SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM10-Q

~~(Mark One)~~

____________________________



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



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

~~For the transition period from~~to

____________________________

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



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

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

Indicate by check mark whether the ~~registrant~~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 filer	☒	x	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 ☒

There were ~~77,859,958~~79,332,662 shares of the Registrant’s common stock, ~~$.01~~$0.01 par value per share, outstanding on October ~~27, 2017.~~

31, 2019.

PEGASYSTEMS INC.

~~Index to Form~~

QUARTERLY REPORT ON FORM 10-Q

PART I—I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	92,104		$	114,422
Marketable securities	20,465			93,001
Total cash, cash equivalents, and marketable securities	112,569			207,423
Accounts receivable	123,268			180,872
Unbilled receivables	172,090			172,656
Other current assets	58,204			49,684
Total current assets	466,131			610,635
Long-term unbilled receivables	123,962			151,237
Goodwill	78,862			72,858
Other long-term assets	248,069			147,823
Total assets	$	917,024		$	982,553
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,435		$	16,487
Accrued expenses	41,520			45,506
Accrued compensation and related expenses	88,349			84,671
Deferred revenue	159,849			185,145
Other current liabilities	15,742			—
Total current liabilities	320,895			331,809
Operating lease liabilities	56,904			—
Other long-term liabilities	10,393			29,213
Total liabilities	388,192			361,022
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—			—
Common stock, 200,000 shares authorized; 79,324 and 78,526 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	793			785
Additional paid-in capital	129,559			123,205
Retained earnings	412,389			510,863
Accumulated other comprehensive (loss)	(13,909		)	(13,322		)
Total stockholders’ equity	528,832			621,531
Total liabilities and stockholders’ equity	$	917,024		$	982,553

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~

(LOSS)

(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

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(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



PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in 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
Repurchase of common stock	(171	)	(2		)	(10,179		)	—			—			(10,181		)
Issuance of common stock for share-based compensation plans	358		4			(11,395		)	—			—			(11,391		)
Issuance of common stock under Employee Stock Purchase Plan	15		—			849			—			—			849
Stock-based compensation	—		—			16,163			—			—			16,163
Cash dividends declared ($0.12 per share)	—		—			—			(2,364		)	—			(2,364		)
Other comprehensive (loss)	—		—			—			—			(7,341		)	(7,341		)
Net (loss)	—		—			—			(10,409		)	—			(10,409		)
June 30, 2018	78,748		787			141,400			506,769			(9,784		)	639,172
Repurchase of common stock	(242	)	(2		)	(14,277		)	—			—			(14,279		)
Issuance of common stock for share-based compensation plans	310		3			(8,399		)	—			—			(8,396		)
Stock-based compensation	—		—			16,408						—			16,408
Cash dividends declared ($0.12 per share)	—		—			—			(2,367		)	—			(2,367		)
Other comprehensive (loss)	—		—			—			—			(2,096		)	(2,096		)
Net (loss)	—		—			—			(7,587		)	—			(7,587		)
September 30, 2018	78,816		$	788		$	135,132		$	496,815		$	(11,880	)	$	620,855
See notes to unaudited condensed consolidated financial statements.



PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated 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, 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
Repurchase of common stock	(88	)	(1		)	(6,301		)	—			—			(6,302		)
Issuance of common stock for share-based compensation plans	320		3			(11,217		)	—			—			(11,214		)
Issuance of common stock under Employee Stock Purchase Plan	16		—			1,103			—			—			1,103
Stock-based compensation	—		—			20,113			—			—			20,113
Cash dividends declared ($0.12 per share)	—		—			—			(2,375		)	—			(2,375		)
Other comprehensive (loss)	—		—			—			—			(171		)	(171		)
Net (loss)	—		—			—			(32,296		)	—			(32,296		)
June 30, 2019	79,144		791			122,880			445,108			(11,492		)	557,287
Repurchase of common stock	(88	)	(1		)	(6,396		)	—			—			(6,397		)
Issuance of common stock for share-based compensation plans	268		3			(8,804		)	—			—			(8,801		)
Stock-based compensation	—		—			21,879			—			—			21,879
Cash dividends declared ($0.12 per share)	—		—			—			(2,381		)	—			(2,381		)
Other comprehensive (loss)	—		—			—			—			(2,417		)	(2,417		)
Net (loss)	—		—			—			(30,338		)	—			(30,338		)
September 30, 2019	79,324		$	793		$	129,559		$	412,389		$	(13,909	)	$	528,832

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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~~

On January 1, 2019, the Company adopted Accounting Standards Codification 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 the Company’s historical accounting under ASC 840 “Leases”.

The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities of $54.2 million. The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.

See Note 9. “Leases” for additional information.

