14,976
Long-term operating lease liabilities	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:

September 30, 2023

December 31, 2022

March 31, 2024

December 31, 2023

Weighted-average remaining lease term

7.0 years

7.5 years

Weighted-average remaining lease term

6.7 years

6.8 years

Weighted-average discount rate (1)

4.0

4.1

Weighted-average discount rate (1)

4.0

(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.

Maturities of lease liabilities:


(in thousands)	(in thousands)	September 30, 2023		(in thousands)	March 31, 2024
Remainder of 2023		$	4,775
2024		17,976
Remainder of 2024
2025	2025	14,870
2026	2026	10,853
2027	2027	9,808
2028	2028	9,245
2029
Thereafter	Thereafter	30,054
Total lease payments	Total lease payments	97,581
Less: imputed interest (1)	Less: imputed interest (1)	(13,175)
		$	84,406
	$

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

Cash flow information


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
Cash paid for operating leases, net of tenant improvement allowances	Cash paid for operating leases, net of tenant improvement allowances	$	14,378	$	11,628
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	1,782	$	6,618

~~PEGASYSTEMS INC.~~

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

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

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

In the ~~nine~~three months ended ~~September 30,~~March 31, 2023, the Company ~~recognized~~recorded a gain of ~~$7.9~~$2.8 million in other income, ~~(loss),~~ net from ~~repurchases~~the repurchase of Notes representing ~~$97.7~~$33 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.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

•During any calendar quarter 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 ~~September 30, 2023,~~March 31, 2024, the Notes were not eligible for conversion.

Repurchase rights

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Carrying value of the Notes:


(in thousands)	(in thousands)	September 30, 2023		December 31, 2022		(in thousands)	March 31, 2024	December 31, 2023
Principal	Principal	$	502,270	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(3,517)		(6,391)
Convertible senior notes, net	Convertible senior notes, net	$	498,753	$	593,609

Interest expense related to the Notes:
Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2023 2022 2023 2022
Contractual interest expense (0.75% coupon) $ 827 $ 1,125 $ 2,949 $ 3,375
Amortization of issuance costs 613 724 1,988 2,163
$ 1,440 $ 1,849 $ 4,937 $ 5,538

~~PEGASYSTEMS INC.~~

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


	Three Months Ended March 31,
(in thousands)	2024		2023
Contractual interest expense (0.75% coupon)	$	942	$	1,125
Amortization of issuance costs	617		728
	$	1,559	$	1,853

The average interest rate on the Notes in the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~ was 1.2%.

Future payments:


		September 30, 2023
	March 31, 2024										March 31, 2024
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal	Interest		Total

2024		$	—	$	3,767	$	3,767
Remainder of 2024
2025	2025	502,270		1,884		504,154
		$	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 initially 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 nine months ended September 30,~~ 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $0.3 million. As of ~~September 30, 2023,~~March 31, 2024, Capped Call Transactions covering approximately 3.7 million shares were outstanding.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value calculated following the governing documents may not represent a fair value measurement. The Capped Call Transactions are ~~classified as other long-term assets and~~ remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
January 1,	January 1,	$	2,582	$	59,964
Settlements	Settlements	(341)		—
Fair value adjustment	Fair value adjustment	(449)		(56,381)
September 30,		$	1,792	$	3,583
March 31,

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~~On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025.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:~~

•~~Through December 31, 2023, the parent company must maintain at least $200 million in cash, investments, and availability under the Credit Facility and the Company must maintain:~~

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

•Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain 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.~~1.

As of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Company had $27.3 million in outstanding letters of credit, ~~which reduced the Company’s~~reducing available borrowing capacity under the Credit Facility, ~~and~~but no outstanding cash ~~borrowings under the Credit Facility.~~borrowings.

~~PEGASYSTEMS INC.~~

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

NOTE 9. RESTRUCTURING

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


(in thousands)	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 space reduction	September 30, 2023	$	17,236
Office space reduction	December 31, 2023	$	1,497

Accrued employee severance and related benefits:

Change for all restructuring actions:


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


	Three Months Ended March 31,
(in thousands)	2024		2023
January 1,	$	8,095	$	18,573
Costs incurred	384		220
Cash disbursements	(3,347)		(14,458)
Currency translation adjustments	(131)		181
March 31,	$	5,001	$	4,516

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

•Level 3 - significant unobservable inputs 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:


		September 30, 2023								December 31, 2022
	March 31, 2024																					March 31, 2024				December 31, 2023
(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	$	22,686	$	—	$	—	$	22,686	$	2,526	$	—	$	—	$	2,526
Marketable securities	Marketable securities	$	—	$	167,286	$	—	$	167,286	$	—	$	152,167	$	—	$	152,167
Capped Call Transactions (1)	Capped Call Transactions (1)	$	—	$	1,792	$	—	$	1,792	$	—	$	2,582	$	—	$	2,582
Venture investments (1) (2)	Venture investments (1) (2)	$	—	$	—	$	19,348	$	19,348	$	—	$	—	$	13,069	$	13,069

(1) Included in other long-term assets.

