SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
FORM10-Q
(Mark One)
☒ | | | | | | | | |
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended
September 30, 2017March 31, 2020
☐ | | | | | | | | |
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period fromto
Commission File Number:
1-11859____________________________
(Exact name of Registrant as specified in its charter)
____________________________
| | | | | | | | | | | | | | | | | | | | | | | |
Massachusetts | | | | | | | 04-2787865 |
(State or other jurisdiction of incorporation or organization) | | | | | | | (IRS Employer Identification No.) |
| |
One Rogers Street, Cambridge, MA | | 02142-1209 |
(Address of principal executive offices) | | (Zip Code) |
One Rogers Street, Cambridge, MA 02142-1209
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | PEGA | NASDAQ Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ x No ☐¨ Indicate by check mark whether the registrantRegistrant 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 registrantRegistrant was required to submit and post such files). Yes ☒ x No ☐¨ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, 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” in
Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | x | Accelerated filer | ☐ | ☐ |
| | | |
Non-accelerated filer | ☐ | ☐ (Do not check if smaller reporting company) | | Smaller reporting company | ☐ | ☐ |
| | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrantRegistrant 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
77,859,95880,089,203 shares of the Registrant’s common stock,
$.01$0.01 par value per share, outstanding on
October 27, 2017.April 13, 2020.
PEGASYSTEMS INC.
Index to Form
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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PART I—I - FINANCIAL INFORMATION | |
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Item 1. Unaudited Condensed Consolidated Financial Statements | | | | |
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 2016 2019 | | | 2 | |
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2020 and 2016 2019 | | | 3 | |
Unaudited Condensed Consolidated Statements of Comprehensive Income(Loss) for the three and nine months ended September 30, 2017March 31, 2020 and 2016 2019 | | | 4 | |
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 | | | 5 | |
Notes to Unaudited Condensed Consolidated Financial Statements | | | 6 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 15 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | | | 25 | |
Item 4. Controls and Procedures | | | 25 | |
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PART II—OTHER INFORMATION
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PART II - OTHER INFORMATION | |
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Item 1A. Risk Factors | | | | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | 25 | |
Item 6. Exhibits | | | 26 | |
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Signature | | | 27 | |
PART
I—I - FINANCIAL INFORMATION
ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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 | |
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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 | |
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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 | |
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Total liabilities | | | 293,369 | | | | 318,767 | |
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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 | |
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Total liabilities and stockholders’ equity | | $ | 665,070 | | | $ | 654,656 | |
| | | | | | | | |
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 538,142 | | | $ | 68,363 | |
| | | |
| | | |
Accounts receivable | 191,533 | | | 199,720 | |
Unbilled receivables | 182,399 | | | 180,219 | |
Other current assets | 72,000 | | | 57,308 | |
Total current assets | 984,074 | | | 505,610 | |
Unbilled receivables | 110,393 | | | 121,736 | |
Goodwill | 78,498 | | | 79,039 | |
Other long-term assets | 301,428 | | | 278,427 | |
Total assets | $ | 1,474,393 | | | $ | 984,812 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 27,770 | | | $ | 17,475 | |
Accrued expenses | 36,985 | | | 48,001 | |
Accrued compensation and related expenses | 59,928 | | | 104,126 | |
Deferred revenue | 197,018 | | | 190,080 | |
Other current liabilities | 17,790 | | | 18,273 | |
Total current liabilities | 339,491 | | | 377,955 | |
Convertible senior notes, net | 505,108 | | | — | |
Operating lease liabilities | 47,919 | | | 52,610 | |
Other long-term liabilities | 15,264 | | | 15,237 | |
Total liabilities | 907,782 | | | 445,802 | |
Stockholders’ equity: | | | |
Preferred stock,1,000 shares authorized; NaN issued | — | | | — | |
Common stock, 200,000 shares authorized; 80,076 and 79,599 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 801 | | | 796 | |
Additional paid-in capital | 196,310 | | | 140,523 | |
Retained earnings | 383,142 | | | 410,919 | |
Accumulated other comprehensive (loss) | | (13,642) | | | (13,228) | |
Total stockholders’ equity | 566,611 | | | 539,010 | |
Total liabilities and stockholders’ equity | $ | 1,474,393 | | | $ | 984,812 | |
See notes to unaudited condensed consolidated financial statements.
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 | |
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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 | |
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Total cost of revenue | | | 69,731 | | | | 60,437 | | | | 205,696 | | | | 177,047 | |
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Gross profit | | | 110,084 | | | | 122,365 | | | | 395,346 | | | | 373,609 | |
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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 | |
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Total operating expenses | | | 124,373 | | | | 116,867 | | | | 376,647 | | | | 347,626 | |
| | | | | | | | | | | | | | | | |
(Loss)/income from operations | | | (14,289 | ) | | | 5,498 | | | | 18,699 | | | | 25,983 | |
Foreign currency transaction (loss)/gain | | | (552 | ) | | | 1,082 | | | | (793 | ) | | | 2,764 | |
Interest income, net | | | 144 | | | | 172 | | | | 470 | | | | 650 | |
Other income/(expense), net | | | — | | | | (1,237 | ) | | | 287 | | | | (4,891 | ) |
| | | | | | | | | | | | | | | | |
(Loss)/income before (benefit)/provision for income taxes | | | (14,697 | ) | | | 5,515 | | | | 18,663 | | | | 24,506 | |
(Benefit)/provision for income taxes | | | (12,885 | ) | | | 2,214 | | | | (17,952 | ) | | | 6,269 | |
| | | | | | | | | | | | | | | | |
Net (loss)/income | | $ | (1,812 | ) | | $ | 3,301 | | | $ | 36,615 | | | $ | 18,237 | |
| | | | | | | | | | | | | | | | |
(Loss)/earnings per share: | | | | | | | | | | | | | | | | |
Basic | | | (0.03 | ) | | | 0.04 | | | | 0.47 | | | | 0.24 | |
Diluted | | | (0.03 | ) | | | 0.04 | | | | 0.44 | | | | 0.23 | |
Weighted-average number of common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 77,691 | | | | 76,278 | | | | 77,258 | | | | 76,323 | |
Diluted | | | 77,691 | | | | 79,548 | | | | 82,717 | | | | 79,401 | |
Cash dividends declared per share | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.09 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Revenue | | | | | | | |
Software license | $ | 93,916 | | | $ | 63,264 | | | | | |
Maintenance | 73,695 | | | 67,706 | | | | | |
Services | 97,980 | | | 81,576 | | | | | |
Total revenue | 265,591 | | | 212,546 | | | | | |
Cost of revenue | | | | | | | |
Software license | 684 | | | 1,378 | | | | | |
Maintenance | 5,576 | | | 6,335 | | | | | |
Services | 73,268 | | | 66,724 | | | | | |
Total cost of revenue | 79,528 | | | 74,437 | | | | | |
Gross profit | | 186,063 | | | 138,109 | | | | | |
Operating expenses | | | | | | | |
Selling and marketing | 136,024 | | | 108,865 | | | | | |
Research and development | 58,727 | | | 50,596 | | | | | |
General and administrative | 15,630 | | | 12,676 | | | | | |
Total operating expenses | 210,381 | | | 172,137 | | | | | |
(Loss) from operations | | (24,318) | | | (34,028) | | | | | |
Foreign currency transaction (loss) | | (5,947) | | | (3,712) | | | | | |
Interest income | | 607 | | | 723 | | | | | |
Interest expense | | (2,306) | | | — | | | | | |
Loss on capped call transactions | | (18,592) | | | — | | | | | |
Other income, net | | 1,374 | | | — | | | | | |
| | | | | | | |
(Loss) before (benefit from) income taxes | | (49,182) | | | (37,017) | | | | | |
(Benefit from) income taxes | | (23,810) | | | (8,300) | | | | | |
Net (loss) | | $ | (25,372) | | | $ | (28,717) | | | | | |
(Loss) per share | | | | | | | | |
Basic | $ | (0.32) | | | $ | (0.37) | | | | | |
Diluted | $ | (0.32) | | | $ | (0.37) | | | | | |
Weighted-average number of common shares outstanding | | | | | | | |
Basic | 79,808 | | | 78,584 | | | | | |
Diluted | 79,808 | | | 78,584 | | | | | |
See notes to unaudited condensed consolidated financial statements.
