UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2014March 31, 2015
or
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts | 04-2787865 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
One Rogers Street Cambridge, MA | 02142-1209 | |
(Address of principal executive offices) | (Zip Code) |
(617) 374-9600
(Registrant’s telephone number including area code)
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.
Large accelerated filer | x | Accelerated filer | ||||||
Non-accelerated filer | ¨ (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
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 76,308,50176,543,705 shares of the Registrant’s common stock, $.01 par value per share, outstanding on July 25, 2014.April 24, 2015.
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Part I—Financial Information | ||||||
Item 1. | Financial Statements (Unaudited): | |||||
Condensed Consolidated Balance Sheets as of | 3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
Part II—Other Information | ||||||
Item 1A. | ||||||
Item 2. | ||||||
Item 6. | ||||||
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
As of | As of | |||||||
June 30, 2014 | December 31, 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 127,111 | $ | 80,231 | ||||
Marketable securities | 89,102 | 76,461 | ||||||
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Total cash, cash equivalents, and marketable securities | 216,213 | 156,692 | ||||||
Trade accounts receivable, net of allowance of $1,865 and $1,997 | 114,642 | 165,628 | ||||||
Deferred income taxes | 12,052 | 12,014 | ||||||
Income taxes receivable | 11,690 | 4,708 | ||||||
Other current assets | 8,982 | 9,148 | ||||||
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Total current assets | 363,579 | 348,190 | ||||||
Property and equipment, net | 27,223 | 28,957 | ||||||
Long-term deferred income taxes | 61,264 | 60,291 | ||||||
Long-term other assets | 2,998 | 2,526 | ||||||
Intangible assets, net | 50,060 | 56,574 | ||||||
Goodwill | 40,463 | 40,329 | ||||||
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Total assets | $ | 545,587 | $ | 536,867 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 6,827 | $ | 3,678 | ||||
Accrued expenses | 31,609 | 31,814 | ||||||
Accrued compensation and related expenses | 42,397 | 44,399 | ||||||
Deferred revenue | 120,501 | 110,882 | ||||||
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Total current liabilities | 201,334 | 190,773 | ||||||
Income taxes payable | 21,469 | 21,269 | ||||||
Long-term deferred revenue | 24,535 | 34,196 | ||||||
Other long-term liabilities | 17,693 | 18,841 | ||||||
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Total liabilities | 265,031 | 265,079 | ||||||
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Stockholders’ equity (1): | ||||||||
Preferred stock, 1,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, 200,000 shares authorized; 76,348 shares and 76,324 shares issued and outstanding | 763 | 764 | ||||||
Additional paid-in capital | 139,198 | 139,565 | ||||||
Retained earnings | 135,658 | 127,826 | ||||||
Accumulated other comprehensive income | 4,937 | 3,633 | ||||||
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Total stockholders’ equity | 280,556 | 271,788 | ||||||
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Total liabilities and stockholders’ equity | $ | 545,587 | $ | 536,867 | ||||
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(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
As of | As of | |||||||
March 31, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 127,480 | $ | 114,585 | ||||
Marketable securities | 97,877 | 96,631 | ||||||
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Total cash, cash equivalents, and marketable securities | 225,357 | 211,216 | ||||||
Trade accounts receivable, net of allowance of $1,664 and $1,540 | 150,902 | 154,844 | ||||||
Deferred income taxes | 12,950 | 12,974 | ||||||
Income taxes receivable | 5,623 | 4,502 | ||||||
Other current assets | 13,277 | 9,544 | ||||||
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Total current assets | 408,109 | 393,080 | ||||||
Property and equipment, net | 31,135 | 30,156 | ||||||
Long-term deferred income taxes | 69,208 | 69,258 | ||||||
Long-term other assets | 3,087 | 2,783 | ||||||
Intangible assets, net | 42,487 | 45,664 | ||||||
Goodwill | 46,777 | 46,860 | ||||||
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Total assets | $ | 600,803 | $ | 587,801 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 6,408 | $ | 4,752 | ||||
Accrued expenses | 35,136 | 42,958 | ||||||
Accrued compensation and related expenses | 30,642 | 47,250 | ||||||
Deferred revenue | 170,476 | 134,672 | ||||||
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Total current liabilities | 242,662 | 229,632 | ||||||
Income taxes payable | 24,825 | 24,896 | ||||||
Long-term deferred revenue | 18,499 | 20,859 | ||||||
Other long-term liabilities | 17,000 | 17,709 | ||||||
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Total liabilities | 302,986 | 293,096 | ||||||
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Stockholders’ equity: | ||||||||
Preferred stock, 1,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, 200,000 shares authorized; 76,563 shares and 76,357 shares issued and outstanding | 766 | 764 | ||||||
Additional paid-in capital | 143,976 | 141,495 | ||||||
Retained earnings | 156,692 | 153,058 | ||||||
Accumulated other comprehensive loss | (3,617 | ) | (612 | ) | ||||
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Total stockholders’ equity | 297,817 | 294,705 | ||||||
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Total liabilities and stockholders’ equity | $ | 600,803 | $ | 587,801 | ||||
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See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue: | ||||||||||||||||
Software license | $ | 54,012 | $ | 40,206 | $ | 106,626 | $ | 83,415 | ||||||||
Maintenance | 45,393 | 37,937 | 90,274 | 74,259 | ||||||||||||
Services | 43,580 | 39,172 | 86,549 | 75,887 | ||||||||||||
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Total revenue | 142,985 | 117,315 | 283,449 | 233,561 | ||||||||||||
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Cost of revenue: | ||||||||||||||||
Software license | 1,177 | 1,576 | 2,756 | 3,159 | ||||||||||||
Maintenance | 5,044 | 3,772 | 9,708 | 7,507 | ||||||||||||
Services | 40,470 | 32,530 | 80,140 | 64,865 | ||||||||||||
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Total cost of revenue | 46,691 | 37,878 | 92,604 | 75,531 | ||||||||||||
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Gross profit | 96,294 | 79,437 | 190,845 | 158,030 | ||||||||||||
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Operating expenses: | ||||||||||||||||
Selling and marketing | 56,342 | 45,346 | 102,149 | 84,616 | ||||||||||||
Research and development | 27,323 | 19,761 | 51,932 | 39,337 | ||||||||||||
General and administrative | 10,250 | 7,277 | 19,552 | 14,073 | ||||||||||||
Acquisition-related costs | 157 | — | 363 | — | ||||||||||||
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Total operating expenses | 94,072 | 72,384 | 173,996 | 138,026 | ||||||||||||
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Income from operations | 2,222 | 7,053 | 16,849 | 20,004 | ||||||||||||
Foreign currency transaction (loss) gain | (4) | (437) | 318 | (2,327) | ||||||||||||
Interest income, net | 163 | 135 | 287 | 253 | ||||||||||||
Other income (expense), net | 6 | (94) | (526) | 745 | ||||||||||||
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Income before provision for income taxes | 2,387 | 6,657 | 16,928 | 18,675 | ||||||||||||
Provision for income taxes | 883 | 1,954 | 5,659 | 4,903 | ||||||||||||
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Net income | $ | 1,504 | $ | 4,703 | $ | 11,269 | $ | 13,772 | ||||||||
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Earnings per share (1): | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.06 | $ | 0.15 | $ | 0.18 | ||||||||
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Diluted | $ | 0.02 | $ | 0.06 | $ | 0.14 | $ | 0.18 | ||||||||
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Weighted-average number of common shares outstanding (1): | ||||||||||||||||
Basic | 76,286 | 75,898 | 76,385 | 75,896 | ||||||||||||
Diluted | 78,280 | 77,498 | 78,563 | 77,538 | ||||||||||||
Cash dividends declared per share | $ | 0.030 | $ | 0.015 | $ | 0.045 | $ | 0.030 | ||||||||
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(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 March 31, | ||||||||
2015 | 2014 | |||||||
Revenue: | ||||||||
Software license | $ | 57,975 | $ | 52,614 | ||||
Maintenance | 48,752 | 44,881 | ||||||
Services | 47,191 | 42,969 | ||||||
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Total revenue | 153,918 | 140,464 | ||||||
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Cost of revenue: | ||||||||
Software license | 1,076 | 1,579 | ||||||
Maintenance | 5,180 | 4,664 | ||||||
Services | 43,803 | 39,670 | ||||||
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Total cost of revenue | 50,059 | 45,913 | ||||||
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Gross profit | 103,859 | 94,551 | ||||||
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Operating expenses: | ||||||||
Selling and marketing | 55,735 | 45,807 | ||||||
Research and development | 29,844 | 24,609 | ||||||
General and administrative | 6,345 | 9,302 | ||||||
Acquisition-related | 26 | 206 | ||||||
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Total operating expenses | 91,950 | 79,924 | ||||||
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Income from operations | 11,909 | 14,627 | ||||||
Foreign currency transaction (loss) gain | (2,962 | ) | 322 | |||||
Interest income, net | 313 | 124 | ||||||
Other expense, net | — | (532 | ) | |||||
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Income before provision for income taxes | 9,260 | 14,541 | ||||||
Provision for income taxes | 3,325 | 4,776 | ||||||
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Net income | $ | 5,935 | $ | 9,765 | ||||
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Earnings per share: | ||||||||
Basic | $ | 0.08 | $ | 0.13 | ||||
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Diluted | $ | 0.08 | $ | 0.12 | ||||
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Weighted-average number of common shares outstanding: | ||||||||
Basic | 76,401 | 76,298 | ||||||
Diluted | 78,592 | 78,661 | ||||||
Cash dividends declared per share | $ | 0.03 | $ | 0.015 | ||||
