UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

FORM10-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 March 31, 2019

~~For the quarterly period ended September 30, 2017~~

☐

¨	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~~registrant as specified in its charter)

____________________



Massachusetts		04-2787865
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
	~~(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~~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 RegulationS-T during the preceding 12 months (or for such shorter period that the ~~registrant~~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, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth ~~company,”~~company” inRule 12b-2 of the Exchange Act.



Large accelerated filerx	☒	Accelerated filer¨	☐

Non-accelerated filer¨	~~☐ (Do not check if smaller reporting company)~~	Smaller reporting company¨	☐

		Emerging growth company	☐¨

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

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

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



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

There were ~~77,859,958~~78,908,093 shares of the Registrant’s common stock, ~~$.01~~$0.01 par value per share, outstanding on ~~October 27, 2017.~~

May 1, 2019.

PEGASYSTEMS INC.

~~Index to Form~~

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



	Page
~~Page~~PART I - FINANCIAL INFORMATION

~~PART I—FINANCIAL INFORMATION~~

Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~ 2018		2	3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~ 2018		3	4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~ 2018		4	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~ 2018		5	7
Notes to Unaudited Condensed Consolidated Financial Statements		6	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		25	22
Item 4. Controls and Procedures	22
	25
PART II - OTHER INFORMATION
~~PART II—OTHER INFORMATION~~

Item 1A. Risk Factors		25	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6. Exhibits	23
25
~~Item 6. Exhibits~~ Signature		26

~~Signature~~24		27

PART I—I - FINANCIAL INFORMATION

~~ITEM 1.~~

~~UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

   September 30,
2017 December 31,
2016
Assets

Current assets:

Cash and cash equivalents
   $ 130,568 $ 70,594
Marketable securities
   63,812 63,167


Total cash, cash equivalents, and marketable securities
   194,380 133,761
Trade accounts receivable, net of allowance of $6,189 and $4,126
   191,161 265,028
Income taxes receivable
   34,864 14,155
Other current assets
   17,679 12,188


Total current assets
   438,084 425,132
Property and equipment, net
   39,849 38,281
Deferred income taxes
   73,459 69,898
Long-term other assets
   5,982 3,990
Intangible assets, net
   34,755 44,191
Goodwill
   72,941 73,164


Total assets
   $ 665,070 $ 654,656


Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
   $ 12,535 $ 14,414
Accrued expenses
   39,681 36,751
Accrued compensation and related expenses
   53,869 60,660
Deferred revenue
   160,931 175,647


Total current liabilities
   267,016 287,472
Income taxes payable
   4,774 4,263
Long-term deferred revenue
   6,130 10,989
Other long-term liabilities
   15,449 16,043


Total liabilities
   293,369 318,767


Stockholders’ equity:

Preferred stock, 1,000 shares authorized; no shares issued and outstanding
   —   —
Common stock, 200,000 shares authorized; 77,839 shares and 76,591 shares issued and outstanding
   778 766
Additionalpaid-in capital
   146,728 143,903
Retained earnings
   227,953 198,315
Accumulated other comprehensive loss
   (3,758 ) (7,095 )


Total stockholders’ equity
   371,701 335,889


Total liabilities and stockholders’ equity
   $ 665,070 $ 654,656



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	110,367		$	114,422
Marketable securities	91,804			93,001
Total cash, cash equivalents, and marketable securities	202,171			207,423
Accounts receivable	135,352			180,872
Unbilled receivables	161,480			172,656
Other current assets	63,731			49,684
Total current assets	562,734			610,635
Long-term unbilled receivables	130,494			151,237
Goodwill	72,898			72,858
Other long-term assets	190,433			147,823
Total assets	$	956,559		$	982,553
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	11,559		$	16,487
Accrued expenses	40,947			45,506
Accrued compensation and related expenses	56,349			84,671
Deferred revenue	180,845			185,145
Other current liabilities	12,447			—
Total current liabilities	302,147			331,809
Operating lease liabilities	45,325			—
Deferred income tax liabilities	8,319			6,939
Other long-term liabilities	12,339			22,274
Total liabilities	368,130			361,022
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—			—
Common stock, 200,000 shares authorized; 78,896 and 78,526 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	789			785
Additional paid-in capital	119,182			123,205
Retained earnings	479,779			510,863
Accumulated other comprehensive loss	(11,321		)	(13,322		)
Total stockholders’ equity	588,429			621,531
Total liabilities and stockholders’ equity	$	956,559		$	982,553

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
Revenue:

Software license
   $ 41,793 $ 68,833 $ 195,220 $ 207,849
Maintenance
   62,204 55,038 180,759 163,174
Services
   75,818 58,931 225,063 179,633


Total revenue
   179,815 182,802 601,042 550,656


Cost of revenue:

Software license
   1,276 1,313 3,826 3,646
Maintenance
   6,716 6,659 20,945 18,889
Services
   61,739 52,465 180,925 154,512


Total cost of revenue
   69,731 60,437 205,696 177,047


Gross profit
   110,084 122,365 395,346 373,609


Operating expenses:

Selling and marketing
   70,209 67,032 217,384 202,126
Research and development
   41,031 38,036 121,089 108,530
General and administrative
   13,133 11,725 38,174 34,067
Acquisition-related
   —   74 —   2,903


Total operating expenses
   124,373 116,867 376,647 347,626


(Loss)/income from operations
   (14,289 ) 5,498 18,699 25,983
Foreign currency transaction (loss)/gain
   (552 ) 1,082 (793 ) 2,764
Interest income, net
   144 172 470 650
Other income/(expense), net
   —   (1,237 ) 287 (4,891 )


(Loss)/income before (benefit)/provision for income taxes
   (14,697 ) 5,515 18,663 24,506
(Benefit)/provision for income taxes
   (12,885 ) 2,214 (17,952 ) 6,269


Net (loss)/income
   $ (1,812 ) $ 3,301 $ 36,615 $ 18,237


(Loss)/earnings per share:

Basic
   (0.03 ) 0.04 0.47 0.24
Diluted
   (0.03 ) 0.04 0.44 0.23
Weighted-average number of common shares outstanding:

Basic
   77,691 76,278 77,258 76,323
Diluted
   77,691 79,548 82,717 79,401
Cash dividends declared per share
   $ 0.03 $ 0.03 $ 0.09 $ 0.09



	Three Months Ended March 31,
	2019			2018
Revenue
Software license	$	63,264		$	87,773
Maintenance	67,706			64,525
Services	81,576			82,884
Total revenue	212,546			235,182
Cost of revenue
Software license	1,378			1,255
Maintenance	6,335			6,082
Services	66,724			68,277
Total cost of revenue	74,437			75,614
Gross profit	138,109			159,568
Operating expenses
Selling and marketing	108,865			88,383
Research and development	50,596			46,785
General and administrative	12,676			16,464
Total operating expenses	172,137			151,632
(Loss) income from operations	(34,028		)	7,936
Foreign currency transaction loss	(3,712		)	(1,085		)
Interest income, net	723			764
Other income, net	—			363
(Loss) income before benefit from income taxes	(37,017		)	7,978
Benefit from income taxes	(8,300		)	(4,222		)
Net (loss) income	$	(28,717	)	$	12,200
(Loss) earnings per share
Basic	$	(0.37	)	$	0.16
Diluted	$	(0.37	)	$	0.15
Weighted-average number of common shares outstanding
Basic	78,584			78,236
Diluted	78,584			83,102

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017    2016
Net (loss)/income
   $ (1,812 ) $ 3,301 $ 36,615    $ 18,237
Other comprehensive income/(loss), net of tax

Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax
   22 (174 ) 148    168
Foreign currency translation adjustments
   549 (169 ) 3,189    (1,400 )




Total other comprehensive income/(loss), net of tax
   571 (343 ) 3,337    (1,232 )




Comprehensive (loss)/income
   $ (1,241 ) $ 2,958 $ 39,952    $ 17,005



	Three Months Ended March 31,
	2019			2018
Net (loss) income	$	(28,717	)	$	12,200
Other comprehensive income, net of tax
Unrealized gain (loss) on available-for-sale marketable securities, net of tax	374			(188		)
Foreign currency translation adjustments	1,627			4,450
Total other comprehensive income, net of tax	2,001			4,262
Comprehensive (loss) income	$	(26,716	)	$	16,462

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’ EQUITY

(in ~~thousands)~~

   Nine Months Ended
September 30,
   2017 2016
Operating activities:

Net income
   $ 36,615 $ 18,237
Adjustments to reconcile net income to cash provided by operating activities:

Deferred income taxes
   (2,607 ) (2,841 )
Depreciation and amortization
   18,703 17,896
Stock-based compensation expense
   39,929 30,634
Foreign currency transaction loss/(gain)
   793 (2,764 )
Othernon-cash
   (89 ) 153
Change in operating assets and liabilities:

Trade accounts receivable
   80,580 3,940
Income taxes receivable and other current assets
   (25,943 ) (11,904 )
Accounts payable and accrued expenses
   (8,546 ) (16,678 )
Deferred revenue
   (25,639 ) (17,698 )
Other long-term assets and liabilities
   130 1,581


Cash provided by operating activities
   113,926 20,556
Investing activities:

Purchases of marketable securities
   (25,687 ) (22,614 )
Proceeds from maturities and called marketable securities
   23,124 21,838
Sales of marketable securities
   —   62,283
Payments for acquisitions, net of cash acquired
   (297 ) (49,113 )
Investment in property and equipment
   (9,106 ) (15,253 )


Cash used in investing activities
   (11,966 ) (2,859 )
Financing activities:

Dividend payments to shareholders
   (6,941 ) (6,883 )
Common stock repurchases for tax withholdings for net settlement of equity awards
   (34,113 ) (10,398 )
Common stock repurchases under share repurchase programs
   (2,986 ) (25,750 )


Cash used in financing activities
   (44,040 ) (43,031 )
Effect of exchange rates on cash and cash equivalents
   2,054 (1,309 )


Net increase/(decrease) in cash and cash equivalents
   59,974 (26,643 )
Cash and cash equivalents, beginning of period
   70,594 93,026


Cash and cash equivalents, end of period
   $ 130,568 $ 66,383

thousands, except per share amounts)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
	Number of Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
December 31, 2017	78,081		$	781		$	152,097		$	509,697		$	(6,705	)	$	655,870
Repurchase of common stock	(101	)	(1		)	(5,688		)	—			—			(5,689		)
Issuance of common stock for share-based compensation plans	566		5			(15,556		)	—			—			(15,551		)
Stock-based compensation	—		—			15,109			—			—			15,109
Cash dividends declared ($0.12 per share)	—		—			—			(2,355		)	—			(2,355		)
Other comprehensive income	—		—			—			—			4,262			4,262
Net income	—		—			—			12,200			—			12,200
March 31, 2018	78,546		$	785		$	145,962		$	519,542		$	(2,443	)	$	663,846