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~~does not expect the ~~effect~~adoption of this ~~ASU~~standard will have a material effect 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 January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities and~~right-of-use~~ ~~assets upon adoption with no material impact to its~~position or results of ~~operations and cash flows.~~

~~Revenue~~

Inoperations.

3. MARKETABLE SECURITIES



	September 30, 2019
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Municipal bonds	$	10,680	$	69	$	—	$	10,749
Corporate bonds	9,611		105		—		9,716
	$	20,291	$	174	$	—	$	20,465



	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, 2019, maturities of marketable securities ranged from May ~~2014, the FASB issued ASUNo. 2014-09,~~ ~~“Revenue from Contracts~~2020 to August 2022, 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~~weighted-average remaining maturity 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 disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company has elected the full retrospective adoption model, effective 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 Form~~10-K~~ ~~for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.~~

approximately 1.5 years.

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

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables



(in thousands)	September 30, 2019		December 31, 2018
Accounts receivable	$	123,268	$	180,872
Unbilled receivables	172,090		172,656
Long-term unbilled receivables	123,962		151,237
	$	419,320	$	504,765

Unbilled receivables are client committed amounts for which revenue recognition ~~have been met,~~precedes billing, 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 termsbilling is ~~recognized when control is transferred~~solely subject to the ~~customer. Any unrecognized license~~passage of time.

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



(Dollars in thousands)	September 30, 2019
1 year or less	$	172,090	59	%
1-2 years	84,045		28	%
2-5 years	39,917		13	%
	$	296,052	100	%

Contract assets and deferred revenue ~~from these arrangements,~~



(in thousands)	September 30, 2019		December 31, 2018
Contract assets ⁽¹⁾	$	5,046	$	3,711
Long-term contract assets ⁽²⁾	2,381		2,543
	$	7,427	$	6,254

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



(in thousands)	September 30, 2019		December 31, 2018
Deferred revenue	$	159,849	$	185,145
Long-term deferred revenue ⁽¹⁾	4,029		5,344
	$	163,878	$	190,489

⁽¹⁾Included in other long-term liabilities.

Contract assets are client committed amounts for which 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 change in deferred revenue in the nine months ended September 30, 2019 was primarily due to revenue recognized during the period that was included in deferred revenue at December 31, ~~2015, will~~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 relate to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company generally only pays sales commissions on the initial contract and not ~~be recognized in revenue in future periods but as~~any subsequent contract renewals. 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 recognizedresult, there are no commensurate commissions paid on contract renewals. Deferred costs are amortized 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 does not have VSOE for fixed price services, time~~



(in thousands)	September 30, 2019		December 31, 2018
Deferred contract costs ⁽¹⁾	$	67,182	$	64,367

⁽¹⁾ Included in other long-term assets.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Amortization of deferred contract costs ⁽¹⁾	$	8,193	$	4,208	$	22,372	$	11,806

⁽¹⁾Included in selling 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.marketing expenses.

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.~~

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~3. MARKETABLE SECURITIES~~

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The ~~Company’s marketable securities~~change in the carrying amount of goodwill was:



(in thousands)	Nine Months Ended September 30, 2019
Balance as of January 1,	$	72,858
Acquisition ⁽¹⁾	6,179
Currency translation adjustments	(175		)
Balance as of September 30,	$	78,862

⁽¹⁾ In May 2019, the Company acquired In the Chat Communications Inc., a privately-held software provider of digital customer service software, for $10.9 million, net of cash acquired. The Company also expects to issue up to approximately 15 thousand shares in retention-based bonus payments to a key employee upon the achievement of specified retention milestones. The principal assets and liabilities acquired as part of the business combination were additional goodwill and technology intangible assets of $6.2 million and $5.1 million.

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



		September 30, 2019
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related	4-10 years	$	63,089	$	(53,960	)	$	9,129
Technology	2-10 years	64,843		(53,252		)	11,591
Other	1 - 5 years	5,361		(5,361		)	—
		$	133,293	$	(112,573	)	$	20,720

⁽¹⁾Included in other long-term assets.



		December 31, 2018
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related	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 ~~September 30, 2017, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.~~

~~As of September 30, 2017, remaining maturities of marketable debt securities ranged from October 2017 to September 2020, 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

intangible assets was:



(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Cost of revenue	$	647	$	1,232	$	2,854	$	3,695
Selling and marketing	370		1,603		2,754		4,813
	$	1,017	$	2,835	$	5,608	$	8,508

7. ACCRUED EXPENSES



(in thousands)	September 30, 2019		December 31, 2018
Outside professional services expenses	$	8,568	$	10,367
Income and other taxes	5,418		10,387
Marketing and sales program expenses	5,969		5,860
Dividends payable	2,381		2,363
Employee-related expenses	4,785		3,536
Cloud hosting expenses	10,158		4,604
Other	4,241		8,389
	$	41,520	$	45,506

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~The income statement impact of the Company’s outstanding forward contracts and foreign currency transactions was 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 )

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.