(2) Investments in privately-held companies.

~~PEGASYSTEMS INC.~~

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

Changes in venture investments:


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
January 1,	January 1,	$	13,069	$	7,648
New investments	New investments	400		400
Sales of investments		(2,773)		(3,954)

Changes in foreign exchange rates
Changes in foreign exchange rates
Changes in foreign exchange rates	Changes in foreign exchange rates	27		(675)
Changes in fair value:	Changes in fair value:
included in other income (loss), net		10,886		5,989
included in other income, net
included in other income, net
included in other income, net
included in other comprehensive (loss)	included in other comprehensive (loss)	(2,261)		2,502
September 30,		$	19,348	$	11,910
March 31,

The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities.

Fair value of the Convertible Senior Notes

The fair value of the Notes outstanding (including the embedded conversion feature) was ~~$460.3~~$481.7 million as of ~~September 30, 2023~~March 31, 2024, and ~~$521.1~~$466.5 million as of December 31, ~~2022. In the nine months ended September 30, 2023 the Company repurchased Notes representing $97.7 million in aggregate principal amount.~~2023.

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
September 30, Nine Months Ended
September 30,
(Dollars in thousands) 2023 2022 2023 2022
U.S. $ 154,741 47 % $ 148,200 55 % $ 489,645 51 % $ 513,197 56 %
Other Americas 23,497 7 % 18,546 7 % 58,013 6 % 80,558 9 %
United Kingdom (“U.K.”) 41,622 12 % 24,074 9 % 112,751 12 % 83,837 9 %
Europe (excluding U.K.), Middle East, and Africa 67,880 20 % 46,212 17 % 173,551 18 % 140,586 15 %
Asia-Pacific 46,903 14 % 33,699 12 % 124,423 13 % 103,197 11 %
$ 334,643 100 % $ 270,731 100 % $ 958,383 100 % $ 921,375 100 %

~~Revenue streams~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2023 2022 2023 2022
Perpetual license $ 2,747 $ 9,223 $ 4,729 $ 18,929
Subscription license 74,342 31,112 200,066 210,245
Revenue recognized at a point in time 77,089 40,335 204,795 229,174
Maintenance 83,538 77,526 245,210 235,568
Pega Cloud 118,040 97,359 340,982 281,182
Consulting 55,976 55,511 167,396 175,451
Revenue recognized over time 257,554 230,396 753,588 692,201
Total revenue $ 334,643 $ 270,731 $ 958,383 $ 921,375


	Three Months Ended March 31,
(Dollars in thousands)	2024				2023
U.S.	$	180,983	54	%	$	184,519	56	%
Other Americas	21,786		7	%	15,011		5	%
United Kingdom (“U.K.”)	32,117		10	%	42,237		13	%
Europe (excluding U.K.), Middle East, and Africa	61,847		19	%	51,318		16	%
Asia-Pacific	33,414		10	%	32,387		10	%
	$	330,147	100	%	$	325,472	100	%

1615

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2023 2022 2023 2022
Pega Cloud $ 118,040 $ 97,359 $ 340,982 $ 281,182
Maintenance 83,538 77,526 245,210 235,568
Subscription services 201,578 174,885 586,192 516,750
Subscription license 74,342 31,112 200,066 210,245
Subscription 275,920 205,997 786,258 726,995
Consulting 55,976 55,511 167,396 175,451
Perpetual license 2,747 9,223 4,729 18,929
$ 334,643 $ 270,731 $ 958,383 $ 921,375
Revenue streams


	Three Months Ended March 31,
(in thousands)	2024		2023
Subscription license	$	63,338	$	84,527
Perpetual license	859		403
Revenue recognized at a point in time	64,197		84,930
Maintenance	81,001		79,630
Pega Cloud	130,902		107,879
Consulting	54,047		53,033
Revenue recognized over time	265,950		240,542
Total revenue	$	330,147	$	325,472


	Three Months Ended March 31,
(in thousands)	2024		2023
Pega Cloud	$	130,902	$	107,879
Maintenance	81,001		79,630
Subscription services	211,903		187,509
Subscription license	63,338		84,527
Subscription	275,241		272,036
Consulting	54,047		53,033
Perpetual license	859		403
	$	330,147	$	325,472