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 | ) |
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Total other comprehensive income/(loss), net of tax | | | 571 | | | | (343 | ) | | | 3,337 | | | | (1,232 | ) |
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Comprehensive (loss)/income | | $ | (1,241 | ) | | $ | 2,958 | | | $ | 39,952 | | | $ | 17,005 | |
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| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Net (loss) | $ | (25,372) | | | $ | (28,717) | | | | | |
Other comprehensive (loss) income, net of tax | | | | | | | | |
Unrealized gain on available-for-sale securities | | 100 | | | 374 | | | | | |
Foreign currency translation adjustments | (514) | | | 1,627 | | | | | |
Total other comprehensive (loss) income, net of tax | | (414) | | | 2,001 | | | | | |
Comprehensive (loss) | | $ | (25,786) | | | $ | (26,716) | | | | | |
See notes to unaudited condensed consolidated financial statements.
PEGASYSTEMS INC.
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 | |
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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 | ) |
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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 | ) |
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Cash used in financing activities | | | (44,040 | ) | | | (43,031 | ) |
Effect of exchange rates on cash and cash equivalents | | | 2,054 | | | | (1,309 | ) |
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Net increase/(decrease) in cash and cash equivalents | | | 59,974 | | | | (26,643 | ) |
Cash and cash equivalents, beginning of period | | | 70,594 | | | | 93,026 | |
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Cash and cash equivalents, end of period | | $ | 130,568 | | | $ | 66,383 | |
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PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
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| Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Total Stockholders’ Equity |
| Number of Shares | | Amount | | | | | | | | |
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 ($0.03 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 | |
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December 31, 2019 | 79,599 | | | $ | 796 | | | $ | 140,523 | | | $ | 410,919 | | | $ | (13,228) | | | $ | 539,010 | |
Equity component of convertible senior notes, net | — | | | — | | | 61,604 | | | — | | | — | | | 61,604 | |
Repurchase of common stock | (87) | | | (1) | | | (5,999) | | | — | | | — | | | (6,000) | |
Issuance of common stock for share-based compensation plans | 564 | | | 6 | | | (23,017) | | | — | | | — | | | (23,011) | |
Stock-based compensation | — | | | — | | | 23,199 | | | — | | | — | | | 23,199 | |
Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,405) | | | — | | | (2,405) | |
Other comprehensive (loss) | — | | | — | | | — | | | — | | | (414) | | | (414) | |
Net (loss) | — | | | — | | | — | | | (25,372) | | | — | | | (25,372) | |
March 31, 2020 | 80,076 | | | $ | 801 | | | $ | 196,310 | | | $ | 383,142 | | | $ | (13,642) | | | $ | 566,611 | |
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See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Operating activities | | | |
Net (loss) | | $ | (25,372) | | | $ | (28,717) | |
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities | | | | |
Stock-based compensation | 23,175 | | | 18,350 | |
Loss on capped call transactions | 18,592 | | | — | |
Deferred income taxes | (9,231) | | | 1,455 | |
Amortization of deferred contract costs | 8,497 | | | 8,301 | |
Lease expense | 3,852 | | | 3,403 | |
Amortization of debt discount and issuance costs | 1,719 | | | — | |
Amortization of intangible assets and depreciation | 4,919 | | | 6,755 | |
Amortization of investments | — | | | 315 | |
Foreign currency transaction loss | | 5,947 | | | 3,712 | |
Other non-cash | (1,374) | | | 16 | |
Change in operating assets and liabilities, net | (49,047) | | | 9,113 | |
Cash (used in) provided by operating activities | | (18,323) | | | 22,703 | |
Investing activities | | | |
Purchases of investments | (1,490) | | | (7,224) | |
Proceeds from maturities and called investments | — | | | 8,548 | |
Sales of investments | 1,424 | | | — | |
| | | |
Investment in property and equipment | (12,496) | | | (2,790) | |
Cash (used in) investing activities | | (12,562) | | | (1,466) | |
Financing activities | | | |
Proceeds from issuance of convertible senior notes | 600,000 | | | — | |
Payment of debt issuance costs | (14,527) | | | — | |
Purchase of capped calls related to convertible senior notes | (51,900) | | | — | |
Dividend payments to shareholders | (2,388) | | | (2,363) | |
| | | |
| | | |
| | | |
| | | |
Common stock repurchases | (29,011) | | | (23,224) | |
Cash provided by (used in) financing activities | | 502,174 | | | (25,587) | |
Effect of exchange rate changes on cash and cash equivalents | (1,510) | | | 295 | |
Net increase (decrease) in cash and cash equivalents | | 469,779 | | | (4,055) | |
Cash and cash equivalents, beginning of period | 68,363 | | | 114,422 | |
Cash and cash equivalents, end of period | $ | 538,142 | | | $ | 110,367 | |
See notes to unaudited condensed consolidated financial statements.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all
of the information
and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form
10-K for the year ended December 31,
2016.2019.
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
2017.2020.
2. NEW ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
Financial instruments
In
May 2017,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-09 “Stock Compensation (Topic 718), Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date for the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.Financial Instruments
In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments—Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses.model. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effectadopted this ASU will have on its consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be 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 andright-of-use assets upon adoption with no material impact to its results of operations and cash flows.
Revenue
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition, creating the new Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, ASC 606 requires 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,standard effective January 1, 2018.2020. 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 Reportadoption of this standard did not have a material effect on Form10-K for the year ended December 31, 2018 will be the Company’s first Annual Report that willfinancial position or results of operations.
3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Accounts receivable | $ | 191,533 | | | $ | 199,720 | |
Unbilled receivables | 182,399 | | | 180,219 | |
Long-term unbilled receivables | 110,393 | | | 121,736 | |
| $ | 484,325 | | | $ | 501,675 | |
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. They are expected to be
issuedbilled in
compliance with ASC 606.the future as follows:
| | | | | | | | |
(Dollars in thousands) | March 31, 2020 | |
1 year or less | $ | 182,399 | | 62 | % |
1-2 years | 88,928 | | 31 | % |
2-5 years | 21,465 | | 7 | % |
| $ | 292,792 | | 100 | % |
Unbilled receivables based upon contract effective date:
| | | | | | | | |
(Dollars in thousands) | March 31, 2020 | |
2020 | $ | 40,533 | | 14 | % |
2019 | 102,154 | | 35 | % |
2018 | 55,484 | | 19 | % |
2017 | 44,691 | | 15 | % |
2016 and prior | 49,930 | | 17 | % |
| $ | 292,792 | | 100 | % |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contract assets and deferred revenue
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Contract assets (1) | $ | 6,195 | | | $ | 5,558 | |
Long-term contract assets (2) | 5,664 | | | 5,420 | |
| $ | 11,859 | | | $ | 10,978 | |
Deferred revenue | $ | 197,018 | | | $ | 190,080 | |
Long-term deferred revenue (3) | 5,630 | | | 5,407 | |
| $ | 202,648 | | | $ | 195,487 | |
(1) Included in other current assets. (2) Included in other long-term assets. (3) 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
Company has made significant progress on quantifyingchange in deferred revenue in the
impactthree months ended March 31, 2020 was primarily due to new billings in advance of
its adoption and identifying necessary changes to our policies, processes, systems, and controls.The Company expects the following impacts:
Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term of the agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition, have been met, and any corresponding maintenance overpartially offset by revenue recognized during the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the customer. Any unrecognized license revenue from these arrangements,period that was included in deferred revenue at December 31, 2015, will not be recognized2019.
4. DEFERRED CONTRACT COSTS
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Deferred contract costs (1) | $ | 81,452 | | | $ | 85,314 | |
(1) Included in revenueother long-term assets.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(in thousands) | 2020 | | 2019 | | | | |
Amortization of deferred contract costs (1) | $ | 8,497 | | | $ | 8,301 | | | | | |
(1) Included in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016selling and 2017 will be recognized in fullmarketing expenses.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Change in the year that controlcarrying amount of goodwill:
| | | | | |
(in thousands) | Three Months Ended March 31, 2020 |
Balance as of January 1, | $ | 79,039 | |
| |
Currency translation adjustments | (541) | |
Balance as of March 31, | $ | 78,498 | |
Intangibles
Intangible assets are recorded at cost and amortized using the license is transferred to the customer instead ofstraight-line method over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.their estimated useful lives:
Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective Evidence (“VSOE”) for the remaining undelivered elements, which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2020 | | | | |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4 - 10 years | | $ | 63,096 | | | $ | (54,703) | | | $ | 8,393 | |
Technology | 2 - 10 years | | 64,842 | | | (54,546) | | | 10,296 | |
Other | 1 - 5 years | | 5,361 | | | (5,361) | | | — | |
| | | $ | 133,299 | | | $ | (114,610) | | | $ | 18,689 | |
(1) Included in future credits, significant discounts, and material rights under ASC 606, to be allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the customer, which is generally upon delivery of the license.other long-term assets.
