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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

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

There were ~~37,961,290~~76,308,501 shares of the Registrant’s common stock, $.01 par value per share, outstanding on ~~November 1, 2013.~~July 25, 2014.


	As of		As of		As of		As of
	September 30, 2013		December 31, 2012		June 30, 2014		December 31, 2013
*ASSETS*

Current assets:

Cash and cash equivalents	$	108,827	$	77,525	$	127,111	$	80,231

Marketable securities		79,618		45,460		89,102		76,461



Total cash, cash equivalents, and marketable securities		188,445		122,985		216,213		156,692
Trade accounts receivable, net of allowance of $772 and $963		90,583		134,066

Trade accounts receivable, net of allowance of $1,865 and $1,997						114,642		165,628

Deferred income taxes		10,152		10,202		12,052		12,014

Income taxes receivable		4,199		6,261		11,690		4,708

Other current assets		6,929		5,496		8,982		9,148



Total current assets		300,308		279,010		363,579		348,190

Property and equipment, net		28,977		30,827		27,223		28,957

Long-term deferred income taxes		49,693		49,292		61,264		60,291

Long-term other assets		1,657		1,680		2,998		2,526

Intangible assets, net		49,910		58,232		50,060		56,574

Goodwill		20,451		20,451		40,463		40,329



Total assets	$	450,996	$	439,492	$	545,587	$	536,867

*LIABILITIES AND STOCKHOLDERS’ EQUITY*

Current liabilities:

Accounts payable	$	2,347	$	3,330	$	6,827	$	3,678

Accrued expenses		20,741		15,534		31,609		31,814

Accrued compensation and related expenses		31,925		40,715		42,397		44,399

Deferred revenue		91,758		95,546		120,501		110,882



Total current liabilities		146,771		155,125		201,334		190,773

Income taxes payable		13,748		13,551		21,469		21,269

Long-term deferred revenue		17,954		18,719		24,535		34,196

Other long-term liabilities		17,466		15,618		17,693		18,841



Total liabilities		195,939		203,013		265,031		265,079

Stockholders’ equity:

Stockholders’ equity (1):

Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—		—		—		—
Common stock, 100,000 shares authorized; 37,989 shares and 37,945 shares issued and outstanding		380		379

Common stock, 200,000 shares authorized; 76,348 shares and 76,324 shares issued and outstanding						763		764

Additional paid-in capital		138,271		138,576		139,198		139,565

Retained earnings		113,410		94,349		135,658		127,826

Accumulated other comprehensive income		2,996		3,175		4,937		3,633



Total stockholders’ equity		255,057		236,479		280,556		271,788



Total liabilities and stockholders’ equity	$	450,996	$	439,492	$	545,587	$	536,867

(1) The number of common shares outstanding for all prior periods has been retroactively restated to reflect the Company’s two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012		2014		2013		2014		2013
Revenue:

Software license	$	44,802	$	28,575	$	128,217	$	95,517	$	54,012	$	40,206	$	106,626	$	83,415

Maintenance		37,979		32,317		112,238		97,657		45,393		37,937		90,274		74,259
Professional services		39,230		40,765		115,117		124,706

Services										43,580		39,172		86,549		75,887


Total revenue		122,011		101,657		355,572		317,880		142,985		117,315		283,449		233,561

Cost of revenue:

Software license		1,592		1,585		4,751		4,763		1,177		1,576		2,756		3,159

Maintenance		3,599		3,745		11,106		11,072		5,044		3,772		9,708		7,507
Professional services		32,907		32,335		97,772		103,351

Services										40,470		32,530		80,140		64,865


Total cost of revenue		38,098		37,665		113,629		119,186		46,691		37,878		92,604		75,531


Gross profit		83,913		63,992		241,943		198,694		96,294		79,437		190,845		158,030


Operating expenses:

Selling and marketing		42,663		36,893		127,279		116,476		56,342		45,346		102,149		84,616

Research and development		19,786		19,506		59,123		57,411		27,323		19,761		51,932		39,337

General and administrative		7,130		7,192		21,203		21,171		10,250		7,277		19,552		14,073

Acquisition-related costs		545		—		545		—		157		—		363		—


Total operating expenses		70,124		63,591		208,150		195,058		94,072		72,384		173,996		138,026


Income from operations		13,789		401		33,793		3,636		2,222		7,053		16,849		20,004
Foreign currency transaction gain (loss)		661		438		(1,666)		337

Foreign currency transaction (loss) gain										(4)		(437)		318		(2,327)

Interest income, net		123		113		376		318		163		135		287		253
Other expense, net		(1,163)		(920)		(418)		(1,496)

Other income (expense), net										6		(94)		(526)		745


Income before provision for income taxes		13,410		32		32,085		2,795		2,387		6,657		16,928		18,675

Provision for income taxes		4,700		363		9,603		1,336		883		1,954		5,659		4,903

Net income (loss)	$	8,710	$	(331)	$	22,482	$	1,459

Earnings (loss) per share:
Net income									$	1,504	$	4,703	$	11,269	$	13,772

Earnings per share (1):
Basic									$	0.02	$	0.06	$	0.15	$	0.18


Diluted									$	0.02	$	0.06	$	0.14	$	0.18


Weighted-average number of common shares outstanding (1):

Basic	$	0.23	$	(0.01)	$	0.59	$	0.04		76,286		75,898		76,385		75,896

Diluted	$	0.22	$	(0.01)	$	0.58	$	0.04		78,280		77,498		78,563		77,538

Weighted-average number of common shares outstanding
Basic		37,955		37,881		37,950		37,834
Diluted		39,079		37,881		38,872		38,897
Cash dividends declared per share	$	0.03	$	0.03	$	0.09	$	0.09	$	0.030	$	0.015	$	0.045	$	0.030

(1) The number of common shares and per share amounts have been retroactively restated for all prior periods presented to reflect the Company’s two-for-one common stock split effected in the form of a common stock dividend distributed on April 1, 2014.


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012			2013			2012		2014		2013		2014		2013
Net income (loss)	$	8,710	$	(331	)	$	22,482		$	1,459
Other comprehensive income (loss):
Unrealized gain (loss) on securities, net of tax		113		33			(32	)		80
Net income											$	1,504	$	4,703	$	11,269	$	13,772

Other comprehensive income:

Unrealized (loss) gain on securities, net of tax												(3)		(182)		28		(145)

Foreign currency translation adjustments		2,340		1,315			(147	)		1,248		891		(417)		1,276		(2,487)


Total other comprehensive income (loss)		2,453		1,348			(179	)		1,328		888		(599)		1,304		(2,632)


Comprehensive income	$	11,163	$	1,017		$	22,303		$	2,787	$	2,392	$	4,104	$	12,573	$	11,140


	Nine Months Ended September 30,				Six Months Ended June 30,
	2013		2012		2014		2013
Operating activities:

Net income	$	22,482	$	1,459	$	11,269	$	13,772

Adjustments to reconcile net income to cash provided by operating activities:

Excess tax benefits from exercise or vesting of equity awards		(2,670)		(3,161)		(2,526)		(1,718)

Deferred income taxes		(537)		(511)		(899)		(273)

Depreciation and amortization		14,173		13,986		11,412		9,419

Stock-based compensation expense		9,713		8,622		8,453		6,713
Foreign currency transaction loss (gain)		1,666		(337)

Foreign currency transaction (gain) loss						(318)		2,327

Other non-cash items		2,736		4,021		495		2,250

Change in operating assets and liabilities:

Trade accounts receivable		42,611		18,938		51,155		37,336

Income taxes receivable and other current assets		2,599		(1,468)		(3,836)		(1,031)

Accounts payable and accrued expenses		(5,762)		(20,491)		94		(10,051)

Deferred revenue		(3,836)		2,747		(214)		5,166

Other long-term assets and liabilities		260		5,279		(1,150)		370


Cash provided by operating activities		83,435		29,084		73,935		64,280


Investing activities:

Purchase of marketable securities		(56,645)		(13,336)		(29,547)		(32,690)

Matured and called marketable securities		21,129		18,465		15,996		8,540

Payments for acquisitions						(1,593)		—

Investment in property and equipment		(4,158)		(21,875)		(2,864)		(1,972)


Cash used in investing activities		(39,674)		(16,746)		(18,008)		(26,122)


Financing activities:

Issuance of common stock for share-based compensation plans		970		753		338		801

Excess tax benefits from exercise or vesting of equity awards		2,670		3,161		2,526		1,718

Dividend payments to shareholders		(2,281)		(3,404)		(2,290)		(1,142)

Common stock repurchases for tax withholdings for net settlement of equity awards		(4,123)		(3,650)		(3,402)		(2,780)

Common stock repurchases under share repurchase programs		(9,178)		(3,910)		(8,459)		(7,275)


Cash used in financing activities		(11,942)		(7,050)		(11,287)		(8,678)


Effect of exchange rate on cash and cash equivalents		(517)		596		2,240		(3,160)


Net increase in cash and cash equivalents		31,302		5,884		46,880		26,320

Cash and cash equivalents, beginning of period		77,525		60,353		80,231		77,525


Cash and cash equivalents, end of period	$	108,827	$	66,237	$	127,111	$	103,845

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 of the information and footnotes 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, ~~2012.~~2013.