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of ~~September 30, 2023:~~March 31, 2024:


(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
1 year or less	1 year or less	$	202,610	$	391,324			$	48,427			$	4,567	$	39,335			$	686,263		54	%
1 year or less
1 year or less																				$	461,928			$	225,598					$	33,985					$	2,727					$	34,716					$	758,954	53		%
1-2 years	1-2 years	58,610		239,787		4,356				2,696		3,662		309,111		24	%	1-2 years		292,787			65,605		65,605			10,008				10,008			—			—			1,604				1,604		370,004					370,004		26	26	%
2-3 years	2-3 years	28,585		121,778		8,518				—		1,100		159,981		13	%	2-3 years		149,797			32,307		32,307			2,903				2,903			—			—			2,428				2,428		187,435					187,435		13	13	%
Greater than 3 years	Greater than 3 years	17,478		89,870		2,664				—		—		110,012		9	%	Greater than 3 years		86,601			21,650		21,650			98				98			—			—			—				—		108,349					108,349		8	8	%
		$	307,283	$	842,759	$	63,965			$	7,263	$	44,097	$	1,265,367	100	%
	$																					$	991,113			$	345,160						$	46,994				$	2,727					$	38,748					$	1,424,742		100	%

As of ~~September 30, 2022:~~March 31, 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
1 year or less	1 year or less	$	191,045	$	328,111			$	69,753			$	814	$	27,968			$	617,691		53	%
1 year or less
1 year or less																				$	389,632			$	235,315					$	35,346					$	5,262					$	41,203					$	706,758	54		%
1-2 years	1-2 years	55,141		213,304		4,113				4,505		6,699		283,762		25	%	1-2 years		239,228			66,272		66,272			3,215				3,215			2,252			2,252			6,653				6,653		317,620					317,620		24	24	%
2-3 years	2-3 years	24,496		115,416		1,420				2,252		1,648		145,232		13	%	2-3 years		131,085			29,295		29,295			6,777				6,777			—			—			2,292				2,292		169,449					169,449		13	13	%
Greater than 3 years	Greater than 3 years	16,198		82,807		1,734				—		508		101,247		9	%	Greater than 3 years		106,778			7,479		7,479			—				—			—			—			—				—		114,257					114,257		9	9	%
		$	286,880	$	739,638	$	77,020			$	7,571	$	36,823	$	1,147,932	100	%
	$																					$	866,723			$	338,361						$	45,338				$	7,514					$	50,148					$	1,308,084		100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12. STOCK-BASED COMPENSATION

Expense


		Three Months Ended September 30,				Nine Months Ended September 30,
		Three Months Ended March 31,
		Three Months Ended March 31,
		Three Months Ended March 31,
(in thousands)
(in thousands)
(in thousands)	(in thousands)	2023		2022		2023		2022
Cost of revenue	Cost of revenue	$	6,410	$	6,797	$	22,497	$	19,754
Cost of revenue
Cost of revenue
Selling and marketing
Selling and marketing
Selling and marketing	Selling and marketing	10,401		12,933		43,410		36,524
Research and development	Research and development	7,375		7,724		24,286		22,425
Research and development
Research and development
General and administrative	General and administrative	7,113		6,320		19,890		14,598
		$	31,299	$	33,774	$	110,083	$	93,301
General and administrative
General and administrative
		$
		$
		$
Income tax benefit	Income tax benefit	$	(316)	$	(600)	$	(1,569)	$	(1,505)
Income tax benefit
Income tax benefit

As of ~~September 30, 2023,~~March 31, 2024, the Company had ~~$137.5~~$184.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.8 years.

~~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


	Three Months Ended March 31, 2024
(in thousands)	Quantity	Total Fair Value
Restricted stock units (1)	1,239	$	76,466
Non-qualified stock options	1,718	$	44,377
Performance stock options (2)	566	$	13,921

(1) Includes units issued when employees elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.

(2) 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. For the performance stock options granted in three months ended March 31, 2024, 25% can vest on the first anniversary of the grant date, and 75% can vest on the second anniversary of the grant date, based on the achievement of specific performance conditions. The options ~~usually vest over two years and~~ expire ten years from the grant ~~date, subject to specific performance conditions.~~date.