Currently, the Company does not have VSOE for fixed price services, time and materials services | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | | | |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4 - 10 years | | $ | 63,140 | | | $ | (54,368) | | | $ | 8,772 | |
Technology | 2 - 10 years | | 64,843 | | | (53,898) | | | 10,945 | |
Other | 1 - 5 years | | 5,361 | | | (5,361) | | | — | |
| | | $ | 133,344 | | | $ | (113,627) | | | $ | 19,717 | |
(1) Included in certain geographical areas, and unspecified future products, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a stand-alone selling price. Once the transaction price is allocated to each of the performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer, professional services revenue will be recognized over time based on input or output measures that reflect the Company’s performance on the contract. This will result in the acceleration of professional services revenue when compared to the current practice of ratable recognition for professional services when there is a lack of VSOE.
Sales commissions and other third party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. As a practical expedient, if the term of the contract is one year or less, the Company will expense these costs as incurred. The Company expects this change to impact its multi-year cloud offerings and term and perpetual licenses with additional rights of use that extend beyond one year.long-term assets.
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
Amortization of intangible assets:
| | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Cost of revenue | $ | 647 | | | $ | 1,332 | | | | | |
Selling and marketing | 371 | | | 1,603 | | | | | |
| $ | 1,018 | | | $ | 2,935 | | | | | |
6. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act. This included $75 million in aggregate principal amount of the Notes that the Company issued resulting from initial purchasers fully exercising their option to purchase additional Notes. There are no required principal payments prior to the maturity of the Notes. The
Company’s marketable securities are as follows: | | | | | | | | | | | | | | | | |
(in thousands) | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
September 30, 2017 | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 32,764 | | | $ | 12 | | �� | $ | (17 | ) | | $ | 32,759 | |
Corporate bonds | | | 31,079 | | | | 12 | | | | (38 | ) | | | 31,053 | |
| | | | | | | | | | | | | | | | |
| | $ | 63,843 | | | $ | 24 | | | $ | (55 | ) | | $ | 63,812 | |
| | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 36,746 | | | $ | — | | | $ | (139 | ) | | $ | 36,607 | |
Corporate bonds | | | 26,610 | | | | 1 | | | | (51 | ) | | | 26,560 | |
| | | | | | | | | | | | | | | | |
| | $ | 63,356 | | | $ | 1 | | | $ | (190 | ) | | $ | 63,167 | |
| | | | | | | | | | | | | | | | |
Notes will accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The proceeds of the issuance were used for the Capped Call Transactions (described below), working capital, and other general corporate purposes.
Total net proceeds from the Notes and Capped Call Transactions:
| | | | | | | | |
(in thousands) | | Amount |
Principal | | $ | 600,000 | |
Less: issuance costs | | (14,527) | |
Less: Capped Call Transactions | | (51,900) | |
| | $ | 533,573 | |
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
•During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
•During the five (5) consecutive business days immediately after any five (5) consecutive trading day period, (the “Measurement Period”) if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than ninety eight percent (98%) of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
•Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).
As of September 30, 2017,March 31, 2020, no Notes were eligible for conversion at the election of the noteholder.
The initial conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events including spin offs, tender offers, exchange offers and certain stockholder distributions.
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company
did not hold any investments with unrealized losses that are consideredmay redeem for cash all or part of the Notes, at a repurchase price equal to
be other-than-temporary.As100% 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 exposuresprincipal amount, plus accrued and mayre-initiate this programunpaid interest, 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 valuelast reported sale price of the Company’s outstanding forward contracts was $128.4 million.
The fair valuecommon stock exceeded 130% 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 Septemberconversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 2017,consecutive trading day period ending on, and including, the trading day immediately preceding the date on which 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 | |
provides a redemption notice.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The income statement impact
If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental change relates to events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
In accounting for the transaction, the Notes have been separated into liability and equity components.
•The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.
•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
The excess of the principal amount of the Notes over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the contractual term of the Notes.
The Company incurred issuance costs of $14.5 million related to the Notes, which were allocated between liability and equity components of the Notes proportionate to the initial carry amount of the liability and equity components.
•Issuance costs attributable to the liability component are netted against the principal balance of the Notes and are amortized as interest expense using the effective interest method over the contractual term of the Notes.
•Issuance costs attributable to the equity component are netted with the equity component in additional paid-in capital and are not amortized.
Net carrying amount of the liability component:
| | | | | | | |
(in thousands) | March 31, 2020 | | |
Principal | $ | 600,000 | | | |
Unamortized debt discount | (82,624) | | | |
Unamortized issuance costs | (12,268) | | | |
| $ | 505,108 | | | |
Net carrying amount of the equity component, included in additional paid in capital:
| | | | | | | |
(in thousands) | March 31, 2020 | | |
Conversion options (1) | $ | 61,604 | | | |
(1) Net of issuance costs and taxes.
Interest expense related to the Notes:
| | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(in thousands) | 2020 | | | | | | |
Contractual interest expense (0.75% coupon) | $ | 450 | | | | | | | |
Amortization of debt discount (1) | 1,497 | | | | | | | |
Amortization of issuance cost (1) | 222 | | | | | | | |
| $ | 2,169 | | | | | | | |
(1) Amortized based upon an effective interest rate of 4.31%.
Future payments of principal and contractual interest:
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | |
(in thousands) | Principal | | Interest | | Total |
2020 | $ | — | | | | $ | 2,338 | | | $ | 2,338 | |
2021 | — | | | | 4,500 | | | 4,500 | |
2022 | — | | | | 4,500 | | | 4,500 | |
2023 | — | | | | 4,500 | | | 4,500 | |
2024 | — | | | | 4,500 | | | 4,500 | |
2025 | 600,000 | | | | 1,488 | | | 601,488 | |
| $ | 600,000 | | | | $ | 21,826 | | | $ | 621,826 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock and are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is initially $196.44. The Capped Call Transactions are classified as “other long-term assets” and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
Change in value of Capped Call Transactions:
| | | | | |
(in thousands) | Three Months Ended March 31, 2020 |
Value at issuance | $ | 51,900 | |
Fair value adjustment | (18,592) | |
Balance as of March 31, | $ | 33,308 | |
Credit Facility
In November 2019, and as amended in February 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Facility allows the Company to increase the aggregate commitment up to $200 million.
The Credit Facility contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. The Company is also required to comply with financial covenants that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. The commitments expire on November 4, 2024, and any outstanding forward contractsloans will be payable on such date.
As of March 31, 2020 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 | ) |
| | | | | | | | | | | | | | | | |
5.December 31, 2019, the Company had 0 outstanding borrowings under the Credit Facility.
7. FAIR VALUE MEASUREMENTS
Assets and
Liabilities Measuredliabilities measured at
Fair Valuefair value on a
Recurring Basisrecurring basis
The Company records its money market funds, marketable securities,cash equivalents, Capped Call Transactions, and forward contractsinvestments 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)
•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2)
•Level 2 - significant other inputs that are observable either directly or indirectly; and (Level 3)
•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company’s
cash equivalents are composed of money market funds
which are classified within Level 1
ofin the fair value hierarchy. The Company’s
marketable securitiesinvestments in privately-held companies are classified within Level
2 of3 in the fair value
hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.hierarchy. The
Company’s foreign currency forward contracts, which were all classified within Level 2fair value 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. If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchyCapped Call Transactions at the end of
theeach reporting period
is determined using a Black-Scholes option-pricing model. These valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. The Company applies significant judgment in
whichits determination of expected volatility. The Company considers both historical and implied volatility levels of the
actual event or change in circumstance occurs. There were no transfers between Level 1underlying equity security and
Level 2 during the nine months ended September 30, 2017.PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
apply limited consideration of historical peer group volatility levels.
The Company’s assets and liabilities measured at fair value on a recurring basis consistedwere:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | December 31, 2019 | | | | | | |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents (1) | $ | 460,475 | | | | $ | — | | | | $ | — | | | $ | 460,475 | | | $ | — | | | | $ | — | | | | $ | — | | | $ | — | |
Investments in privately-held companies (2) | $ | — | | | $ | — | | | $ | 6,338 | | | $ | 6,338 | | | $ | — | | | | $ | — | | | | $ | 4,871 | | | | $ | 4,871 | |
Capped Call Transactions (2) (3) | $ | — | | | | $ | 33,308 | | | | $ | — | | | | $ | 33,308 | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
(1) Composed 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 | |
investments in money market funds. (2) Included in other long-term assets. (3) See "6. Debt" for additional information.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Change in investments in privately-held companies:
| | | | | |
(in thousands) | Three Months Ended March 31, 2020 |
Balance as of January 1, | $ | 4,871 | |
New investments | 1,490 | |
Sales of investments | (1,424) | |
Currency translation adjustments | (73) | |
Fair value adjustment | 1,474 | |
Balance as of end of period | $ | 6,338 | |
For certain other financial instruments, including
cash equivalents, accounts receivable, and accounts payable, the carrying value approximates
their fair value due to the relatively short maturity of these items.