December 31, 2018	78,526		785			123,205			510,863			(13,322		)	621,531
Repurchase of common stock	(144	)	(1		)	(7,586		)	—			—			(7,587		)
Issuance of common stock for share-based compensation plans	514		5			(14,843		)	—			—			(14,838		)
Stock-based compensation	—		—			18,406			—			—			18,406
Cash dividends declared ($0.12 per share)	—		—			—			(2,367		)	—			(2,367		)
Other comprehensive income	—		—			—			—			2,001			2,001
Net loss	—		—			—			(28,717		)				(28,717		)
March 31, 2019	78,896		$	789		$	119,182		$	479,779		$	(11,321	)	$	588,429

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended
March 31,
2019 2018
Operating activities:
Net (loss) income $ (28,717 ) $ 12,200
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Stock-based compensation 18,350
15,109
Amortization and depreciation 18,774
10,322
Foreign currency transaction loss 3,712
1,085
Other non-cash 1,471
1,137
Change in operating assets and liabilities, net 9,113
15,802
Cash provided by operating activities 22,703
55,655
Investing activities:

Purchases of investments (7,224 ) (35,204 )
Proceeds from maturities and called investments 8,548
5,995
Other (2,790 ) (2,069 )
Cash used in investing activities (1,466 ) (31,278 )
Financing activities:
Dividend payments to shareholders (2,363 ) (2,344 )
Common stock repurchases (23,224 ) (20,708 )
Cash used in financing activities (25,587 ) (23,052 )
Effect of exchange rate changes on cash and cash equivalents 295
2,186
Net (decrease) increase in cash and cash equivalents (4,055 ) 3,511
Cash and cash equivalents, beginning of period 114,422
162,279
Cash and cash equivalents, end of period $ 110,367
$ 165,790

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all 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 Form10-K for the year ended December 31, ~~2016.~~

2018.

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 ~~2017.~~

2019.

2. NEW ACCOUNTING PRONOUNCEMENTS

~~Stock-Based Compensation~~

Financial instruments

In ~~May 2017,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ~~(“ASU”)No. 2017-09~~ “Stock Compensation (Topic 718), Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date for the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

~~Financial Instruments~~

~~In June 2016, the FASB issued ASU~~No. 2016-13, “Financial ~~Instruments—~~Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including ~~trade~~ accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss ~~model for credit losses.~~model. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

Leases

~~In February 2016, the FASB issued ASUNo. 2016-02,~~ ~~“Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use~~ ~~asset for the right to use the underlying asset for the lease term. The effective date for the Company will be~~

On January 1, 2019, the Company adopted Accounting Standards Codifications 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with ~~early adoption permitted.~~ the Company’s historic accounting under ASC 840 “Leases”.

The Company ~~expects~~elected the permitted practical expedients to not reassess the following related to leases that ~~most~~commenced before the effective date of ~~its operating~~ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease ~~commitments will be subject to this ASU~~classification for any expired or existing leases; and ~~recognized as operating~~(iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities ~~andright-of-use~~ ~~assets upon adoption with no material impact to its results~~ of ~~operations and cash flows.~~

~~Revenue~~

~~In May 2014,~~$54.2 million. The difference between the ~~FASB issued ASUNo. 2014-09,~~ “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition, creating the new Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, ASC 606 requires disclosurevalue of the ~~nature, amount, timing,~~right of use assets and ~~uncertainty~~lease liabilities is due to the reclassification of ~~revenue~~existing deferred rent, prepaid rent, and ~~cash flows arising from contracts with customers.~~

~~The Company has elected the full retrospective adoption model, effective~~unamortized lease incentives as of January 1, ~~2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form10-K~~2019.

See Note 9. “Leases” for ~~the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.~~

~~PEGASYSTEMS INC.~~

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

~~The Company has made significant progress on quantifying the impact of its adoption and identifying necessary changes to our policies, processes, systems, and controls.~~

~~The Company expects the following impacts:~~

Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met, and any corresponding maintenance over the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the customer. Any unrecognized license revenue from these arrangements, included in deferred revenue at December 31, 2015, will not be recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016 and 2017 will be recognized in full in the year that control of the license is transferred to the customer instead of over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.

Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective Evidence (“VSOE”) for the remaining undelivered elements, which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights under ASC 606, to be allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional ~~license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the customer, which is generally upon delivery of the license.~~information.

Currently, the Company does not have VSOE for fixed price services, time and materials services in certain geographical areas, and unspecified future products, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a stand-alone selling price. Once the transaction price is allocated to each of the performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer, professional services revenue will be recognized over time based on input or output measures that reflect the Company’s performance on the contract. This will result in the acceleration of professional services revenue when compared to the current practice of ratable recognition for professional services when there is a lack of VSOE.

Sales commissions and other third party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. As a practical expedient, if the term of the contract is one year or less, the Company will expense these costs as incurred. The Company expects this change to impact its multi-year cloud offerings and term and perpetual licenses with additional rights of use that extend beyond one year.

ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract modifications are recognized currently.

~~There will be a corresponding effect on tax liabilities in relation to all of the above impacts.~~

~~PEGASYSTEMS INC.~~

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

3. MARKETABLE SECURITIES

~~The Company’s marketable securities are as follows:~~

(in thousands)    Amortized
Cost    Unrealized
Gains    Unrealized
Losses    Fair
Value
September 30, 2017

Municipal bonds
   $ 32,764    $ 12 �� $ (17 )    $ 32,759
Corporate bonds
   31,079    12    (38 )    31,053








   $ 63,843    $ 24    $ (55 )    $ 63,812








December 31, 2016

Municipal bonds
   $ 36,746    $ —      $ (139 )    $ 36,607
Corporate bonds
   26,610    1    (51 )    26,560








   $ 63,356    $ 1    $ (190 )    $ 63,167



	March 31, 2019
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	42,693	$	86	$	(20	)	$	42,759
Corporate bonds	48,966		142		(63		)	49,045
	$	91,659	$	228	$	(83	)	$	91,804



	December 31, 2018
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	44,802	$	13	$	(110	)	$	44,705
Corporate bonds	48,499		23		(226		)	48,296
	$	93,301	$	36	$	(336	)	$	93,001

As of ~~September 30, 2017,~~March 31, 2019, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

As of ~~September 30, 2017, remaining~~March 31, 2019, maturities of marketable ~~debt~~ securities ranged from ~~October 2017~~April 2019 to ~~September 2020,~~August 2022, with a weighted-average remaining maturity of approximately ~~14 months.~~

~~4. DERIVATIVE INSTRUMENTS~~

~~In May 2017, the Company discontinued its forward contracts program; however, it will continue to evaluate periodically its foreign exchange exposures and mayre-initiate~~ ~~this program if it is deemed necessary.~~

The Company has historically used foreign currency forward contracts (“forward contracts”) to hedge its exposure to fluctuations in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary.

~~At December 31, 2016, the total notional value of the Company’s outstanding forward contracts was $128.4 million.~~

~~The fair value of the Company’s outstanding forward contracts was as follows:~~

   December 31, 2016
(in thousands)    Recorded In:    Fair Value
Asset Derivatives

Foreign currency forward contracts
   Other current assets    $ 628
Liability Derivatives

Foreign currency forward contracts
   Accrued expenses    $ 883

~~As of September 30, 2017, the Company did not have any forward contracts outstanding.~~

~~The Company had forward contracts outstanding with total notional values as of September 30, 2016 as follows:~~

(in thousands)
Euro
   € 21,810
British pound
   £ 5,919
Australian dollar
   A$     19,515
United States dollar
   $ 59,450

1.4 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables



(in thousands)	March 31, 2019		December 31, 2018
Accounts receivable	$	135,352	$	180,872
Unbilled receivables	161,480		172,656
Long-term unbilled receivables	130,494		151,237
	$	427,326	$	504,765

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

As of March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was not material.

Unbilled receivables are expected to be billed in the future as follows:



(Dollars in thousands)	March 31, 2019
1 year or less	$	161,480	55	%
1-2 years	86,496		30	%
2-5 years	43,998		15	%
	$	291,974	100	%

Contract assets and deferred revenue



(in thousands)	March 31, 2019		December 31, 2018
Contract assets ⁽¹⁾	$	3,380	$	3,711
Long-term contract assets ⁽²⁾	1,818		2,543
	$	5,198	$	6,254
Deferred revenue	$	180,845	$	185,145
Long-term deferred revenue ⁽³⁾	5,866		5,344
	$	186,711	$	190,489

⁽¹⁾Included in other current assets.⁽²⁾ Included in other long-term assets.⁽³⁾Included in other long-term liabilities.

Contract assets are amounts under client contracts where revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.

The ~~income statement~~change in deferred revenue in the three months ended March 31, 2019 was primarily due to $89.4 million of revenue recognized, excluding the impact of netting contract assets and deferred revenue at the ~~Company’s outstanding forward contracts~~contract level, during the period that was included in deferred revenue at December 31, 2018, partially offset by new billings in advance of revenue recognition.

5. DEFERRED CONTRACT COSTS

The Company recognizes an asset for the incremental costs of obtaining a client contract, which primarily relate to sales commissions, if the Company expects to benefit from those costs for more than one year. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average 5 years.



(in thousands)	March 31, 2019		December 31, 2018
Deferred contract costs ⁽¹⁾	$	64,869	$	64,367

⁽¹⁾ Included in other long-term assets.



	Three Months Ended March 31,
(in thousands)	2019		2018
Amortization of deferred contract costs ⁽¹⁾	$	8,301	$	3,789

⁽¹⁾Included in selling and ~~foreign currency transactions was~~marketing expenses.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The change in the carrying amount of goodwill was:



(in thousands)	Three Months Ended March 31,
(in thousands)	2019
Balance as of January 1,	$	72,858
Currency translation adjustments	40
Balance as of March 31,	$	72,898

Intangibles

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

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017    2016    2017    2016
Gain (loss) from the change in the fair value of forward contracts included in other income (expense), net
   $ —      $ (1,237 )    $ 286    $ (4,955 )
Foreign currency transaction (loss) gain from the remeasurement of foreign currency assets and liabilities
   (552 )    1,082    (793 )    2,764








   $ (552 )    $ (155 )    $ (507 )    $ (2,191 )



		March 31, 2019
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,136	$	(52,839	)	$	10,297
Technology	2-10 years	59,742		(51,730		)	8,012
Other	1 - 5 years	5,361		(5,361		)	—
		$	128,239	$	(109,930	)	$	18,309

⁽¹⁾Included in other long-term assets.



		December 31, 2018
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,115	$	(51,224	)	$	11,891
Technology	2-10 years	59,742		(50,398		)	9,344
Other	1 - 5 years	5,361		(5,361		)	—
		$	128,218	$	(106,983	)	$	21,235

⁽¹⁾Included in other long-term assets.