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)~~

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~~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 months ended September 30, ~~2017.~~

~~PEGASYSTEMS INC.~~

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

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:



	September 30, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	88	$	—	$	—	$	88
Marketable securities:
Municipal bonds	$	—	$	10,749	$	—	$	10,749
Corporate bonds	—		9,716		—		9,716
Total marketable securities	$	—	$	20,465	$	—	$	20,465
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	4,583	$	4,583

⁽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~~

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 not recognize any impairments of its assets recorded at fair 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 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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Intangible~~

reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

Expense



(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Fixed lease costs	$	4,763	$	13,344
Variable lease costs	1,470		4,153
	$	6,233	$	17,497

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



(in thousands)	September 30, 2019
Right of use assets ⁽¹⁾	$	62,296
Lease liabilities ⁽²⁾	$	15,742
Long-term lease liabilities	$	56,904

⁽¹⁾Represents the Company’s ~~unaudited condensed consolidated statements~~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:



	September 30, 2019
Weighted-average remaining lease term	4.2 years
Weighted-average discount rate ⁽¹⁾	5.8	%

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

Maturities of lease liabilities are:



(in thousands)	September 30, 2019
Remainder of 2019	$	3,402
2020	21,061
2021	18,800
2022	17,642
2023 and thereafter	21,375
Total lease payments	82,280
Less: imputed interest ⁽¹⁾	(9,634		)
Total short and long-term lease liabilities	$	72,646

⁽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 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 before 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.

Cash flow information



(in thousands)	Nine Months Ended September 30, 2019
Cash paid for leases	14,586
Right of use assets recognized for new leases and amendments (non-cash)	31,126

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~9. DEFERRED~~

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 September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2019				2018				2019				2018
U.S.	$	123,447	57	%	$	103,075	51	%	$	347,120	55	%	$	327,409	51	%
Other Americas	11,748		5	%	10,424		5	%	49,450		8	%	37,766		6	%
United Kingdom (“U.K.”)	23,034		11	%	19,277		9	%	64,269		10	%	68,450		11	%
Europe (excluding U.K.), Middle East, and Africa	34,761		16	%	42,254		21	%	102,342		16	%	101,150		16	%
Asia-Pacific	23,713		11	%	28,233		14	%	71,660		11	%	100,449		16	%
	$	216,703	100	%	$	203,263	100	%	$	634,841	100	%	$	635,224	100	%

Revenue streams



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Perpetual license	$	9,016	$	20,276	$	43,286	$	56,829
Term license	48,989		32,066		122,257		128,070
Revenue recognized at a point in time	58,005		52,342		165,543		184,899
Maintenance	70,371		66,017		207,406		196,448
Cloud	35,153		22,184		94,610		57,967
Consulting	53,174		62,720		167,282		195,910
Revenue recognized over time	158,698		150,921		469,298		450,325
	$	216,703	$	203,263	$	634,841	$	635,224



(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Term license	$	48,989	$	32,066	$	122,257	$	128,070
Cloud	35,153		22,184		94,610		57,967
Maintenance	70,371		66,017		207,406		196,448
Subscription ⁽¹⁾	154,513		120,267		424,273		382,485
Perpetual license	9,016		20,276		43,286		56,829
Consulting	53,174		62,720		167,282		195,910
	$	216,703	$	203,263	$	634,841	$	635,224

⁽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 (“RPO”)

Expected future revenue on existing contracts:



	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56	%
1-2 years	853		3,798		18,590		105,081		863		129,185		21	%
2-3 years	1,306		591		8,323		72,915		841		83,976		14	%
Greater than 3 years	—		85		4,959		51,591		—		56,635		9	%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100	%



	September 30, 2018
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	25,343	$	44,283	$	140,591	$	88,529	$	14,107	$	312,853	60	%
1-2 years	6,490		10,063		8,877		70,815		1,830		98,075		19	%
2-3 years	360		1,598		2,586		54,646		449		59,639		11	%
Greater than 3 years	1,306		218		1,079		49,110		50		51,763		10	%
	$	33,499	$	56,162	$	153,133	$	263,100	$	16,436	$	522,330	100	%

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



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2019		2018			2019		2018
Total revenue	$	216,703	$	203,263		$	634,841	$	635,224
Client A	*		10		%	*		*

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

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 itsnon-employee~~ ~~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.~~

~~The Company recognizes stock based compensation on the accelerated recognition method, treating each vesting tranche as if it were an individual grant.~~

Expense



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Cost of revenues	$	4,787		$	4,319		$	14,216		$	12,277
Selling and marketing	8,317			6,198			24,055			16,895
Research and development	4,858			3,917			13,990			11,356
General and administrative	3,884			1,974			7,981			7,045
	$	21,846		$	16,408		$	60,242		$	47,573
Income tax benefit	$	(4,430	)	$	(3,555	)	$	(12,226	)	$	(10,037	)

As of September 30, ~~2017,~~2019, the Company had ~~approximately $56.8~~$95.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, ~~related to all unvested RSUs and unvested stock options that~~which is expected to be recognized over a weighted-average period of ~~2.1~~2.2 years.