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See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Net income | $ | 1,504 | $ | 4,703 | $ | 11,269 | $ | 13,772 | $ | 5,935 | $ | 9,765 | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Unrealized (loss) gain on securities, net of tax | (3) | (182) | 28 | (145) | ||||||||||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||||||||||
Unrealized gain on securities, net of tax | 91 | 31 | ||||||||||||||||||||||
Foreign currency translation adjustments | 891 | (417) | 1,276 | (2,487) | (3,096 | ) | 385 | |||||||||||||||||
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Total other comprehensive income (loss) | 888 | (599) | 1,304 | (2,632) | ||||||||||||||||||||
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Total other comprehensive (loss) income, net | (3,005 | ) | 416 | |||||||||||||||||||||
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Comprehensive income | $ | 2,392 | $ | 4,104 | $ | 12,573 | $ | 11,140 | $ | 2,930 | $ | 10,181 | ||||||||||||
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See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2014
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| 2015 | 2014 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 11,269 | $ | 13,772 | $ | 5,935 | $ | 9,765 | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Excess tax benefits from exercise or vesting of equity awards | (2,526) | (1,718) | (822 | ) | (971 | ) | ||||||||||
Deferred income taxes | (899) | (273) | (3 | ) | 44 | |||||||||||
Depreciation and amortization | 11,412 | 9,419 | 5,624 | 5,846 | ||||||||||||
Stock-based compensation expense | 8,453 | 6,713 | 6,269 | 3,295 | ||||||||||||
Foreign currency transaction (gain) loss | (318) | 2,327 | ||||||||||||||
Foreign currency transaction loss (gain) | 2,962 | (322 | ) | |||||||||||||
Other non-cash items | 495 | 2,250 | 161 | 222 | ||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Trade accounts receivable | 51,155 | 37,336 | (299 | ) | 57,291 | |||||||||||
Income taxes receivable and other current assets | (3,836) | (1,031) | (4,403 | ) | 1,629 | |||||||||||
Accounts payable and accrued expenses | 94 | (10,051) | (21,621 | ) | (21,587 | ) | ||||||||||
Deferred revenue | (214) | 5,166 | 33,919 | 18,337 | ||||||||||||
Other long-term assets and liabilities | (1,150) | 370 | (201 | ) | (691 | ) | ||||||||||
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Cash provided by operating activities | 73,935 | 64,280 | 27,521 | 72,858 | ||||||||||||
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Investing activities: | ||||||||||||||||
Purchase of marketable securities | (29,547) | (32,690) | ||||||||||||||
Matured and called marketable securities | 15,996 | 8,540 | ||||||||||||||
Purchases of marketable securities | (18,120 | ) | (11,630 | ) | ||||||||||||
Proceeds from maturities and called marketable securities | 16,549 | 11,021 | ||||||||||||||
Payments for acquisitions | (1,593) | — | (535 | ) | (793 | ) | ||||||||||
Investment in property and equipment | (2,864) | (1,972) | (3,275 | ) | (1,228 | ) | ||||||||||
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Cash used in investing activities | (18,008) | (26,122) | (5,381 | ) | (2,630 | ) | ||||||||||
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Financing activities: | ||||||||||||||||
Issuance of common stock for share-based compensation plans | 338 | 801 | 146 | 22 | ||||||||||||
Excess tax benefits from exercise or vesting of equity awards | 2,526 | 1,718 | 822 | 971 | ||||||||||||
Dividend payments to shareholders | (2,290) | (1,142) | (2,294 | ) | (1,145 | ) | ||||||||||
Common stock repurchases for tax withholdings for net settlement of equity awards | (3,402) | (2,780) | (2,584 | ) | (1,805 | ) | ||||||||||
Common stock repurchases under share repurchase programs | (8,459) | (7,275) | (2,427 | ) | (4,630 | ) | ||||||||||
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Cash used in financing activities | (11,287) | (8,678) | (6,337 | ) | (6,587 | ) | ||||||||||
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Effect of exchange rate on cash and cash equivalents | 2,240 | (3,160) | ||||||||||||||
Effect of exchange rates on cash and cash equivalents | (2,908 | ) | 458 | |||||||||||||
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Net increase in cash and cash equivalents | 46,880 | 26,320 | 12,895 | 64,099 | ||||||||||||
Cash and cash equivalents, beginning of period | 80,231 | 77,525 | 114,585 | 80,231 | ||||||||||||
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Cash and cash equivalents, end of period | $ | 127,111 | $ | 103,845 | $ | 127,480 | $ | 144,330 | ||||||||
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See notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
1. | ACCOUNTING POLICIES |
Basis of Presentation
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all 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, 2013.2014.
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 2014.2015.
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.
At the Company’s 2014 Annual Meeting of Stockholders, held on May 20, 2014, the stockholders approved an amendment to 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 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 modify this dividend program at any time without notice.
During the second quarter of 2014, the Company recorded $3.5 million in adjustments to the purchase price allocation of its acquisition of Antenna Software, Inc. (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 7 “Acquisitions” and Note 8 “Goodwill and Other Intangible Assets” for further discussion of these adjustments.
2. NEW ACCOUNTING PRONOUNCEMENTS
2. | NEW ACCOUNTING PRONOUNCEMENTS |
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. ThisOn April 1, 2015, the FASB voted to propose a delay in the effective date of this ASU will befor reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. As a result, the proposed new effective date for the Company will be January 1, 2017.2018. Management is currently assessing the impact the adoption of this ASU will have on the Company’s consolidated financial statements.
3. MARKETABLE SECURITIES
3. | MARKETABLE SECURITIES |
(in thousands) | June 30, 2014 | March 31, 2015 | ||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||
Municipal bonds | $ | 34,398 | 117 | (5) | $ | 34,510 | $ | 28,130 | $ | 39 | $ | (12 | ) | $ | 28,157 | |||||||||||||||||
Corporate bonds | 51,625 | 51 | (29) | 51,647 | 64,864 | 47 | (35 | ) | 64,876 | |||||||||||||||||||||||
Certificates of deposit | 2,943 | 3 | (1) | 2,945 | 4,839 | 6 | (1 | ) | 4,844 | |||||||||||||||||||||||
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$ | 88,966 | 171 | (35) | $ | 89,102 | $ | 97,833 | $ | 92 | $ | (48 | ) | $ | 97,877 | ||||||||||||||||||
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(in thousands) | December 31, 2013 | |||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
Municipal bonds | $ | 41,545 | 75 | (20) | $ | 41,600 | ||||||||||||||||||||||||||
Corporate bonds | 31,868 | 52 | (4) | 31,916 | ||||||||||||||||||||||||||||
Certificates of deposit | 2,948 | 1 | (4) | 2,945 | ||||||||||||||||||||||||||||
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|
|
| |||||||||||||||||||||||||||||
$ | 76,361 | 128 | (28) | $ | 76,461 | |||||||||||||||||||||||||||
|
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|
|
(in thousands) | December 31, 2014 | |||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Municipal bonds | $ | 27,820 | $ | 52 | $ | (17 | ) | $ | 27,855 | |||||||
Corporate bonds | 65,487 | 5 | (144 | ) | 65,348 | |||||||||||
Certificates of deposit | 3,428 | 2 | (2 | ) | 3,428 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 96,735 | $ | 59 | $ | (163 | ) | $ | 96,631 | ||||||||
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|
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|
|
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 June 30, 2014,March 31, 2015, remaining maturities of marketable debt securities ranged from July 2014April 2015 to July 2016,May 2017, with a weighted-average remaining maturity of approximately 1314 months.
4. DERIVATIVE INSTRUMENTS
4. | DERIVATIVE INSTRUMENTS |
The Company has historically used foreign currency forward contracts (“forward contracts”) to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, cash and intercompany payables. The U.S. operating company invoices most of its foreign clients in foreign currencies, which results in cash and receivables held at the end of the reporting period denominated in those foreign currencies. Since the U.S. operating company’s functional currency is the U.S. dollar, the Company recognizes a foreign currency transaction gain or (loss) on the foreign currency denominated cash, intercompany payables, and cash primarilyaccounts receivable held by the U.S. operating company.company in its consolidated statements of operations when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company has been primarily exposed to the fluctuation in the British pound, Euro, Australian dollar, and EuroIndian rupee relative to the U.S. dollar. More recently, the Company has experienced increased levels of exposure to the Australian dollar and Indian 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 income (expense),expense, net, in its consolidated statement of operations. TheseHowever, the fluctuations in the value of these foreign currency forward contracts have termspartially offset the gains and losses from the remeasurement or settlement of 90 days or less.
As of June 30, 2014the foreign currency denominated accounts receivable, intercompany payables, and December 31, 2013,cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company did not have anyenters into foreign currency forward contracts outstanding.with terms not greater than 90 days.
DuringEffective in the second quarter of 2014,2015, the Company did not enter into any forward contracts. intends to restructure its transactions with its non-North American clients who will begin transacting with Pegasystems Limited, a U.K. subsidiary of the Company, which has the British pound as its functional currency. This reorganization could result in foreign currency transaction gains or (losses) on cash, intercompany payables, and accounts receivable held by the U.K. subsidiary in currencies other than the British pound. As a result, the Company expects its exposure to fluctuations in primarily the Euro and Australian dollar relative to the U.S. dollar to decrease, and its exposure from these currencies relative to the British pound to increase.