Assets Measured
The fair value of the Company’s Notes was recorded at
Fair Value$515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature. The fair value of the debt component was determined based on a
Nonrecurring BasisAssets recorded atdiscounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $600 million.
The fair value of the Notes (inclusive of the conversion feature which is embedded in the Notes) was approximately $533 million as of March 31, 2020. The fair value was determined based on the quoted price of the Notes in an over-the-counter market on the last trading day of the reporting period and has been classified within Level 2 in the fair value hierarchy. See "6. Debt" for additional information.
8. LEASES
Expense
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(in thousands) | 2020 | | 2019 | | | | |
Fixed lease costs | $ | 4,818 | | | $ | 4,300 | | | | | |
Short-term lease costs | 455 | | | 285 | | | | | |
Variable lease costs | 1,278 | | | 1,321 | | | | | |
| $ | 6,551 | | | $ | 5,906 | | | | | |
Right of use assets and lease liabilities
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Right of use assets (1) | $ | 54,624 | | | | $ | 58,273 | |
Lease liabilities (2) | $ | 15,385 | | | | $ | 15,885 | |
Long-term lease liabilities | $ | 47,919 | | | | $ | 52,610 | |
(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. (2) Included in other current liabilities.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Weighted-average remaining lease term | 3.8 years | | 4 years |
Weighted-average discount rate (1) | 5.8 % | | | 5.8 | % |
(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a nonrecurringcollateralized basis such as property and equipment and intangible assets, are recognized at fair value when they are impaired. Duringover the nine months ended September 30, 2017 and 2016,term of the Company did not recognize any impairmentslease.
Maturities 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 | |
| | | | |
lease liabilities are:
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
2020 | $ | 13,838 | | | $ | 19,373 | |
2021 | 18,640 | | | 18,702 | |
2022 | 17,383 | | | 17,671 | |
2023 | 16,350 | | | 16,615 | |
2024 and thereafter | 4,619 | | | 4,734 | |
Total lease payments | 70,830 | | | 77,095 | |
Less: imputed interest (1) | (7,526) | | | (8,600) | |
Total short and long-term lease liabilities | $ | 63,304 | | | $ | 68,495 | |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible assets
(1) Lease liabilities are recordedmeasured at costthe 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.
Cash flow information
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2020 | | 2019 |
Cash paid for leases | $ | 5,520 | | | $ | 5,197 | |
Right of use assets recognized for new leases and amendments (non-cash) | $ | 551 | | | $ | 8,034 | |
9. REVENUE
Geographic revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | | | |
(Dollars in thousands) | 2020 | | | 2019 | | | | | | | |
U.S. | $ | 172,417 | | 65 | % | | $ | 103,991 | | 48 | % | | | | | | |
Other Americas | 15,342 | | 6 | % | | 28,829 | | 14 | % | | | | | | |
United Kingdom (“U.K.”) | 21,837 | | 8 | % | | 24,549 | | 12 | % | | | | | | |
Europe (excluding U.K.), Middle East, and Africa | 31,938 | | 12 | % | | 34,186 | | 16 | % | | | | | | |
Asia-Pacific | 24,057 | | 9 | % | | 20,991 | | 10 | % | | | | | | |
| $ | 265,591 | | 100 | % | | $ | 212,546 | | 100 | % | | | | | | |
Revenue streams
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(in thousands) | 2020 | | 2019 | | | | |
Perpetual license | $ | 3,659 | | | $ | 14,950 | | | | | |
Term license | 90,257 | | | 48,314 | | | | | |
Revenue recognized at a point in time | 93,916 | | | 63,264 | | | | | |
Maintenance | 73,695 | | | 67,706 | | | | | |
Cloud | 43,466 | | | 27,758 | | | | | |
Consulting | 54,514 | | | 53,818 | | | | | |
Revenue recognized over time | 171,675 | | | 149,282 | | | | | |
| $ | 265,591 | | | $ | 212,546 | | | | | |
| | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Term license | $ | 90,257 | | | $ | 48,314 | | | | | |
Cloud | 43,466 | | | 27,758 | | | | | |
Maintenance | 73,695 | | | 67,706 | | | | | |
Subscription (1) | 207,418 | | | 143,778 | | | | | |
Perpetual license | 3,659 | | | 14,950 | | | | | |
Consulting | 54,514 | | | 53,818 | | | | | |
| $ | 265,591 | | | $ | 212,546 | | | | | |
(1) Reflects client arrangements (term license, cloud, and
maintenance) that 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 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 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 estimated amortization expense relatedsubject 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 | |
| | | | | | | | |
renewal.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. DEFERRED 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 | |
| | | | | | | | |
Remaining performance obligations ("Backlog")
Expected future revenue on existing contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | | | | |
(Dollars in thousands) | Perpetual license | | Term license | | Maintenance | | Cloud | | Consulting | | Total | |
1 year or less | $ | 3,995 | | | $ | 30,962 | | | $ | 205,083 | | | $ | 174,277 | | | $ | 18,945 | | | $ | 433,262 | | 58 | % |
1-2 years | 2,168 | | | 5,088 | | | 34,633 | | | 125,473 | | | 1,215 | | | 168,577 | | 22 | % |
2-3 years | — | | | 6,504 | | | 19,411 | | | 81,187 | | | 107 | | | 107,209 | | 14 | % |
Greater than 3 years | — | | | 635 | | | 10,596 | | | 33,537 | | | 10 | | | 44,778 | | 6 | % |
| $ | 6,163 | | | $ | 43,189 | | | $ | 269,723 | | | $ | 414,474 | | | $ | 20,277 | | | $ | 753,826 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | | | | | | | | | | |
(Dollars in thousands) | Perpetual license | | Term License | | Maintenance | | Cloud | | Consulting | | Total | |
1 year or less | $ | 10,263 | | | $ | 44,404 | | | $ | 187,324 | | | $ | 115,548 | | | $ | 13,251 | | | $ | 370,790 | | 58 | % |
1-2 years | 998 | | | 4,274 | | | 9,350 | | | 91,539 | | | 1,363 | | | 107,524 | | 17 | % |
2-3 years | 2,180 | | | 756 | | | 4,438 | | | 71,509 | | | 473 | | | 79,356 | | 13 | % |
Greater than 3 years | — | | | 135 | | | 2,008 | | | 72,742 | | | 27 | | | 74,912 | | 12 | % |
| $ | 13,441 | | | $ | 49,569 | | | $ | 203,120 | | | $ | 351,338 | | | $ | 15,114 | | | $ | 632,582 | | 100 | % |
10. 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 aone-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 March 31, | | | | | | |
(in thousands) | 2020 | | 2019 | | | | |
Cost of revenues | $ | 5,152 | | | $ | 4,519 | | | | | |
Selling and marketing | 9,718 | | | 7,374 | | | | | |
Research and development | 5,496 | | | 4,560 | | | | | |
General and administrative | 2,809 | | | 1,897 | | | | | |
| $ | 23,175 | | | $ | 18,350 | | | | | |
Income tax benefit | $ | (4,582) | | | $ | (3,740) | | | | | |
As of
September 30, 2017,March 31, 2020, the Company had
approximately $56.8$146.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures,
related to all unvested RSUs and unvested stock options thatwhich is expected to be recognized over a weighted-average period of
2.12.3 years.
Grants
The Company granted the following stock-based compensation awards:
| | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | |
(in thousands) | Shares | | Total Fair Value |
RSUs | 813 | | | $ | 72,733 | |
Non-qualified stock options | 1,540 | | | $ | 34,988 | |
| | | |
Common stock issued
During the three months ended March 31, 2020, the Company issued 0.6 million shares of common stock to settle obligations of the Company’s stock-based compensation plans.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. EARNINGSINCOME TAXES
Effective income tax rate
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
(Dollars in thousands) | 2020 | | 2019 |
(Benefit from) income taxes | | $ | (23,810) | | | $ | (8,300) | |
Effective income tax rate | 48 | % | | 22 | % |
During the three months ended March 31, 2020, the Company’s effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carry back claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).
Basic earnings(loss) per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings(loss) 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, RSUs, and RSUs, usingthe impact of the conversion spread of the Company’s convertible senior notes.