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. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2013.~~2014.

~~Acquisition-related costs~~On March 6, 2014, the Company’s Board of Directors approved a two-for-one stock split of the Company’s common stock, effected in the form of a stock dividend. On April 1, 2014, each stockholder of record at the close of business on March 20, 2014 (the “Record Date”) received as a dividend, one additional share of common stock, par value $.01, for each share of common stock held on the Record Date. All shares of common stock and per share amounts in the Company’s unaudited condensed consolidated financial statements and in the accompanying notes for all periods presented have been restated to reflect the stock split, except for the number of authorized shares of common stock.

~~Acquisition-related costs are expensed as incurred and include costs~~At the Company’s 2014 Annual Meeting of Stockholders, held on May 20, 2014, the stockholders approved an amendment to ~~affect~~the Company’s Restated Articles of Organization increasing the number of authorized shares of common stock from 100,000,000 to 200,000,000.

On May 27, 2014, the Company announced an ~~impending~~increase in its quarterly cash dividend from $0.015 to $0.03 per share. As a result, it is the Company’s current intention to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or ~~completed acquisition and direct and incremental costs associated with an acquisition.~~ modify this dividend program at any time without notice.

During the ~~third~~second quarter of ~~2013, acquisition-related costs~~2014, the Company recorded $3.5 million in adjustments to the purchase price allocation of ~~$0.5 million were primarily legal and advisory fees and due diligence costs associated with the Company’s~~its acquisition of Antenna Software, Inc. ~~(“Antenna”~~(together with its subsidiaries, “Antenna”). on October 9, 2013. As required by applicable business combination accounting rules, these adjustments were applied retrospectively. Therefore, short-term and long-term deferred income tax assets, goodwill, accrued expenses, and income taxes payable have been revised as of December 31, 2013 to reflect these adjustments. These revisions did not have any impact on the Company’s previously reported results of operations or cash flows. See Note ~~12 “Subsequent Event”.~~7 “Acquisitions” and Note 8 “Goodwill and Other Intangible Assets” for further discussion of these adjustments.

Revenue from Contracts with Customers: In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. This ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. This ASU also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. This ASU will be effective for the Company January 1, 2017. Management is currently assessing the impact the adoption of this ASU will have on the Company’s consolidated financial statements.


(in thousands)	September 30, 2013								June 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Municipal bonds	$	47,325		60		(28)	$	47,357	$	34,398		117		(5)	$	34,510

Corporate bonds		29,776		56		(9)		29,823		51,625		51		(29)		51,647

Certificates of deposit		2,442		1		(5)		2,438		2,943		3		(1)		2,945

	$	79,543		117		(42)	$	79,618	$	88,966		171		(35)	$	89,102


(in thousands)	December 31, 2012								December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Municipal bonds	$	30,488		48		(10)	$	30,526	$	41,545		75		(20)	$	41,600

Corporate bonds		14,853		83		(2)		14,934		31,868		52		(4)		31,916

Certificates of deposit										2,948		1		(4)		2,945

	$	45,341		131		(12)	$	45,460	$	76,361		128		(28)	$	76,461

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income, net of related income taxes.

As of ~~September~~June 30, ~~2013,~~2014, remaining maturities of marketable debt securities ranged from ~~October 2013~~July 2014 to ~~February~~July 2016, with a weighted-average remaining maturity of approximately 1413 months.

The Company ~~uses~~has historically used foreign currency forward contracts (“forward contracts”) to manage its exposure to changes in foreign currency denominated accounts receivable, intercompany payables and cash primarily held by the U.S. operating company. The Company has been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, the Company has experienced increased levels of exposure to the Australian dollar and Indian ~~rupee, for which it began to use forward contracts in the third quarter of 2013.~~rupee.

The forward contracts utilized by the Company are not designated as hedging instruments and as a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other ~~expense,~~income (expense), net, in its consolidated statement of operations. These forward contracts have terms of 90 ~~day terms~~days or less.

As of ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012,~~2013, the Company did not have any forward contracts outstanding.

During the ~~third~~second quarter ~~and~~of 2014, the Company did not enter into any forward contracts. The Company is in the process of reassessing its hedging strategy.

During the first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, the Company entered into forward contracts with notional values as follows:


	Notional Amount									Notional Amount
										Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
Foreign currency (in thousands)	2013		2012		2013		2012			2014		2013		2014		2013

Euro	€	28,500	€	21,700	€	61,000		€	48,900	€	—	€	16,500	€	21,900	€	32,500

British pound	£	26,000	£	16,000	£	59,500		£	39,000	£	—	£	14,500	£	26,500	£	33,500

Australian dollar	A$	15,500	A$	—	A$	15,500		A$	—	A$	—	A$	—	A$	12,900	A$	—

Indian rupee	Rs	460,000	Rs	—	Rs	460,000		Rs	—	Rs	—	Rs	—	Rs	204,000	Rs	—

During the ~~third quarter and~~ first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, the total change in the fair value of the Company’s forward contracts recorded in other ~~expense,~~income (expense), net, was as follows:


	Change in Fair Value in USD								Change in Fair Value in USD
									Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2013		2012		2013		2012		2014		2013		2014		2013
Loss included in other expense, net	$	(1,173)	$	(926)	$	(430)	$	(1,522)

(Loss) gain included in other income (expense), net									$	—	$	(95)	$	(532)	$	743

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company records its marketable securities at fair value.

The Company’s investments are all classified within Level 1 and Level 2 of the fair value hierarchy. The Company’s investments classified within Level 1 of the fair value hierarchy are valued using quoted market prices. The Company’s investments classified within Level 2 of the fair value hierarchy are valued based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

The fair value hierarchy of the Company’s cash equivalents and marketable securities at fair value is as follows:


			Fair Value Measurements at Reporting Date Using						Fair Value Measurements at Reporting Date Using
(in thousands)	September 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)

Money market funds	$	3,070	$	3,070	$	—	$	5,232	$	5,232	$	—


Marketable securities:

Municipal bonds	$	47,357	$	13,289	$	34,068	$	34,510	$	15,720	$	18,790

Corporate bonds		29,823		29,823		—		51,647		51,647		—

Certificates of deposit		2,438		—		2,438		2,945		—		2,945


Total marketable securities	$	79,618	$	43,112	$	36,506	$	89,102	$	67,367	$	21,735


			Fair Value Measurements at Reporting Date Using						Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)

Money market funds	$	2,873	$	2,873	$	—	$	2,232	$	2,232	$	—


Marketable securities:

Municipal bonds	$	30,526	$	11,966	$	18,560	$	41,600	$	10,569	$	31,031

Corporate bonds		14,934		14,934		—		31,916		31,916		—

Certificates of deposit							$	2,945	$	—	$	2,945


Total marketable securities	$	45,460	$	26,900	$	18,560	$	76,461	$	42,485	$	33,976

Assets recorded at fair value on a nonrecurring basis, such as property and equipment, and intangible assets, are recognized at fair value when they are impaired. During the first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.


(in thousands)	September 30, 2013		December 31, 2012		June 30, 2014		December 31, 2013

Trade accounts receivable	$	58,037	$	112,106	$	84,167	$	129,007

Unbilled trade accounts receivable		33,318		22,923		32,340		38,618


Total accounts receivable		91,355		135,029		116,507		167,625


Allowance for sales credit memos		(772)		(963)		(1,865)		(1,997)

	$	90,583	$	134,066	$	114,642	$	165,628

Unbilled trade accounts receivable relate to services revenue earned under time and material arrangements, and maintenance and license arrangements that had not been invoiced as of ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012,~~2013, respectively.

On April 28, 2014, the Company acquired MeshLabs Software Private Limited (“MeshLabs”), a provider of advanced text analytics and social engagement solutions based in Bangalore, India, for $0.8 million in cash consideration.

On October 9, 2013, the Company acquired Antenna, a leading provider of mobile application development platforms. The Company acquired all of the outstanding capital stock of Antenna in a cash merger for $27.1 million, including the final working capital adjustment to the purchase price, which was paid by the Company in the first quarter of 2014. The total purchase price of $27.1 million included $4.2 million, which was deposited in escrow to secure the selling stockholders’ indemnification obligations to the Company. Under the merger agreement, this amount may be due to the former shareholders of Antenna in or before April 2015 less any amounts presented and approved for payment against the escrow. During the second quarter and first six months of 2014, the Company incurred and recorded direct and incremental expenses associated with the transaction of $0.1 million and $0.3 million, respectively, which were primarily professional fees.