~~11.~~

The Company granted the following stock-based compensation awards:



	Nine Months Ended September 30, 2019
(in thousands)	Shares	Total Fair Value
RSUs	1,153	$	75,510
Non-qualified stock options	2,165	$	41,260
Common stock	11	$	800

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the nine months ended September 30, 2019, the Company issued 1.1 million shares of common stock under the Company’s stock-based compensation plans.

Effective income tax rate



	Nine Months Ended September 30,
(Dollars in thousands)	2019			2018
(Benefit from) income taxes	$	(43,158	)	$	(23,692	)
Effective income tax rate	32		%	80		%

During the nine months ended September 30, 2019, the Company’s effective income tax rate decreased primarily due to the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation and an increase in U.S. research and development tax credits.

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 September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019			2018			2019			2018
Basic
Net (loss)	$	(30,338	)	$	(7,587	)	$	(91,351	)	$	(5,796	)
Weighted-average common shares outstanding	79,200			78,700			78,928			78,525
(Loss) per share, basic	$	(0.38	)	$	(0.10	)	$	(1.16	)	$	(0.07	)

Diluted
Net (loss)	$	(30,338	)	$	(7,587	)	$	(91,351	)	$	(5,796	)
Weighted-average effect of dilutive securities:
Stock options	—			—			—			—
RSUs	—			—			—			—
Effect of dilutive securities	—			—			—			—
Weighted-average common shares outstanding, assuming dilution	79,200			78,700			78,928			78,525
(Loss) per share, diluted	$	(0.38	)	$	(0.10	)	$	(1.16	)	$	(0.07	)

Outstanding anti-dilutive stock options and RSUs ⁽¹⁾	5,953			6,119			5,923			6,380

⁽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~~

14. SUBSEQUENT EVENTS

On November 6, 2019, 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~~Company entered into a five-year $100 million, senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“~~CODM”~~PNC”) ~~in deciding how to allocate resources and in assessing performance.~~

. The Company ~~develops~~may use borrowings to finance working capital needs and ~~licenses software applications~~ for ~~customer engagement~~general corporate purposes. Subject to specific circumstances, the Credit Agreement allows the Company to increase the aggregate commitment up to $200 million.

The Credit Agreement contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestures and ~~its Pega~~^® ~~Platform, and provides consulting services, maintenance, and training related to its offerings.~~affiliate transactions. The Company ~~derives substantially all~~is also required to comply with financial covenants that consist of ~~its revenue from the sale and support~~a maximum net consolidated leverage ratio 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 excellence3.5 (with a step-up in the ~~enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information~~event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. The commitments expire on ~~a consolidated basis. Therefore, the Company determined it has one reportable segment—Customer Engagement Solutions~~November 4, 2024, 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~~

any outstanding loans will be payable on such date.

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;~~third-party 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 as well as~~2018 and 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 expressly 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.

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 also 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 a number of select financial and performance metrics. The~~metrics

We utilize several performance metrics in analyzing and assessing our overall performance, making operating decisions, and forecasting and planning for future periods.



(Dollars in thousands, except per share amounts)	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change
(Dollars in thousands, except per share amounts)	2019			2018			Change					2019			2018			Change
Total revenue	$	216,703		$	203,263		$	13,440		7	%	$	634,841		$	635,224		$	(383	)	—	%
Subscription revenue ⁽¹⁾	$	154,513		$	120,267		$	34,246		28	%	$	424,273		$	382,485		$	41,788		11	%
Net (loss)	$	(30,338	)	$	(7,587	)	$	(22,751	)	(300	)%	$	(91,351	)	$	(5,796	)	$	(85,555	)	(1,476	)%
(Loss) per share, diluted	$	(0.38	)	$	(0.10	)	$	(0.28	)	(280	)%	$	(1.16	)	$	(0.07	)	$	(1.09	)	(1,557	)%

⁽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~~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) (2)}

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

⁽¹⁾Total 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 license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting services for Client Cloud arrangements.


•	Pega Cloud: the sum of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.

⁽²⁾As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the ~~number~~presentation of ~~committed contract years~~

~~Quarterly Maintenance revenue reported for~~ACV growth rates on a constant currency basis enhances the ~~current three months ended period multiplied by 4.~~

   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 of the predictability and repeatability~~understanding 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~~results and ~~Cloud Backlog~~

~~A measure of the continued growth~~evaluation of our ~~business as a result of~~performance in comparison to prior periods.