Amortization of intangible assets was:



(in thousands)	Three Months Ended March 31,
(in thousands)	2019		2018
Cost of revenue	$	1,332	$	1,232
Selling and marketing	1,603		1,605
	$	2,935	$	2,837

7. ACCRUED EXPENSES



(in thousands)	March 31, 2019		December 31, 2018
Outside professional services expenses	$	8,815	$	10,367
Income and other taxes	7,954		10,387
Marketing and sales program expenses	8,318		5,860
Dividends payable	2,367		2,363
Employee-related expenses	5,432		3,536
Other	8,061		12,993
	$	40,947	$	45,506

8. FAIR VALUE MEASUREMENTS

Assets and ~~Liabilities Measured~~liabilities measured at ~~Fair Value~~fair value on a ~~Recurring Basis~~

recurring basis

The Company records its ~~money market funds,~~cash equivalents, marketable securities, and ~~forward contracts~~investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: ~~(Level 1)~~

Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; ~~(Level 2)~~

Level 2 - significant other inputs that are observable either directly or indirectly; and ~~(Level 3)~~

Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The Company’s cash equivalents are composed of money market funds and time deposits, which are classified within Level 1 ofand Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are 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. The Company’s ~~foreign currency forward contracts, which were all~~investments in privately-held companies are classified within Level 23 of the fair value ~~hierarchy, are valued based on the notional amounts and rates under the contracts and observable market inputs such as currency exchange rates and credit risk.~~ hierarchy.

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 between ~~Level 1 and Level 2~~levels during the ~~nine~~three months ended ~~September 30, 2017.~~

~~PEGASYSTEMS INC.~~

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

March 31, 2019.

The Company’s assets and liabilities measured at fair value on a recurring basis ~~consisted of the following:~~

   Fair Value Measurements at Reporting Date Using          Total
(in thousands)    Level 1    Level 2
September 30, 2017

Fair Value Assets:

Money market funds
   $     655    $ —            $ 655
Marketable securities:

Municipal bonds
   $ —      $ 32,759          32,759
Corporate bonds
   —      31,053          31,053






   $ —      $ 63,812          $ 63,812
December 31, 2016

Fair Value Assets:

Money market funds
   $ 458    $ —            $ 458
Marketable securities:

Municipal bonds
   $ —      $ 36,607          $ 36,607
Corporate bonds
   —      26,560          26,560






   $ —      $ 63,167          $ 63,167
Foreign currency forward contracts
   —      628          628
Fair Value Liabilities:

Foreign currency forward contracts
   $ —      $ 883          $ 883

were:



	March 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	12,401	$	10,062	$	—	$	22,463
Marketable securities:
Municipal bonds	$	—	$	42,759	$	—	$	42,759
Corporate bonds	—		49,045		—		49,045
Total marketable securities	$	—	$	91,804	$	—	$	91,804
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,390	$	3,390

⁽¹⁾ Included in other long-term assets.



	December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	10,155	$	10,000	$	—	$	20,155
Marketable securities:
Municipal bonds	$	—	$	44,705	$	—	$	44,705
Corporate bonds	—		48,296		—		48,296
Total marketable securities	$	—	$	93,001	$	—	$	93,001
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,390	$	3,390

⁽¹⁾ Included in other long-term assets.

For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates ~~their~~ fair value due to the relatively short maturity of these items.

~~Assets Measured~~

9. LEASES

The Company’s leases are primarily for office space used in the ordinary course of business.

Accounting policy

All the Company’s leases are operating leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at ~~Fair Value~~the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a ~~Nonrecurring Basis~~

~~Assets recorded at fair value on a nonrecurring~~straight-line basis ~~such as property and equipment and intangible assets,~~over the term of the lease. Variable lease costs are recognized ~~at fair value when they are impaired. During~~in the ~~nine months ended September 30, 2017~~period in which the obligation for those payments is incurred. The Company combines lease and ~~2016,~~non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term, if the Company ~~did~~is reasonably certain it will exercise those options. The Company’s leases do not ~~recognize~~contain any ~~impairments of its assets recorded at fair~~material residual value ~~on a nonrecurring basis.~~

~~6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE~~

(in thousands)    September 30,
2017    December 31,
2016
Trade accounts receivable
   $ 164,530    $ 234,473
Unbilled trade accounts receivable
   32,820    34,681




Total trade accounts receivable
   197,350    269,154
Allowance for sales credit memos
   (6,189 )    (4,126 )




   $ 191,161    $ 265,028

~~Unbilled trade accounts receivable primarily relate to services earned under time and materials arrangements and to license, maintenance, and cloud arrangements that have commenced~~guarantees or ~~been delivered in excess of scheduled invoicing.~~

~~7. GOODWILL AND OTHER INTANGIBLE ASSETS~~

~~The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 as follows:~~

(in thousands)
Balance as of January 1,
   $ 73,164
Purchase price adjustments to goodwill
   (354 )
Currency translation adjustments
   131


Balance as of September 30,
   $ 72,941

restrictive covenants.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Intangible~~

Expense



	Three Months Ended March 31,
(in thousands)	2019
Operating lease costs	$	4,300
Variable lease costs ⁽¹⁾	1,321
	$	5,621

⁽¹⁾ Lease costs that are not fixed at lease commencement.

Right of use assets ~~are recorded at cost~~ and ~~are amortized using~~lease liabilities



(in thousands)	March 31, 2019
Right of use assets ⁽¹⁾	$	46,464
Lease liabilities ⁽²⁾	$	12,447
Long-term lease liabilities	$	45,325

⁽¹⁾An asset that represents the ~~straight-line method over their estimated useful lives as follows:~~

(in thousands)    Range of
Remaining
Useful Lives    Cost    Accumulated
Amortization    Net Book
Value
September 30, 2017

Customer related intangibles
   4-10 years    $ 63,158    $ (43,205 )    $ 19,953
Technology
   7-10 years    58,942    (44,140 )    14,802
Other intangibles
   —      5,361    (5,361 )    —






      $ 127,461    $ (92,706 )    $ 34,755






December 31, 2016

Customer related intangibles
   4-10 years    $ 63,091    $ (37,573 )    $ 25,518
Technology
   3-10 years    58,942    (40,269 )    18,673
Other intangibles
   —      5,361    (5,361 )    —






      $ 127,394    $ (83,203 )    $ 44,191

~~Amortization expense of intangibles assets is reflected~~Company’s right to use the leased asset during the lease term. Included in other long-term assets. ⁽²⁾Included in other current liabilities.

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



	March 31, 2019
Weighted-average remaining lease term	4.3 years
Weighted-average discount rate ⁽¹⁾	5.7	%

⁽¹⁾The rate implicit in the lease is not readily determinable in most of the Company’s ~~unaudited condensed consolidated statements~~leases, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of ~~operations~~the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.

Maturities of lease liabilities were:



(in thousands)	March 31, 2019
Remainder of 2019	$	11,324
2020	15,784
2021	13,764
2022	12,761
2023	11,604
Total lease payments	65,237
Less: imputed interest ⁽¹⁾	(7,465		)
	$	57,772

⁽¹⁾Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as ~~follows:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017    2016    2017    2016
Cost of revenue
   $ 1,232    $ 1,642    $ 3,871    $ 4,626
Selling and marketing
   1,873    1,867    5,608    5,274
General and administrative
   —      90    —      268








   $ 3,105    $ 3,599    $ 9,479    $ 10,168

~~Future~~a result of a lease reassessment event.

As of December 31, 2018, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as determined prior to the adoption of ASC 842 were:



(in thousands)	Operating Leases ⁽¹⁾
2019	$	15,993
2020	14,807
2021	13,262
2022	12,279
2023	11,084
	$	67,425

⁽¹⁾Operating leases include future minimum rent payments, net of estimated ~~amortization expense related~~sublease income for facilities that the Company has vacated pursuant to ~~intangible assets as of September 30, 2017 is as follows:~~

(in thousands)
Remainder of 2017
   $ 2,846
2018
   11,347
2019
   5,555
2020
   2,659
2021
   2,637
2022 and thereafter
   9,711


   $ 34,755

~~8. ACCRUED EXPENSES~~

(in thousands)    September 30,
2017    December 31,
2016
Outside professional services
   $ 13,447    $ 10,204
Income and other taxes
   5,947    10,422
Marketing and sales program expenses
   4,679    3,707
Dividends payable
   2,336    2,298
Employee related expenses
   4,715    3,806
Other
   8,557    6,314




   $ 39,681    $ 36,751

its restructuring activities.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~9. DEFERRED~~

Cash flow information



	Three Months Ended March 31,
(in thousands)	2019
Cash paid for leases	5,197
Right of use assets recognized for new leases (non-cash)	8,034

10. REVENUE

(in thousands)    September 30,
2017    December 31,
2016
Term license
   $ 5,636    $ 15,843
Perpetual license
   20,844    23,189
Maintenance
   105,588    112,397
Cloud
   18,805    13,604
Professional Services
   10,058    10,614




Current deferred revenue
   160,931    175,647
Perpetual license
   4,085    7,909
Maintenance
   828    1,802
Cloud
   1,217    1,278




Long-term deferred revenue
   6,130    10,989




   $ 167,061    $ 186,636

~~10.~~

Geographic revenue



	Three Months Ended March 31,
(Dollars in thousands)	2019				2018
U.S.	$	103,991	48	%	$	113,985	48	%
Other Americas	28,829		14	%	17,715		8	%
United Kingdom (“U.K.”)	24,549		12	%	26,094		11	%
Europe (excluding U.K.), Middle East, and Africa	34,186		16	%	31,826		14	%
Asia-Pacific	20,991		10	%	45,562		19	%
	$	212,546	100	%	$	235,182	100	%

Revenue streams



	Three Months Ended March 31,
(in thousands)	2019		2018
Perpetual license	$	14,950	$	23,078
Term license	48,314		64,695
Revenue recognized at a point in time	63,264		87,773
Maintenance	67,706		64,525
Cloud	27,758		15,582
Consulting	53,818		67,302
Revenue recognized over time	149,282		147,409
	$	212,546	$	235,182



(in thousands)	Three Months Ended March 31,
(in thousands)	2019		2018
Term license	$	48,314	$	64,695
Cloud	27,758		15,582
Maintenance	67,706		64,525
Subscription ⁽¹⁾	143,778		144,802
Perpetual license	14,950		23,078
Consulting	53,818		67,302
	$	212,546	$	235,182

⁽¹⁾Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remaining performance obligations

Revenue recognition timing on existing contracts:



	March 31, 2019
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	10,263	$	44,404	$	187,324	$	115,548	$	13,251	$	370,790	58	%
1-2 years	998		4,274		9,350		91,539		1,363		107,524		17	%
2-3 years	2,180		756		4,438		71,509		473		79,356		13	%
Greater than 3 years	—		135		2,008		72,742		27		74,912		12	%
	$	13,441	$	49,569	$	203,120	$	351,338	$	15,114	$	632,582	100	%



	March 31, 2018
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	33,859	$	21,087	$	156,702	$	47,764	$	9,403	$	268,815	59	%
1-2 years	14,106		7,877		21,381		52,849		1,098		97,311		21	%
2-3 years	1,204		5,634		4,924		37,844		—		49,606		11	%
Greater than 3 years	382		853		1,825		40,478		—		43,538		9	%
	$	49,551	$	35,451	$	184,832	$	178,935	$	10,501	$	459,270	100	%

The above amounts include contracts that have an original expected duration of one year or less.