The operations of Antenna are included in the Company’s operating results from the date of acquisition. For the three and six months ended June 30, 2014, revenue of approximately $4.1 million and $8.7 million, respectively, and a net loss of approximately $2.8 million and $5.2 million, respectively, was attributable to Antenna and included in the Company’s unaudited condensed consolidated statements of operations. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for the Company to identify revenue from new arrangements solely attributable to Antenna.

The Company is in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize the allocation of the purchase price to the fair value of assets acquired and liabilities assumed and establish the related tax basis. In the first quarter of 2014, the Company paid $0.8 million of the remaining merger consideration related to the final working capital adjustment, resulting in a $0.6 million purchase price adjustment to goodwill. In the second quarter of 2014, the Company recorded a $3.5 million purchase price adjustment related to taxes. These purchase price adjustments are also reflected retrospectively as of December 31, 2013 in the accompanying unaudited condensed consolidated balance sheet. The Company expects to finalize remaining purchase accounting adjustments during the third quarter of 2014.

As of June 30, 2014, as a result of the preliminary purchase price allocation, the Company recognized $19.9 million of goodwill, which is primarily due to the expected synergies of the combined entities and the workforce in place. The goodwill created by the transaction is nondeductible for tax purposes. The Company recorded $36.9 million of deferred tax assets, a $24.2 million valuation allowance related to the Company’s preliminary determination it will not be able to utilize all of the acquired Antenna federal and foreign net operating losses due to various limitations and restrictions, and a $6.8 million deferred tax liability associated with the acquired intangibles, for a net deferred tax asset of $5.9 million. A summary of the preliminary purchase price allocation for the acquisition of Antenna is as follows:

The valuation of the assumed deferred revenue was based on the Company’s contractual commitment to provide post-contract customer support to Antenna clients and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. The majority of the deferred revenue will be recognized in the 12 months following the acquisition.

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired customer related, technology and trade name intangible assets. The non-compete assets were valued using the with-and-without method, a form of the income approach which considers the cash flow differentials under multiple scenarios with or without key executives. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company’s estimates of contract renewal, technology attrition and revenue growth projections.

The estimated fair values for specifically identifiable intangible assets acquired, by major asset class, are as follows:

The following pro forma financial information presents the combined results of operations of the Company and Antenna as if the acquisition had occurred on January 1, 2012 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Antenna acquisition, factually supportable, and expected to have a continuing impact on the Company. These pro forma adjustments include a net increase in amortization expense to eliminate historical amortization of Antenna intangible assets and to record amortization expense for the $10.4 million of acquired identifiable intangibles, a decrease in interest income as a result of the cash paid for the acquisition, and a decrease in interest expense as a result of the repayment of all Antenna outstanding debt in connection with the acquisition. The pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on January 1, 2012.

~~There were no~~The following table presents the changes in the carrying amount of goodwill:

(1) The purchase price adjustments identified during the first ~~nine~~six months of 2014 have been retroactively applied as of December 31, 2013.

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


(in thousands)	Range of Useful Lives		Cost		Accumulated Amortization		Net Book Value		Range of Useful Lives		Cost		Accumulated Amortization		Net Book Value
As of September 30, 2013
As of June 30, 2014

Customer related intangibles		9 years	$	44,355	$	(16,838)	$	27,517		4-9 years	$	48,634	$	(21,311)	$	27,323

Technology		4-9 years		43,446		(21,053)		22,393		3-9 years		47,616		(26,189)		21,427

Other intangibles		1-5 years		2,238		(2,238)		—		1-5 years		4,810		(3,500)		1,310

Total			$	90,039	$	(40,129)	$	49,910			$	101,060	$	(51,000)	$	50,060

											Cost		Accumulated Amortization		Net Book Value
			Cost		Accumulated Amortization		Net Book Value
As of December 31, 2012
As of December 31, 2013

Customer related intangibles		9 years	$	44,355	$	(13,142)	$	31,213		4-9 years	$	48,634	$	(18,317)	$	30,317

Technology		4-9 years		43,446		(16,431)		27,015		3-9 years		47,102		(22,873)		24,229

Other intangibles		1-5 years		2,238		(2,234)		4		1-5 years		4,658		(2,630)		2,028

Total			$	90,039	$	(31,807)	$	58,232			$	100,394	$	(43,820)	$	56,574

~~For the third quarter and first nine months of 2013 and 2012, amortization~~Amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2014		2013		2014		2013
Cost of revenue	$	1,444	$	1,541	$	3,284	$	3,082

Selling and marketing		1,499		1,232		2,995		2,464

General and administrative		481		—		901		4

Total amortization expense	$	3,424	$	2,773	$	7,180	$	5,550

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:


(in thousands)	September 30, 2013		December 31, 2012		June 30, 2014		December 31, 2013
Partner commissions	$	4,349	$	1,723	$	1,981	$	4,106

Other taxes		3,120		2,711		8,529		10,349

Employee reimbursable expenses		2,255		879		2,214		1,539

Dividends payable		1,140		—		2,291		1,145

Professional services contractor fees		1,660		602		2,528		1,997

Self-insurance health and dental claims		977		1,707		1,274		1,265

Professional fees		930		811		1,845		2,378

Short-term deferred rent		783		1,111		1,342		740
Foreign income taxes payable		649		1,167
Acquisition-related costs		482		—

Income taxes payable						606		1,770

Acquisition-related costs and merger consideration						175		997

Restructuring		113		441		369		371

Sales and marketing events						4,180		308

Other		4,283		4,382		4,275		4,849

	$	20,741	$	15,534	$	31,609	$	31,814


(in thousands)	September 30, 2013		December 31, 2012		June 30, 2014		December 31, 2013
Software license	$	17,206	$	24,303	$	25,610	$	28,826

Maintenance		63,342		62,144		83,917		72,715
Professional services and other		11,210		9,099

Cloud						5,317		2,552

Services and other						5,657		6,789


Current deferred revenue		91,758		95,546		120,501		110,882


Software license		16,690		15,407		23,906		32,727
Maintenance and professional services		1,264		3,312

Maintenance and services						524		1,115

Cloud						105		354

Long-term deferred revenue		17,954		18,719		24,535		34,196

	$	109,712	$	114,265	$	145,036	$	145,078

During the fourth quarter of 2013, in connection with the Company’s evaluation of its combined facilities with Antenna, the Company approved a plan to eliminate space within one facility. The Company ceased use of this space during the fourth quarter of 2013 and recognized $1.7 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires in 2021.

For the ~~third~~second quarter and first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012		2014		2013		2014		2013
Cost of services	$	947	$	849	$	3,134	$	2,710	$	1,387	$	1,014	$	2,398	$	2,187

Operating expenses		2,053		1,935		6,579		5,912		3,771		2,267		6,055		4,526


Total stock-based compensation before tax	$	3,000	$	2,784	$	9,713	$	8,622	$	5,158	$	3,281	$	8,453	$	6,713

Income tax benefit		(893)		(915)		(2,941)		(2,781)		(1,591)		(944)		(2,582)		(2,047)

On April 1, 2014, the Company effected a two-for-one stock split of the Company’s common stock in the form of a stock dividend. All shares of common stock and per share amounts in the Company’s unaudited condensed consolidated financial statements and in the accompanying notes for all prior periods presented have been restated to reflect the stock split, except for the number of authorized shares of common stock. See Note 1 “Accounting Policies” for further discussion.

During the first ~~nine~~six months of ~~2013,~~2014, the Company issued approximately ~~344,000~~422,000 shares to its employees and ~~14,000~~22,000 shares to its non-employee directors under the Company’s share-based compensation plans.

During the first ~~nine~~six months of ~~2013,~~2014, the Company granted approximately ~~114,000~~1,049,000 restricted stock units (“RSUs”) and 1,070,000 non-qualified stock options to its employees with a total fair ~~value~~values of approximately ~~$3.3 million.~~$20.7 million and $8.2 million, respectively. Approximately ~~59,000~~100,000 RSUs were issued in connection with the election by employees to receive 50% of their ~~2013~~2014 target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.Stock-based compensation of approximately ~~$1.7~~$2 million associated with this RSU grant will be recognized over a one-year period beginning on the grant date.

The Company recognizes stock based compensation on the accelerated recognition method, while treating each vesting tranche as if it were an individual grant. As of ~~September~~June 30, ~~2013,~~2014, the Company had approximately ~~$12.2~~$25.6 million of unrecognized ~~stock-based~~stock- based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of ~~2.1~~2.2 years.