Remaining performance obligations (“RPO”)

Expected future ~~contractual commitments by our clients.~~

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

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



	September 30, 2019
(Dollars in thousands)	Perpetual license			Term license			Maintenance			Cloud			Consulting			Total
1 year or less	$	7,689		$	25,948		$	158,220		$	133,785		$	13,145		$	338,787		56	%
1-2 years	853			3,798			18,590			105,081			863			129,185			21	%
2-3 years	1,306			591			8,323			72,915			841			83,976			14	%
Greater than 3 years	—			85			4,959			51,591			—			56,635			9	%
	$	9,848		$	30,422		$	190,092		$	363,372		$	14,849		$	608,583		100	%
Change in RPO Since September 30, 2018
	$	(23,651	)	$	(25,740	)	$	36,959		$	100,272		$	(1,587	)	$	86,253
	(71		)%	(46		)%	24		%	38		%	(10		)%	17		%

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)~~



	September 30, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	25,343	$	44,283	$	140,591	$	88,529	$	14,107	$	312,853	60	%
1-2 years	6,490		10,063		8,877		70,815		1,830		98,075		19	%
2-3 years	360		1,598		2,586		54,646		449		59,639		11	%
Greater than 3 years	1,306		218		1,079		49,110		50		51,763		10	%
	$	33,499	$	56,162	$	153,133	$	263,100	$	16,436	$	522,330	100	%

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~~

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
September 30, Change Nine Months Ended
September 30, Change
2019 2018 2019 2018
Cloud $ 35,153
16 % $ 22,184
11 % $ 12,969
58 % $ 94,610
15 % $ 57,967
9 % $ 36,643
63 %
Term license 48,989
23 % 32,066
16 % 16,923
53 % 122,257
19 % 128,070
20 % (5,813 ) (5 )%
Maintenance 70,371
32 % 66,017
32 % 4,354
7 % 207,406
33 % 196,448
31 % 10,958
6 %
Subscription ⁽¹⁾
154,513
71 % 120,267
59 % 34,246
28 % 424,273
67 % 382,485
60 % 41,788
11 %
Perpetual license 9,016
4 % 20,276
10 % (11,260 ) (56 )% 43,286
7 % 56,829
9 % (13,543 ) (24 )%
Consulting 53,174
25 % 62,720
31 % (9,546 ) (15 )% 167,282
26 % 195,910
31 % (28,628 ) (15 )%
$ 216,703
100 % $ 203,263
100 % $ 13,440
7 % $ 634,841
100 % $ 635,224
100 % $ (383 ) — %

⁽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~~become effective.

Subscription revenue

The increases in ~~the recognition of revenue over longer periods.~~

~~The decrease in perpetual license~~cloud 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~~2019 reflect the shift in client preferences to ~~a lower percentage~~cloud arrangements from other types of ~~perpetual arrangements executed and recognized in revenue.~~

arrangements. The ~~decrease~~increase in term license revenue in the three months ended September 30, ~~2017~~2019 was ~~primarily~~ due to arevenue recognized from several large, multi-year term license ~~renewal for which the second year of the term was recognized as revenue~~contracts 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%.~~2019. The ~~increase~~decrease in term license revenue in the nine months ended September 30, ~~2017~~2019 was ~~primarily due~~attributable to ~~broad based growth amongst new and existing customers offset by a large~~revenue recognized from term license ~~arrangement~~contracts in the nine months ended September 30, 2019 with multi-year committed maintenance periods, which ~~was prepaid and recognized~~resulted in a greater portion of the contract value being allocated to maintenance. The increases in maintenance revenue in the three and nine months ended ~~March 31, 2016. If this term license arrangement was not prepaid and recognized in revenue 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 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~~2019 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 decreases 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 from new~~ in the three and nine months ended September 30, 2019 reflects the shift in client preferences in favor of our cloud offerings instead of our 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~~decreases in consulting ~~services~~ revenue ~~were primarily due to higher billable hours during~~in 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 revenue from our Pega Cloud offerings. The increases in cloud revenue~~2019 were primarily due to ~~continued~~decreases in billable hours.

Gross profit



	Three Months Ended September 30,									Change					Nine Months Ended September 30,								Change
(Dollars in thousands)	2019					2018				Change					2019				2018				Change
Software license	$	57,329		99	%	$	51,087	98	%	$	6,242		12	%	$	162,561	98	%	$	181,127	98	%	$	(18,566	)	(10	)%
Maintenance	63,683			90	%	59,938		91	%	3,745			6	%	188,091		91	%	178,413		91	%	9,678			5	%
Cloud	17,329			49	%	12,569		57	%	4,760			38	%	46,841		50	%	31,853		55	%	14,988			47	%
Consulting	(2,536		)	(5	)%	5,246		8	%	(7,782		)	*		4,933		3	%	19,977		10	%	(15,044		)	(75	)%
	$	135,805		63	%	$	128,840	63	%	$	6,965		5	%	$	402,426	63	%	$	411,370	65	%	$	(8,944	)	(2	)%

* not meaningful

The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth ofas 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 %

business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.