11. STOCK-BASED COMPENSATION

~~Stock-based compensation expense is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017    2016    2017    2016
Cost of revenues
   $ 3,613    $ 3,117    $ 10,913    $ 8,711
Selling and marketing
   3,976    3,468    11,482    9,395
Research and development
   3,420    2,260    10,306    7,480
General and administrative
   2,480    1,983    7,228    4,706
Acquisition-related
   —      (10 )    —      342








Total stock-based compensation before tax
   $ 13,489    $ 10,818    $ 39,929    $ 30,634








Income tax benefit
   $ (4,129 )    $ (3,227 )    $ (12,231 )    $ (8,917 )

~~During the nine months ended September 30, 2017, the Company issued approximately 1,299,000 shares of common stock to its employees and 18,000 shares of common stock to its~~

~~non-employee~~Expense ~~directors under the Company’s stock-based compensation plans.~~

~~During the nine months ended September 30, 2017, the Company granted approximately 1,052,000 restricted stock units (“RSUs”) and 1,520,000non-qualified~~ stock options to its employees with total fair values of approximately $47.5 million and $20.6 million, respectively. This includes approximately 175,000 RSUs which were granted in connection with the election by employees to receive 50% of their 2017 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $7.7 million associated with this RSU grant will be recognized over a~~one-year~~ ~~period beginning on the grant date.~~



	Three Months Ended March 31,
(in thousands)	2019			2018
Cost of revenues	$	4,519		$	3,701
Selling and marketing	7,374			4,658
Research and development	4,560			3,637
General and administrative	1,897			3,113
	$	18,350		$	15,109
Income tax benefit	$	(3,740	)	$	(3,141	)

The Company recognizes ~~stock based~~stock-based compensation onusing the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of ~~September 30, 2017,~~March 31, 2019, the Company had ~~approximately $56.8~~$114.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested ~~RSUs~~restricted stock units (“RSUs”) and ~~unvested~~ stock ~~options that is~~options. These amounts are expected to be recognized over a weighted-average period of ~~2.1~~2.3 years.

~~11.~~

Grants

The Company granted the following stock-based compensation awards:



	Three Months Ended March 31,
	2019
(in thousands)	Shares	Total Fair Value
RSUs	839	$	53,184
Non-qualified stock options	1,770	$	33,344

RSU vestings and stock option exercises

During the three months ended March 31, 2019, 0.5 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. INCOME TAXES

Effective income tax rate



	Three Months Ended March 31,
(Dollars in thousands)	2019			2018
Benefit from income taxes	$	(8,300	)	$	(4,222	)
Effective income tax rate	22		%	(53		)%

During the three months ended March 31, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.

13. 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 stock options and RSUs, using the treasury stock method. ~~Certain shares related to some~~In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.

The calculation of the ~~Company’s~~basic and diluted earnings per share was:



	Three Months Ended March 31,
(in thousands, except per share amounts)	2019			2018
Basic
Net (loss) income	$	(28,717	)	$	12,200
Weighted-average common shares outstanding	78,584			78,236
(Loss) earnings per share, basic	$	(0.37	)	$	0.16

Diluted
Net (loss) income	$	(28,717	)	$	12,200
Weighted-average effect of dilutive securities:
Stock options	—			3,119
RSUs	—			1,747
Effect of dilutive securities	—			4,866
Weighted-average common shares outstanding, assuming dilution	78,584			83,102
(Loss) earnings per share, diluted	$	(0.37	)	$	0.15

Outstanding anti-dilutive stock options and RSUs ⁽¹⁾	5,563			397

⁽¹⁾ Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the ~~periods presented, but could~~period presented. These awards may be dilutive in the future.

~~PEGASYSTEMS INC.~~

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

~~The calculation of the Company’s basic and diluted earnings per share is as follows:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands, except per share amounts)    2017    2016    2017    2016
Basic

Net (loss)/income
   $ (1,812 )    $ 3,301    $ 36,615    $ 18,237








Weighted-average common shares outstanding
   77,691    76,278    77,258    76,323








(Loss)/earnings per share, basic
   $ (0.03 )    $ 0.04    $ 0.47    $ 0.24








Diluted

Net (loss)/income
   $ (1,812 )    $ 3,301    $ 36,615    $ 18,237








Weighted-average effect of dilutive securities:

Stock options
   —      1,933    3,519    1,851
RSUs
   —      1,337    1,940    1,227








Effect of assumed exercise of stock options and RSUs
   —      3,270    5,459    3,078








Weighted-average common shares outstanding, assuming dilution
   77,691    79,548    82,717    79,401








(Loss)/earnings per share, diluted
   $ (0.03 )    $ 0.04    $ 0.44    $ 0.23








Outstanding stock options and RSUs excluded as impact would be anti-dilutive
   7,232    296    219    368

~~In periods of loss, all equity awards are excluded, as the inclusion of any equity awards would be anti-dilutive.~~

~~12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS~~

~~Geographic Information~~

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 software applications for customer engagement and its Pega~~^® Platform, and provides consulting services, maintenance, and training related to its 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 case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment—Customer Engagement Solutions and one reporting unit.

~~The Company’s international revenue, based upon the clients’ location, is as follows:~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 2017 2016
U.S.
   $ 95,087    53 % $ 111,274    61 % $ 351,330    59 % $ 308,049    56 %
Other Americas
   8,722    5 % 7,952    4 % 30,243    5 % 49,494    9 %
U.K.
   18,485    10 % 21,490    12 % 68,003    11 % 77,181    14 %
Other EMEA⁽¹⁾
   28,100    16 % 23,656    13 % 76,958    13 % 67,314    12 %
Asia Pacific
   29,421    16 % 18,430    10 % 74,508    12 % 48,618    9 %










   $ 179,815    100 % $ 182,802    100 % $ 601,042    100 % $ 550,656    100 %

⁽¹⁾	~~Includes Europe, the Middle East and Africa, but excludes the United Kingdom.~~

~~PEGASYSTEMS INC.~~

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

~~Major Clients~~

~~Clients accounting for 10% or more of the Company’s total revenue were as follows:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017 2016    2017    2016
Total revenue
   $ 179,815 $ 182,802    $ 601,042    $ 550,656
Client A
   10.6 % *    *    *

*	~~Client accounted for less than 10% of total revenue.~~

~~Clients accounting for 10% or more of the Company’s total trade accounts receivable were as follows:~~

(in thousands)    September 30,
2017 December 31,
2016
Total trade accounts receivable
   197,350 269,154
Client A
   12.4 % *

*	~~Client accounted for less than 10% of total trade account receivable~~

~~ITEM 2.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Forward-Looking Statements~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-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 revenue recognition, ~~under license and cloud arrangements~~ and are described more completely in Part I of our Annual Report on Form10-K for the year ended December 31, ~~2016.~~

2018.

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,” “likely,” “usually,” 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 materially from those expressed in such forward-looking statements 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;~~ reliance on third party ~~relationships; the potential loss of vendor specific objective evidence for our consulting services;~~relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in ~~international economies;~~ the ~~Company’s~~global economy, our continued effort to market and sell both domestically and ~~internationally;~~internationally, foreign currency exchange ~~rates; the financial impact of any future acquisitions;~~rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security ~~breaches;~~breaches, and management of ~~the Company’s~~our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of ~~the Company’s~~our Annual Report on Form10-K for the year ended December 31, ~~2016~~2018 as well as other filings we make with the U.S. Securities and Exchange Commission

~~We have~~ (“SEC”).

Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise ~~any~~these forward-looking statements whether as athe result of new information, future events, or ~~risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur or to materially change.~~

~~Business overview~~

otherwise.

BUSINESS OVERVIEW

We develop, market, license, and support enterprise software applications ~~for marketing, sales, service,~~that help organizations transform the way they engage with their customers and ~~operations. In addition, we~~process and complete work across their enterprise. We license our no-code Pega^® ~~Platform~~ Platform™ for rapid application development to clients that wish to build and extend their own business applications. ~~The~~Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified no-code Pega Platform, ~~assists our clients in building, deploying,~~empowering businesses to quickly design, extend, and ~~evolving~~scale their enterprise applications ~~creating an environment in which~~to meet strategic business ~~and 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.~~

Our ~~software applications and Pega Platform can be deployed on Pega, partner, or customer-managed cloud architectures.~~

~~Our~~target clients ~~include~~are Global 3000 ~~companies~~organizations and government agencies that ~~seek~~require applications to ~~manage complex enterprise systems~~differentiate themselves in the markets they serve. Our applications achieve and ~~customer service issues with greater~~facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and ~~cost-effectiveness. Our strategy is~~retaining customers, and reducing risk. We deliver applications tailored to ~~sell a client a series of licenses, each focused on a~~our clients’ specific ~~purpose or area of operations in support of longer term enterprise-wide digital transformation initiatives.~~

Our license revenue is primarily derived from sales of our applications and our Pega Platform. Our cloud revenue is derived from the licensing of our hosted Pega Platform and software application environments. Our consulting services revenue is primarily related to new license implementations.

~~Financial and~~ industry needs.

Performance ~~Metrics~~

~~Management evaluates our financial performance, based~~metrics

We utilize a number of ~~select financial~~different performance measures in analyzing and assessing our overall performance, ~~metrics. The performance metrics~~making operating decisions, and forecasting and planning for future periods.



(Dollars in thousands, except per share amounts)	Three Months Ended March 31,					Change
(Dollars in thousands, except per share amounts)	2019			2018		Change
Total revenue	$	212,546		$	235,182	$	(22,636	)	(10	)%
Subscription revenue ⁽¹⁾	$	143,778		$	144,802	$	(1,024	)	(1	)%
Net (loss) income	$	(28,717	)	$	12,200	$	(40,917	)	*
(Loss) earnings per share, diluted	$	(0.37	)	$	0.15	$	(0.52	)	*

* not meaningful

⁽¹⁾ Reflects client arrangements (term license, cloud, and maintenance) that are ~~periodically reviewed and revised~~subject to reflect any changes in our business. Historically, Recurring Revenue and License and Cloud Backlog have been our primary performance metrics. However, due to the change in the revenue recognition patterns of term license arrangements as a result of the expected implementation of the new revenue accounting standard (See Note 2) in the first quarter of 2018, we have started tracking renewal.