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding options, RSUs, and warrants, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. Certain shares related to some of the Company’s outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were antidilutive in the periods presented, but could be dilutive in the future.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2013		2012		2013		2012		2014		2013		2014		2013
*Basic(1)*
Net income (loss)	$	8,710	$	(331)	$	22,482	$	1,459
Net income									$	1,504	$	4,703	$	11,269	$	13,772

Weighted-average common shares outstanding		37,955		37,881		37,950		37,834		76,286		75,898		76,385		75,896

Earnings (loss) per share, basic	$	0.23	$	(0.01)	$	0.59	$	0.04
Earnings per share, basic									$	0.02	$	0.06	$	0.15	$	0.18


*Diluted(1)*
Net income (loss)	$	8,710	$	(331)	$	22,482	$	1,459
Net income									$	1,504	$	4,703	$	11,269	$	13,772

Weighted-average common shares outstanding, basic		37,955		37,881		37,950		37,834		76,286		75,898		76,385		75,896
Weighted-average effect of dilutive securities:
Stock options and warrants		913		—		729		817

Stock options										1,607		1,234		1,766		1,272

RSUs		211		—		193		246		387		366		412		370

Effect of assumed exercise of stock options, warrants and RSUs		1,124		—		922		1,063		1,994		1,600		2,178		1,642

Weighted-average common shares outstanding, diluted		39,079		37,881		38,872		38,897		78,280		77,498		78,563		77,538

Earnings (loss) per share, diluted	$	0.22	$	(0.01)	$	0.58	$	0.04
Earnings per share, diluted									$	0.02	$	0.06	$	0.14	$	0.18

Outstanding options and RSUs excluded as impact would be antidilutive		33		1,865		146		55		166		216		112		404

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company develops and licenses its ~~rules-based~~ software solutions and provides ~~professional and cloud~~consulting services, maintenance, and training related to its software. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides business process solutions in the enterprise applications market. To assess performance, the Company’s ~~chief operating decision maker primarily~~CODM reviews financial information ~~on a consolidated basis. Therefore,~~for two operating segments, which the Company has determined ~~it operates in~~can be aggregated and represent one reportable segment — Business Process Solutions.

The Company’s international revenue is from sales to clients based outside of the U.S. The Company derived its revenue from the following geographic areas:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2013			2012			2013			2012			2014			2013			2014				2013
U.S.	$	59,034	49%	$	56,475	56%	$	189,489	53%	$	173,406	55%	$	70,411	49 %	$	62,313	53 %	$	152,428		54 %	$	130,455	56 %
Other Americas														5,464	4 %		6,449	6 %		9,304		3 %		10,211	4 %
United Kingdom		22,115	18%		18,862	18%		58,782	17%		55,329	17%		24,643	17 %		21,228	18 %		53,557		19 %		36,667	16 %
Europe, other		24,748	20%		12,836	13%		66,012	18%		45,051	14%
Other		16,114	13%		13,484	13%		41,289	12%		44,094	14%
Other EMEA														34,008	24 %		21,530	18 %		50,308		18 %		41,628	18 %
Asia Pacific														8,459	6 %		5,795	5 %		17,852		6 %		14,600	6 %

	$	122,011	100%	$	101,657	100%	$	355,572	100%	$	317,880	100%	$	142,985	100 %	$	117,315	100 %	$	283,449	��	100 %	$	233,561	100 %

~~Clients~~There were no clients accounting for 10% or more of the Company’s total ~~revenue~~revenue. There was one client accounting for 10% or more of the Company’s total outstanding trade receivables, net, ~~were~~ as ~~follows:~~listed below:


	Three Months Ended September 30,				Nine Months Ended September 30,

									As of June 30,		As of December 31,
(Dollars in thousands)	2013		2012		2013		2012		2014		2013

Total revenue	$	122,011	$	101,657	$	355,572	$	317,880

Trade receivables, net of allowance									$	114,642	$	165,628
Client A		10%		—%		—%		—%		n/a		16 %

On ~~October 9, 2013,~~July 1, 2014, the ~~Company acquired Antenna, a leading provider of mobile application development platforms. The~~ Company acquired all of the outstanding capital stock of ~~Antenna~~Profeatable Corporation (“Profeatable”), the provider of Firefly co-browsing technology, based in ~~a merger~~Philadelphia, Pennsylvania, for ~~$26.3~~$2.5 million in ~~cash. The Company is~~cash consideration, inclusive of $0.2 million in the process of preparing an allocation of the purchase price to the fair value of assets acquired and liabilities assumed, but currently expects that a substantial portion of the Antenna purchase price will ultimately be allocated to intangible assets, and that such assets are likely to include acquired core technology, customer related assets and goodwill. During the third quarter of 2013, the Company incurred direct and incremental expenses associated with the transaction of $0.5 million and expects to incur an additional estimated $2.2 million of such expenses that are primarily professional fees to affect the acquisition.cash acquired.

The Company ~~believes~~will incorporate the ~~acquisition~~Firefly cloud-based collaboration technology into its Build for Change^® platform and customer service and sales applications. This should enable organizations to enhance customer experience and increase employee productivity through collaboration. Firefly will ~~offer its collective clients faster time-to-market and increased flexibility in end-to-end mobile application development, powerful device management and cloud-based mobile Backend-as-a-Service.~~also continue to be offered as a stand-alone solution.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends by the Company, and the timing of recognizing revenue under existing term license agreements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets, the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our ~~professional~~consulting services, and management of the Company’s growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2012 and in Item 1A of Part II of this Quarterly Report on Form 10-Q.~~2013. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

We develop, market, license, and support Better Business Software^® solutions that help clients improve their business results by giving them the power to engage customers, simplify their operations, and adapt to change. Our unified software ~~which allows organizations~~platform enables our clients to build, deploy, and change enterprise applications easily and ~~quickly. Our unified software platform enables our clients to build enterprise applications in a fraction of the time it would take with competitive disjointed architectures,~~quickly, by directly capturing business objectives, automating programming, and automating work. We also provide consulting services, ~~cloud service offerings,~~ maintenance, and training related to our software.

We focus our sales efforts primarily on target accounts, which are large companies or divisions within companies and typically leaders in their industry. Our strategy is to sell a series of licenses that are focused on a specific purpose or area of ~~operations, rather than to sell a large enterprise license.~~operations.

Our license revenue is primarily derived from sales of our ~~PegaRULES~~Pega Build for Change^® platform (PegaRULES Process Commander^® (“PRPC”) ~~software~~) and related ~~solution frameworks.~~business solutions. PRPC is a comprehensive platform for building and managing Business Process Management (“BPM”) applications that unifies business rules and business processes. Our ~~solution frameworks,~~solutions, built on the capabilities of PRPC, are purpose or industry-specific collections of best practice functionality, which allow organizations to quickly implement new ~~client-facing~~customer-facing practices and processes, bring new offerings to market, and provide customized or specialized processing. Our products are simpler, easier to use and often result in shorter implementation periods than competitive enterprise software products. PRPC and related ~~solution frameworks~~business solutions can be used by a broad range of clients across markets including financial services, insurance, healthcare, communications and media, life sciences, ~~energy~~manufacturing and ~~government.~~high technology, and government markets.

Our business solution ~~frameworks~~ products include ~~customer relationship management~~Customer Relationship Management (“CRM”) software, which enables unified predictive decisioning and analytics and optimizes the overall customer experience. Our decision management products and capabilities are designed to manage processes so that ~~all~~ actions optimize the ~~outcome~~process outcomes based on business objectives. We continue to invest in the development of new products and intend to remain a leader in BPM, CRM, and decision management.

We also offer Pega Cloud^®, a service offering that allows our clients to immediately build, test, and deploy their ~~Pega~~ applications in a secure cloud environment, while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in ~~consulting~~ services revenue.

Our acquisition of Profeatable Corporation (“Profeatable”) on July 1, 2014, allows us to integrate Profeatable’s Firefly cloud-based collaboration technology into our Build for Change^® platform and customer service and sales applications. This should enable organizations to enhance customer experience and increase employee productivity through collaboration. Firefly will also continue to be offered as a stand-alone solution. The Firefly technology enables users to securely share content by simultaneously browsing web pages. It empowers agents to proactively engage customers when and where they need it most, improving customer satisfaction, and driving adoption of self-service tools to increase revenue. It also increases productivity, enabling employees to more easily collaborate on work, regardless of location.

Our acquisition of MeshLabs Software Private Limited (“MeshLabs”) on April 28, 2014, unified MeshLabs’ social listening, text analytics, and natural language processing with the existing capabilities of our customer service, marketing, and case management solutions. The combined solution enables our clients to collect social content, such as tweets, blogs, posts on Facebook or in other social communities, and enrich it by detecting language, topic, taxonomy and sentiment to deliver actionable social insight and intelligence. With this combination, our clients can monitor, triage, and respond to social content across all channels, and turn it into actionable social intelligence to improve customer engagement, increase customer retention and more effectively market and sell on social networks.