NOTE 13. INCOME TAXES

Effective income tax rate


		Three Months Ended September 30,				Nine Months Ended September 30,
				Three Months Ended March 31,
				Three Months Ended March 31,
				Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2023		2022		2023			2022			(Dollars in thousands)	2024		2023
Provision for income taxes		$	3,545	$	11,748	$	15,395		$	190,239
(Benefit from) provision for income taxes
Effective income tax rate	Effective income tax rate					(26)		%	(100)		%	Effective income tax rate	20	%	(34)	%

The Company’s effective income tax rate in the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024, was primarily driven by the valuation allowance on the Company’s deferred tax assets in the U.S. and U.K., and ~~projected~~forecasted taxable income, offset by an income tax benefit for discrete items in the ~~U.S., partially offset by available tax credits and losses in the U.S.~~three months ended March 31, 2024.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. A deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income. Quarterly, the Company reassesses the need for a valuation allowance on its net deferred tax assets by 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, including the impact of enacted legislation, tax-planning strategies, and recent operating results.

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

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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of (loss) per share:


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

Net (loss)

Net (loss)

Net (loss)	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)	83,336		81,996		82,996		81,842

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
(Loss) per share, diluted
(Loss) per share, diluted
(Loss) per share, diluted	(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)	2,255		3,019		1,652		3,589

Outstanding anti-dilutive stock options and RSUs (4)

Outstanding anti-dilutive stock options and RSUs (4)

(1) 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 3.7 million shares as of ~~September 30, 2023.~~March 31, 2024.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are convertible) as of ~~September 30, 2023.~~March 31, 2024. 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.

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.

In the three months ended March 31, 2024 the Company recorded a $32.4 million litigation settlement net of insurance recoveries, which is comprised of an agreed in principle $35 million litigation settlement reduced by $2.6 million of expected insurance coverage recovery. The Company had no accrued ~~losses~~loss for litigation as of ~~September 30, 2023 and~~ December 31, ~~2022.~~2023.

Appian Corp. v. Pegasystems Inc. & Youyong Zou

~~As previously reported, the~~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~~A panel of the Court of Appeals of Virginia ~~is completed. The Court of Appeals of Virginia has set~~heard oral arguments on November 15, 2023, ~~as the date for oral arguments~~and will issue a written opinion in the ~~appeal.~~future. Although it is not possible to predict timing, ~~this~~the entirety of the appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company moved to dismiss the consolidated amended complaint on December 19, 2022. The hearing on the Company’s motion to dismiss took place on May 17, 2023. After hearing argument from both sides, the Court denied the Company’s motion from the bench and stated that a written opinion would follow. On June 30, 2023, the Company filed its Answer to the complaint. On July 24, 2023, the Court issued its written opinion denying the motion to dismiss as to the Company and Defendant Trefler but granting the motion without prejudice as to Mr. Stillwell.

On March 4, 2024, the parties agreed in principle to a proposed settlement of the litigation for an aggregate sum of $35 million. On April 23, 2024, the parties executed a stipulation of settlement. On April 23, 2024, the plaintiffs filed a motion seeking preliminary approval of the settlement. The ~~Company believes it has strong defenses~~parties are awaiting a ruling by the court on that motion and thereafter final approval of the settlement, which will not be heard until after a notice period to the ~~claims brought against~~proposed class of shareholders during which they have the ~~defendants and intends~~opportunity to ~~defend against these claims vigorously. The Company is unable~~object to ~~reasonably estimate possible damages or a range of possible damages in this matter given~~ the ~~stage~~proposed settlement. Although the outcome of the ~~lawsuit,~~litigation is not certain until final disposition, the ~~Company’s belief~~Company has recorded a $35 million accrued loss as of March 31, 2024, for the proposed settlement, the substantial majority of which the Company anticipates will be paid for directly by the Company and not reimbursed by insurance. However, it is possible that ~~it has strong defenses~~actual future losses related to the ~~claims asserted, its intent~~litigation could exceed the accrual amount if and to ~~defend against these claims, and there being no specified quantum of damages sought in~~ the ~~complaint.~~

~~PEGASYSTEMS INC.~~

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

extent that the court does not approve the proposed settlement.

In re Pegasystems Inc., Derivative Litigation

On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc., asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court. The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit and there being no specified quantum of damages sought in the complaint.

SEC Inquiry

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

2019

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. These statements ~~which speak~~represent our views 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,~~2023, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

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, whether as the result of new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of ~~October 25, 2023.~~April 24, 2024.

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, which is 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~~artificial intelligence (“AI”) 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~~our clients’ specific ~~industry needs of our clients.~~industry.