The ~~decrease~~increase in total gross profit in the three months ended September 30, ~~2017~~2019 was primarily due to ~~a shift in the mix of license arrangements executed from perpetual to term licenses and~~ an increase in ~~lower margin services revenue.~~

term revenue recognized from several large, multi-year term license contracts in the three months ended September 30, 2019. It was also due to an increase in cloud revenue reflecting the shift in client preferences to cloud arrangements from other types of arrangements, an increase in maintenance revenue due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90%.

The ~~increase~~decrease in total gross profit in the nine months ended September 30, ~~2017~~2019 was primarily due to ~~increased~~a decrease in term and perpetual license revenue and a decrease in consulting revenue due to a decrease in billable hours.

The decrease in total ~~revenue.~~

gross profit percent in the nine months ended September 30, 2019 was driven by the shift in client preferences in favor of cloud arrangements, which are lower margin than our term and perpetual license revenue streams and decreases in cloud and consulting gross profit percent.

The ~~increases~~decreases in ~~service~~cloud gross profit percent in the three and nine months ended September 30, ~~2017 was~~2019 were driven by an increase in costs as we accelerated our investments in cloud infrastructure and service delivery to support future growth. The decreases in consulting gross profit percent in the three and nine months ended September 30, 2019 were driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project ~~which began~~and an increase in ~~the second half of 2016~~consulting resource availability as we continue growing and ~~several additional large projects for which costs were recognized in 2016 but whose associated revenue was not recognized until after September 30, 2016.~~

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 September 30,						Change				Nine Months Ended September 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
Selling and marketing ⁽¹⁾	$	115,237		$	87,490		$	27,747	32	%	$	341,064		$	269,845		$	71,219	26	%
As a percent of total revenue	53		%	43		%					54		%	42		%
Selling and marketing headcount, end of period											1,532			1,194			338		28	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with ~~our~~ selling and marketing ~~personnel~~activities, 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~~increases in the three ~~months ended September 30, 2017 was primarily due to an increase in compensation~~ and benefits of $1.8 million, driven by 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~~2019 were primarily due to ~~an increase in~~ compensation and benefits of ~~$12.7~~$22.6 million ~~respectively, driven by~~and $58.1 million, attributable to increased headcount, ~~and~~ equity compensation, and ~~an increase~~increases of $4.0 million and $10.6 million in ~~employee~~deferred contract cost amortization. Also, contributing to the increases were travel and entertainment ~~partially offset by a decrease in brand marketing program expenses~~ of ~~$2.2~~$2.6 million and $4.5 million.

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 September 30,						Change				Nine Months Ended September 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
Research and development ⁽¹⁾	$	52,492		$	46,504		$	5,988	13	%	$	152,802		$	135,261		$	17,541	13	%
As a percent of total revenue	24		%	23		%					24		%	21		%
Research and development headcount, end of period											1,631			1,595			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 in the three and nine months ended September 30, ~~2017~~2019 were primarily due to ~~increases in~~ compensation and benefits of ~~$2.9~~$3.8 million and ~~$12.6~~$10.5 million, ~~respectively,~~ attributable to ~~increased~~an increase in headcount and equity ~~compensation.~~

compensation, and $1.2 million and $4.5 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 September 30,						Change				Nine Months Ended September 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
General and administrative ⁽¹⁾	$	14,843		$	12,104		$	2,739	23	%	$	41,693		$	38,749		$	2,944	8	%
As a percent of total revenue	7		%	6		%					7		%	6		%
General and administrative headcount, end of period ⁽²⁾											420			326			94		29	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. ~~They~~It also ~~include~~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 in the three and nine months ended September 30, ~~2017~~2019 were primarily due to ~~increases in~~ compensation and benefits of ~~$0.4~~$3.2 million and $4$3.7 million, ~~respectively, attributable~~due to increased ~~headcount and equity compensation.~~ headcount.