Annual Contract Value (“ACV”)~~, a new performance measure.~~

~~Select Financial Metrics~~

(Dollars in thousands,
except per share amounts)
   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 Change 2017 2016 Change
Total revenue
   $ 179,815 $ 182,802 (2,987 ) (2 )% $ 601,042 $ 550,656 $ 50,386    9 %
Operating margin
   (8 )% 3 % 3 % 5 %
Diluted (loss)/earnings per share
   $ (0.03 ) $ 0.04 $ (0.07 ) (175 )% $ 0.44 $ 0.23 $ 0.21    91 %
Cash flow provided by operating activities
   113,926 20,556 93,370    454 %

~~Select Performance Metrics~~

~~Annual Contract Value (“ACV”)~~

⁽¹⁾

The change in ACV measures the growth and predictability of future cash flows from ~~committed term license,~~Pega cloud and ~~maintenance~~client cloud committed arrangements as of the end of the particular reporting period.



	March 31,				Change
(Dollars in thousands)	2019		2018		Change
Pega Cloud ACV	$	128,636	$	72,966	$	55,670	76	%
Client Cloud ACV	462,130		421,159		40,971		10	%
Total ACV	$	590,766	$	494,125	$	96,641	20	%

⁽¹⁾ACV, as of a given date, is the sum of the following two components:

~~Term and Cloud~~Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total value divided by the total number of ~~committed contract~~ years

~~Quarterly Maintenance~~ and (2) maintenance revenue reported for the ~~current three months~~quarter ended ~~period~~on such date, multiplied by 4.four. We do not provide hosting for Client Cloud arrangements

   September 30,
(in thousands)    2017    2016    Change
Term License and Cloud ACV
   $ 200,180    $ 163,408    $ 36,772    23 %
Maintenance ACV
   248,816    220,152    $ 28,664    13 %





Term License, Cloud and Maintenance ACV
   $ 448,996    $ 383,560    $ 65,436    17 %

~~Recurring Revenue~~

~~A measure~~

Pega Cloud: the total of the ~~predictability and repeatability~~annual value of ~~our revenue.~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Recurring revenue

Term license
   $ 21,678 $ 28,919 $ (7,241 ) (25 )% $ 106,170 $ 102,115 $ 4,055    4 %
Maintenance
   62,204 55,038 $ 7,166 13 % 180,759 163,174 $ 17,585    11 %
Cloud
   13,354 10,873 $ 2,481 23 % 36,914 30,640 $ 6,274    20 %



Total recurring revenue
   $ 97,236 $ 94,830 $ 2,406 3 % $ 323,843 $ 295,929 $ 27,914    9 %



Recurring revenue as a percent of total revenue
   54 % 52 % 54 % 54 %

~~License and Cloud Backlog~~

~~A measure~~each cloud contract in effect on such date, which is equal to its total value divided by the total number of ~~the continued growth~~years.

Remaining performance obligations

Revenue recognition timing on existing contracts:



	March 31, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	10,263	$	44,404	$	187,324	$	115,548	$	13,251	$	370,790	58	%
1-2 years	998		4,274		9,350		91,539		1,363		107,524		17	%
2-3 years	2,180		756		4,438		71,509		473		79,356		13	%
Greater than 3 years	—		135		2,008		72,742		27		74,912		12	%
	$	13,441	$	49,569	$	203,120	$	351,338	$	15,114	$	632,582	100	%



	March 31, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	33,859	$	21,087	$	156,702	$	47,764	$	9,403	$	268,815	59	%
1-2 years	14,106		7,877		21,381		52,849		1,098		97,311		21	%
2-3 years	1,204		5,634		4,924		37,844		—		49,606		11	%
Greater than 3 years	382		853		1,825		40,478		—		43,538		9	%
	$	49,551	$	35,451	$	184,832	$	178,935	$	10,501	$	459,270	100	%

The above amounts include contracts that have an original expected duration of ~~our business as a result of future contractual commitments by our clients.~~

~~License and Cloud Backlog is the sum of the following two components:~~

one year or less.

~~Deferred license and cloud revenue as recorded on the Company’s balance sheet. (See Note 9 “Deferred Revenue”)~~

License and cloud contractual commitments, which are not recorded on our balance sheet because we have not yet invoiced our clients, nor have we recognized the associated revenue. (See “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources” contained elsewhere in this Quarterly Report on Form~~10-Q~~ ~~for additional information)~~CRITICAL ACCOUNTING POLICES

License and cloud backlog may vary in any given period depending on the amount and timing of when the arrangements are executed, as well as the mix between perpetual, term, and cloud license arrangements, which may depend on our clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term and cloud license arrangements executed will generally result in revenue being recognized over longer periods.

   September 30, Change
(Dollars in thousands)    2017 2016
Deferred license and cloud revenue on the balance sheet

Term license and cloud
   $ 25,658    51 % $ 19,627    42 % 31 %
Perpetual license
   24,929    49 % 27,653    58 % (10 )%





Total deferred license and cloud revenue
   50,587    100 % 47,280    100 % 7 %





License and cloud contractual commitments not on the balance sheet

Term license and cloud
   450,535    91 % 352,804    94 % 28 %
Perpetual license
   46,459    9 % 23,483    6 % 98 %





Total license and cloud commitments
   496,994    100 % 376,287    100 % 32 %





Total license (term and perpetual) and cloud backlog
   $ 547,581    $ 423,567    29 %





Total term license and cloud backlog
   476,193    87 % 372,431    88 % 28 %

~~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

(“U.S.”) 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 the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given available information.

~~There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form10-K~~ ~~for the year ended December 31, 2016.~~

For more information regarding our critical accounting policies, we encourage you to read the discussion contained in ~~Item 7 under~~ the ~~heading “Critical Accounting Estimates and Significant Judgments” and Note 2 “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained~~following locations in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~

2018:

“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Total revenue
   $ 179,815 $ 182,802 $ (2,987 ) (2 )% $ 601,042 $ 550,656 $ 50,386 9 %
Gross profit
   $ 110,084 $ 122,365 $ (12,281 ) (10 )% $ 395,346 $ 373,609 $ 21,737 6 %
Total operating expenses
   $ 124,373 $ 116,867 $ 7,506 6 % $ 376,647 $ 347,626 $ 29,021 8 %
(Loss)/income from operations
   $ (14,289 ) $ 5,498 $ (19,787 ) (360 )% $ 18,699 $ 25,983 $ (7,284 ) (28 )%
Operating margin
   (8 )% 3 % 3 % 5 %
(Loss)/income before (benefit)/provision for income taxes
   $ (14,697 ) $ 5,515 $ (20,212 ) (366 )% $ 18,663 $ 24,506 $ (5,843 ) (24 )%

Operations”; and

Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data”.

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

RESULTS OF OPERATIONS

Revenue

~~Software~~

(Dollars in thousands) Three Months Ended
March 31, Change
2019 2018
Term license $ 48,314
23 % $ 64,695
28 % $ (16,381 ) (25 )%
Cloud 27,758
13 % 15,582
7 % 12,176
78 %
Maintenance 67,706
32 % 64,525
27 % 3,181
5 %
Subscription revenue ⁽¹⁾
143,778
68 % 144,802
62 % (1,024 ) (1 )%
Perpetual license 14,950
7 % 23,078
10 % (8,128 ) (35 )%
Consulting 53,818
25 % 67,302
28 % (13,484 ) (20 )%
$ 212,546
100 % $ 235,182
100 % $ (22,636 ) (10 )%

⁽¹⁾ Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

Our license revenue

(Dollars in thousands)    Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 Change 2017 2016 Change
Perpetual license
   $ 20,115    48 % $ 39,914    58 % $ (19,799 ) (50 )% $ 89,050    46 % $ 105,734    51 % ($ 16,684 ) (16 )%
Term license
   21,678    52 % 28,919    42 % (7,241 ) (25 )% 106,170    54 % 102,115    49 % 4,055 4 %










Total license revenue
   $ 41,793    100 % $ 68,833    100 % $ (27,040 ) (39 )% $ 195,220    100 % $ 207,849    100 % ($ 12,629 ) (6 )%

~~The~~ is derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software applications.

We expect our revenue mix ~~between perpetual and term license~~to continue to shift in favor of our subscription offerings, particularly cloud arrangements, ~~executed~~which could result in ~~a particular period varies based on clients’ deployment preferences. A change~~slower total revenue growth in the ~~mix may cause our revenues to vary materially~~near term. Revenue from ~~period to period. A higher proportion of term license~~cloud arrangements ~~executed will~~is generally ~~result in license revenue being~~ recognized over ~~longer periods. Additionally, some of our~~the service period, while revenue from term and perpetual license arrangements ~~include extended payment terms or additional~~is generally recognized upfront when the license rights ~~of use, which may also result in the recognition of~~become effective.

Subscription revenue ~~over longer periods.~~

The decrease in perpetual license revenue in the three months ended September 30, 2017 was primarily due to a decrease in the average value of perpetual arrangements executed and a lower percentage of perpetual arrangements executed and recognized in revenue in the current period. The decrease in perpetual license revenue in the nine months ended September 30, 2017 was primarily due to a lower percentage of perpetual arrangements executed and recognized in revenue.

The decrease in term license revenue in the three months ended ~~September 30, 2017~~March 31, 2019 was primarily due to ~~a large term license renewal for which the second year of the term was recognized as~~lower average revenue in the three months ended September 30, 2016. If the second year of this term license arrangement was not paid in advance in the three months ended September 30, 2016, term license revenue would have decreased 2%.per arrangement. The increase in term license revenue in the nine months ended September 30, 2017 was primarily due to broad based growth amongst new and existing customers offset by a large term license arrangement which was prepaid and recognized incloud revenue in the three months ended March 31, ~~2016. If this term license arrangement was not prepaid and recognized~~2019 reflects the shift in ~~revenue~~client preferences to cloud arrangements from other types of arrangements.

The increase in ~~the three months ended March 31, 2016 term license revenue would have increased 26%.~~

~~The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable perpetual arrangements not reflected in deferred~~maintenance revenue was ~~$13.3 million as of September 30, 2017 compared to $3.9 million as of September 30, 2016.~~

The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable term and cloud arrangements not reflected in deferred revenue was $37.7 million as of September 30, 2017 compared to $26.7 million as of September 30, 2016. For additional information see “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources.”

~~Maintenance revenue~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(Dollars in thousands)    2017    2016    Change 2017    2016    Change
Maintenance
   $ 62,204    $ 55,038    $ 7,166    13 % $ 180,759    $ 163,174    $ 17,585    11 %

~~The increases were~~ primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates ~~significantly~~ in excess of 90%.

~~Services~~

Perpetual license

The decrease in perpetual license revenue

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Consulting services
   $ 61,535    81 % $ 46,829    80 % $ 14,706 31 % $ 183,447    82 % $ 144,263    80 % $ 39,184 27 %
Cloud
   13,354    18 % 10,873    18 % 2,481 23 % 36,914    16 % 30,640    17 % 6,274 20 %
Training
   929    1 % 1,229    2 % (300 ) (24 )% 4,702    2 % 4,730    3 % (28 ) (1 )%










Total services
   $ 75,818    100 % $ 58,931    100 % $ 16,887 29 % $ 225,063    100 % $ 179,633    100 % $ 45,430 25 %

~~Consulting services revenue is primarily generated~~ in the three months ended March 31, 2019 reflects the shift in client preferences in favor of our cloud offerings and away from ~~new~~perpetual license ~~implementations.~~ arrangements.