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

Reconciliation of ACV and ~~Constant Currency~~constant currency ACV


(in millions, except percentages)
(in millions, except percentages)
(in millions, except percentages)	(in millions, except percentages)	Q3 22		Q3 23		1-Year Change		March 31, 2023				March 31, 2024			1-Year Change
ACV	ACV	$	1,040	$	1,169	12	%	ACV	$	1,174	$							$	1,273	9	9	%
Impact of changes in foreign exchange rates	Impact of changes in foreign exchange rates	—		(22)
Constant Currency ACV		$	1,040	$	1,147	10	%
Constant currency ACV
Constant currency ACV
Constant currency ACV									$	1,174			$	1,277		9	%

Note: Constant currency ACV is calculated by applying the ~~Q3 2022~~March 31, 2023 foreign exchange rates to all periods shown.

2221

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


(Dollars in thousands)	Three Months Ended March 31,
	2024		2023

Cash provided by operating activities	$	180,146	$	68,107
Investment in property and equipment	(604)		(11,487)
Free cash flow (1)	$	179,542	$	56,620



Supplemental information (2)
Restructuring	$	3,347	$	14,458
Legal fees	2,739		1,515
Interest on convertible senior notes	1,884		2,250
Income taxes	8,163		2,825

	$	16,133	$	21,048

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

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

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

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

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

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

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

•▪~~Other~~Income taxes: ~~Includes fees related to capital advisory services, canceled in-person sales and marketing events, and incremental costs incurred integrating acquisitions.~~Direct income taxes paid net of refunds received.

2322

Remaining performance obligations (“Backlog”)

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


(in millions, except percentages)	(in millions, except percentages)	Q3 22		Q3 2023		1-Year Growth Rate		(in millions, except percentages)	March 31, 2023			March 31, 2024			1-Year Growth Rate
Backlog - GAAP	Backlog - GAAP	$	1,148	$	1,265	10	%	Backlog - GAAP	$	1,308	$	$	1,425	9		9		%
Impact of changes in foreign exchange rates	Impact of changes in foreign exchange rates	—		(33)
Constant currency backlog	Constant currency backlog	$	1,148	$	1,232	7	%
Constant currency backlog
Constant currency backlog									$	1,308		$	1,429		9		%

Note: Constant currency Backlog is calculated by applying the ~~Q3 2022~~Q1 2023 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:~~2023:

•“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.~~2023.

2423

RESULTS OF OPERATIONS

Revenue


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,								Change							Nine Months Ended September 30,														Change
		2023				2022									2023							2022
(Dollars in thousands)

2024
2024
Pega Cloud
Pega Cloud
Pega Cloud	Pega Cloud	$	118,040	35	%	$	97,359	36	%			$	20,681		21	%			$	340,982		36	%			$	281,182		31	%			$	59,800		21	%
Maintenance	Maintenance	83,538		25	%	77,526		29	%	6,012		8		%			245,210		25		%			235,568		25		%			9,642		4		%
Maintenance
Maintenance
Subscription services
Subscription services
Subscription services	Subscription services	201,578		60	%	174,885		65	%	26,693		15		%			586,192		61		%			516,750		56		%			69,442		13		%
Subscription license	Subscription license	74,342		22	%	31,112		11	%	43,230		139		%			200,066		21		%			210,245		23		%			(10,179)		(5)		%
Subscription license
Subscription license
Subscription
Subscription
Subscription	Subscription	275,920		82	%	205,997		76	%	69,923		34		%			786,258		82		%			726,995		79		%			59,263		8		%
Consulting	Consulting	55,976		17	%	55,511		21	%	465		1		%			167,396		18		%			175,451		19		%			(8,055)		(5)		%
Consulting
Consulting
Perpetual license	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		%
Perpetual license
Perpetual license
		$
		$
		$

•The ~~increases~~increase in Pega Cloud revenue for the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud.

•The ~~increases~~increase in maintenance revenue in the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to continued demand for our subscription license offerings, which are generally bundled with maintenance.

•The ~~increase~~decrease in subscription license revenue in the three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to ~~increased license deliveries~~a large multi-year contract recognized in revenue in the three months ended ~~September 30,~~March 31, 2023. The decrease in subscription license revenue in the nine months ended September 30, 2023 was primarily due to several large multi-year contracts recognized in revenue in the nine months ended September 30, 2022.

•The ~~decrease~~increase in consulting revenue in the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to ~~lower~~an increase in consultant realization rates in the Americas.