Stock-based compensation



	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(Dollars in thousands)	2019		2018		Change				2019		2018		Change
Cost of revenues	$	4,787	$	4,319	$	468	11	%	$	14,216	$	12,277	$	1,939	16	%
Selling and marketing	8,317		6,198		2,119		34	%	24,055		16,895		7,160		42	%
Research and development	4,858		3,917		941		24	%	13,990		11,356		2,634		23	%
General and administrative	3,884		1,974		1,910		97	%	7,981		7,045		936		13	%
	$	21,846	$	16,408	$	5,438	33	%	$	60,242	$	47,573	$	12,669	27	%

The ~~increase~~increases in the three and nine months ended September 30, ~~2017 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~~2019 were primarily due to the increased value of our annual periodic equity awards granted in March ~~2016~~2019 and ~~2017.~~2018 and increased headcount. 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 )%

Other income (expense), net



	Three Months Ended September 30,					Change					Nine Months Ended September 30,					Change
(Dollars in thousands)	2019			2018		Change					2019			2018		Change
Foreign currency transaction (loss) gain	$	(1,970	)	$	399	$	(2,369	)	*		$	(3,577	)	$	558	$	(4,135	)	*
Interest income, net	556			683		(127		)	(19	)%	1,823			2,076		(253		)	(12	)%
Other income, net	323			—		323			*		378			363		15			4	%
	$	(1,091	)	$	1,082	$	(2,173	)	*		$	(1,376	)	$	2,997	$	(4,373	)	*

* not meaningful

The ~~decreases~~changes in ~~amortization of intangibles in the three and nine months ended September 30, 2017~~foreign currency transaction (loss) gain were primarily due to the ~~amortization in full~~impact 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 foreign currency forward contracts (“forward contracts”) to hedge our exposure to~~ fluctuations in foreign currency exchange rates associated with our foreign ~~currency denominated~~currency-denominated cash, accounts receivable, and intercompany receivables and payables held ~~primarily~~ by ~~the U.S. parent company and its~~our 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~~

(Benefit from) 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 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 September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
(Benefit from) income taxes	$	(17,520	)	$	(8,589	)	$	(43,158	)	$	(23,692	)
Effective income tax rate							32		%	80		%

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 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 nine months ended September 30, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation and an increase in U.S. research and development tax credits.

LIQUIDITY AND CAPITAL RESOURCES



	Nine Months Ended September 30,
(in thousands)	2019			2018
Cash provided by (used in):
Operating activities	$	(13,462	)	$	67,088
Investing activities	53,448			(49,595		)
Financing activities	(61,941		)	(71,664		)
Effect of exchange rates on cash and cash equivalents	(363		)	(1,913		)
Net (decrease) in cash and cash equivalents	$	(22,318	)	$	(56,084	)



(in thousands)	September 30, 2019		December 31, 2018
Held by U.S. entities	$	41,484	$	143,533
Held by foreign entities	71,085		63,890
Total cash, cash equivalents, and marketable securities	$	112,569	$	207,423

   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

needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million. See Item 5. “Other Information” for additional information.

We believe that our current cash, cash equivalents, marketable securities, ~~and~~ cash flow from operations, and borrowing capacity 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~~ Whether these resources are adequate to meet our ~~cash~~liquidity needs beyond that period will depend on our growth, operating results, and ~~cash equivalents was held in~~the investments required to meet possible increased demand for our ~~foreign subsidiaries.~~ services. If we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.

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 (used in) 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, or negative cash flow, in the near term. Cash from cloud arrangements is generally collected over an average service period of three years, while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective.

The primary ~~drivers during~~driver of the decrease in the nine months ended September 30, ~~2017 were net income of $36.6 million and $80.6 million from trade accounts receivable, largely due to increased cash collections and~~2019 was 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~~recent shift in ~~the table below had been billed and no~~our 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~~mix toward cloud arrangements, ~~were approximately $376.3 million~~which are generally collected over an average service period of three years, and increased costs as ~~of September 30, 2016.~~

the Company accelerated investments in its cloud offerings and selling and marketing activities to support future growth.

Cash ~~used in~~provided by (used in) investing activities

~~During~~

The change in cash provided by (used in) investing activities was primarily driven by the ~~nine months ended September 30, 2017, we purchased $25.7 million~~payment of ~~marketable debt securities and made investments~~consideration for the acquisition of ~~$9.1 million~~In the Chat Communications Inc. 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~~May 2019.

Cash (used in) financing activities

We primarily used 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.

~~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 were:



	Nine Months Ended September 30,
(in thousands)	2019
January 1,	$	6,620
Authorizations ⁽²⁾	60,000
Repurchases	(20,286		)
September 30,	$	46,334

⁽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 .

Common stock repurchases ~~made~~



	Nine Months Ended September 30,
	2019			2018
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	514	$	34,871	591	$	35,530
Stock repurchase program ⁽¹⁾
Repurchases paid	318	20,086		512	29,949
Repurchases unsettled at period end	3	200		3	200
Activity in period ⁽²⁾	835	$	55,157	1,106	$	65,679

⁽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 months ended September 30, ~~2017~~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~~$31.6 million and ~~$10.1~~$28.2 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



	Nine Months Ended September 30,
(in thousands)	2019		2018
Dividend payments to shareholders	$	7,105	$	7,067

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 the risk of loss that may affect us due to adverse~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes ~~in financial market prices and rates. Our 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 included~~2019 to the market risk exposure disclosed 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.~~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.~~

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~~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 below and 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 they 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~~

On November 6, 2019, we entered into a five-year $100 million, senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). We may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million. See Item 5. “Other Information” for additional information.