The Company is in the process of reassessing its hedging strategy.strategy and has not entered into any forward contracts since February 2014. The Company intends to fully or partially hedge its exposures relative to both the U.S. dollar and the British pound under its revised strategy, once implemented. As of March 31, 2015 and December 31, 2014, the Company did not have any forward contracts outstanding.
During the first six months of 2014 and 2013, the
The Company entered into forward contracts with notional values as follows:
Notional Amount | ||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Notional Amount | ||||||||||||||||||||||||||||||
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|
| Three Months Ended March 31, | ||||||||||||||||||||||||||||
Foreign currency (in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||
Euro | € | — | € | 16,500 | € | 21,900 | € | 32,500 | € | — | € | 21,900 | ||||||||||||||||||||
British pound | £ | — | £ | 14,500 | £ | 26,500 | £ | 33,500 | £ | — | £ | 26,500 | ||||||||||||||||||||
Australian dollar | A$ | — | A$ | — | A$ | 12,900 | A$ | — | A$ | — | A$ | 12,900 | ||||||||||||||||||||
Indian rupee | Rs | — | Rs | — | Rs | 204,000 | Rs | — | Rs | — | Rs | 204,000 |
During the first six months of 2014 and 2013, theThe total change in the fair value of the Company’s forward contracts recorded in other income (expense),expense, net, was as follows:
Change in Fair Value in USD | ||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Change in Fair Value in USD | ||||||||||||||||||||||
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|
| Three Months Ended March 31, | ||||||||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
(Loss) gain included in other income (expense), net | $ | — | $ | (95) | $ | (532) | $ | 743 | ||||||||||||||||
Loss included in other expense, net | $ | — | $ | (532 | ) |
5. FAIR VALUE MEASUREMENTS
5. | FAIR VALUE MEASUREMENTS |
Assets Measured at Fair Value on a Recurring Basis
Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs inon which there is little or no market data, which requiresrequire 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 investmentsmoney market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices.prices in active markets for identical assets. The Company’s investments classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers of investments between Level 1 and Level 2 during the quarter ended March 31, 2015.
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) | June 30, 2014 |
Quoted Prices in | Significant Other Observable Inputs (Level 2) | March 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||||||||||
Money market funds | $ | 5,232 | $ | 5,232 | $ | — | $ | 1,070 | $ | 1,070 | $ | — | ||||||||||||
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Marketable securities: | ||||||||||||||||||||||||
Municipal bonds | $ | 34,510 | $ | 15,720 | $ | 18,790 | $ | 28,157 | $ | — | $ | 28,157 | ||||||||||||
Corporate bonds | 51,647 | 51,647 | — | 64,876 | — | 64,876 | ||||||||||||||||||
Certificates of deposit | 2,945 | — | 2,945 | 4,844 | — | 4,844 | ||||||||||||||||||
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|
| ||||||||||||||||||||||
Total marketable securities | $ | 89,102 | $ | 67,367 | $ | 21,735 | $ | 97,877 | $ | — | $ | 97,877 | ||||||||||||
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| |||||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||
(in thousands) | December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | |||||||||||||||||||||
Money market funds | $ | 2,232 | $ | 2,232 | $ | — | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||
Municipal bonds | $ | 41,600 | $ | 10,569 | $ | 31,031 | ||||||||||||||||||
Corporate bonds | 31,916 | 31,916 | — | |||||||||||||||||||||
Certificates of deposit | $ | 2,945 | $ | — | $ | 2,945 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total marketable securities | $ | 76,461 | $ | 42,485 | $ | 33,976 | ||||||||||||||||||
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||
(in thousands) | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | |||||||||
Money market funds | $ | 2,295 | $ | 2,295 | $ | — | ||||||
|
|
|
|
|
| |||||||
Marketable securities: | ||||||||||||
Municipal bonds | $ | 27,855 | $ | — | $ | 27,855 | ||||||
Corporate bonds | 65,348 | — | 65,348 | |||||||||
Certificates of deposit | 3,428 | — | 3,428 | |||||||||
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|
|
|
|
| |||||||
Total marketable securities | $ | 96,631 | $ | — | $ | 96,631 | ||||||
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis
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 sixthree months of 20142015 and 2013,2014, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.
6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
(in thousands) | June 30, 2014 | December 31, 2013 | ||||||
Trade accounts receivable | $ | 84,167 | $ | 129,007 | ||||
Unbilled trade accounts receivable | 32,340 | 38,618 | ||||||
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|
|
| |||||
Total accounts receivable | 116,507 | 167,625 | ||||||
|
|
|
| |||||
Allowance for sales credit memos | (1,865) | (1,997) | ||||||
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| |||||
$ | 114,642 | $ | 165,628 | |||||
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|
6. | TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE |
(in thousands) | March 31, 2015 | December 31, 2014 | ||||||
Trade accounts receivable | $ | 130,068 | $ | 128,757 | ||||
Unbilled trade accounts receivable | 22,498 | 27,627 | ||||||
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| |||||
Total accounts receivable | 152,566 | 156,384 | ||||||
|
|
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| |||||
Allowance for sales credit memos | (1,664 | ) | (1,540 | ) | ||||
|
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| |||||
$ | 150,902 | $ | 154,844 | |||||
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|
|
Unbilled trade accounts receivable primarily relate to services revenue earned under time and materialmaterials arrangements and to maintenance and license arrangements that hadwhich have commenced or been delivered but have not been invoiced as of June 30, 2014 and December 31, 2013, respectively.
7. ACQUISITIONS
MeshLabs
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.
Antenna
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.invoiced.
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:
7. | ||||
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GOODWILL AND OTHER INTANGIBLE ASSETS |
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:
(in thousands) | Weighted-average (in years) | |||||
Customer related intangible assets | $ | 4,279 | 4 | |||
Technology | 3,656 | 3 | ||||
Non-compete | 1,342 | 1 | ||||
Trade name | 1,078 | 3 | ||||
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| |||||
$ | 10,355 | 3.2 | ||||
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|
Pro forma Information
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.
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 | ||||
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|
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changesChanges in the carrying amount of goodwill:
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| ||||
| ||||
| ||||
(1) The purchase price adjustments identified during the first six months of 2014 have been retroactively applied as of December 31, 2013.
Balance as of January 1, Translation adjustments Balance as of March 31, (in thousands) 2015 $ 46,860 (83 ) $ 46,777
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 June 30, 2014 | ||||||||||||||||||||||||||||||||
As of March 31, 2015 | ||||||||||||||||||||||||||||||||
Customer related intangibles | 4-9 years | $ | 48,634 | $ | (21,311) | $ | 27,323 | 4-9 years | $ | 49,547 | $ | (25,865 | ) | $ | 23,682 | |||||||||||||||||
Technology | 3-9 years | 47,616 | (26,189) | 21,427 | 3-9 years | 48,342 | (30,233 | ) | 18,109 | |||||||||||||||||||||||
Other intangibles | 1-5 years | 4,810 | (3,500) | 1,310 | 1-3 years | 5,361 | (4,665 | ) | 696 | |||||||||||||||||||||||
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Total | $ | 101,060 | $ | (51,000) | $ | 50,060 | $ | 103,250 | $ | (60,763 | ) | $ | 42,487 | |||||||||||||||||||
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Cost | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
As of December 31, 2013 | ||||||||||||||||||||||||||||||||
Customer related intangibles | 4-9 years | $ | 48,634 | $ | (18,317) | $ | 30,317 | |||||||||||||||||||||||||
Technology | 3-9 years | 47,102 | (22,873) | 24,229 | ||||||||||||||||||||||||||||
Other intangibles | 1-5 years | 4,658 | (2,630) | 2,028 | ||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||
Total | $ | 100,394 | $ | (43,820) | $ | 56,574 | ||||||||||||||||||||||||||
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|
Range of Useful Lives | Cost | Accumulated Amortization | Net Book Value | |||||||||||||
As of December 31, 2014 | ||||||||||||||||
Customer related intangibles | 4-9 years | $ | 49,590 | $ | (24,338 | ) | $ | 25,252 | ||||||||
Technology | 3-9 years | 48,342 | (28,890 | ) | 19,452 | |||||||||||
Other intangibles | 1-3 years | 5,361 | (4,401 | ) | 960 | |||||||||||
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Total | $ | 103,293 | $ | (57,629 | ) | $ | 45,664 | |||||||||
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|
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, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Cost of revenue | $ | 1,444 | $ | 1,541 | $ | 3,284 | $ | 3,082 | $ | 1,343 | $ | 1,840 | ||||||||||||
Selling and marketing | 1,499 | 1,232 | 2,995 | 2,464 | 1,531 | 1,496 | ||||||||||||||||||
General and administrative
|
| 481
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| —
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| 901
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| 4
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| 264 | 420 | ||||||||||
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Total amortization expense | $ | 3,424 | $ | 2,773 | $ | 7,180 | $ | 5,550 | $ | 3,138 | $ | 3,756 | ||||||||||||