•~~The decreases in perpetual license revenue in the three and 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 September 30,								Change							Nine Months Ended September 30,														Change
		2023				2022									2023							2022
(Dollars in thousands)

2024
2024
Pega Cloud
Pega Cloud
Pega Cloud	Pega Cloud	$	88,553	75	%	$	68,673	71	%			$	19,880		29	%			$	250,943		74	%			$	194,350		69	%			$	56,593		29	%
Maintenance	Maintenance	77,119		92	%	71,671		92	%	5,448		8		%			225,696		92		%			219,296		93		%			6,400		3		%
Maintenance
Maintenance
Subscription services
Subscription services
Subscription services	Subscription services	165,672		82	%	140,344		80	%	25,328		18		%			476,639		81		%			413,646		80		%			62,993		15		%
Subscription license	Subscription license	73,713		99	%	30,484		98	%	43,229		142		%			198,095		99		%			208,322		99		%			(10,227)		(5)		%
Subscription license
Subscription license
Subscription
Subscription
Subscription	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)		*
Consulting
Consulting
Perpetual license	Perpetual license	2,723		99	%	9,120		99	%	(6,397)		(70)		%			4,678		99		%			18,756		99		%			(14,078)		(75)		%
		$	240,880	72	%	$	177,681	66	%	$	63,199	36		%			$	670,546	70		%			$	645,013	70		%			$	25,533	4		%
Perpetual license
Perpetual license
		$
		$
		$

* not meaningful

•The ~~increases~~increase in Pega Cloud gross profit percent in the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to increased cost efficiency, particularly for hosting services and employee compensation and benefits, as Pega Cloud continues to grow and scale.

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

•The increase in consulting gross profit percent in the three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to ~~higher consultant utilization~~an increase 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.

2524

Operating expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,						Change							Nine Months Ended September 30,										Change
		2023			2022								2023					2022
(Dollars in thousands)

2024
2024
Selling and marketing
Selling and marketing
Selling and marketing	Selling and marketing	$	131,598		$	153,517				$	(21,919)		(14)	%				$	425,253				$	472,951			$	(47,698)		(10)	%
% of Revenue	% of Revenue	39		%	57		%								44		%			51		%
% of Revenue
% of Revenue
Research and development
Research and development
Research and development	Research and development	$	74,955		$	75,342		$	(387)	(1)		%			$	224,262				$	221,173				$	3,089	1		%
% of Revenue	% of Revenue	22		%	28		%								23		%			24		%
% of Revenue
% of Revenue
General and administrative
General and administrative
General and administrative	General and administrative	$	27,321		$	26,043		$	1,278	5		%			$	73,893				$	94,530				$	(20,637)	(22)		%
% of Revenue	% of Revenue	8		%	10		%								8		%			10		%
% of Revenue
% of Revenue
Litigation settlement, net of recoveries
Litigation settlement, net of recoveries
Litigation settlement, net of recoveries
% of Revenue
% of Revenue
% of Revenue
Restructuring
Restructuring
Restructuring	Restructuring	$	17,822		$	—		$	17,822	100		%			$	21,450				$	—				$	21,450	100		%
% of Revenue	% of Revenue	5		%	—		%								2		%			—		%
% of Revenue
% of Revenue

•The ~~decreases~~decrease in selling and marketing during the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to ~~decreases~~a decrease in compensation and benefits of ~~$18.6~~$17.5 million ~~and $45.0 million, respectively. The decreases were due to~~from reduced headcount as we ~~optimize~~optimized our go-to-market strategy. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

•The ~~increase~~decrease in research and development for the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to ~~additional investments~~a decrease in ~~our products~~compensation and ~~services.~~benefits of $1.5 million due to reduced headcount and a decrease in cloud hosting expenses of $1.2 million.

•The ~~changes~~increase in ~~general and administrative in the three and nine months ended September 30, 2023 were primarily due to an increase~~litigation settlement, net of ~~$2.3 million~~recoveries in the three months ended ~~September 30, 2023 and a decrease of $21.4 million in~~March 31, 2024 was primarily due to the ~~nine months ended September 30, 2023 in legal fees and related expenses~~estimated cost to settle ongoing litigation arising from proceedings outside the ordinary course of 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~~2023 for additional information.

•The ~~increases~~decrease in restructuring expenses during the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to ~~our~~ efforts to optimize our go-to-market ~~organization.~~organization in the three months ended March 31, 2023. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.