Our acquisition of Antenna Software, Inc. and its subsidiaries (“Antenna”) on October 9, 2013 expanded our Application Mobility Platform, which provides clients with a mobile application development platform to build, manage, and deploy mobile applications as part of a seamless omnichannel experience. Enterprises can manage the complex elements of the mobile application lifecycle including security, integration, testing, and management of mobile applications and devices. Our mobile application development solutions help businesses to significantly reduce their development time, deployment costs, and the complexity associated with run-the-business mobile applications. The operations of Antenna are included in our operating results from the date of acquisition. For the three and six months ended June 30, 2014, revenue of approximately $4.1 million and $8.7 million, respectively, and a net loss of approximately $2.8 million and $5.2 million, respectively, was attributable to Antenna and included in our unaudited condensed consolidated statements of operations. Due to the rapid integration of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable to the recognition of the fair value of acquired deferred maintenance and hosting revenue, it may not be feasible for us to identify revenue from new arrangements solely attributable to Antenna.

We offer training for our staff, clients, and partners at our regional training facilities, at third party facilities, and at client sites. ~~We also offer~~Our online training ~~online~~ through ~~Pega Academy, which~~PegaACADEMY provides an alternative way to learn our software in a virtual environment quickly and easily. We believe that this online training will continue to expand the number of trained experts at a faster pace.

On October 9, 2013, we acquired Antenna Software, Inc. (“Antenna”), a leading provider of mobile application development platforms for $26.3 million in cash. We believe the acquisition will offer our collective clients faster time-to-market and increased flexibility in end-to-end mobile application development, powerful device management and cloud-based mobile Backend-as-a-Service.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon ~~the~~our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future given available information.

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2012.~~2013. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Policies, Significant Judgments, and Estimates” and Note 2 “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, ~~2012.~~2013.


	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase (Decrease)			Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
Total revenue	$	122,011	$	101,657	$	20,354	20%	$	355,572	$	317,880	$	37,692	12%	$	142,985	$	117,315	$	25,670	22 %	$	283,449	$	233,561	$	49,888		21 %

Gross profit	$	83,913	$	63,992	$	19,921	31%	$	241,943	$	198,694	$	43,249	22%	$	96,294	$	79,437	$	16,857	21 %	$	190,845	$	158,030	$	32,815		21 %

Total operating expenses	$	70,124	$	63,591	$	6,533	10%	$	208,150	$	195,058	$	13,092	7%	$	94,072	$	72,384	$	21,688	30 %	$	173,996	$	138,026	$	35,970		26 %

Income from operations	$	13,789	$	401	$	13,388	n/m	$	33,793	$	3,636	$	30,157	829%	$	2,222	$	7,053	$	(4,831)	(68)%	$	16,849	$	20,004	$	(3,155	)	(16)%

Income before provision for income taxes	$	13,410	$	32	$	13,378	n/m	$	32,085	$	2,795	$	29,290	n/m	$	2,387	$	6,657	$	(4,270)	(64)%	$	16,928	$	18,675	$	(1,747	)	(9)%


	Three Months Ended June 30,						Increase (Decrease)			Six Months Ended June 30,						Increase

(Dollars in thousands)	2014			2013						2014			2013

*License revenue*
Perpetual licenses	$	33,272	62 %	$	24,647	61 %	$	8,625		$	56,657	53 %	$	51,007	61 %	$	5,650

Term licenses		19,040	35 %		13,230	33 %		5,810			45,866	43 %		28,910	35 %		16,956

Subscription		1,700	3 %		2,329	6 %		(629)			4,103	4 %		3,498	4 %		605


Total license revenue	$	54,012	100 %	$	40,206	100 %	$	13,806	34 %	$	106,626	100 %	$	83,415	100 %	$	23,211	28 %

The aggregate value of new license arrangements executed during the ~~third~~second quarter and first six months of ~~2013 nearly doubled as~~2014 significantly increased compared to the ~~third quarter of 2012~~same periods in 2013 due to a higher ~~average~~number and higher value of license arrangements executed in these periods compared to the ~~third quarter of~~same periods in 2013. The ~~aggregate value of new license arrangements executed during the first nine months of 2013 was higher than~~increase in the ~~same period in 2012 due to both a larger number and higher average~~aggregate value of license arrangements executed was primarily due to one perpetual license arrangement larger than $10 million executed in the ~~first nine months~~second quarter of ~~2013.~~2014. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the first ~~nine~~six months of 2014 and 2013, approximately 84% and ~~2012, approximately 72% and 68%~~64%, respectively, of the value of new license arrangements were executed with existing clients.

The mix between perpetual and term license arrangements executed in a particular period varies based on client needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods as payments become due or earlier if prepaid. ~~However, some~~Some of our perpetual license arrangements include extended payment terms or additional rights of use, which also result in the recognition of revenue over longer periods.

The ~~increase~~increases in perpetual license revenue during the ~~third~~second quarter and first six months of ~~2013~~2014 compared to the same ~~period~~periods in ~~2012 was~~2013 were primarily due to ~~larger~~the higher value ~~perpetual arrangements executed during the third quarter~~ of ~~2013 than in the third quarter of 2012. The increase in perpetual license revenue during the first nine months of 2013 compared to the same period in 2012 was primarily due to higher value~~ perpetual arrangements executed during the first ~~nine~~six months of ~~2013 and the fourth quarter of 2012~~2014 than during the ~~first nine months~~same period in 2013. The aggregate value of ~~2012 and~~payments due under noncancellable perpetual licenses was $46.7 million as of June 30, 2014 compared to $34 million as of June 30, 2013. We expect to recognize $39.4 million of the ~~fourth quarter~~$46.7 million as revenue during the remainder of ~~2011.~~2014.

The increases in term license revenue were primarily due to revenue recognized on term license arrangements executed in ~~2012~~the second half of 2013 and ~~2011.~~a $1.5 million prepayment of a customer arrangement in the first quarter of 2014. The aggregate value of payments due under noncancellable term licenses and our Pega Cloud arrangements grew to ~~$203.6~~$252 million as of ~~September~~June 30, ~~2013~~2014 compared to ~~$155.9~~212.8 million as of ~~September~~June 30, ~~2012.~~2013. We expect to recognize ~~$16~~$36.5 million of the ~~$203.6~~$252 million as revenue during the remainder of ~~2013~~2014 in addition to new term license and Pega Cloud agreements we may complete or prepayments we may receive from existing term license agreements. See the table of future cash receipts ~~on page 22.~~in Liquidity and Capital Resources - Cash Provided by Operating Activities.

Subscription revenue primarily consists of the ratable recognition of license, maintenance and bundled services revenue on ~~perpetual~~ license arrangements that include a right to successor products or unspecified future products. Subscription revenue does not include revenue from our Pega Cloud ~~offerings,~~arrangements, which is included in ~~consulting~~ services. The timing of scheduled payments under client arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The decrease in subscription revenue during the second quarter of 2014 and the increase in subscription revenue for the first ~~nine~~six months of ~~2013~~2014 compared to the same ~~period~~periods in ~~2012 was~~2013 were primarily due to ~~revenue recognized in~~ the ~~second quarter~~timing of ~~2012~~payments for a ~~large payment that became due.~~customer arrangement.


	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
*Maintenance revenue*

Maintenance	$	37,979	$	32,317	$	5,662	18%	$	112,238	$	97,657	$	14,581	15%	$	45,393	$	37,937	$	7,456	20 %	$	90,274	$	74,259	$	16,015	22 %

The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our ~~software.~~software and continued strong renewal rates. Maintenance revenue primarily attributable to recognition of the fair value of the acquired Antenna deferred maintenance revenue was $0.2 million and $0.5 million in the second quarter and first six months of 2014, respectively.


	Three Months Ended June 30,								Increase (Decrease)					Six Months Ended June 30,								Increase (Decrease)
(Dollars in thousands)	2014				2013									2014				2013
Services revenue
Consulting services	$	38,835	89	%	$	36,189	92	%	$	2,646		7	%	$	76,911	89	%		69,372	91	%	$	7,539		11	%

Cloud		3,727	9	%		1,945	5	%		1,782		92	%		7,585	9	%		3,803	5	%		3,782		99	%

Training		1,018	2	%		1,038	3	%		(20	)	(2	) %		2,053	2	%		2,712	4	%		(659	)	(24	) %


Total services	$	43,580	100	%	$	39,172	100	%	$	4,408		11	%	$	86,549	100	%	$	75,887	100	%	$	10,662		14	%

Consulting services ~~includes~~primarily relate to new license implementations. The increase in consulting services revenue during the second quarter of 2014 was primarily due to the higher number of projects at higher realization rates compared to the second quarter of 2013, and $1.1 million of revenue from Antenna. The increase in consulting services revenue during the first six months of 2014 was a result of unusually low services revenue in the first quarter of 2013 mainly because many of our large fourth quarter 2012 license arrangements were for the purchase of additional usage, which did not require implementation services. In addition, the increase in consulting services revenue during the first six months of 2014 was due to $2.2 million in revenue from Antenna. Our consulting services may be lower in future periods as our clients are becoming enabled and our partners may be leading more projects.