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|
Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:
(in thousands) as of June 30, 2014 | Future estimated amortization expense | |||||||
Remainder of 2014 | $ | 6,209 | ||||||
2015 | 11,557 | |||||||
(in thousands) as of March 31, 2015 | Future estimated amortization expense | |||||||
Remainder of 2015 | $ | 9,066 | ||||||
2016 | 11,145 | 11,517 | ||||||
2017 | 9,564 | 9,819 | ||||||
2018 | 8,688 | 8,819 | ||||||
2019 | 2,897 | 3,027 | ||||||
2020 and thereafter | 239 | |||||||
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$ | 50,060 | $ | 42,487 | |||||
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|
9. ACCRUED EXPENSES
8. | ACCRUED EXPENSES |
(in thousands) | June 30, 2014 | December 31, 2013 | ||||||
Partner commissions | $ | 1,981 | $ | 4,106 | ||||
Other taxes | 8,529 | 10,349 | ||||||
Employee reimbursable expenses | 2,214 | 1,539 | ||||||
Dividends payable | 2,291 | 1,145 | ||||||
Professional services contractor fees | 2,528 | 1,997 | ||||||
Self-insurance health and dental claims | 1,274 | 1,265 | ||||||
Professional fees | 1,845 | 2,378 | ||||||
Short-term deferred rent | 1,342 | 740 | ||||||
Income taxes payable | 606 | 1,770 | ||||||
Acquisition-related costs and merger consideration | 175 | 997 | ||||||
Restructuring | 369 | 371 | ||||||
Sales and marketing events | 4,180 | 308 | ||||||
Other | 4,275 | 4,849 | ||||||
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$ | 31,609 | $ | 31,814 | |||||
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|
10. DEFERRED REVENUE
(in thousands) | March 31, 2015 | December 31, 2014 | ||||||
Partner commissions | $ | 2,903 | $ | 2,441 | ||||
Other taxes | 9,072 | 10,970 | ||||||
Employee reimbursable expenses | 1,872 | 1,474 | ||||||
Dividends payable | 2,300 | 2,294 | ||||||
Professional services contractor fees | 1,959 | 2,297 | ||||||
Self-insurance health and dental claims | 1,299 | 2,115 | ||||||
Professional fees | 2,528 | 2,444 | ||||||
Short-term deferred rent | 1,474 | 1,446 | ||||||
Income taxes payable | 2,240 | 8,966 | ||||||
Acquisition-related expenses and merger consideration | 2,179 | 2,702 | ||||||
Restructuring | 431 | 461 | ||||||
Marketing and sales program expenses | 2,653 | 1,914 | ||||||
Cloud hosting expenses | 1,246 | 516 | ||||||
Other | 2,980 | 2,918 | ||||||
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$ | 35,136 | $ | 42,958 | |||||
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(in thousands) | June 30, 2014 | December 31, 2013 | ||||||
Software license | $ | 25,610 | $ | 28,826 | ||||
Maintenance | 83,917 | 72,715 | ||||||
Cloud | 5,317 | 2,552 | ||||||
Services and other | 5,657 | 6,789 | ||||||
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Current deferred revenue | 120,501 | 110,882 | ||||||
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Software license | 23,906 | 32,727 | ||||||
Maintenance and services | 524 | 1,115 | ||||||
Cloud | 105 | 354 | ||||||
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Long-term deferred revenue | 24,535 | 34,196 | ||||||
|
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| |||||
$ | 145,036 | $ | 145,078 | |||||
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|
9. | DEFERRED REVENUE |
(in thousands) | March 31, 2015 | December 31, 2014 | ||||||
Software license | $ | 52,407 | $ | 38,961 | ||||
Maintenance | 101,722 | 83,467 | ||||||
Cloud | 9,044 | 4,209 | ||||||
Services and other | 7,303 | 8,035 | ||||||
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Current deferred revenue | 170,476 | 134,672 | ||||||
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Software license | 18,188 | 19,878 | ||||||
Maintenance and services | 311 | 981 | ||||||
|
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Long-term deferred revenue | 18,499 | 20,859 | ||||||
|
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| |||||
$ | 188,975 | $ | 155,531 | |||||
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11. ACCRUED RESTRUCTURING COSTS
10. | ACCRUED RESTRUCTURING |
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 in restructuring expenses. During the third quarter of 2014, the Company restructured the remaining space within the same facility, revised its restructuring estimate, and recognized $0.2 million in additional restructuring expense. These restructuring expenses representingrepresent future lease payments and demising costs, net of estimated sublease income for this space. The lease expires in 2021.
A summary of the restructuring activity is as follows:
(in thousands) | ||||
Balance as of December 31, 2014 | $ | 1,179 | ||
Restructuring expenses | — | |||
Cash payments | (88 | ) | ||
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Balance as of March 31, 2015 | $ | 1,091 | ||
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(in thousands) | 2015 | 2014 | ||||||
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Accrued expenses | $ | 431 | $ | 461 | ||||
Other long-term liabilities | 660 | 718 | ||||||
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$ | 1,091 | $ | 1,179 | |||||
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STOCK-BASED COMPENSATION |
As of June 30, | As of December 31, | |||||||
(in thousands) | 2014 | 2013 | ||||||
Reported as: | ||||||||
Accrued expenses | $ | 369 | $ | 371 | ||||
Other long-term liabilities | 1,052 | 1,220 | ||||||
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$ | 1,421 | $ | 1,591 | |||||
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12. STOCK-BASED COMPENSATION
For the second quarter and first six months of 2014 and 2013, stock-basedStock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Cost of services | $ | 1,387 | $ | 1,014 | $ | 2,398 | $ | 2,187 | ||||||||||||||||
Cost of revenues | $ | 1,953 | $ | 1,011 | ||||||||||||||||||||
Operating expenses | 3,771 | 2,267 | 6,055 | 4,526 | 4,316 | 2,284 | ||||||||||||||||||
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Total stock-based compensation before tax | $ | 5,158 | $ | 3,281 | $ | 8,453 | $ | 6,713 | $ | 6,269 | $ | 3,295 | ||||||||||||
Income tax benefit | (1,591) | (944) | (2,582) | (2,047) | (1,783 | ) | (991 | ) |
On April 1, 2014,During the first three months of 2015, the Company effected a two-for-one stock split of the Company’s common stock in the form of a stock dividend. Allissued approximately 313,000 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 six months of 2014, the Company issued approximately 422,000 shares to its employees and 22,000 shares to its non-employee directors under the Company’s share-based compensation plans.
During the first sixthree months of 2014,2015, the Company granted approximately 1,049,0001,566,000 restricted stock units (“RSUs”) and 1,070,0001,995,000 non-qualified stock options to its employees with total fair values of approximately $20.7$30.6 million and $8.2$14.8 million, respectively. Approximately 100,000250,000 RSUs were issuedgranted in connection with the election by employees to receive 50% of their 20142015 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 $2$4.3 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 June 30, 2014,March 31, 2015, the Company had approximately $25.6$49.4 million of unrecognized stock- basedstock-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 2.22.3 years.
13. EARNINGS PER SHARE
12. | EARNINGS PER SHARE |
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 antidilutiveanti-dilutive in the periods presented, but could be dilutive in the future.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands, except per share amounts) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Basic | ||||||||||||||||||||||||
Net income | $ | 1,504 | $ | 4,703 | $ | 11,269 | $ | 13,772 | $ | 5,935 | $ | 9,765 | ||||||||||||
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Weighted-average common shares outstanding | 76,286 | 75,898 | 76,385 | 75,896 | 76,401 | 76,298 | ||||||||||||||||||
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Earnings per share, basic | $ | 0.02 | $ | 0.06 | $ | 0.15 | $ | 0.18 | $ | 0.08 | $ | 0.13 | ||||||||||||
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Net income | $ | 1,504 | $ | 4,703 | $ | 11,269 | $ | 13,772 | $ | 5,935 | $ | 9,765 | ||||||||||||
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Weighted-average common shares outstanding, basic | 76,286 | 75,898 | 76,385 | 75,896 | 76,401 | 76,298 | ||||||||||||||||||
Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||
Stock options | 1,607 | 1,234 | 1,766 | 1,272 | 1,510 | 1,926 | ||||||||||||||||||
RSUs | 387 | 366 | 412 | 370 | 681 | 437 | ||||||||||||||||||
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Effect of assumed exercise of stock options, warrants and RSUs | 1,994 | 1,600 | 2,178 | 1,642 | ||||||||||||||||||||
Effect of assumed exercise of stock options and RSUs | 2,191 | 2,363 | ||||||||||||||||||||||
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Weighted-average common shares outstanding, diluted | 78,280 | 77,498 | 78,563 | 77,538 | 78,592 | 78,661 | ||||||||||||||||||
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Earnings per share, diluted | $ | 0.02 | $ | 0.06 | $ | 0.14 | $ | 0.18 | $ | 0.08 | $ | 0.12 | ||||||||||||
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Outstanding options and RSUs excluded as impact would be antidilutive | 166 | 216 | 112 | 404 | ||||||||||||||||||||
Outstanding options and RSUs excluded as impact would be anti-dilutive | 60 | 57 |
14. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS
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 strategic software solutionsapplications and Pega 7 platform and provides consulting services, maintenance, and training related to its software.offerings. 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 CODM reviews financial information for two operating segments, whichon a consolidated basis. Therefore, the Company has determined can be aggregated and representit has one reportable segment — Digital Enterprise Business Process Solutions.Solutions, and one reporting unit.