Other income and expenses
(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2023 2022 2023 2022
Foreign currency transaction gain (loss) $ 1,994 $ 3,826 $ (1,832) (48) % $ (3,971) $ 8,415 $ (12,386) *
Interest income 2,532 520 2,012 387 % 5,831 1,036 4,795 463 %
Interest expense (1,533) (1,992) 459 23 % (5,229) (5,882) 653 11 %
(Loss) on capped call transactions (2,294) (6,876) 4,582 67 % (449) (56,381) 55,932 99 %
Other income (loss), net 6,383 (29) 6,412 * 18,668 6,497 12,171 187 %

$ 7,082 $ (4,551) $ 11,633 * $ 14,850 $ (46,315) $ 61,165 *


(Dollars in thousands)	Three Months Ended March 31,				Change
	2024		2023
Foreign currency transaction (loss)	$	(3,262)	$	(2,675)	$	(587)	(22)	%
Interest income	5,281		1,485		3,796		256	%
Interest expense	(1,752)		(1,918)		166		9	%
Gain on capped call transactions	3,299		3,206		93		3	%
Other income, net	1,684		6,583		(4,899)		(74)	%
	$	5,250	$	6,681	$	(1,431)	(21)	%

* not meaningful

•The ~~changes~~change in foreign currency transaction ~~gain~~ (loss) in the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to ~~the impact of~~ fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

•The ~~increases~~increase in interest income in the three ~~and nine~~ months ended ~~September 30, 2023 were~~March 31, 2024 was primarily due to ~~increases in~~higher investment balances and market interest rates.

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

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

•~~The increase~~decrease in other income, ~~(loss),~~ net in the three months ended ~~September 30, 2023~~March 31, 2024 was due to a ~~$6.4~~gain of $3.8 million ~~increase in the value of equity securities held in~~on our venture investments ~~portfolio. The increase in other income (loss), net in the nine months ended September 30, 2023, was due to~~and a ~~$7.9~~gain of $2.8 million ~~gain~~ from repurchases of our convertible senior notes ~~and a $10.9 million increase~~ in the ~~value of equity securities held in our venture investments portfolio.~~three months ended March 31, 2023. For additional information, see “Note 8. Debt” and "Note 10. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report.

~~Provision~~(Benefit from) provision for income taxes


		Nine Months Ended September 30,
		Three Months Ended March 31,
		Three Months Ended March 31,
		Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)		2023			2022			(Dollars in thousands)	2024		2023
Provision for income taxes			$	15,395		$	190,239
(Benefit from) provision for income taxes
Effective income tax rate	Effective income tax rate		(26)		%	(100)		%	Effective income tax rate	20	%	(34)	%

The effective income tax rate in the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 was primarily driven by the valuation allowance on our deferred tax assets in the U.S. and U.K., and ~~projected~~forecasted taxable income, offset by an income tax benefit for discrete items in the ~~U.S., partially offset by available~~three months ended March 31, 2024.

The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax ~~credits~~regulations, known as Pillar Two, that began to come into effect on January 1, 2024. We are monitoring this development and ~~losses~~evaluating its potential impact on our tax rate and eligibility to qualify for the safe harbor provisions. For 2024, we currently anticipate meeting the transitional safe harbors in ~~the U.S.~~most jurisdictions, with any remaining top-up tax being immaterial.

LIQUIDITY AND CAPITAL RESOURCES


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
Cash provided by (used in):	Cash provided by (used in):
Operating activities
Operating activities
Operating activities	Operating activities	$	137,920	$	(13,446)
Investing activities	Investing activities	(24,176)		10,104
Financing activities	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	(1,621)		(5,513)
Net increase (decrease) in cash, cash equivalents, and restricted cash		$	27,092	$	(52,339)
Net increase in cash, cash equivalents, and restricted cash

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


(in thousands)	March 31, 2024		December 31, 2023
Held in U.S. entities	$	491,808	$	263,453
Held in foreign entities	127,141		159,885
Total cash, cash equivalents, and marketable securities	618,949		423,338
Restricted cash included in other current assets	775		—
Restricted cash included in other long-term assets	2,990		2,925
Total cash, cash equivalents, marketable securities, and restricted cash	$	622,714	$	426,263

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, convertible senior notes due on March 1, 2025, 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 have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations.

Operating activities

The change in cash provided by ~~(used in)~~ operating activities in the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to growth in client collections and the impact of our cost-efficiency ~~initiatives, and lower legal fees and related costs arising from proceedings outside the ordinary course of business. We expect to continue to incur additional costs for these proceedings.~~initiatives. For additional information, see “Note 9. Restructuring” and "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report.

Investing activities

The change in cash (used in) ~~provided by~~ investing activities in the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 was primarily due to our investments in financial instruments and reduced investment in property and equipment as we optimize our office space.

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. ~~In the nine months ended September 30, 2023, we paid $89 million to repurchase $97.7 million in aggregate principal amount of convertible senior notes.~~ As of ~~September 30, 2023,~~March 31, 2024, we had ~~$502~~$502.3 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025. As of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, we had $27.3 million in outstanding letters of credit, ~~which reduced the Company’s~~reducing available borrowing capacity under the Credit Facility, ~~and~~but no outstanding cash ~~borrowings under the Credit Facility.~~borrowings. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.