Calculation of the basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(in thousands, except per share amounts) | 2020 | | 2019 | | | | |
Net (loss) | $ | (25,372) | | | $ | (28,717) | | | | | |
Weighted-average common shares outstanding | 79,808 | | | 78,584 | | | | | |
(Loss) per share, basic | | $ | (0.32) | | | $ | (0.37) | | | | | |
| | | | | | | |
Net (loss) | $ | (25,372) | | | $ | (28,717) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average common shares outstanding, assuming dilution (1) (2) | 79,808 | | | 78,584 | | | | | |
(Loss) per share, diluted | | $ | (0.32) | | | $ | (0.37) | | | | | |
| | | | | | | |
Outstanding anti-dilutive stock options and RSUs (3) | 5,948 | | | 5,563 | | | | | |
(1) The Company expects to settle the principal amount of the Notes in cash. As a result, only the amount by which the conversion value exceeds the aggregated principal amount of the Notes is included in the diluted earnings per share computation under the treasury stock method. Certain shares related to someThe conversion spread has a dilutive impact on diluted net income per share when the average market price of the Company’s common stock for a given period of time exceeds the initial conversion price of $135.05 per share for the Notes. In connection with the issuance of the Notes, the Company entered into Capped Call Transactions, which were not included in calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive.
(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(3) 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 couldperiod presented. These awards may be dilutive in the future.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The calculation of the Company’s basic and diluted earnings per share is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands, except per share amounts) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Basic | | | | | | | | | | | | | | | | |
Net (loss)/income | | $ | (1,812 | ) | | $ | 3,301 | | | $ | 36,615 | | | $ | 18,237 | |
| | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 77,691 | | | | 76,278 | | | | 77,258 | | | | 76,323 | |
| | | | | | | | | | | | | | | | |
(Loss)/earnings per share, basic | | $ | (0.03 | ) | | $ | 0.04 | | | $ | 0.47 | | | $ | 0.24 | |
| | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | |
Net (loss)/income | | $ | (1,812 | ) | | $ | 3,301 | | | $ | 36,615 | | | $ | 18,237 | |
| | | | | | | | | | | | | | | | |
Weighted-average effect of dilutive securities: | | | | | | | | | | | | | | | | |
Stock options | | | — | | | | 1,933 | | | | 3,519 | | | | 1,851 | |
RSUs | | | — | | | | 1,337 | | | | 1,940 | | | | 1,227 | |
| | | | | | | | | | | | | | | | |
Effect of assumed exercise of stock options and RSUs | | | — | | | | 3,270 | | | | 5,459 | | | | 3,078 | |
| | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding, assuming dilution | | | 77,691 | | | | 79,548 | | | | 82,717 | | | | 79,401 | |
| | | | | | | | | | | | | | | | |
(Loss)/earnings per share, diluted | | $ | (0.03 | ) | | $ | 0.04 | | | $ | 0.44 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | | |
Outstanding stock options and RSUs excluded as impact would be anti-dilutive | | | 7,232 | | | | 296 | | | | 219 | | | | 368 | |
In periods of loss, all equity awards are excluded, as the inclusion of any equity awards would be anti-dilutive.
12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS
Geographic Information
Operating segments are defined as components of an enterprise, about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.
The Company develops and licenses software applications for customer engagement and its Pega® Platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services—software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment—Customer Engagement Solutions and one reporting unit.
The Company’s international revenue, based upon the clients’ location, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
U.S. | | $ | 95,087 | | | | 53 | % | | $ | 111,274 | | | | 61 | % | | $ | 351,330 | | | | 59 | % | | $ | 308,049 | | | | 56 | % |
Other Americas | | | 8,722 | | | | 5 | % | | | 7,952 | | | | 4 | % | | | 30,243 | | | | 5 | % | | | 49,494 | | | | 9 | % |
U.K. | | | 18,485 | | | | 10 | % | | | 21,490 | | | | 12 | % | | | 68,003 | | | | 11 | % | | | 77,181 | | | | 14 | % |
Other EMEA(1) | | | 28,100 | | | | 16 | % | | | 23,656 | | | | 13 | % | | | 76,958 | | | | 13 | % | | | 67,314 | | | | 12 | % |
Asia Pacific | | | 29,421 | | | | 16 | % | | | 18,430 | | | | 10 | % | | | 74,508 | | | | 12 | % | | | 48,618 | | | | 9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 179,815 | | | | 100 | % | | $ | 182,802 | | | | 100 | % | | $ | 601,042 | | | | 100 | % | | $ | 550,656 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes Europe, the Middle East and Africa, but excludes the United Kingdom. |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major Clients
Clients accounting for 10% or more of the Company’s total revenue were as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Total revenue | | $ | 179,815 | | | $ | 182,802 | | | $ | 601,042 | | | $ | 550,656 | |
Client A | | | 10.6 | % | | | * | | | | * | | | | * | |
* | Client accounted for less than 10% of total revenue. |
Clients accounting for 10% or more of the Company’s total trade accounts receivable were as follows:
| | | | | | | | |
(in thousands) | | September 30, 2017 | | | December 31, 2016 | |
Total trade accounts receivable | | | 197,350 | | | | 269,154 | |
Client A | | | 12.4 | % | | | * | |
* | Client accounted for less than 10% of total trade account receivable |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions are intended to identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions.
These
forward-looking statements
include,deal with future events, and are subject to various risks and uncertainties that are difficult to predict, including, 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 Imanagement of our
Annual Report on Form10-K for the year ended December 31, 2016.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 intendedtransition 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, a more subscription-based business model, variation in demand for our products and services, andincluding among clients in the difficulty in predictingpublic sector, the completionimpact of product acceptance and other factors affectingactual or threatened public health emergencies, such as the timing of license revenue recognition;Coronavirus (COVID-19), reliance on third party relationships;third-party service providers, compliance with our debt obligations and debt covenants, the potential lossimpact of vendor specific objective evidence for our consulting services; the inherent risks associated with international operationsconvertible senior notes and related capped call transactions, reliance on key personnel, and the continued uncertainties in international economies; the Company’s continued effort to market and sell both domestically and internationally;global economy, 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, security breaches and security breaches;flaws, our ability to protect our intellectual property rights and costs associated with defending such rights, maintenance of our client retention rate, and management of the Company’sour 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 completelyfurther in Part I of the Company’sour Annual Report on Form10-K for the year ended December 31, 2016 as well as2019, and other filings we make with the U.S. Securities and Exchange Commission
We have no (“SEC”).
Except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise
anythese forward-looking statements whether as
athe result of new information, future events, or
risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur or to materially change.Business overview
otherwise.
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software applications for marketing, sales, service,that help organizations transform the way they engage with their customers and operations. In addition, weprocess work across their enterprise. We also license our low-code Pega® Platform Platform™ for rapid application development to clients that wish to build and extend their ownbusiness applications. TheOur 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 low-code Pega Platform, assists our clients in building, deploying,empowering businesses to quickly design, extend, and evolvingscale their enterprise applications creating an environment in whichto 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.Ourtarget clients includeare Global 3000 companiesorganizations and government agencies that seekrequire applications to manage complex enterprise systemsdifferentiate themselves in the markets they serve. Our applications achieve and customer service issues with greaterfacilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and cost-effectiveness. Our strategy isretaining customers, and reducing risk. We deliver applications tailored to sellour clients’ specific industry needs.
COVID-19
The impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, and impact on our partners or employees, all of which are uncertain and cannot be predicted. As of March 31, 2020, COVID-19 has not had a
client a series of licenses, each focusedmaterial impact on
a specific purpose or areaour results of operations
in support of longer term enterprise-wide digital transformation initiatives.or financial condition.
Our
licenseshift towards subscription-based revenue
is primarily derived from salesstreams, the industry mix of our
applications andclients, our
Pega Platform. Our cloud revenue is derived fromproduct mix, the
licensingfact that many of our
hosted Pega Platformclients are well-known and
software application environments. Our consulting services revenueof large size, and the critical nature of our products to our clients may reduce the impact of COVID-19 on our business compared to other businesses or may delay the effect, if any, of COVID-19 on our results of operations until future periods. However, it is
primarily relatednot possible to
new license implementations.Financialestimate the ultimate impact that COVID-19 will have on our business, and such an impact will depend on future developments, which are highly uncertain and cannot be predicted. For example, in response to the COVID-19 pandemic, we have shifted certain of our client events to virtual-only experiences, and we may deem it advisable to similarly alter, postpone or cancel entirely additional client, employee, or industry events in the future. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.