Cloud represents revenue from our Pega Cloud offerings. The ~~decreases~~increases in ~~consulting services~~cloud revenue during the second quarter and first six months of 2014 were primarily ~~the result of more clients becoming enabled~~due to $1 million and ~~our partners leading more implementation projects. If this trend continues, our consulting services~~$2.2 million, respectively, in revenue ~~may continue~~attributable to ~~decrease in future periods.~~ Antenna.

The decrease in our training revenue during the first ~~nine~~six months of ~~2013 compared to the same period in 2012~~2014 was primarily due to the increased adoption of our ~~Pega Academy~~PegaACADEMY self-service online training by our partners, which has a significantly lower average price per ~~student.~~student as compared to our traditional instructor-led training.


	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)			Three Months Ended June 30,				Increase (Decrease)			Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
*Gross Profit*

Software license	$	43,210	$	26,990	$	16,220	60%	$	123,466	$	90,754	$	32,712	36%	$	52,835	$	38,630	$	14,205	37 %	$	103,870	$	80,256	$	23,614	29 %

Maintenance		34,380		28,572		5,808	20%		101,132		86,585		14,547	17%		40,349		34,165		6,184	18 %		80,566		66,752		13,814	21 %
Professional services		6,323		8,430		(2,107)	(25)%		17,345		21,355		(4,010)	(19)%

Services																3,110		6,642		(3,532)	(53) %		6,409		11,022		(4,613)	(42) %


Total gross profit	$	83,913	$	63,992	$	19,921	31%	$	241,943	$	198,694	$	43,249	22%	$	96,294	$	79,437	$	16,857	21 %	$	190,845	$	158,030	$	32,815	21 %

Total gross profit %		69%		63%					68%		63%					67 %		68 %					67 %		68 %

Software license gross profit %		96%		94%					96%		95%					98 %		96 %					97 %		96 %

Maintenance gross profit %		91%		88%					90%		89%					89 %		90 %					89 %		90 %
Professional services gross profit %		16%		21%					15%		17%

Services gross profit %																7 %		17 %					7 %		15 %

The increases in total gross profit were primarily due to increases in software license and maintenance revenue.

The decreases in ~~professional~~ services gross profit percent were primarily due to ~~lower consulting revenues,~~$1.8 million of gross margin loss associated with Antenna projects and approximately $1.2 million of costs incurred on several consulting projects in the second quarter and first six months of 2014, for which the corresponding revenue will be recognized in future periods, as revenue recognition criteria had not been ~~met,~~met. In addition, these services gross profit decreases were due to subcontractor and ~~an increase in employee incentive expenses.~~employee-related expenses as a result of the increased on-boarding and enablement costs due to demand for consulting projects.


	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase (Decrease)			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
Amortization of intangibles:
Cost of revenue															$	1,444	$	1,541	$	(97)	(6) %	$	3,284	$	3,082	$	202	7 %

*Selling and marketing*																1,499		1,232		267	22 %		2,995		2,464		531	22 %
Selling and marketing	$	42,663	$	36,893	$	5,770	16%	$	127,279	$	116,476	$	10,803	9%
As a percent of total revenue		35%		36%					36%		37%
Selling and marketing headcount at September 30,									538		524		14	3%

General and administrative																481		—		481	n/m		901		4		897	n/m

															$	3,424	$	2,773	$	651	23 %	$	7,180	$	5,550	$	1,630	29 %

The increases in amortization expense during the second quarter and first six months of 2014 were due to the amortization associated with $10.4 million of intangibles acquired from Antenna in October 2013.

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

The increase in selling and marketing expenses during the ~~third~~second quarter of ~~2013~~2014 compared to the same period in ~~2012~~2013 was primarily due to a ~~$2.2~~$4.6 million increase in compensation and benefit expenses associated with higher headcount, a ~~$1.4~~$3 million increase in commission expense associated with the higher value of new license arrangements executed ~~and~~during the second quarter of 2014 compared to the second quarter of 2013, a ~~$2.7~~$1.6 million increase in ~~partner commission expense.~~marketing and sales program expenses primarily related to PegaWORLD, our annual user conference, a $0.8 million increase in employee travel and entertainment expenses, a $0.3 million increase in rent and rent-related expenses, and a $0.3 million increase in amortization expense due to the Antenna customer-related intangible assets.

The increase in selling and marketing expenses during the first ~~nine~~six months of ~~2013~~2014 compared to the same period in ~~2012~~2013 was primarily due to a ~~$5.5~~$7.7 million increase in compensation and benefit expenses associated with higher headcount, a ~~$2.2~~$3.7 million increase in commission expense associated with the higher value of new license arrangements executed ~~and~~during the first six months of 2014 compared to the first six months of 2013, a ~~$2.8~~$2 million increase in ~~partner commission expense.~~marketing and sales program expenses primarily related to PegaWORLD, a $1.5 million increase in employee travel and entertainment expenses, a $0.5 million increase in rent and rent-related expenses, and a $0.5 million increase in amortization expense due to the Antenna customer-related intangible assets.

Effective January 1, 2014, we realigned the organizational structure of our product management and design team. As a result of this realignment, we changed the classification of this team’s expenses from selling and marketing to research and development as the roles of the members of this team are now aligned with our research and development efforts. The decrease caused by this realignment partially offset the increase in headcount as well as the overall increase in selling and marketing expenses during the second quarter and first six months of 2014 compared to the same periods in 2013.


	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
*Research and development*

Research and development	$	19,786	$	19,506	$	280	1%	$	59,123	$	57,411	$	1,712	3%	$	27,323	$	19,761	$	7,562	38 %	$	51,932	$	39,337	$	12,595	32 %

As a percent of total revenue		16%		19%					17%		18%					19 %		17 %					18 %		17 %
Research and development headcount at September 30,									817		713		104	15%

Research and development headcount at June 30,																							1,020		792		228	29 %

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products as well as enhancements and engineering changes to existing products.

The realignment of the organizational structure of our product management and design team as discussed above contributed to the increase in headcount as well as the overall increase in research and ~~development.~~development expense during the second quarter and first six months of 2014 compared to the same periods in 2013.

The increase in headcount also reflects the impact of Antenna and the growth in our India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee.

The increase in research and development expenses during the ~~third~~second quarter of ~~2013~~2014 compared to the same period in ~~2012~~2013 was primarily due to a ~~$1.3~~$5.6 million increase in compensation and benefit expenses associated with higher headcount ~~partially offset by~~inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a ~~$0.8~~$0.6 million ~~decrease~~increase in expendable equipment, a $0.5 million increase in contracted professional services, and a $0.4 million increase in rent and ~~equipment-related~~rent-related expenses.

The increase in research and development expenses during the first ~~nine~~six months of ~~2013~~2014 compared to the same period in ~~2012~~2013 was primarily due to a ~~$5.5~~$9.2 million increase in compensation and benefit expenses associated with higher headcount ~~partially offset by a $2.3 million decrease in contractor~~inclusive of the compensation and benefit expenses associated with our ~~hiring of employees to replace contractors,~~product management and design group now included in research and development, a $1.2 million increase in expendable equipment, a $0.6 million increase in contracted professional services, and a ~~$1.9~~$0.6 million ~~decrease~~increase in rent and ~~equipment-related~~rent-related expenses.


	Three Months Ended September 30,				(Decrease)			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
*General and administrative*

General and administrative	$	7,130	$	7,192	$	(62)	(1)%	$	21,203	$	21,171	$	32	—%	$	10,250	$	7,277	$	2,973	41 %	$	19,552	$	14,073	$	5,479	39 %

As a percent of total revenue		6%		7%					6%		7%					7 %		6 %					7 %		6 %
General and administrative headcount at September 30,									248		243		5	2%

General and administrative headcount at June 30,																							286		248		38	15 %

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology and corporate services departments whose costs are allocated to our other functional departments.

The increase in general and administrative expenses during the second quarter of 2014 compared to the same period in 2013 was primarily due to a $1.4 million increase in compensation and benefits associated with higher headcount, a $0.8 million increase in professional fees, and a $0.4 million increase in amortization associated with the Antenna trademark intangible asset.

The increase in general and administrative expenses during the first six months of 2014 compared to the same period in 2013 was primarily due to a $2.7 million increase in compensation and benefits associated with higher headcount, $1.7 million increase in professional fees, and a $0.8 million increase in amortization associated with the Antenna trademark intangible asset.