Consulting

Our consulting ~~services~~ revenue ~~may fluctuate in future periods~~fluctuates depending onupon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.

The ~~increases~~decrease in consulting ~~services~~ revenue ~~were~~in the three months ended March 31, 2019 was primarily due to ~~higher~~a decrease in billable ~~hours during~~hours.

Gross profit



	Three Months Ended March 31,								Change
(Dollars in thousands)	2019				2018				Change
Software license	$	61,886	98	%	$	86,518	99	%	$	(24,632	)	(28	)%
Maintenance	61,371		91	%	58,443		91	%	2,928			5	%
Cloud	14,460		52	%	7,861		50	%	6,599			84	%
Consulting	392		1	%	6,746		10	%	(6,354		)	(94	)%
	$	138,109	65	%	$	159,568	68	%	$	(21,459	)	(13	)%

The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the ~~three and nine months ended September 30, 2017 driven by a large project which began in the second half of 2016.~~

~~Cloud revenue represents~~service period, while revenue from ~~our Pega Cloud offerings. The increases in cloud revenue were primarily due to continued growth of our cloud client base.~~

~~Gross profit~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Software license
   $ 40,517 $ 67,520 $ (27,003 ) (40 )% $ 191,394 $ 204,203 $ (12,809 ) (6 )%
Maintenance
   55,488 48,379 7,109 15 % 159,814 144,285 15,529 11 %
Services
   14,079 6,466 7,613 118 % 44,138 25,121 19,017 76 %


Total gross profit
   $ 110,084 $ 122,365 $ (12,281 ) (10 )% $ 395,346 $ 373,609 $ 21,737 6 %
Software license gross profit %
   97 % 98 % 98 % 98 %
Maintenance gross profit %
   89 % 88 % 88 % 88 %
Services gross profit %
   19 % 11 % 20 % 14 %


Total gross profit %
   61 % 67 % 66 % 68 %

term and perpetual license arrangements is generally recognized upfront when the license rights become effective.

The decrease in total gross profit in the three months ended ~~September 30, 2017~~March 31, 2019 was primarily due to athe decrease in term and perpetual license revenue reflecting the shift in ~~the mix of license arrangements executed from perpetual to term licenses and an increase~~client preferences toward our cloud offerings.

The decrease in ~~lower margin services revenue.~~

~~The increase in~~ total ~~gross profit in the nine months ended September 30, 2017 was primarily due to increased total revenue.~~

~~The increases in service~~ gross profit percent in the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 was driven by a shift in favor of cloud arrangements, which are lower margin than our term and perpetual license revenue streams. The increase in cloud gross profit percent was driven by cost efficiency gains as our cloud business continues to grow and scale. The decrease in consulting gross profit percent was driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project which began in the second half of 2016 and ~~several additional large projects for which costs were recognized~~an increase in ~~2016 but whose associated revenue was not recognized until after September 30, 2016.~~

consulting resource availability in Europe as we continue growing and leveraging our partner network.

Operating expenses

Selling and marketing

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Selling and marketing
   $ 70,209 $ 67,032 $ 3,177    5 % $ 217,384 $ 202,126 $ 15,258    8 %
As a percent of total revenue
   39 % 37 %    36 % 37 %
Selling and marketing headcount, end of period
      934 875 59    7 %

~~Selling and marketing expenses include~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Selling and marketing ⁽¹⁾	$	108,865		$	88,383		$	20,482	23	%
As a percent of total revenue	51		%	38		%
Selling and marketing headcount, end of period	1,282			1,082			200		18	%

⁽¹⁾ Includes 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~~client-related intangibles.

The increase in the three months ended ~~September 30, 2017~~March 31, 2019 was primarily due to an increase in compensation and benefits of ~~$1.8~~$17.7 million, ~~driven by~~attributable to increased headcount, and ~~equity compensation, partially offset by a decrease in sales commissions associated with the lower value of new license arrangements executed during the three months ended September 30, 2017.~~

~~The increase in the nine months ended September 30, 2017 was primarily due to~~ an increase of $4.5 million in compensation and benefits of $12.7 million, respectively, driven by increased headcount and equity compensation, and an increase in employee travel and entertainment, partially offset by a decrease in brand marketing program expenses of $2.2 million.

deferred contract commission amortization. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts ~~in existing industries, as well as to expand coverage in new industries and geographies and to increase the number of sales opportunities.~~

Research and development

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Research and development
   $ 41,031 $ 38,036 $ 2,995    8 % $ 121,089 $ 108,530 $ 12,559    12 %
As a percent of total revenue
   23 % 21 %    20 % 20 %
Research and Development headcount, end of period
      1,474 1,437 37    3 %

~~Research and development expenses include~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Research and development ⁽¹⁾	$	50,596		$	46,785		$	3,811	8	%
As a percent of total revenue	24		%	20		%
Research and development headcount, end of period	1,638			1,602			36		2	%

⁽¹⁾ Includes compensation, benefits, contracted services, and other headcount-related expenses associated with the ~~creation and~~ development of our products, as well as enhancements and design changes to existing products and the integration of acquired technologies.

The ~~increases~~increase in the three ~~and nine~~ months ended ~~September 30, 2017 were~~March 31, 2019 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$2.9~~$2.1 million, ~~and $12.6 million, respectively,~~ attributable to ~~increased~~an increase in headcount, and ~~equity compensation.~~

an increase of $1.6 million in cloud hosting expenses as we expand our cloud-focused research and development activities.

General and administrative

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
General and administrative
   $ 13,133 $ 11,725 $ 1,408    12 % $ 38,174 $ 34,067 $ 4,107    12 %
As a percent of total revenue
   7 % 6 %    6 % 6 %
General and administrative headcount, end of period
      407 371 36    10 %

~~General and administrative expenses include~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
General and administrative ⁽¹⁾	$	12,676		$	16,464		$	(3,788	)	(23	)%
As a percent of total revenue	6		%	7		%
General and administrative headcount, end of period ⁽²⁾	373			299			74			25	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. ~~They also include~~Also includes accounting, legal, and other professional consulting and administrative fees. ⁽²⁾The ~~general and administrative~~ headcount includes employees in ~~human resources,~~ information technology and corporate services departments, whose costs are partially allocated to other operating expense areas.

The ~~increases~~decrease in the three ~~and nine~~ months ended ~~September 30, 2017 were~~March 31, 2019 was primarily due to ~~increases~~a decrease in compensation and benefits of ~~$0.4~~$1.2 million, due to a decrease in equity compensation, and $4a decrease of $1.9 million ~~respectively, attributable~~in legal and other professional services fees. Despite the headcount increase, associated compensation and benefits did not increase because these costs are primarily allocated to ~~increased headcount and equity compensation.~~ other operating expense areas.

Stock-based compensation



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Cost of revenues	$	4,519		$	3,701		$	818		22	%
Selling and marketing	7,374			4,658			2,716			58	%
Research and development	4,560			3,637			923			25	%
General and administrative	1,897			3,113			(1,216		)	(39	)%
	$	18,350		$	15,109		$	3,241		21	%
Income tax benefit	$	(3,740	)	$	(3,141	)	$	(599	)	19	%

The increase in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 was ~~partially offset by a decrease of $1.5 million in legal fees.~~

~~Stock-based compensation~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands)    2017 2016 Change 2017 2016 Change
Cost of revenues
   $ 3,613 $ 3,117 $ 496 16 % $ 10,913 $ 8,711 $ 2,202 25 %
Selling and marketing
   3,976 3,468 508 15 % 11,482 9,395 2,087 22 %
Research and development
   3,420 2,260 1,160 51 % 10,306 7,480 2,826 38 %
General and administrative
   2,480 1,983 497 25 % 7,228 4,706 2,522 54 %
Acquisition-related
   —   (10 ) 10 (100 )% —   342 (342 ) (100 )%


Total stock-based compensation before tax
   $ 13,489 $ 10,818 $ 2,671 25 % $ 39,929 $ 30,634 $ 9,295 30 %


Income tax benefit
   $ (4,129 ) $ (3,227 ) $ (902 ) 28 % $ (12,231 ) $ (8,917 ) $ (3,314 ) 37 %

~~The increases were~~ primarily due to the increased value of our annual periodic equity awards granted in March ~~2016~~2019 and ~~2017.~~2018. These awards generally have a five-year vesting schedule.

~~Amortization of intangibles~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(Dollars in thousands)    2017    2016    Change 2017    2016    Change
Cost of revenue
   $ 1,232    $ 1,642    $ (410 ) (25 )% $ 3,871    $ 4,626    $ (755 ) (16 )%
Selling and marketing
   1,873    1,867    6 —   % 5,608    5,274    334 6 %
General and administrative
   —      90    (90 ) (100 )% —      268    (268 ) (100 )%









   $ 3,105    $ 3,599    $ (494 ) (14 )% $ 9,479    $ 10,168    $ (689 ) (7 )%

Non-operating (expense) income, net



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Foreign currency transaction loss	$	(3,712	)	$	(1,085	)	$	(2,627	)	242	%
Interest income, net	723			764			(41		)	(5	)%
Other income, net	—			363			(363		)	(100	)%
	$	(2,989	)	$	42		$	(3,031	)	*

* not meaningful

The ~~decreases~~change in ~~amortization of intangibles in the three and nine months ended September 30, 2017 were~~foreign currency transaction loss was primarily due to ~~the amortization in full of certain intangibles acquired through past acquisitions.~~

~~Non-operating~~ ~~(expense)/income, net~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Foreign currency transaction (loss)/gain
   $ (552 ) $ 1,082 $ (1,634 ) n/m $ (793 ) $ 2,764 $ (3,557 ) n/m
Interest income, net
   144 172 $ (28 ) (16 )% 470 650 (180 ) (28 )%
Other (expense)/income, net
   —   (1,237 ) $ 1,237 (100 )% 287 (4,891 ) 5,178 n/m


   $ (408 ) $ 17 $ (425 ) n/m $ (36 ) $ (1,477 ) $ 1,441 (98 )%

~~n/m - not meaningful~~

~~In May 2017, we discontinued our forward contracts program; however, we will continue to evaluate periodically our foreign exchange exposures and mayre-initiate~~ ~~this program if it is deemed necessary.~~

~~Historically, we have used~~unrealized losses on foreign currency ~~forward contracts (“forward contracts”) to hedge~~denominated cash and receivables of our ~~exposure~~U.K subsidiary due to fluctuations in foreign currency exchange rates ~~associated with our foreign currency denominated cash, accounts receivable,~~as the British Pound strengthened against the Euro and ~~intercompany receivables and payables held primarily by the~~ U.S. ~~parent company and its United Kingdom (“U.K.”) subsidiary. See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-Q for additional information.~~

The total change in the fair value of our foreign currency forward contracts recorded in other income (expense), net, during the three months ended September 30, 2016 was a loss of $1.2 million. The total change in the fair value of our foreign currency forward contracts recorded in other (expense)/income, net, during the nine months ended September 30, 2017 and 2016 was a gain of $0.3 million and a loss of $5 million, respectively.