Performance
MetricsManagement evaluates our financial performance, based a number of select financial and performance metrics. Themetrics
We utilize several performance metrics are periodically reviewedin analyzing and revised to reflect any changes inassessing our business. Historically, Recurring Revenueoverall performance, making operating decisions, and Licenseforecasting and Cloud Backlog have beenplanning for future periods including:
Annual contract value (“ACV”) | +21% since March 31, 2019
•ACV represents the annualized value of 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 Annual Contract Value (“ACV”), a new performance measure.Select Financial Metrics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share amounts) | | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
| 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Total revenue | | $ | 179,815 | | | $ | 182,802 | | | | (2,987 | ) | | | (2 | )% | | $ | 601,042 | | | $ | 550,656 | | | $ | 50,386 | | | | 9 | % |
Operating margin | | | (8 | )% | | | 3 | % | | | | | | | | | | | 3 | % | | | 5 | % | | | | | | | | |
Diluted (loss)/earnings per share | | $ | (0.03 | ) | | $ | 0.04 | | | $ | (0.07 | ) | | | (175 | )% | | $ | 0.44 | | | $ | 0.23 | | | $ | 0.21 | | | | 91 | % |
Cash flow provided by operating activities | | | | | | | | | | | | | | | | | | | 113,926 | | | | 20,556 | | | | 93,370 | | | | 454 | % |
Select Performance Metrics
Annual Contract Value (“ACV”)
The change in ACV measures the growth and predictability of future cash flows from committed term license, cloud, and maintenance arrangementsactive contracts as of the end of the particular reporting period.
measurement date. ACV is the sum of the following two components:
Term and Cloud contract value divided by the number of committed contract years
Quarterly Maintenance revenue reported for 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 of our revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
(Dollars in thousands) | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Term license | | $ | 21,678 | | | $ | 28,919 | | | $ | (7,241 | ) | | | (25 | )% | | $ | 106,170 | | | $ | 102,115 | | | $ | 4,055 | | | | 4 | % |
Maintenance | | | 62,204 | | | | 55,038 | | | $ | 7,166 | | | | 13 | % | | | 180,759 | | | | 163,174 | | | $ | 17,585 | | | | 11 | % |
Cloud | | | 13,354 | | | | 10,873 | | | $ | 2,481 | | | | 23 | % | | | 36,914 | | | | 30,640 | | | $ | 6,274 | | | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total recurring revenue | | $ | 97,236 | | | $ | 94,830 | | | $ | 2,406 | | | | 3 | % | | $ | 323,843 | | | $ | 295,929 | | | $ | 27,914 | | | | 9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recurring revenue as a percent of total revenue | | | 54 | % | | | 52 | % | | | | | | | | | | | 54 | % | | | 54 | % | | | | | | | | |
License and Cloud Backlog
A measure of the continued growth of our business as a result of future contractual commitments by our clients.
License and Cloud Backlog is the sum of the following two components:
Deferredterm license and cloud contracts is calculated by dividing the total value of the contract by the duration of the contract in years. ACV for maintenance is calculated as maintenance revenue for the quarter then ended multiplied by four. Client cloud ACV is composed of maintenance ACV and ACV from term license contracts. We believe the presentation of ACV on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods, as it provides visibility into the impact of changes in foreign currency exchange rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of March 31, 2020.
Remaining performance obligations (“Backlog”) | +19% since March 31, 2019
•Backlog represents contracted revenue that has not yet been recognized, and includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenue in future periods.
Cloud revenue | +57% since March 31, 2019
•Cloud revenue is revenue as recorded on the Company’s balance sheet. (See Note 9 “Deferred Revenue”)
License andreported under US GAAP for 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 Form10-Q for additional information)contracts.
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 containedfollowing locations in our Annual Report on Form
10-K for the year ended December 31,
2016.2019:
•“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, 2019 other than those listed below.
Capped Call Transactions
In February 2020, we entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of Notes. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. These valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies significant judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and apply limited consideration of historical peer group volatility levels.
The Capped Call Transactions are classified as “other long-term assets” and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
See "6. Debt" and “7. Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.
RESULTS OF OPERATIONS
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 licenseto continue to shift in favor of our subscription offerings, particularly cloud arrangements, executedwhich could result in a particular period varies based on clients’ deployment preferences. A changeslower total revenue growth in the mix may cause our revenues to vary materiallynear term. Revenue from period to period. A higher proportion of term licensecloud arrangements executed willis generally result in license revenue being recognized over longer periods. Additionally, some of ourthe service period, while revenue from term and perpetual license arrangements include extended payment terms or additionalis generally recognized upfront when the license rights of use, which may also resultbecome effective.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Three Months Ended March 31, | | | | | | Change | | | | | | | | | | |
| 2020 | | | 2019 | | | | | | | | | | | | | |
Cloud | $ | 43,466 | | 16 | % | | $ | 27,758 | | 13 | % | | $ | 15,708 | | 57 | % | | | | | | | | | |
Maintenance | 73,695 | | 28 | % | | 67,706 | | 32 | % | | 5,989 | | 9 | % | | | | | | | | | |
Term license | 90,257 | | 34 | % | | 48,314 | | 23 | % | | 41,943 | | 87 | % | | | | | | | | | |
Subscription (1) | 207,418 | | 78 | % | | 143,778 | | 68 | % | | 63,640 | | 44 | % | | | | | | | | | |
Perpetual license | 3,659 | | 1 | % | | 14,950 | | 7 | % | | (11,291) | | (76) | % | | | | | | | | | |
Consulting | 54,514 | | 21 | % | | 53,818 | | 25 | % | | 696 | | 1 | % | | | | | | | | | |
Total revenue | $ | 265,591 | | 100 | % | | $ | 212,546 | | 100 | % | | $ | 53,045 | | 25 | % | | | | | | | | | |
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
The increase in
the recognition oftotal revenue
over longer periods.The decrease in perpetual license revenue in the three months ended September 30, 2017 was primarily due to the increase in subscription revenue, partially offset by a decrease in perpetual revenue, which reflects the average valueshift in client preferences to subscription arrangements from other types of perpetualarrangements.
Gross profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | Change | | | | | | | | | | |
(Dollars in thousands) | 2020 | | | 2019 | | | | | | | | | | | | | |
Software license | $ | 93,232 | | 99 | % | | $ | 61,886 | | 98 | % | | $ | 31,346 | | 51 | % | | | | | | | | | |
Maintenance | 68,119 | | 92 | % | | 61,371 | | 91 | % | | 6,748 | | 11 | % | | | | | | | | | |
Cloud | 25,933 | | 60 | % | | 14,460 | | 52 | % | | 11,473 | | 79 | % | | | | | | | | | |
Consulting | (1,221) | | (2) | % | | 392 | | 1 | % | | (1,613) | | * | | | | | | | | | | |
| $ | 186,063 | | 70 | % | | $ | 138,109 | | 65 | % | | $ | 47,954 | | 35 | % | | | | | | | | | |
* not meaningful
The recent shift in our revenue mix toward cloud arrangements executedhas resulted in slower total gross profit growth as our cloud business continues to grow and a lower percentage of perpetualscale. Revenue from cloud arrangements executedis generally recognized over the service period, while revenue from term and recognized in revenue in the current period. The decrease in perpetual license revenuearrangements is generally recognized upfront when the license rights become effective.
The increase in
the nine months ended September 30, 2017gross profit was primarily due to
a lower percentage of perpetual arrangements executed and recognized in revenue.The decreasethe increases in term licenseand cloud revenue, which reflects the shift in the three months ended September 30, 2017client preferences to cloud arrangements from other types of arrangements.
The increase in gross profit percent was primarily due to a large term license renewal for which the second year of the term was recognizedthe:
•increase in cloud gross profit percent, driven by cost efficiency gains as revenueour cloud business continues to grow and scale, and
•decrease in the three months ended September 30, 2016. If the second year of this term license arrangement was not paidconsulting gross profit percent, driven by an increase in advance in the three months ended September 30, 2016, term license revenue would have decreased 2%. consulting resource availability as we leverage our partner network.
Operating expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Three Months Ended March 31, | | | | | | Change | | | | | | | | | | |
| 2020 | | | 2019 | | | | | | | | | | | | | |
Selling and marketing | $ | 136,024 | | 51 | % | | | $ | 108,865 | | 51 | % | | | $ | 27,159 | | 25 | % | | | | | | | | | |
Research and development | $ | 58,727 | | 22 | % | | | $ | 50,596 | | 24 | % | | | $ | 8,131 | | 16 | % | | | | | | | | | |
General and administrative | $ | 15,630 | | 6 | % | | | $ | 12,676 | | 6 | % | | | $ | 2,954 | | 23 | % | | | | | | | | | |
•The increase in term license revenue in the nine months ended September 30, 2017 was primarily due to broad based growth amongst newsales and existing customers offset by a large term license arrangement which was prepaid and recognized in revenue in the three 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 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 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 license implementations. Our consulting services revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.