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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
U.S. | $ | 70,411 | 49 % | $ | 62,313 | 53 % | $ | 152,428 | 54 % | $ | 130,455 | 56 % | $ | 90,164 | 59 | % | $ | 82,016 | 58 | % | ||||||||||||||||||||||||||||
Other Americas | 5,464 | 4 % | 6,449 | 6 % | 9,304 | 3 % | 10,211 | 4 % | 12,296 | 8 | % | 3,841 | 3 | % | ||||||||||||||||||||||||||||||||||
United Kingdom | 24,643 | 17 % | 21,228 | 18 % | 53,557 | 19 % | 36,667 | 16 % | 20,227 | 13 | % | 28,914 | 21 | % | ||||||||||||||||||||||||||||||||||
Other EMEA | 34,008 | 24 % | 21,530 | 18 % | 50,308 | 18 % | 41,628 | 18 % | 18,869 | 12 | % | 16,300 | 11 | % | ||||||||||||||||||||||||||||||||||
Asia Pacific | 8,459 | 6 % | 5,795 | 5 % | 17,852 | 6 % | 14,600 | 6 % | 12,362 | 8 | % | 9,393 | 7 | % | ||||||||||||||||||||||||||||||||||
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$ | 142,985 | 100 % | $ | 117,315 | 100 % | $ | 283,449 | �� | 100 % | $ | 233,561 | 100 % | $ | 153,918 | 100 | % | $ | 140,464 | 100 | % | ||||||||||||||||||||||||||||
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There were no clients accounting for 10% or more of the Company’s total revenue. There was one clientrevenue during the first three months of 2015 and 2014. Clients accounting for 10% or more of the Company’s total outstanding trade receivables, net of allowance, were as listed below:follows:
As of June 30, | As of December 31, | As of March 31, | As of December 31, | |||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Trade receivables, net of allowance | $ | 114,642 | $ | 165,628 | $ | 150,902 | $ | 154,844 | ||||||||
Client A | n/a | 16 % | 12 | % | n/a |
15. SUBSEQUENT EVENT
14. | SUBSEQUENT EVENT |
On July 1, 2014,April 28, 2015, the Company and the former shareholders of Antenna Software, Inc. (“Antenna”) reached a settlement with respect to certain indemnification claims made by the Company against the former shareholders of Antenna, arising under the merger agreement pursuant to which the Company acquired allAntenna in October 2013. Pursuant to the settlement agreement, $2.75 million of the approximately $4.16 million held in escrow as security for indemnification obligations was released to the Company in settlement of the outstanding capital stockindemnification claims, with the remainder of Profeatable Corporation (“Profeatable”), the providerescrow released to the former shareholders and certain former employees of Firefly co-browsing technology, basedAntenna. The receivable for the $2.75 million has been recorded in Philadelphia, Pennsylvania,other current assets in the Company’s unaudited condensed consolidated financial statements as of March 31, 2015, with an offsetting benefit to income from operations in the Company’s unaudited condensed consolidated statement of operations for $2.5 million in cash consideration, inclusive of $0.2 million in cash acquired.the quarterly period ending March 31, 2015.
The Company will incorporate the 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 also continue to be offered as a stand-alone solution.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
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,” “strategy,” “is intended to,” “project,” “guidance,” 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, insurance, healthcare, and healthcarecommunications markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our consulting services, the inherent risks associated with international operations and the continued weakness in international economies, foreign currency exchange rates, the financial impact of the Company’s past acquisitions and any future acquisitions, 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, 2013.2014. We do not intend to update publicly any forward-looking statements publicly, whether as a result of new information, future events, or otherwise.
Business overview
We develop, market, license, and support Better Business Software® solutionsstrategic software applications for marketing, sales and onboarding, customer service, and operations, in addition to licensing our Pega 7 platform for clients that help clients improvewish to build and extend their business results by giving them the power to engage customers, simplify their operations, and adapt to change. Our unified software platform enablesown applications. Pega 7 assists our clients to build, deploy,in building, deploying, and changeevolving enterprise applications, easilycreating an environment in which business and quickly, by directly capturing business objectives, automating programming, and automating work.IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service needs. We also provide consulting services, maintenance, and training for our software, as well as a variety of applications. Our applications and Pega 7 can be deployed in the Cloud or on-premises.
Pega 7 and our related toapplications are used by our software.clients in the financial services, healthcare, insurance, communications and media, public sector, manufacturing, life sciences, and other markets. We sell our software directly, and also through a network of business and technology alliances. Our partners include major systems integrators, management consulting firms, technology providers, and application developers.
We focus our sales efforts primarily on target accounts, which are large companies or divisions withinOur clients include Global 500 companies and typically leaders in their industry.government agencies that seek to manage complex enterprise systems and customer service issues more nimbly and cost-effectively. Our strategy is to sell a client a series of licenses, that areeach focused on a specific purpose or area of operations. As we have found meaningful interest from smaller companies, we are expanding our sales force to extend coverage beyond our traditional Global 500 focus. We license our products and render consulting and training services to clients domestically and internationally, including in Canada, Europe, the Middle East, Latin America, Asia, and Australia. In the first quarter of 2015 and 2014, sales to clients based outside of the United States of America (“U.S.”) represented 41% and 42% of our total revenue, respectively.
Our license revenue is primarily derived from sales of our applications in the areas of marketing, sales and onboarding, customer service and support, and operations, as well as our Pega Build7 platform. Our consulting services revenue is primarily related to new license implementations. Our consulting services revenue may be lower in future periods as more of our clients become enabled and our partners lead more projects. We offer training for Change® platform (PegaRULES Process Commander (“PRPC”))our staff, clients, and related business solutions. PRPC ispartners at our regional training facilities and at third-party facilities, including client sites. Our online training through Pega Academy provides an alternative way to learn our software in a comprehensive platform for building and managing Business Process Management (“BPM”) applicationsvirtual environment. We believe that unifies business rules and business processes. Our solutions, built onthis online training will continue to expand the capabilitiesnumber of PRPC, are purpose or industry-specific collections of best practice functionality, which allow organizations to quickly implement new 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 business solutions can be used bytrained experts at a broad range of clients across markets including financial services, insurance, healthcare, communications and media, life sciences, manufacturing and high technology, and government markets.faster pace.
Our business solution products include 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 actions optimize the process outcomes based on business objectives. We continue to invest heavily in research and development to improve our software. Our research and development operations are primarily located in the development of new productsU.S. and intend to remain a leader in BPM, CRM, and decision management.
India. We also offerregularly evaluate acquisitions or investment opportunities in complementary businesses, services and technologies, and intellectual property rights in an effort to expand and enhance our product offerings.
The Pega Cloud®, a service offering that allows our clients to immediately build, test, and deploy their applicationsMobile capabilities in a secure cloud environment, while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in services revenue.
Our acquisition of Profeatable Corporation (“Profeatable”) on July 1, 2014, allows us7 platform are designed 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 ourhelp 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 toefficiently build, manage, and deploy mobile applications as part of a seamless omnichannelunified omni-channel experience. EnterprisesBy using Pega Mobile, enterprises can deploy Pega applications as packaged, branded mobile applications and 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 theirthe development time, deployment costs,cost, and the complexity associated with run-the-business mobile applications. The
For the first quarter of 2015, we recorded total revenue of $153.9 million, an increase of 10% over the first quarter of 2014. License revenue was $58 million, an increase of 10% over the first quarter of 2014. Diluted earnings per share was $0.08 as compared to $0.12 for the first quarter of 2014, a decrease of 33%, primarily due to the 19% decrease in income from operations and the $3.3 million increase in foreign currency transaction loss. Our results of operations for the first quarter of 2015 were favorably impacted by the settlement of the outstanding indemnification claims against the former shareholders of Antenna are includedSoftware Inc. (“Antenna”) in our operating results fromApril 2015 (See Note 14 “Subsequent Event” in the date of acquisition. Fornotes to 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 ouraccompanying unaudited condensed consolidated statementsfinancial statements) and the settlement of operations. Dueindirect tax liabilities. We generated cash flow from operations of $27.5 million during the first quarter of 2015, a decrease of 62% over the first quarter of 2014. The decrease in cash flow from operations was primarily driven by the decrease in accounts receivable collections during the first quarter of 2015 compared to the rapid integrationfirst quarter of the products, sales force, and operations of Antenna, other than the maintenance and hosting revenue attributable2014.
In addition to the recognitionabove key financial metrics, Management also focuses on license and Cloud backlog. License and Cloud backlog is computed by adding billed deferred license and Cloud revenue as recorded on the balance sheet and license and Cloud commitments, which are not billed and not recorded on our balance sheet. License and Cloud backlog may vary in any given period depending on the amount and timing of when arrangements are executed, as well as the fair value of acquired deferred maintenancemix between perpetual and hosting revenue, it may not be feasible for us to identify revenue from new arrangements solely attributable to Antenna.term license arrangements.
We offer training for our staff, clients, and partners at our regional training facilities, at third party facilities, and at client sites. Our online training through 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.
As of March 31, | % Change | |||||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||||||
Total billed deferred license and Cloud revenue | $ | 79,639 | $ | 62,741 | 27 | % | ||||||
Total off-balance sheet license and Cloud commitments | 294,412 | 270,243 | 9 | % | ||||||||
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Total license and Cloud Backlog | $ | 374,051 | $ | 332,984 | 12 | % | ||||||
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Critical accounting policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared 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, 2013.2014. 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,Estimates and Significant Judgments, and Estimates”Judgments” 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, 2013.2014.