The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations:


	Three Months Ended September 30,				Increase			Nine Months Ended September 30,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2014		2013					2014		2013
Cost of services	$	947	$	849	$	98	12%	$	3,134	$	2,710	$	424	16%	$	1,387	$	1,014	$	373	37%	$	2,398	$	2,187	$	211	10 %

Operating expenses		2,053		1,935		118	6%		6,579		5,912		667	11%		3,771		2,267		1,504	66%		6,055		4,526		1,529	34 %

Total stock-based compensation before tax		3,000		2,784		216	8%		9,713		8,622		1,091	13%		5,158		3,281		1,877	57%		8,453		6,713		1,740	26 %

Income tax benefit		(893)		(915)					(2,941)		(2,781)					(1,591)		(944)					(2,582)		(2,047)

The increases in stock-based compensation expense during the second quarter and first six months of 2014 were primarily due to the timing of the 2013 and 2012 annual periodic equity grants, which occurred in March 2014 and December 2012, respectively, as well as the higher value of the 2013 annual periodic equity grant ~~partially offset by a lower value of~~and executive new hire ~~equity awards.~~grants made since June 30, 2013.

During the second quarter of 2014, we did not enter into any forward contracts as we are in the process of reassessing our hedging strategy.

We ~~use~~have historically used foreign currency forward contracts (“forward contracts”) to manage our exposure to changes in foreign currency denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company. We have not designated these forward contracts as hedging instruments and as a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other ~~expense,~~income (expense), net. The fluctuations in the value of these forward contracts recorded in other ~~expense,~~income (expense), net, partially offset in net income, the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction ~~loss.~~(loss) gain.

We have been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, we have experienced increased levels of exposure to the Australian dollar and Indian rupee. See Note 34 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for discussion onof our use of forward contracts.

The total change in the fair value of our forward contracts recorded in other ~~expense,~~income (expense), net, during the ~~third quarter and~~ first ~~nine~~six months of 2014 and 2013 was a loss of ~~$1.2~~$(0.5) million and ~~$0.4 million, respectively. The total change in the fair value~~a gain of ~~our foreign currency forward contracts recorded in other expense, net, during the third quarter and first nine months of 2012 was a loss of $0.9 million and $1.5~~$0.7 million, respectively.

We account for income taxes at each interim period using our estimated annual effective tax rate and adjust for discrete tax items recorded in the same period. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes. During the ~~third~~second quarter of ~~2013~~2014 and ~~2012,~~2013, we recorded a tax provision of ~~$4.7~~$0.9 million and ~~$0.4 million, respectively. During the first nine months of 2013 and 2012, we recorded a tax provision of $9.6 million and $1.3 million, on pre-tax income of $32.1 million and $2.8~~$2 million, respectively, which resulted in an effective tax rate of ~~29.9%~~37% and ~~47.8%~~29.4%, respectively. During the first six months of 2014 and 2013, we recorded a provision of $5.7 million and $4.9 million, respectively, which resulted in an effective tax rate of 33.4% and 26.3%, respectively. Our effective tax rate for ~~the~~second quarter and first ~~nine~~six months of 2013 was below the statutory rate primarily due to ~~the domestic production activities deduction, our foreign tax rate differential benefit, and~~ a $0.8 million tax benefit related to our 2012 research and experimentation credit recognized in the first quarter of 2013 as a result of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013. Our effective tax rate for the second quarter

and first ~~nine~~six months of ~~2012~~2014 was ~~a result~~higher than in the same periods in 2013 primarily because the research and experimentation credit has not yet been extended to 2014 and the increase in non-deductible foreign stock-based compensation expense in the second quarter and first six months of ~~low pre-tax income and certain discrete items that were recorded~~2014 compared to the same periods in ~~2012.~~2013.


	Nine Months Ended
	September 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2014		2013
Cash provided by (used in):

Operating activities	$	83,435	$	29,084	$	73,935	$	64,280

Investing activities		(39,674)		(16,746)		(18,008)		(26,122)

Financing activities		(11,942)		(7,050)		(11,287)		(8,678)

Effect of exchange rate on cash		(517)		596		2,240		(3,160)

Net increase in cash and cash equivalents	$	31,302	$	5,884	$	46,880	$	26,320


	As of		As of		As of		As of
	September 30, 2013		December 31, 2012		June 30, 2014		December 31, 2013
Total cash, cash equivalents, and marketable securities	$	188,445	$	122,985	$	216,213	$	156,692

The increase in cash and cash equivalents was primarily due to the significant increase in cash provided by operating activities associated with our strong accounts receivable collections during the first ~~nine~~six months of ~~2013,~~2014, which were generated from our significant arrangements executed in the fourth quarter of ~~2012.~~2013 and first six months of 2014. We believe that our current cash, cash equivalents, and cash flow from operations will be sufficient to fund our operations, our dividend payments and our share repurchase program for at least the next 12 months.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. On October 9, 2013, we acquired Antenna for $26.3 million in cash. During the ~~third~~first quarter of ~~2013,~~2014, we ~~incurred direct and incremental expenses associated with the transaction of $0.5 million and expect to incur an additional estimated $2.2~~paid $0.8 million of ~~such expenses that are primarily professional fees~~the remaining merger consideration related to ~~affect~~ the ~~acquisition.~~final working capital adjustment for Antenna. During the second quarter of 2014, we paid $0.8 million in cash consideration to acquire Meshlabs.

As of ~~September~~June 30, ~~2013,~~2014, approximately ~~$54.8~~$64.2 million of our cash and cash equivalents was held in our foreign subsidiaries. If it becomes necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because we consider our earnings permanently reinvested. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

The primary drivers of cash provided by operating activities during the first ~~nine~~six months of ~~2013~~2014 were net income of ~~$22.5~~$11.3 million and the $46 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a ~~$42.6 million~~ decrease in accounts receivable due to our significant ~~collections.~~strong collections, partially offset by an increase in income taxes receivable due to estimated tax payments and the tax benefits associated with domestic stock-based compensation.

The primary drivers of cash provided by operating activities during the first ~~nine~~six months of ~~2012~~2013 were net income of ~~$1.5~~$13.8 million, ~~an $18.9~~and the $31.8 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in ~~account~~accounts receivable due to higher collections, partially offset by a decrease in accounts payable and ~~a $2.7 million increase in deferred revenue.~~accrued expenses due to the timing of payments for compensation-related accruals.

Total contractual future cash receipts due from our existing license and Pega Cloud agreements was approximately ~~$234.2~~$298.7 million as of ~~September~~June 30, ~~2013~~2014 compared to ~~$195.2~~$246.8 million as of ~~September~~June 30, ~~2012.~~2013. The future cash receipts due as of ~~September~~June 30, ~~2013~~2014 are summarized as follows:

During the first ~~nine~~six months of 2014, cash used in investing activities was primarily for purchases of marketable debt securities of $29.5 million, partially offset by the proceeds received from the maturities of marketable debt securities of $16 million.

During the first six months of 2013, cash used in investing activities was primarily for purchases of marketable debt securities of ~~$56.6~~$32.7 million, partially offset by the proceeds received from the maturities of marketable debt securities of ~~$21.1~~$8.5 million.

~~During~~Payments for acquisitions during the first ~~nine~~six months of ~~2012, we invested $21.9~~2014 totaled $1.6 million, ~~primarily~~comprised of the payment of the final working capital adjustment to the Antenna shareholders and cash consideration to acquire MeshLabs, in ~~leasehold improvements, furniture~~the first and ~~fixtures and equipment for the build-out~~second quarters of ~~our U.S. and India offices.~~2014, respectively.

Cash used in financing activities during the first ~~nine~~six months of ~~2013~~2014 and ~~2012~~2013 was primarily for repurchases of our common ~~stock and dividend payments.~~stock. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to ~~$92.4~~$104.5 million of our common stock. Purchases under these programs have been made on the open market.