The increases in consulting services revenue were primarily due to higher billable hours during 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 were primarily due to continued growth of our cloud client base.
Gross profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
(Dollars in thousands) | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Software license | | $ | 40,517 | | | $ | 67,520 | | | $ | (27,003 | ) | | | (40 | )% | | $ | 191,394 | | | $ | 204,203 | | | $ | (12,809 | ) | | | (6 | )% |
Maintenance | | | 55,488 | | | | 48,379 | | | | 7,109 | | | | 15 | % | | | 159,814 | | | | 144,285 | | | | 15,529 | | | | 11 | % |
Services | | | 14,079 | | | | 6,466 | | | | 7,613 | | | | 118 | % | | | 44,138 | | | | 25,121 | | | | 19,017 | | | | 76 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gross profit | | $ | 110,084 | | | $ | 122,365 | | | $ | (12,281 | ) | | | (10 | )% | | $ | 395,346 | | | $ | 373,609 | | | $ | 21,737 | | | | 6 | % |
Software license gross profit % | | | 97 | % | | | 98 | % | | | | | | | | | | | 98 | % | | | 98 | % | | | | | | | | |
Maintenance gross profit % | | | 89 | % | | | 88 | % | | | | | | | | | | | 88 | % | | | 88 | % | | | | | | | | |
Services gross profit % | | | 19 | % | | | 11 | % | | | | | | | | | | | 20 | % | | | 14 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gross profit % | | | 61 | % | | | 67 | % | | | | | | | | | | | 66 | % | | | 68 | % | | | | | | | | |
The decrease in total gross profit in the three months ended September 30, 2017 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.
The increase in total gross profit in the nine months ended September 30, 2017 was primarily due to increased total revenue.
The increases in service gross profit percent in the three and nine months ended September 30, 2017 was driven by a large project which began in the second half of 2016 and several additional large projects for which costs were recognized in 2016 but whose associated revenue was not recognized until after September 30, 2016.
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 compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.
The increase in the three months ended September 30, 2017 was primarily due to an increase in compensation and benefits of $1.8$22.5 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 primarily dueattributable to an increase in compensation and benefits of $12.7 million, respectively, driven by increased headcount and equity compensation, and an increase$5.3 million of costs incurred in employee travel and entertainment, partially offset by2020 as a decrease in brand marketing program expensesresult of $2.2 million.
the cancellation of the live event portion of PegaWorld. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accountsaccounts.
•The increase 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 | % |
Researchresearch and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products, as well as enhancements and design changes to existing products and integration of acquired technologies.
The increases in the three and nine months ended September 30, 2017 werewas primarily due to increasesan increase in compensation and benefits of $2.9$7.2 million, and $12.6 million, respectively, attributable to increased headcount and equity compensation.
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 compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. They also include accounting, legal, and other professional consulting and administrative fees.
•The increase in 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 werewas primarily due to increasesan increase of $1.5 million in compensation and benefits of $0.4 million and $4 million, respectively, attributabledue to increased headcount and equity compensation. headcount.
Other income (expense), net
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Three Months Ended March 31, | | | | Change | | | | | | | | |
| 2020 | | 2019 | | | | | | | | | | |
Foreign currency transaction (loss) | | $ | (5,947) | | | $ | (3,712) | | | $ | (2,235) | | (60) | % | | | | | | | |
Interest income | | 607 | | | 723 | | | (116) | | (16) | % | | | | | | | |
Interest expense | | (2,306) | | | — | | | (2,306) | | * | | | | | | | | |
Other (loss), net | | (17,218) | | | — | | | (17,218) | | * | | | | | | | | |
| $ | (24,864) | | | $ | (2,989) | | | $ | (21,875) | | (732) | % | | | | | | | |
* not meaningful
•The increasechange in other (loss), net is due to a fair value adjustment of $18.6 million on the nine months ended September 30, 2017 was partially offset by a decreaseCapped Call Transactions, entered into in connection with our issuance of $1.5 millionthe Notes. See "6. Debt" 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 | % |
Item 1 of this Quarterly Report for additional information.
•The increaseschange in foreign currency transaction (loss) were primarily due to the increased valueimpact of our annual periodic equity awards granted in March 2016 and 2017. 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 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The decreases in amortization of intangibles in the three and nine months ended September 30, 2017 were due to the amortization in full of certain intangibles acquired through past acquisitions.
Non-operating (expense)/income, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | |
(Dollars in thousands) | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Foreign currency transaction (loss)/gain | | $ | (552 | ) | | $ | 1,082 | | | $ | (1,634 | ) | | | n/m | | | $ | (793 | ) | | $ | 2,764 | | | $ | (3,557 | ) | | | n/m | |
Interest income, net | | | 144 | | | | 172 | | | $ | (28 | ) | | | (16 | )% | | | 470 | | | | 650 | | | | (180 | ) | | | (28 | )% |
Other (expense)/income, net | | | — | | | | (1,237 | ) | | $ | 1,237 | | | | (100 | )% | | | 287 | | | | (4,891 | ) | | | 5,178 | | | | n/m | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | (408 | ) | | $ | 17 | | | $ | (425 | ) | | | n/m | | | $ | (36 | ) | | $ | (1,477 | ) | | $ | 1,441 | | | | (98 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
n/m - not meaningful
In May 2017, we discontinued our forward contracts program; however, we will continue to evaluate periodically our foreign exchange exposures and mayre-initiate this program if it is deemed necessary.
Historically, we have used foreign currency forward contracts (“forward contracts”) to hedge our exposure to fluctuations in foreign currency exchange rates associated with our foreign currency denominatedcurrency-denominated cash, accounts receivable, and intercompany receivables and payables held primarily by the U.S. parent company and itsour United Kingdom (“U.K.”) subsidiary.
•The increase in interest expense is due to our issuance of $600 million in aggregate principal amount of our convertible senior notes (“Notes”) on February 24, 2020. See Note 4 “Derivative Instruments”"6. Debt" in Item 1 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 March 31, | | |
(Dollars in thousands) | | | | | 2020 | | 2019 |
(Benefit from) income taxes | | | | | $ | (23,810) | | | | $ | (8,300) | |
Effective income tax rate | | | | | 48 | % | | 22 | % |
The inclusion of excess tax benefits
as a component offrom stock-based compensation in the provision for income taxes
may increase volatility inhas 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
the vestings of RSU
vesting andawards, the exercise behavior of our stock option holders, and the total value of future grants of
share-basedstock-based compensation awards.
Liquidity
During the three months ended March 31, 2020, our effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and
capital resources | | | | | | | | |
| | Nine Months Ended September 30, | |
(in thousands) | | 2017 | | | 2016 | |
Cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 113,926 | | | $ | 20,556 | |
Investing activities | | | (11,966 | ) | | | (2,859 | ) |
Financing activities | | | (44,040 | ) | | | (43,031 | ) |
Effect of exchange rate on cash | | | 2,054 | | | | (1,309 | ) |
| | | | | | | | |
Net increase/(decrease) in cash and cash equivalents | | $ | 59,974 | | | $ | (26,643 | ) |
| | | | | | | | |
| | |
(in thousands) | | September 30, 2017 | | | December 31, 2016 | |
Total cash, cash equivalents, and marketable securities | | $ | 194,380 | | | $ | 133,761 | |
a carry back claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2020 | | 2019 |
Cash provided by (used in): | | | |
Operating activities | $ | (18,323) | | | $ | 22,703 | |
Investing activities | (12,562) | | | (1,466) | |
Financing activities | 502,174 | | | (25,587) | |
Effect of exchange rates on cash and cash equivalents | (1,510) | | | 295 | |
Net increase (decrease) in cash and cash equivalents | $ | 469,779 | | | $ | (4,055) | |
| | | | | | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Held by U.S. entities | $ | 493,629 | | | $ | 23,437 | |
Held by foreign entities | 44,513 | | | 44,926 | |
Total cash and cash equivalents | $ | 538,142 | | | $ | 68,363 | |
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, and
our share repurchase programquarterly cash dividends 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 cashliquidity needs beyond that period will depend on our growth, operating results, and cash equivalents was held inthe investments required to meet the 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
becomesbecame necessary to repatriate
theseforeign funds, we may be required to pay U.S.
tax, net of any applicableand foreign
tax credits,taxes upon repatriation.