Any failure to meet our debt obligations would damage our business.

Our ability to repay any amounts we borrow under our Credit Agreement will depend on market conditions and our future performance, which are subject to economic, financial, competitive, and other factors beyond our control. If we are not profitable in the future or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for additional capital expenditures, acquisitions and general corporate and other purposes. If we incur significantly more debt, this could intensify the risks described above.

We are required to comply with certain financial and operating covenants under our revolving credit facility. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.

We are required to comply with certain financial and operating covenants under our Credit Agreement. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the Credit Agreement. We are required to comply with specified financial and operating covenants under our Credit Agreement and to make payments, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have ~~been no material changes during~~sufficient working capital or liquidity to satisfy any repayment obligations in the ~~nine months ended September 30, 2017~~event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants under the Credit Agreement at the time we wish to borrow funds, we will be unable to borrow funds. The financial and operating covenants under the ~~risk factors disclosed in~~Credit Agreement also may limit our ~~Annual Report on Form10-K~~ability to borrow funds, including for ~~the year ended December 31, 2016.~~

strategic acquisitions and share repurchases.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~The following table sets forth information regarding our repurchases~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of ~~our common~~Equity Securities

Common stock ~~during~~repurchased in the three months ended September 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, 2018 (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~~

2019 was:



(in thousands, except per share amounts)	Total Number of Shares Purchased ^{(1) (2)}	Average Price Paid per Share ^{(1) (2)}		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program ⁽²⁾	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
July 1, 2019 - July 31, 2019	37	$	75.30	29	$	50,532
August 1, 2019 - August 31, 2019	94	$	72.06	31	$	48,333
September 1, 2019 - September 30, 2019	199	$	71.12	28	$	46,334
	330	$	71.86

⁽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⁾ See “Liquidity and Capital Resources” in Item 2. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

ITEM 5. OTHER INFORMATION

On November 6, 2019, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). We may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows us to increase the aggregate commitment up to $200 million.

The ~~following exhibits are filed or furnished, as~~Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a maximum net consolidated leverage ratio of 3.5 (with a step-up in the ~~case~~event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. Our obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes, among other things, payment defaults, defaults in the performance of

affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events resulting in a material adverse effect on us and a change of control of us.

The interest rates applicable to revolving loans under the Credit Agreement are, at our option, either:

the London Interbank Offered Rates (“LIBOR”) Rate plus an interest margin based on our net consolidated leverage ratio; or

a base rate (which is the highest of (1) PNC’s prime rate, (2) the Federal Funds open rate in effect on such day plus 0.5%, and (3) the daily LIBOR Rate plus 1%) plus an interest margin based on our net consolidated leverage ratio.

We are obligated to pay an unused commitment fee during the term of the Credit Agreement that varies between 0.15% and 0.225% depending on our net consolidated leverage ratio. The credit facility includes a provision for the replacement of the LIBOR rate in the event that such rate is no longer available. The replacement rate will be determined by PNC in consultation with us. The revolving credit facility may be prepaid before maturity in whole or in part at our option without penalty or premium. We may at any time reduce or terminate the commitments under the credit facility.

The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as ~~part of~~Exhibit 10.1 to this ~~report.~~

~~EXHIBIT INDEX~~

Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS



Exhibit No.		Description
10.1		Credit Facility Agreement
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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.

⁺⁺104

~~Management contracts~~

Cover Page Interactive Data File (formatted as Inline XBRL and ~~compensatory plan or arrangements~~contained in Exhibit 101)

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

SIGNATURE

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


				~~Pegasystems Inc.~~

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



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)



	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~~2019 and December 31, ~~2016~~ 2018		2	3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~ 2018		3	4
Unaudited Condensed Consolidated Statements of Comprehensive ~~Income~~(Loss) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~ 2018		4	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018	6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~ 2018		5	8
Notes to Unaudited Condensed Consolidated Financial Statements		6	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		25	24
Item 4. Controls and Procedures	24
	25
PART II - OTHER INFORMATION
~~PART II—OTHER INFORMATION~~

Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 5. Other Information	25
Item 6. Exhibits	25 26

~~Item 6. Exhibits~~ Signature		26

~~Signature~~27		27


	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,				Change				Constant Currency Change
(Dollars in thousands)	2019		2018		Change				Constant Currency Change
Maintenance	$	281,484	$	264,068	$	17,416	7	%	9	%
Term	207,317		174,320		$	32,997	19	%	20	%
Client Cloud	488,801		438,388		$	50,413	11	%	13	%
Pega Cloud	145,549		98,373		47,176		48	%	51	%
Total ACV	$	634,350	$	536,761	$	97,589	18	%	20	%


	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