~~(Benefit)/provision for~~dollar.

Benefit from income taxes

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change    2017 2016 Change
(Benefit)/provision for income taxes
   $ (12,885 ) $ 2,214 $ (15,099 ) n/m    $ (17,952 ) $ 6,269 $ (24,221 ) n/m
Effective income tax rate
   88 % 40 %    (96 )% 26 %

~~n/m - not meaningful~~

~~The (benefit)/provision for income taxes represents current and future amounts for federal, state, and foreign taxes.~~

The increase in the effective income tax rate in the three months ended September 30, 2017 is primarily due to the significant increase of $3.5 million in excess tax benefits generated by our stock compensation plans on significantly lower income before (benefit)/provision for income taxes, which decreased by $20.2 million.

The decrease in the effective income tax rate in the nine months ended September 30, 2017 is primarily due to the significant increase of $19.1 million in excess tax benefits generated by our stock compensation plans, on significantly lower income before (benefit)/provision for income taxes, which decreased by $5.8 million.



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Benefit from income taxes	$	(8,300	)	$	(4,222	)	$	(4,078	)	97	%
Effective income tax rate	22		%	(53		)%

The inclusion of excess tax benefits ~~as a component of~~from stock-based compensation in the provision for income taxes ~~may increase volatility in~~has increased the variability of the effective tax rates ofin recent periods. This fluctuation may continue in future periods, as the amount of excess tax benefits from ~~share-based~~stock-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU ~~vesting and~~vestings, the exercise behavior of our stock option holders, and the total value of future grants of ~~share-based~~stock-based compensation awards.

~~Liquidity~~

During the three months ended March 31, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and ~~capital resources~~

   Nine Months Ended
September 30,
(in thousands)    2017    2016
Cash provided by (used in):

Operating activities
   $ 113,926    $ 20,556
Investing activities
   (11,966 )    (2,859 )
Financing activities
   (44,040 )    (43,031 )
Effect of exchange rate on cash
   2,054    (1,309 )




Net increase/(decrease) in cash and cash equivalents
   $ 59,974    $ (26,643 )




(in thousands)    September 30,
2017    December 31,
2016
Total cash, cash equivalents, and marketable securities
   $ 194,380    $ 133,761

Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.

LIQUIDITY AND CAPITAL RESOURCES



	Three Months Ended March 31,
(in thousands)	2019			2018
Cash provided by (used in):
Operating activities	$	22,703		$	55,655
Investing activities	(1,466		)	(31,278		)
Financing activities	(25,587		)	(23,052		)
Effect of exchange rates on cash and cash equivalents	295			2,186
Net (decrease) increase in cash and cash equivalents	$	(4,055	)	$	3,511



(in thousands)	March 31, 2019		December 31, 2018
Held by U.S. entities	$	141,051	$	143,533
Held by foreign entities	61,120		63,890
Total cash, cash equivalents, and marketable securities	$	202,171	$	207,423

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,~~quarterly cash dividends, and ~~our share repurchase program~~stock repurchases for at least the next 12 months.

~~As of September 30, 2017, approximately $61.1 million of our cash and cash equivalents was held in our foreign subsidiaries.~~

If it ~~becomes~~became necessary to repatriate ~~these~~foreign funds, we may be required to pay U.S. ~~tax, net of any applicable~~state and local taxes, as well as foreign ~~tax credits,~~taxes, upon repatriation. ~~We consider~~Due to the ~~earnings~~complexity of ~~our foreign subsidiaries to be permanently reinvested~~income tax laws and ~~as a result, U.S. taxes on such earnings are not provided. It~~regulations, and the effects of the Tax Reform Act, it is ~~impractical~~impracticable to estimate the amount of ~~U.S. tax~~taxes we ~~may be required~~would have to pay upon repatriation due to the complexity of the foreign tax credit calculations. 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.

pay.

Cash provided by operating activities

As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth in the near term. Cash from cloud arrangements is generally collected throughout the service period of three to five years, while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective.

The primary ~~drivers~~driver during the ~~nine~~three months ended ~~September 30, 2017 were net income of $36.6~~March 31, 2019 was $78.1 million ~~and $80.6 million~~in cash generated from ~~trade accounts receivable,~~client receivables, largely due to ~~increased~~ cash collections and the timing of billings.

~~The primary driver during the nine months ended September 30, 2016 was net income of $18.2 million.~~

~~Future Cash Receipts from Committed License and Cloud Arrangements~~

~~As of September 30, 2017, none of the amounts shown in the table below had been billed and no revenue had been recognized.~~

The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a result of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form

~~10-Q~~ ~~for additional information)~~

   September 30,
2017
(in thousands)    Term and cloud
contracts    Perpetual contracts ⁽¹⁾    Total
Remainder of 2017
   $ 37,723    $ 13,274    $ 50,997
2018
   150,629    21,213    171,842
2019
   125,165    10,033    135,198
2020
   85,939    1,572    87,511
2021
   38,203    367    38,570
2022 and thereafter
   12,876    —      12,876






Total
   $ 450,535    $ 46,459    $ 496,994

⁽¹⁾	~~These amounts are for perpetual licenses with extended payment terms and/or additional rights of use.~~

~~Total contractual future cash receipts due from our existing license and cloud arrangements were approximately $376.3 million as of September 30, 2016.~~

Cash used in investing activities

~~During~~

Cash used in investing activities is primarily driven by the ~~nine months ended September 30, 2017, we purchased $25.7 million~~timing of ~~marketable debt securities~~investment maturities and ~~made investments~~purchases of ~~$9.1 million in property and equipment, partially offset by proceeds received from maturities of marketable debt securities (including called marketable debt securities) of $23.1 million.~~

During the nine months ended September 30, 2016, we acquired OpenSpan for $48.8 million, net of cash acquired, and invested $15.3 million primarily in internally developed software and leasehold improvements at our corporate headquarters, partially offset by proceeds received from the sales of marketable debt securities of $62.3 million.

new investments.

Cash used in financing activities

We used cash primarily for repurchases of our common stock ~~share~~under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.

~~Since 2004, our Board of Directors has approved annual~~

Stock repurchase program ⁽¹⁾

The changes in the remaining stock repurchase ~~programs that have authorized the repurchase in the aggregate of up to $195 million of our common stock.~~authority was:



	Three Months Ended March 31,
(in thousands)	2019
January 1	$	6,620
Authorizations ⁽²⁾	60,000
Repurchases	(7,586		)
March 31,	$	59,034

⁽¹⁾ Purchases under these programs have been made on the open market.

~~The following table is a summary~~⁽²⁾ On March 15, 2019, we announced that our Board of ~~our~~Directors extended the expiration date of the current stock repurchase ~~activity:~~

   Nine Months Ended
September 30,
   2017 2016
(in thousands)    Shares    Amount Authorization Remaining
Under Publicly Announced
Share Repurchased
Programs Shares    Amount Authorization Remaining
Under Publicly Announced
Share Repurchased
Programs
Balance as of January 1,
      $ 39,385    $ 40,534
Authorizations
   —      —   —   —      —   25,879
Repurchase for net settlement of tax under stock-based compensation
   682    (34,791 ) —   414    (10,791 ) —
Repurchases paid under authorized share repurchase program
   68    (2,986 ) (2,986 ) 1,028    (25,530 ) (25,530 )
Repurchases unsettled
   —      —   —   6    (177 ) (177 )






Activity in Period
   750    $ (37,777 ) $ (2,986 ) 1,448    $ (36,498 ) $ 172




Balance as of September 30,
      $ 36,399    $ 40,706

~~In addition~~program to June 30, 2020 and increased the ~~share~~amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020.

Common stock repurchases ~~made~~



	Three Months Ended March 31,
	2019			2018
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	232	$	14,838	270	$	15,575
Stock repurchase program ⁽¹⁾
Repurchases paid	141	7,387		89	4,998
Repurchases unsettled at period end	3	199		12	690
Activity in period ⁽²⁾	376	$	22,424	371	$	21,263

⁽¹⁾ Represents activity under our publicly announced stock repurchase programs, we net settled the majority of our employee stock option exercises and RSU vestings, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

programs. ⁽²⁾During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and 2016, option and RSU holders net settled a total of 2.4 million shares and 1.6 million shares, respectively, of which only 1.3 million shares and 0.8 million shares, respectively, were issued to the option and RSU holders. The balance of the shares were surrendered to us to pay for the exercise price with respect to options and the applicable taxes for both options and RSUs. During the nine months ended September 30, 2017 and 2016,2018, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$23.7~~$12.2 million and ~~$10.1~~$11.2 million, respectively, for the exercise price of options.

These amounts have been excluded from the table above.

Dividends

   Nine Months Ended
September 30,
(per share)    2017    2016
Dividends Declared
   $ 0.09    $ 0.09
Dividends Paid
   $ 0.09    $ 0.09



	Three Months Ended March 31,
(in thousands)	2019		2018
Dividend payments to shareholders	$	2,363	$	2,344

It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify ~~this~~the dividend program at any time without prior notice.

~~ITEM 3.~~ ~~QUANTITATIVE AND QUALITATIVE DISCLOSURE~~

~~Market risk represents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes during the ~~risk of loss that may affect us due~~three months ended March 31, 2019 to ~~adverse changes in financial market prices and rates. Our~~the market risk exposure ~~is primarily related to fluctuations in foreign exchange rates.~~

~~As of September 30, 2017, we did not have any forward contracts outstanding. See Note 4 “Derivative Instruments” of this Quarterly Report on Form10-Q~~ ~~for further discussion.~~

Other than the item discussed above, there were no significant changes to our quantitative and qualitative disclosures about market risk during the first nine months ended September 30, 2017. See Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk includeddisclosed in our Annual Report on Form10-K for the year ended December 31, ~~2016 for a more complete discussion of our market risk exposure.~~

2018.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of ~~Disclosure Controls~~disclosure controls and ~~Procedures~~

procedures

Our management, with the participation of our Chief Executive Officer ~~or CEO,~~(“CEO”) and Chief Financial Officer ~~or CFO,~~(“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (“Exchange Act”)) as of ~~September 30, 2017.~~March 31, 2019. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2017.~~

March 31, 2019.

(b) Changes in ~~Internal Control~~internal control over ~~Financial Reporting~~

financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the ~~Securities~~ Exchange Act) during the quarter ended ~~September 30, 2017~~March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART ~~II—~~II - OTHER INFORMATION

~~ITEM 1A.~~

~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

We encourage you to carefully consider the risk factors identified in ~~Part I,~~ Item 1A. “Risk Factors” inof our Annual Report onForm 10-K for the year ended December 31, ~~2016.~~2018. 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 Form10-Q or elsewhere by management from time to time.