On March 6, 2014, our Board of Directors approved a two-for-one stock split of our common stock in the form of a stock dividend. On April 1, 2014, each stockholder of record at the close of business on March 20, 2014 (the “Record Date”) received as a dividend one additional share of common stock, par value $.01, for each share of common stock held on the Record Date. The number of shares and per share amounts for all prior periods presented have been retroactively restated to reflect our two-for-one common stock split, except for the number of authorized shares of common stock. The following table is a summary of our repurchase activity under all of our repurchase programs during the first ~~nine~~six months of ~~2013~~2014 and ~~2012:~~2013:


	Nine Months Ended September 30,										Six Months Ended June 30,
	2013					2012					2014				2013
(Dollars in thousands)	Shares		Amount			Shares		Amount			Shares		Amount		Shares		Amount
Prior year authorization as of January 1,													$	14,433			$	14,793

Prior year authorization as of January 1,			$	14,793				$	13,963
Repurchases paid		309,692		(9,102	)		125,891		(3,861	)		419,900		(8,305)		512,438		(7,199)

Repurchases unsettled		3,313		(130	)		1,692		(48	)		—		—		314		(5)

Authorization remaining as of September 30,			$	5,561				$	10,054

Authorization remaining as of June 30,													$	6,128			$	7,589

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vesting, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

During the first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of ~~529,000~~700,000 shares and ~~424,000~~731,000 shares, respectively, of which only ~~275,000~~394,000 shares and ~~243,000~~401,000 shares, respectively, were issued to the option and RSU holders and the balance of the shares were surrendered to us to pay for the exercise price and the applicable taxes. During the first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$4.1~~$3.4 million and ~~$3.6~~$2.8 million, respectively, for withholding taxes, and ~~$3.9~~$2.9 million and ~~$2.4~~$2 million, respectively, for the exercise price. The value of share repurchases and shares withheld for net settlement of our employee stock option exercises and vesting of RSUs offset the proceeds received under our various share-based compensation plans during the first ~~nine~~six months of ~~2013~~2014 and ~~2012.~~2013.

We declared a cash dividend of ~~$0.09~~$0.045 and $0.03 per share on a post-split basis in the first ~~nine~~six months of 2014 and 2013, ~~and 2012.~~respectively. We paid cash dividends of $2.3 million and ~~$3.4~~$1.1 million in the first ~~nine~~six months of ~~2013~~2014 and ~~2012,~~2013, respectively. Our Board of Directors authorized the acceleration of the payment of the fourth quarter 2012 dividend to be paid in December 2012 rather than in January 2013. Therefore, there was no dividend payment in the first quarter of 2013. ItOn May 27, 2014, we announced an increase in our quarterly cash dividend from $0.015 to $0.03 per share. As a result, it is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates.

We ~~enter~~have historically entered into foreign currency forward contracts to partially mitigate our exposure to the fluctuations in foreign exchange rates. The fluctuations in the value of these forward contracts partially offsets the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction (loss) gain, thus partially mitigating the volatility.

During the second quarter of 2014, we did not enter into any forwards contracts as we are in the process of reassessing our hedging strategy.

See Note 34 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the first ~~nine~~six months of ~~2013.~~2014. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 for a more complete discussion of our market risk exposure.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or 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) as of ~~September~~June 30, ~~2013.~~2014. 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~~June 30, ~~2013.~~2014.

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 Securities Exchange Act) during the quarter ended ~~September~~June 30, ~~2013~~2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2012.~~2013. These risk factors could materially affect our business, financial condition and future results and could 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 from time to time. ~~Except as described below, there~~There have been no material changes during the first ~~nine~~six months of ~~2013~~2014 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2012.~~2013.

~~The acquisition of other businesses and technologies may present new risks.~~ We have recently undertaken an acquisition and may continue to evaluate and consider other potential strategic transactions, including acquisitions of businesses, technologies, services, products and other assets in the future. These acquisitions, if undertaken, may involve significant new risks and uncertainties, including distraction of management attention away from our current business operations, insufficient new revenue to offset expenses, inadequate return on capital, integration challenges, new regulatory requirements, new third-party intellectual property infringement claims related to the acquired technology and/or services, and issues not discovered in our due diligence process. No assurance can be given that such acquisitions will be successful and will not adversely affect our profitability or operations.

The following table sets forth information regarding our repurchases of our common stock during the ~~third~~second quarter of ~~2013:~~2014:

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed or furnished, as the case may be, as part of this report and such Exhibit Index is incorporated herein by reference.

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.


			Page

Part I—Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013			3

	Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013			4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013			5

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three and six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013			6

	Notes to Condensed Consolidated Financial Statements			7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			1519

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	��		2328

Item 4.	Controls and Procedures			2329

Part II—Other Information

Item 1A.	Risk Factors			2429

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			2429

Item 6.	Exhibits			2530

SIGNATURE				2631


(in thousands)

Total purchase consideration:

Cash	$	27,141


Allocation of the purchase consideration:

Cash	$	783

Accounts receivable, net of allowance		4,170

Other assets		3,978

Property and equipment		655

Deferred tax assets, net		5,862

Identifiable intangible assets		10,355

Goodwill		19,878

Accounts payable		(1,403)

Accrued liabilities		(12,759)

Deferred revenue		(4,378)


Net assets acquired	$	27,141


(in thousands)			Weighted-average amortization period (in years)

Customer related intangible assets	$	4,279	4

Technology		3,656	3

Non-compete		1,342	1

Trade name		1,078	3

	$	10,355	3.2


(in thousands)	2014

Balance as of January 1,	$	37,463

Purchase price adjustments to goodwill retroactively applied (1)		2,866

Goodwill acquired		134


Balance as of June 30,	$	40,463


(in thousands) as of June 30, 2014	Future estimated amortization expense
Remainder of 2014	$	6,209

2015		11,557

2016		11,145

2017		9,564

2018		8,688

2019		2,897

	$	50,060


	Pro Forma
	Three Months Ended		Six Months Ended
(in thousands, except per share amounts)	June 30, 2013

Revenue	$	124,613	$	248,294

Net income	$	2,537	$	9,280

Net income per basic and diluted share	$	0.03	$	0.12


(in thousands) September 30, 2013	Future estimated amortization expense
Remainder of 2013	$	2,773
2014		9,489
2015		8,688
2016		8,688
2017		8,688
2018 & thereafter		11,584

	$	49,910


(in thousands)
Balance as of December 31, 2013	$	1,591

Restructuring costs		—

Cash payments		(170)


Balance as of June 30, 2014	$	1,421


	As of September 30,		As of December 31,
(Dollars in thousands)	2013		2012
Trade receivables, net of allowance	$	90,583	$	134,066
Client A		13%		10%


	Three Months Ended September 30,				Change			Nine Months Ended September 30,				Change
(Dollars in thousands)	2013		2012					2013		2012
Foreign currency transaction gain (loss)	$	661	$	438	$	223	51%	$	(1,666)	$	337	$	(2,003)	(594)%

Interest income, net		123		113		10	9%		376		318		58	18%

Other expense, net		(1,163)		(920)		(243)	26%		(418)		(1,496)		1,078	(72)%

Non-operating loss	$	(379)	$	(369)	$	(10)	3%	$	(1,708)	$	(841)	$	(867)	103%


As of September 30, 2013(in thousands)	Contractual payments for term licenses not recorded on the balance sheet (1)		Other contractual license payments not recorded on the balance sheet (2)		Total
Remainder of 2013	$	16,001	$	4,927	$	20,928
2014		62,844		17,514		80,358
2015		55,939		4,944		60,883
2016		45,154		3,128		48,282
2017 and thereafter		23,708		—		23,708

Total	$	203,646	$	30,513	$	234,159


(in thousands) as of June 30, 2014	Contractual payments for term licenses and cloud arrangements not recorded on the balance sheet (1)		Other contractual license payments not recorded on the balance sheet (2)		Total
Remainder of 2014	$	36,483	$	39,367	$	75,850

2015		78,220		4,175		82,395

2016		66,564		3,128		69,692

2017		37,636		—		37,636

2018 and thereafter		33,085		—		33,085

Total	$	251,988	$	46,670	$	298,658


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Programs (1)		Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Share Repurchase Programs (in thousands) (1)
7/1/2013 - 7/31/2013		24,446	$	33.84		24,446	$	6,762
8/1/2013 - 8/31/2013		24,714		37.02		24,714		5,847
9/1/2013 - 9/30/2013		7,469		38.26		7,469		5,561

Total		56,629	$	35.81


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Programs (1) (2)		Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Share Repurchase Programs (in thousands) (2)
4/1/2014 - 4/30/2014		97,753	$	16.96		97,753	$	8,298

5/1/2014 - 5/31/2014		59,072		18.26		59,072		7,219

6/1/2014 - 6/30/2014		52,177		20.90		52,177		6,128


Total		209,002	$	18.31


	Pegasystems Inc.

Date: ~~November 12, 2013~~August 5, 2014	By:	/s/ RAFEAL E. BROWN


		Rafeal E. Brown
		~~Chief Financial Officer, Chief Administration Officer and Senior~~ ~~Vice President~~
		Chief Financial Officer, Chief Administrative Officer and Senior Vice President
		(principal financial officer)


Exhibit No.		Description

3.1		Articles of Amendment to Restated Articles of Organization of the Registrant, as filed with the Secretary of the State of Massachusetts on June 13, 2014.

10.1+		Compensation program for non-employee members of the Registrant’s Board of Directors.

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.

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

101		The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter ~~and nine months~~ ended ~~September~~June 30, ~~2013~~2014 formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.