Results of Operations
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||
Total revenue | $ | 142,985 | $ | 117,315 | $ | 25,670 | 22 % | $ | 283,449 | $ | 233,561 | $ | 49,888 | 21 % | ||||||||||||||||||
Gross profit | $ | 96,294 | $ | 79,437 | $ | 16,857 | 21 % | $ | 190,845 | $ | 158,030 | $ | 32,815 | 21 % | ||||||||||||||||||
Total operating expenses | $ | 94,072 | $ | 72,384 | $ | 21,688 | 30 % | $ | 173,996 | $ | 138,026 | $ | 35,970 | 26 % | ||||||||||||||||||
Income from operations | $ | 2,222 | $ | 7,053 | $ | (4,831) | (68)% | $ | 16,849 | $ | 20,004 | $ | (3,155 | ) | (16)% | |||||||||||||||||
Income before provision for income taxes | $ | 2,387 | $ | 6,657 | $ | (4,270) | (64)% | $ | 16,928 | $ | 18,675 | $ | (1,747 | ) | (9)% |
Total revenue Gross profit Total operating expenses Income from operations Income before provision for income taxes Three Months Ended
March 31, Increase (Decrease) (Dollars in thousands) 2015 2014 $ 153,918 $ 140,464 $ 13,454 10 % $ 103,859 $ 94,551 $ 9,308 10 % $ 91,950 $ 79,924 $ 12,026 15 % $ 11,909 $ 14,627 $ (2,718 ) (19 )% $ 9,260 $ 14,541 $ (5,281 ) (36 )%
Revenue
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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License revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Perpetual licenses | $ | 33,272 | 62 % | $ | 24,647 | 61 % | $ | 8,625 | $ | 56,657 | 53 % | $ | 51,007 | 61 % | $ | 5,650 | $ | 27,926 | 48 | % | $ | 23,385 | 44 | % | $ | 4,541 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||
Term licenses | 19,040 | 35 % | 13,230 | 33 % | 5,810 | 45,866 | 43 % | 28,910 | 35 % | 16,956 | 27,799 | 48 | % | 26,826 | 51 | % | 973 | 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription | 1,700 | 3 % | 2,329 | 6 % | (629) | 4,103 | 4 % | 3,498 | 4 % | 605 | 2,250 | 4 | % | 2,403 | 5 | % | (153 | ) | (6 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total license revenue | $ | 54,012 | 100 % | $ | 40,206 | 100 % | $ | 13,806 | 34 % | $ | 106,626 | 100 % | $ | 83,415 | 100 % | $ | 23,211 | 28 % | $ | 57,975 | 100 | % | $ | 52,614 | 100 | % | $ | 5,361 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||
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The aggregate value of new license arrangements executed during the second quarter and first sixthree months of 20142015 significantly increased compared to the same periods in 2013 due to a higher number and higher valuefirst three months of license arrangements executed in these periods compared to the same periods in 2013.2014. The increase in the aggregate value of license arrangements executed was primarily due to one perpetual license arrangement largergreater than $10 million executed in the secondfirst quarter of 2014.2015. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the first sixthree months of 2015 and 2014, approximately 46% and 2013, approximately 84% and 64%74%, 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. SomeAdditionally, 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 increasesincrease in perpetual license revenue duringwas primarily due to ratable recognition of a large perpetual arrangement executed in the second quarter and first six months of 2014 that is being recognized ratably over one year from its effective date and the higher value of perpetual arrangements executed in the fourth quarter of 2014 for which the revenue recognition criteria were satisfied during the first quarter of 2015 compared to the same periods in 2013 were primarily due to the higher value of perpetual arrangements executed during the first six months of 2014 than during the same period in 2013.and 2014. The aggregate value of payments due under noncancellable perpetual licenses was $46.7$33.1 million as of June 30, 2014March 31, 2015 compared to $34$36.1 million as of June 30, 2013.March 31, 2014. We expect to recognize $39.4$14.5 million of the $46.7$33.1 million as revenue during the remainder of 2014.2015.
The increasesincrease in term license revenue werewas primarily due to revenue recognized on term licensefrom arrangements executed in the second half of 2013 and a $1.5 million prepayment of a customer arrangement in the first quarter of 2014.2015. The aggregate value of payments due under noncancellable term licenses and our Pega Cloud arrangements grew to $252$261.4 million as of June 30, 2014March 31, 2015 compared to 212.8$234.1 million as of June 30, 2013.March 31, 2014. We expect to recognize $36.5$53 million of the $252$261.4 million as revenue during the remainder of 20142015 in addition to new term license and Pega Cloud agreementsarrangements we may complete or prepayments we may receive from existing term license agreements. See the table of future cash receipts 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 license arrangements that include a right to successor products or unspecified future products. Subscription revenue does not include revenue from our Pega Cloud arrangements, which is included in services.Services revenue. 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 materially quarter to quarter. The decrease in subscription revenue during the second quarter of 2014 and the increase in subscription revenue for the first six months of 2014 compared to the same periods in 2013 were primarily due to the timing of payments for a customer arrangement.
Three Months Ended June 30, | Increase | Six Months Ended June 30, | Increase | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||
Maintenance revenue | ||||||||||||||||||||||||||||||||
Maintenance | $ | 45,393 | $ | 37,937 | $ | 7,456 | 20 % | $ | 90,274 | $ | 74,259 | $ | 16,015 | 22 % |
Maintenance revenue Maintenance Three Months Ended
March 31, Increase (Dollars in thousands) 2015 2014 $ 48,752 $ 44,881 $ 3,871 9 %
The increases in maintenance revenue wereincrease was primarily due to the growth in the aggregate value of the installed base of our software and continued strong renewal rates. Maintenance
Three Months Ended March 31, | Increase | |||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||||||||||||||||||
Services revenue | ||||||||||||||||||||||||
Consulting services | $ | 39,511 | 84 | % | $ | 38,076 | 89 | % | $ | 1,435 | 4 | % | ||||||||||||
Cloud | 6,177 | 13 | % | 3,858 | 9 | % | 2,319 | 60 | % | |||||||||||||||
Training | 1,503 | 3 | % | 1,035 | 2 | % | 468 | 45 | % | |||||||||||||||
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Total services | $ | 47,191 | 100 | % | $ | 42,969 | 100 | % | $ | 4,222 | 10 | % | ||||||||||||
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Consulting services represents 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) | |||||||||||||||||||||||||||||||||||||||||||||
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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 | ) % | ||||||||||||||||||||||||||||
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Total services | $ | 43,580 | 100 | % | $ | 39,172 | 100 | % | $ | 4,408 | 11 | % | $ | 86,549 | 100 | % | $ | 75,887 | 100 | % | $ | 10,662 | 14 | % | ||||||||||||||||||||||||
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Consulting services primarily relate tofrom new license implementations. The increase inOur 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 lowerfluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients are becoming enabled andor led by our partners may be leading more projects.partners.
Cloud represents revenue from our Pega Cloud offerings. The increasesincrease in cloudCloud revenue during the second quarter and first six months of 2014 were primarily due to $1 million and $2.2 million, respectively, in revenue attributable to Antenna.
The decrease in our training revenue during the first six months of 2014 was primarily due to the increased adoptioncontinued growth of our PegaACADEMY self-service onlineCloud client base.
The increase in training by our partners, which has a significantly lower average price per student asrevenue was due to an increase in the number of clients taking courses through Pega Academy during the first quarter of 2015 compared to our traditional instructor-led training.the first quarter of 2014.
Gross profit
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | Three Months Ended March 31, | Increase | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||
Software license | $ | 52,835 | $ | 38,630 | $ | 14,205 | 37 % | $ | 103,870 | $ | 80,256 | $ | 23,614 | 29 % | $ | 56,899 | $ | 51,035 | $ | 5,864 | 11 | % | ||||||||||||||||||||||||||
Maintenance | 40,349 | 34,165 | 6,184 | 18 % | 80,566 | 66,752 | 13,814 | 21 % | 43,572 | 40,217 | 3,355 | 8 | % | |||||||||||||||||||||||||||||||||||
Services | 3,110 | 6,642 | (3,532) | (53) % | 6,409 | 11,022 | (4,613) | (42) % | 3,388 | 3,299 | 89 | 3 | % | |||||||||||||||||||||||||||||||||||
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Total gross profit | $ | 96,294 | $ | 79,437 | $ | 16,857 | 21 % | $ | 190,845 | $ | 158,030 | $ | 32,815 | 21 % | $ | 103,859 | $ | 94,551 | $ | 9,308 | 10 | % | ||||||||||||||||||||||||||
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Total gross profit % | 67 % | 68 % | 67 % | 68 % | 67 | % | 67 | % | ||||||||||||||||||||||||||||||||||||||||
Software license gross profit % | 98 % | 96 % | 97 % | 96 % | 98 | % | 97 | % | ||||||||||||||||||||||||||||||||||||||||
Maintenance gross profit % | 89 % | 90 % | 89 % | 90 % | 89 | % | 90 | % | ||||||||||||||||||||||||||||||||||||||||
Services gross profit % | 7 % | 17 % | 7 % | 15 % | 7 | % | 8 | % |
The increasesincrease in total gross profit werewas primarily due to increasesthe increase in software license and maintenance revenue.
The decreasesdecrease in services gross profit percent werewas primarily due to $1.8 million of gross margin lossincreased employee-related expenses associated with Antenna projects and approximately $1.2 millionhigher headcount, a 12% decline in European professional services utilization rates during the first quarter of costs incurred on several consulting projects in2015 compared to the secondfirst quarter and first six months of 2014, for whichprimarily attributable to the corresponding revenue will be recognizedweak overall economic conditions in future periods, as revenue recognition criteria had not been met. In addition, these services gross profit decreases were dueEurope, and expense overruns primarily related to subcontractor and employee-related expenses as a result of the increased on-boarding and enablement costs due to demand for consulting projects.one fixed price project.