2726

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	~~Nine~~Three Months Ended ~~September 30, 2023~~March 31, 2024
December 31, ~~2022~~2023	$	~~58,075~~60,000
Authorizations (1)	~~1,925~~—

~~September 30, 2023~~March 31, 2024	$	60,000

(1) On April ~~25, 2023,~~23, 2024, our Board of Directors extended the expiration date of our current share repurchase program from June 30, ~~2023~~2024 to June 30, ~~2024, and the amount of stock we are authorized to repurchase was increased to $60 million.~~2025.

Common stock repurchases


		Nine Months Ended September 30,
		2023			2022
	Three Months Ended March 31,												Three Months Ended March 31,
	2024										2024			2023
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares			Amount

Stock repurchase program		—	—		279	24,508
Tax withholdings for net settlement of equity awards
Tax withholdings for net settlement of equity awards
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	39	1,654		253	17,575
		39	$	1,654	532	$	42,083

In the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022,~~ instead of receiving cash from the equity holders, we withheld shares with a value of ~~$1.0~~$2.8 million and ~~$11.5~~$0.6 million, respectively, for the exercise price of options. These amounts are not included in the table above.

Dividends

We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
Dividend payments to stockholders	Dividend payments to stockholders	$	7,458	$	7,368

Contractual obligations

As of ~~September 30, 2023,~~March 31, 2024, our contractual obligations were:


		Payments due by period
	Payments due by period
(in thousands)
(in thousands)
(in thousands)	(in thousands)	Remainder of 2023		2024		2025		2026		2027		2028 and after		Other		Total		Remainder of 2024	2025	2026	2027	2028	2029 and after	Other	Total
Convertible senior notes (1)	Convertible senior notes (1)	$	—	$	3,767	$	504,154	$	—	$	—��	$	—	$	—	$	507,921
Purchase obligations (2)	Purchase obligations (2)	43,491		134,122		126,065		120,745		134,060		177		—		558,660
Operating lease obligations	Operating lease obligations	4,775		17,976		14,870		10,853		9,808		39,299		—		97,581
Venture investment commitments (3)	Venture investment commitments (3)	500		500		—		—		—		—		—		1,000
Liability for uncertain tax positions (4)	Liability for uncertain tax positions (4)	—		—		—		—		—		—		2,017		2,017
		$	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 amount owed for purchase obligations offor 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, partially offsetting our foreign currency exposure.

2827

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


		Nine Months Ended September 30,
		2023		2022
	Three Months Ended March 31,										Three Months Ended March 31,
	2024								2024			2023
(Decrease) in revenue	(Decrease) in revenue	(4)	%	(4)	%	(Decrease) in revenue	(4)	%		(4)	%
(Decrease) increase in net income	(Decrease) increase in net income	(5)	%	2	%	(Decrease) increase in net income	(4)	%		1	%

Remeasurement risk

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

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

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


		Nine Months Ended September 30,
	Three Months Ended March 31,								Three Months Ended March 31,
(in thousands)	(in thousands)	2023		2022		(in thousands)	2024	2023
Foreign currency (loss)	Foreign currency (loss)	$	(11,351)	$	(6,335)

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of ~~September 30, 2023.~~March 31, 2024. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2023.~~March 31, 2024.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September 30, 2023~~March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2928

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,~~2023, 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 ~~September 30, 2023:~~March 31, 2024:
(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 —


(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, 2024 - January 31, 2024	14	$	49.31	—	$	60,000
February 1, 2024 - February 29, 2024	45	63.50		—	$	60,000
March 1, 2024 - March 31, 2024	19	63.69		—	$	60,000
	78	$	61.06	—

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

(2) Includes shares withheld to cover the option exercise price and tax withholding obligations for stock compensation awards subject to net settlement provisions.

ITEM 5. OTHER INFORMATION

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

During the three months ended ~~September 30, 2023,~~March 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Credit Facility

On April 23, 2024, we entered into an amendment to our $100 million senior secured revolving credit agreement with PNC Bank, National Association which extends the expiration date of the Credit Facility to February 4, 2025. 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 23, 2024, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2024 to June 30, 2025. 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, 2024 and December 31, 2025.

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

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

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

3.2

10.1

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

31.1

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

31.1

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

31.2

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

31.2

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

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.

SIGNATURE

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


		Pegasystems Inc.

Dated:	~~October 25, 2023~~April 24, 2024	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)


	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


	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