There have been no material changes during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~

2018.

~~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 three months ended ~~September~~March 31, 2019.



(in thousands, except per share amounts)	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
January 1, 2019 - January 31, 2019	153	$	51.30	129	$	18
February 1, 2019 - February 28, 2019	129	$	63.81	—	$	18
March 1, 2019 - March 31, 2019	285	$	64.97	15	$	59,034
	567	$	61.03

⁽¹⁾Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

⁽²⁾ On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, ~~2017:~~

Period
   Total Number
of Shares
Purchased
(in thousands)    Average Price
Paid per
Share    Total Number of
Shares Purchased as Part
of Publicly Announced
Share Repurchase
Program (1)
(in thousands)    Approximate Dollar
Value of Shares That
May Yet Be Purchased at
Period End Under Publicly
Announced Share
Repurchased Programs (1)
(in thousands)
July 1, 2017 - July 31, 2017
   12    $ 58.54    —      $ 36,399
August 1, 2017 - August 31, 2017
   55    56.16    —      36,399
September 1, 2017 - September 30, 2017
   108    56.56    —      36,399



Total
   175    $ 56.57

1.	Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of the company’s stock compensation awards have been included in the above table.

2. Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 20182020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a~~pre-arranged~~ ~~stock repurchase plan, intended to comply with the requirements of Rule10b5-1~~ ~~under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule10b-18~~ ~~under the Exchange Act (the“10b5-1~~ ~~Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1~~ ~~Plan.~~

~~ITEM 6.~~

~~EXHIBITS~~

~~The following exhibits are filed or furnished, as the case~~ may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as ~~part~~market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of ~~this report.~~

~~EXHIBIT INDEX~~

Rule 10b5-1 under the Exchange Act, and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All stock repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

ITEM 6. EXHIBITS



Exhibit No.		Description

31.1		Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Executive Officer.

31.2		Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Financial Officer.

3232+		Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101.INS		XBRL Instance document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Label Linkbase Document.

101.PRE		XBRL Taxonomy Presentation Linkbase Document.

⁺⁺	~~Management contracts and compensatory plan or arrangements~~

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

SIGNATURE

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


				~~Pegasystems Inc.~~

~~Date:~~		~~November 8, 2017~~Pegasystems Inc.
			~~By:~~
Dated:	May 7, 2019	By:	/s/ KENNETH STILLWELL
					Kenneth Stillwell
					Chief Financial Officer and Chief Administrative Officer
					(Principal Financial Officer)


	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	130,568		$	70,594
Marketable securities		63,812			63,167

Total cash, cash equivalents, and marketable securities		194,380			133,761
Trade accounts receivable, net of allowance of $6,189 and $4,126		191,161			265,028
Income taxes receivable		34,864			14,155
Other current assets		17,679			12,188

Total current assets		438,084			425,132
Property and equipment, net		39,849			38,281
Deferred income taxes		73,459			69,898
Long-term other assets		5,982			3,990
Intangible assets, net		34,755			44,191
Goodwill		72,941			73,164

Total assets	$	665,070		$	654,656

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,535		$	14,414
Accrued expenses		39,681			36,751
Accrued compensation and related expenses		53,869			60,660
Deferred revenue		160,931			175,647

Total current liabilities		267,016			287,472
Income taxes payable		4,774			4,263
Long-term deferred revenue		6,130			10,989
Other long-term liabilities		15,449			16,043

Total liabilities		293,369			318,767

Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—			—
Common stock, 200,000 shares authorized; 77,839 shares and 76,591 shares issued and outstanding		778			766
Additionalpaid-in capital		146,728			143,903
Retained earnings		227,953			198,315
Accumulated other comprehensive loss		(3,758	)		(7,095	)

Total stockholders’ equity		371,701			335,889

Total liabilities and stockholders’ equity	$	665,070		$	654,656


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue:
Software license	$	41,793		$	68,833		$	195,220		$	207,849
Maintenance		62,204			55,038			180,759			163,174
Services		75,818			58,931			225,063			179,633

Total revenue		179,815			182,802			601,042			550,656

Cost of revenue:
Software license		1,276			1,313			3,826			3,646
Maintenance		6,716			6,659			20,945			18,889
Services		61,739			52,465			180,925			154,512

Total cost of revenue		69,731			60,437			205,696			177,047

Gross profit		110,084			122,365			395,346			373,609

Operating expenses:
Selling and marketing		70,209			67,032			217,384			202,126
Research and development		41,031			38,036			121,089			108,530
General and administrative		13,133			11,725			38,174			34,067
Acquisition-related		—			74			—			2,903

Total operating expenses		124,373			116,867			376,647			347,626

(Loss)/income from operations		(14,289	)		5,498			18,699			25,983
Foreign currency transaction (loss)/gain		(552	)		1,082			(793	)		2,764
Interest income, net		144			172			470			650
Other income/(expense), net		—			(1,237	)		287			(4,891	)

(Loss)/income before (benefit)/provision for income taxes		(14,697	)		5,515			18,663			24,506
(Benefit)/provision for income taxes		(12,885	)		2,214			(17,952	)		6,269

Net (loss)/income	$	(1,812	)	$	3,301		$	36,615		$	18,237

(Loss)/earnings per share:
Basic		(0.03	)		0.04			0.47			0.24
Diluted		(0.03	)		0.04			0.44			0.23
Weighted-average number of common shares outstanding:
Basic		77,691			76,278			77,258			76,323
Diluted		77,691			79,548			82,717			79,401
Cash dividends declared per share	$	0.03		$	0.03		$	0.09		$	0.09


(in thousands)	Amortized Cost		Unrealized Gains			Unrealized Losses			Fair Value
September 30, 2017
Municipal bonds	$	32,764	$	12	��	$	(17	)	$	32,759
Corporate bonds		31,079		12			(38	)		31,053

	$	63,843	$	24		$	(55	)	$	63,812

December 31, 2016
Municipal bonds	$	36,746	$	—		$	(139	)	$	36,607
Corporate bonds		26,610		1			(51	)		26,560

	$	63,356	$	1		$	(190	)	$	63,167


	December 31, 2016
(in thousands)	Recorded In:		Fair Value
Asset Derivatives
Foreign currency forward contracts		Other current assets	$	628
Liability Derivatives
Foreign currency forward contracts		Accrued expenses	$	883


(in thousands)
Euro	€	21,810
British pound	£	5,919
Australian dollar	A$	19,515
United States dollar	$	59,450


(in thousands)	Range of Remaining Useful Lives		Cost		Accumulated Amortization			Net Book Value
September 30, 2017
Customer related intangibles		4-10 years	$	63,158	$	(43,205	)	$	19,953
Technology		7-10 years		58,942		(44,140	)		14,802
Other intangibles		—		5,361		(5,361	)		—

			$	127,461	$	(92,706	)	$	34,755

December 31, 2016
Customer related intangibles		4-10 years	$	63,091	$	(37,573	)	$	25,518
Technology		3-10 years		58,942		(40,269	)		18,673
Other intangibles		—		5,361		(5,361	)		—

			$	127,394	$	(83,203	)	$	44,191


(in thousands)
Remainder of 2017	$	2,846
2018		11,347
2019		5,555
2020		2,659
2021		2,637
2022 and thereafter		9,711

	$	34,755


	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except per share amounts)	2017			2016		2017		2016
Basic
Net (loss)/income	$	(1,812	)	$	3,301	$	36,615	$	18,237

Weighted-average common shares outstanding		77,691			76,278		77,258		76,323

(Loss)/earnings per share, basic	$	(0.03	)	$	0.04	$	0.47	$	0.24

Diluted
Net (loss)/income	$	(1,812	)	$	3,301	$	36,615	$	18,237

Weighted-average effect of dilutive securities:
Stock options		—			1,933		3,519		1,851
RSUs		—			1,337		1,940		1,227

Effect of assumed exercise of stock options and RSUs		—			3,270		5,459		3,078

Weighted-average common shares outstanding, assuming dilution		77,691			79,548		82,717		79,401

(Loss)/earnings per share, diluted	$	(0.03	)	$	0.04	$	0.44	$	0.23

Outstanding stock options and RSUs excluded as impact would be anti-dilutive		7,232			296		219		368


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2017				2016				2017				2016
U.S.	$	95,087	53	%	$	111,274	61	%	$	351,330	59	%	$	308,049	56	%
Other Americas		8,722	5	%		7,952	4	%		30,243	5	%		49,494	9	%
U.K.		18,485	10	%		21,490	12	%		68,003	11	%		77,181	14	%
Other EMEA⁽¹⁾		28,100	16	%		23,656	13	%		76,958	13	%		67,314	12	%
Asia Pacific		29,421	16	%		18,430	10	%		74,508	12	%		48,618	9	%

	$	179,815	100	%	$	182,802	100	%	$	601,042	100	%	$	550,656	100	%


	September 30,
(in thousands)	2017		2016		Change
Term License and Cloud ACV	$	200,180	$	163,408	$	36,772	23	%
Maintenance ACV		248,816		220,152	$	28,664	13	%

Term License, Cloud and Maintenance ACV	$	448,996	$	383,560	$	65,436	17	%


	Three Months Ended September 30,													Nine Months Ended September 30,
(Dollars in thousands)	2017				2016				Change					2017				2016				Change
Consulting services	$	61,535	81	%	$	46,829	80	%	$	14,706		31	%	$	183,447	82	%	$	144,263	80	%	$	39,184		27	%
Cloud		13,354	18	%		10,873	18	%		2,481		23	%		36,914	16	%		30,640	17	%		6,274		20	%
Training		929	1	%		1,229	2	%		(300	)	(24	)%		4,702	2	%		4,730	3	%		(28	)	(1	)%

Total services	$	75,818	100	%	$	58,931	100	%	$	16,887		29	%	$	225,063	100	%	$	179,633	100	%	$	45,430		25	%


	September 30, 2017
(in thousands)	Term and cloud contracts		Perpetual contracts ⁽¹⁾		Total
Remainder of 2017	$	37,723	$	13,274	$	50,997
2018		150,629		21,213		171,842
2019		125,165		10,033		135,198
2020		85,939		1,572		87,511
2021		38,203		367		38,570
2022 and thereafter		12,876		—		12,876

Total	$	450,535	$	46,459	$	496,994


	Nine Months Ended September 30,
(per share)	2017		2016
Dividends Declared	$	0.09	$	0.09
Dividends Paid	$	0.09	$	0.09


Period	Total Number of Shares Purchased (in thousands)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (1) (in thousands)		Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs (1) (in thousands)
July 1, 2017 - July 31, 2017		12	$	58.54		—	$	36,399
August 1, 2017 - August 31, 2017		55		56.16		—		36,399
September 1, 2017 - September 30, 2017		108		56.56		—		36,399

Total		175	$	56.57