Operating expenses
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase | |||||||||||||||||||||||||||||
(Dollars in thousands) | 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 % | ||||||||||||||||||||||||
General and administrative | 481 | — | 481 | n/m | 901 | 4 | 897 | n/m | ||||||||||||||||||||||||
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$ | 3,424 | $ | 2,773 | $ | 651 | 23 % | $ | 7,180 | $ | 5,550 | $ | 1,630 | 29 % | |||||||||||||||||||
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n/m - not meaningful
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||||||||||
Amortization of intangibles | ||||||||||||||||
Cost of revenue | $ | 1,343 | $ | 1,840 | $ | (497 | ) | (27 | )% | |||||||
Selling and marketing | 1,531 | 1,496 | 35 | 2 | % | |||||||||||
General and administrative | 264 | 420 | (156 | ) | (37 | )% | ||||||||||
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$ | 3,138 | $ | 3,756 | $ | (618 | ) | (16 | )% | ||||||||
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The increases in amortization expense during the second quarter and first six months of 2014 weredecrease was primarily due to the full amortization associated with $10.4in 2014 of $9.6 million of technology intangibles acquired from AntennaChordiant in October 2013.April 2010.
Three Months Ended June 30, | Increase | Six Months Ended June 30, | Increase | Three Months Ended March 31, | Increase | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
Selling and marketing | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling and marketing | $ | 56,342 | $ | 45,346 | $ | 10,996 | 24 % | $ | 102,149 | $ | 84,616 | $ | 17,533 | 21 % | $ | 55,735 | $ | 45,807 | $ | 9,928 | 22 | % | ||||||||||||||||||||||||||
As a percent of total revenue | 39 % | 39 % | 36 % | 36 % | 36 | % | 33 | % | ||||||||||||||||||||||||||||||||||||||||
Selling and marketing headcount at June 30, | 614 | 539 | 75 | 14 % | ||||||||||||||||||||||||||||||||||||||||||||
Selling and marketing headcount at March 31, | 657 | 608 | 49 | 8 | % |
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 second quarter of 2014 compared to the same period in 2013 was primarily due to a $4.6$4.1 million increase in compensation and benefit expensesbenefits associated with higher headcount, a $3$3.1 million increase in commission expense associated with the higher value of new license arrangements executed during the second quarter of 2014 compared to the second quarter of 2013, a $1.6 million increase in 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 six months of 2014 compared to the same period in 2013 was primarily due to a $7.7 million increase in compensation and benefit expenses associated with higher headcount, a $3.7 million increase in commission expensecommissions associated with the higher value of new license arrangements executed during the first six monthsquarter of 20142015 compared to the first six monthsquarter of 2013,2014, and a $2$3.1 million increase in 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.expenses.
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 June 30, | Increase | Six Months Ended June 30, | Increase | Three Months Ended March 31, | Increase | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
Research and development | ||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | $ | 27,323 | $ | 19,761 | $ | 7,562 | 38 % | $ | 51,932 | $ | 39,337 | $ | 12,595 | 32 % | $ | 29,844 | $ | 24,609 | $ | 5,235 | 21 | % | ||||||||||||||||||||||||||
As a percent of total revenue | 19 % | 17 % | 18 % | 17 % | 19 | % | 18 | % | ||||||||||||||||||||||||||||||||||||||||
Research and development headcount at June 30, | 1,020 | 792 | 228 | 29 % | ||||||||||||||||||||||||||||||||||||||||||||
Research and development headcount at March 31, | 1,095 | 924 | 171 | 19 | % |
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 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.facility. The increase in offshore headcount lowered our average compensation expense per employee.
The increase in research and development expenses during the second quarter of 2014 compared to the same period in 2013 was primarily due to a $5.6$3.9 million increase in compensation and benefit expenses associated with higher headcount, inclusive of the compensation and benefit expenses associated with our product management and design group now included in research and development, a $0.6 million increase in expendable equipment, a $0.5 million increase in contracted professional services, a $0.3 million increase in cloud hosting costs, and a $0.3 million increase in computer and computer-related costs, partially offset by a $0.4 million increase in rent and rent-related expenses.
The increasebenefit which was the portion from the settlement of the Antenna indemnification claims recorded in research and development expenses during(See Note 14 “Subsequent Event” in the first six months of 2014 comparednotes to the same period in 2013 was primarily due to a $9.2 million increase in compensation and benefit expenses associated with higher headcount inclusive of the compensation and benefit expenses associated with our 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 $0.6 million increase in rent and rent-related expenses.accompanying unaudited condensed consolidated financial statements).
Three Months Ended June 30, | Increase | Six Months Ended June 30, | Increase | Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
General and administrative | ||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 10,250 | $ | 7,277 | $ | 2,973 | 41 % | $ | 19,552 | $ | 14,073 | $ | 5,479 | 39 % | $ | 6,345 | $ | 9,302 | $ | (2,957 | ) | (32 | )% | |||||||||||||||||||||||||
As a percent of total revenue | 7 % | 6 % | 7 % | 6 % | 4 | % | 7 | % | ||||||||||||||||||||||||||||||||||||||||
General and administrative headcount at June 30, | 286 | 248 | 38 | 15 % | ||||||||||||||||||||||||||||||||||||||||||||
General and administrative headcount at March 31, | 299 | 276 | 23 | 8 | % |
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 increasedecrease was primarily due to a $3.4 million benefit comprised of $1.8 million which was the portion from the settlement of the Antenna indemnification claims recorded in general and administrative expenses during(See Note 14 “Subsequent Event” in the second quarter of 2014 comparednotes to the same period in 2013 was primarily due to a $1.4accompanying unaudited condensed consolidated financial statements) and $1.6 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 withfrom the Antenna trademark intangible asset.
The increase in general and administrative expenses during the first six monthssettlement 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.indirect tax liabilities.
Stock-based compensation
The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of operations:
Three Months Ended June 30, | Increase | Six Months Ended June 30, | Increase | Three Months Ended March 31, | Increase | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
Cost of services | $ | 1,387 | $ | 1,014 | $ | 373 | 37% | $ | 2,398 | $ | 2,187 | $ | 211 | 10 % | ||||||||||||||||||||||||||||||||||
Cost of revenues | $ | 1,953 | $ | 1,011 | $ | 942 | 93 | % | ||||||||||||||||||||||||||||||||||||||||
Operating expenses | 4,316 | 2,284 | 2,032 | 89 | % | |||||||||||||||||||||||||||||||||||||||||||
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Operating expenses | 3,771 | 2,267 | 1,504 | 66% | 6,055 | 4,526 | 1,529 | 34 % | ||||||||||||||||||||||||||||||||||||||||
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Total stock-based compensation before tax | 5,158 | 3,281 | 1,877 | 57% | 8,453 | 6,713 | 1,740 | 26 % | 6,269 | 3,295 | 2,974 | 90 | % | |||||||||||||||||||||||||||||||||||
Income tax benefit | (1,591) | (944) | (2,582) | (2,047) | (1,783 | ) | (991 | ) |
The increases in stock-based compensation expense during the second quarter and first six months of 2014 wereincrease was 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 20132014 annual periodic equity grant compared to the 2013 grant, which occurred in March 2015 and executive new hire grants made since June 30, 2013.2014, respectively.
Non-operating income and expenses, net
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||
Foreign currency transaction (loss) gain | $ | (4) | $ | (437) | $ | 433 | (99) % | $ | 318 | $ | (2,327) | $ | 2,645 | (114) % | ||||||||||||||||||
Interest income, net | 163 | 135 | 28 | 21 % | 287 | 253 | 34 | 13 % | ||||||||||||||||||||||||
Other income (expense), net | 6 | (94) | 100 | (106) % | (526) | 745 | (1,271) | (171) % | ||||||||||||||||||||||||
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Non-operating gain (loss) | $ | 165 | $ | (396) | $ | 561 | (142) % | $ | 79 | $ | (1,329) | $ | 1,408 | (106) % | ||||||||||||||||||
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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.
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||||||||||
Foreign currency transaction (loss) gain | $ | (2,962 | ) | $ | 322 | $ | (3,284 | ) | (1,020 | )% | ||||||
Interest income, net | 313 | 124 | 189 | 152 | % | |||||||||||
Other expense, net | — | (532 | ) | 532 | (100 | )% | ||||||||||
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Non-operating loss | $ | (2,649 | ) | $ | (86 | ) | $ | (2,563 | ) | 2,980 | % | |||||
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We 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 income (expense),expense, net. The fluctuations in the value of these forward contracts recorded in other income (expense),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) gain.
We have beenare primarily exposed to the fluctuation in the British pound, Euro, Australian dollar and EuroIndian rupee relative to the U.S. dollar. More recently,Beginning in the second quarter of 2015, we have experienced increased levels ofexpect our exposure to fluctuations in primarily the Euro and Australian dollar relative to the U.S. dollar to decrease, and Indian rupee.our exposure from these currencies relative to the British pound to increase.
We are in the process of reassessing our hedging strategy and have not entered into any forward contracts since February 2014. We intend to fully or partially hedge our exposures relative to both the U.S. dollar and the British pound under our revised strategy, once implemented. See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for discussion of our use of forward contracts.
The totalcontracts and our anticipated change in the fair value of our forward contracts recorded in other income (expense), net, during the first six months of 2014 and 2013 was a loss of $(0.5) million and a gain of $0.7 million, respectively.exposures.
Provision for income taxes
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 secondfirst quarter of 20142015 and 2013,2014, we recorded a tax provisionprovisions of $0.9$3.3 million and $2$4.8 million, respectively, which resulted in an effective tax rate of 37%35.9% and 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%32.8%, respectively. Our effective tax rate for second quarter and first six months of 2013 was below the statutory rate primarily due to 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 six months of 20142015 was higher than in the same periodsperiod in 20132014 primarily because the research and experimentation credit has not yet been extended to 2014 and the increaseof a decrease in non-deductible foreign stock-based compensation expense in the second quarter and first six months of 2014 compared to the same periods in 2013.our anticipated domestic production activities deduction.
Liquidity and capital resources
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 73,935 | $ | 64,280 | $ | 27,521 | $ | 72,858 | ||||||||
Investing activities | (18,008) | (26,122) | (5,381 | ) | (2,630 | ) | ||||||||||
Financing activities | (11,287) | (8,678) | (6,337 | ) | (6,587 | ) | ||||||||||
Effect of exchange rate on cash | 2,240 | (3,160) | (2,908 | ) | 458 | |||||||||||
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Net increase in cash and cash equivalents | $ | 46,880 | $ | 26,320 | $ | 12,895 | $ | 64,099 | ||||||||
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As of | As of | |||||||||||||||
June 30, 2014 | December 31, 2013 | |||||||||||||||
Total cash, cash equivalents, and marketable securities | $ | 216,213 | $ | 156,692 | ||||||||||||
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As of March 31, 2015 | As of December 31, 2014 | |||||||
Total cash, cash equivalents, and marketable securities | $ | 225,357 | $ | 211,216 | ||||
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The increase in cash and cash equivalents during the first three months of 2015 was primarily due to the significant increase in cash provided by operating activities associated with our strong accounts receivable collections during the first six months of 2014, which were generated from our significant arrangements executed in the fourth quarter of 2013 and first six months of 2014.period. We believe that our current cash, cash equivalents, marketable securities, 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 first quarter of 2014, we paid $0.8 million of the remaining merger consideration related to the final working capital adjustment for our October 2013 acquisition of Antenna. During the secondfirst quarter of 2014,2015, we paid $0.8$0.5 million in additional cash consideration to the selling shareholders of one of the three companies acquired in 2014 based on the achievement of certain performance milestones. We may be required to pay an additional $1.2 million in cash to the same selling shareholders based on the achievement of certain performance milestones through the end of 2016. In addition, we will pay $1.1 million of additional cash consideration in 2015 to acquire Meshlabs.the selling shareholders of another of the three companies acquired in 2014.
As of June 30, 2014,March 31, 2015, approximately $64.2$48.4 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.
Cash provided by operating activities
The primary drivers of cash provided by operating activities during the first sixthree months of 20142015 were net income of $11.3$5.9 million and a $33.9 million increase in deferred revenue due to the $46timing of our annual billings, partially offset by a $21.6 million net change in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease in accounts receivablepayable and accrued expenses primarily due to our significant strong collections, partially offset by an increase in income taxes receivable due to estimated taxthe timing of payments and the tax benefits associated with domestic stock-based compensation.for compensation-related accruals.
The primary drivers of cash provided by operating activities during the first sixthree months of 20132014 were net income of $13.8$9.8 million, and the $31.8a $57.3 million net changedecrease in assets and liabilities. The net change in assets and liabilities primarily consisted of a decrease intrade accounts receivable due to higherour significant collections, and an $18.3 million increase in deferred revenue primarily due to the timing of our annual billings, partially offset by a $21.6 million decrease in accounts payable and accrued expenses primarily due to the timing of payments for compensation-related accruals.
Future Cash Receipts from License and Cloud Arrangements
Total contractual future cash receipts due from our existing license and Pega Cloud agreementsarrangements was approximately $298.7$294.4 million as of June 30, 2014March 31, 2015 compared to $246.8$270.2 million as of June 30, 2013.March 31, 2014. The future cash receipts due as of June 30, 2014 are summarized as follows:
(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 | |||||||||
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Total | $ | 251,988 | $ | 46,670 | $ | 298,658 | ||||||
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(in thousands) as of March 31, 2015 | 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 2015 | $ | 52,970 | $ | 14,471 | $ | 67,441 | ||||||
2016 | 88,812 | 15,696 | 104,508 | |||||||||
2017 | 52,712 | 1,526 | 54,238 | |||||||||
2018 | 37,474 | 684 | 38,158 | |||||||||
2019 and thereafter | 29,383 | 684 | 30,067 | |||||||||
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Total | $ | 261,351 | $ | 33,061 | $ | 294,412 | ||||||
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(1) | These amounts include contractual future cash receipts related to our |
(2) | These amounts |
Cash used in investing activities
During the first sixthree months of 2015, cash used in investing activities was primarily for purchases of marketable debt securities of $18.1 million, partially offset by the proceeds received from the maturities of marketable debt securities of $16.5 million. We also invested $3.3 million primarily in leasehold improvements for the build-out of our new office in Hyderabad, India.
During the first three months of 2014, cash used in investing activities was primarily for purchases of marketable debt securities of $29.5$11.6 million, partially offset by the proceeds received from the maturities of marketable debt securities of $16$11 million.
During We also invested $1.2 million primarily in leasehold improvements for the first six monthsbuild-out of 2013, cash used in investing activities was primarily for purchases of marketable debt securities of $32.7 million, partially offset by the proceeds received from the maturities of marketable debt securities of $8.5 million.
Payments for acquisitions during the first six months of 2014 totaled $1.6 million, comprised of the payment of the final working capital adjustment to the Antenna shareholders and cash consideration to acquire MeshLabs, in the first and second quarters of 2014, respectively.our Bengaluru, India office.
Cash used in financing activities
Cash used in financing activities during the first sixthree months of 20142015 and 20132014 was primarily for repurchases of our common stock. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $104.5$119 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 sixthree months of 20142015 and 2013:
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
Prior year authorization as of January 1, | $ | 14,433 | $ | 14,793 | $ | 13,284 | $ | 14,433 | ||||||||||||||||||||||||
Repurchases paid | 419,900 | (8,305) | 512,438 | (7,199) | 106,290 | (2,132 | ) | 210,802 | (4,476 | ) | ||||||||||||||||||||||
Repurchases unsettled | — | — | 314 | (5) | 400 | (9 | ) | 96 | (2 | ) | ||||||||||||||||||||||
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Authorization remaining as of March 31, | $ | 11,143 | $ | 9,955 | ||||||||||||||||||||||||||||
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Authorization remaining as of June 30, | $ | 6,128 | $ | 7,589 | ||||||||||||||||||||||||||||
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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 sixthree months of 20142015 and 2013,2014, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of 700,000501,000 shares and 731,000323,000 shares, respectively, of which only 394,000297,000 shares and 401,000187,000 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 sixthree months of 20142015 and 2013,2014, instead of receiving cash from the equity holders, we withheld shares with a value of $3.4$2.6 million and $2.8$1.8 million, respectively, for withholding taxes, and $2.9$1.5 million and $2$1.0 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 sixthree months of 20142015 and 2013.2014.
Dividends
We declared a cash dividend of $0.045 and $0.03 per share on a post-split basis in the first six months of 2014 and 2013, respectively. We paid cash dividends of $2.3 million and $1.1 million in the first six months of 2014 and 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. On May 27, 2014, we announced an increase in our quarterly cash dividend from $0.015 to $0.03 per share. AsWe declared a result, itcash dividend of $0.03 and $0.015 in the first three months of 2015 and 2014, respectively. We paid cash dividends of $2.3 million and $1.1 million in the first three months of 2015 and 2014, respectively. It is our current intention to pay a quarterly cash dividend of $0.03 per share,share; however, the Board of Directors may terminate or modify this dividend program at any time without notice.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
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 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 offsetsoffset 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 Beginning in the second quarter of 2014,2015, we did not enter into any forwards contracts as weexpect to have foreign currency transaction gains or (losses) on cash, intercompany payables, and accounts receivables held by our U.K. subsidiary in currencies other than the British pound.
We are in the process of reassessing our hedging strategy.strategy, and we have not entered into any forward contracts since February 2014. We intend to fully or partially hedge our exposures relative to both the U.S. dollar and the British pound under our revised strategy, once implemented.
See Note 4 “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 sixthree months of 2014.2015. 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, 20132014 for a more complete discussion of our market risk exposure.
Item 4. Controls and Procedures
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures.
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 June 30, 2014.March 31, 2015. 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 June 30, 2014.March 31, 2015.
(b) Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended June 30, 2014March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1A. | Risk Factors |
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, 2013.2014. 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. There have been no material changes during the first sixthree months of 20142015 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information regarding our repurchases of our common stock during the secondfirst quarter of 2014:2015:
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 | ||||||||||||
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Total | 209,002 | $ | 18.31 |
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) | ||||||||||||
1/1/2015 - 1/31/2015 | 58,069 | $ | 19.88 | 58,069 | $ | 12,129 | ||||||||||
2/1/2015 - 2/28/2015 | 14,360 | 20.06 | 14,360 | 11,841 | ||||||||||||
3/1/2015 - 3/31/2015 | 34,261 | 20.37 | 34,261 | 11,143 | ||||||||||||
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Total | 106,690 | $ | 20.06 |
(1) |
Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to |
Item 6. | Exhibits |
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.
Pegasystems Inc. | |||||||
Date: | May 6, 2015 | By: | /s/ RAFEAL E. BROWN | ||||
Rafeal E. Brown | |||||||
Chief Financial Officer, Chief Administrative Officer and Senior Vice President | |||||||
( |
PEGASYSTEMS INC.
Exhibit Index
Exhibit
| Description | |
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 ended |
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