We considerDue to the
earningscomplexity of
our foreign subsidiaries to be permanently reinvestedincome tax laws and
as a result, U.S. taxes on such earnings are not provided. Itregulations, and the effects of the Tax Reform Act, it is
impracticalimpracticable to estimate the amount of
U.S. taxtaxes we
may be requiredwould 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
The primary drivers during
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
nine months ended September 30, 2017 were net incomenear term. Cash from cloud and term arrangements is generally collected over an average service period of
$36.6 million and $80.6 millionthree years, while cash from
trade accounts receivable, largely due to increased cash collections andperpetual license arrangements is generally collected upfront, shortly after the
timing of billings.license rights become effective.
The primary driver
duringof the
ninedecrease in the three months ended
September 30, 2016March 31, 2020 was
net income of $18.2 million.Future Cash Receiptsthe recent shift in our revenue mix toward cloud arrangements and increased costs as we accelerated investments in our cloud offerings and selling and marketing activities to support future growth.
In the three months ended March 31, 2020, COVID-19 did not have a material impact on our cash flows from
Committed License and Cloud ArrangementsAs of September 30, 2017, none of the amounts shown in the table below had been billed and no revenue had been recognized.
The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a result of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form10-Qoperations. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors 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 futureinformation.
Cash (used in) investing activities
The change in cash
receipts due from our existing license and cloud arrangements were approximately $376.3 million as of September 30, 2016.Cash used in(used in) investing activities
During the nine months ended September 30, 2017, we purchased $25.7 million of marketable debt securities and made was primarily driven by investments of $9.1 million in property and equipment partially offset by proceeds received from maturities of marketable debt securities (including called marketable debt securities) of $23.1 million.
During the nine months ended September 30, 2016, we acquired OpenSpan for $48.8 million, net of cash acquired, and invested $15.3 million primarily in internally developed software and leasehold improvements at our corporate headquarters, partially offset by proceeds received from the sales of marketable debt securities of $62.3 million.
Cash used in financing activities
We used cash primarily for repurchasesseveral of our common stock, share repurchases for tax withholdings for the net settlementoffice locations.
Cash provided by (used in) financing activities
In February 2020, we issued $600 million in aggregate principal amount of our equity awards,convertible senior notes (“Notes”) due March 1, 2025, which provided net proceeds as follows:
| | | | | | | | |
(in thousands) | | Amount |
Principal | | $ | 600,000 | |
Less: issuance costs | | (14,527) | |
Less: Capped Call Transactions | | (51,900) | |
| | $ | 533,573 | |
A portion of the proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes. See "6. Debt" in Item 1 of this Quarterly Report for additional information.
In November 2019, and as amended in February 2020, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of March 31, 2020 and December 31, 2019, we had 0 outstanding borrowings under the payment of our quarterly dividend.Since 2004, our Board of Directors has approved annualCredit Facility.
Stock repurchase program (1)
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:
| | | | | |
(in thousands) | Three Months Ended March 31, 2020 |
January 1, | $ | 45,484 | |
| |
Repurchases | (6,000) | |
March 31, | $ | 39,484 | |
(1) Purchases under these programs have been made on the open market.The following table is a summary of our 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 to the share
Common stock repurchases made
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | | | 2019 | | |
(in thousands) | Shares | | Amount | | Shares | | Amount |
Tax withholdings for net settlement of equity awards | 257 | | | $ | 23,011 | | | 232 | | | $ | 14,838 | |
Stock repurchase program (1) | 87 | | 6,000 | | | 144 | | | 7,586 | |
Activity in period (2) | 344 | | | $ | 29,011 | | | 376 | | | $ | 22,424 | |
(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 ninethree months ended September 30, 2017March 31, 2020 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 2016,2019, instead of receiving cash from the equity holders, we withheld shares with a value of $23.7$15.3 million and $10.1$12.2 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 | |
It is our current intention
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2020 | | 2019 |
Dividend payments to shareholders | $ | 2,388 | | | $ | 2,363 | |
We currently intend to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify
thisthe dividend program at any time without
prior notice.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE |
Contractual obligations
As of March 31, 2020, our contractual obligations were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period | | | | | | | | | | | | |
(in thousands) | 2020 | | 2021 | | 2022-2023 | | 2024-2025 | | 2026 and thereafter | | Other | | Total |
Purchase obligations (1) | $ | 49,237 | | | $ | 56,689 | | | $ | 57,498 | | | $ | — | | | $ | — | | | $ | — | | | $ | 163,424 | |
Investment commitments (2) | 995 | | | 703 | | | — | | | — | | | — | | | — | | | 1,698 | |
Liability for uncertain tax positions (3) | — | | | — | | | — | | | — | | | — | | | 5,210 | | | 5,210 | |
Operating lease obligations (4) | 13,837 | | | 18,640 | | | 33,733 | | | 3,925 | | | 695 | | | — | | | 70,830 | |
Total | $ | 64,069 | | | $ | 76,032 | | | $ | 91,231 | | | $ | 3,925 | | | $ | 695 | | | $ | 5,210 | | | $ | 241,162 | |
(1) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(2) Represents the maximum funding that would be expected under existing investment agreements with privately-held companies. Our investment agreements generally allow us to withhold unpaid committed funds at our discretion.
(3) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
(4) See "8. Leases" in Item 1 of this Quarterly Report for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our marketinternational sales are usually denominated in foreign currencies. However, the operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in the following impact:
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
(Decrease) increase in revenue | | (3) | % | | (4) | % |
(Decrease) increase in net income | | (14) | % | | (6) | % |
Remeasurement risk exposure is primarily related to
We experience fluctuations in
foreign exchange rates.Astransaction gains or losses from remeasurement 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.
Othermonetary assets and liabilities that are denominated in currencies other than the item discussed above, there were no significantfunctional currency of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash and cash equivalents, accounts receivable, unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to
our quantitativethe Australian dollar, Euro, and
qualitative disclosures about market risk duringU.S. dollar would result in the
first nine months ended September 30, 2017. See Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form10-K for the year ended December 31, 2016 for a more complete discussion of our market risk exposure.following impact: | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in millions) | 2020 | | 2019 |
Foreign currency gain (loss) | | $ | 7 | | | $ | (4) | |
ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of
Disclosure Controlsdisclosure controls and
Proceduresprocedures
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 Rules
13a-15(e) and
15d-15(e) under the Securities Exchange
Act)Act of 1934, as amended (“Exchange Act”)) as of
September 30, 2017.March 31, 2020. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of
September 30, 2017.March 31, 2020.
(b) Changes in
Internal Controlinternal control over
Financial Reportingfinancial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and
15d-15(f) under the
Securities Exchange Act) during the quarter ended
September 30, 2017March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
COVID-19
In response to COVID-19, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures. However, those changes have so far not been material.
PART
II—II - OTHER INFORMATION
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, 2016.2019, which was filed with the Securities and Exchange Commission on February 12, 2020. 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.
Coronavirus (“COVID-19”)
Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.
The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that we or our employees and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that are requested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending and may adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of their contracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.
We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorld conference and by encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implement them without adversely affecting our business operations.
We continue to monitor the situation and may adjust our current policies as more information and public health guidance become available. Precautionary measures that have been noadopted, or may be adopted in the future, could negatively affect our client success efforts, sales, and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 may disrupt the operations of our clients, vendors, and partners for an indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.
It is not possible at this time to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods, if at all. The extent to which COVID-19 impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to predict accurately, including:
•the duration and scope of the pandemic;
•governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;
•the actions taken in response to economic disruption;
•the impact of business disruptions and reductions in our clients’ business and the resulting impact on their demand for our services and solutions; and
•our ability to provide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of offices and facilities.
Risks related to our Convertible Senior Notes
We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results.
As of March 31, 2020, we had $600 million aggregate principal amount of indebtedness under our Convertible Senior Notes due 2025 (the “Notes”).
Our indebtedness may:
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;
•require us to use a substantial portion of our cash flow from operations to make debt service payments;
•limit our flexibility to plan for, or react to, changes in our business and industry;
•place us at a competitive disadvantage compared to our less leveraged competitors;
•dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and
•increase our vulnerability to the impact of adverse economic and industry conditions.
Our ability to pay our debt when due or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
In addition, we and our subsidiaries may incur additional debt to meet future financing needs. We will not be restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. If we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
Pursuant to their terms, holders of the Notes may convert their Notes at their option prior to the scheduled maturities of Notes under certain circumstances. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020, between us and U.S. Bank National Association, as trustee (the “Trustee”) (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and we currently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the Indenture requires the repurchase or to pay any cash payable on future conversions of the Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material changes duringreduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the nine months ended September 30, 2017Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record noncash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock, and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, is included in the denominator for purposes of calculating diluted earnings per share. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.
The capped call transactions may affect the value of the Notes and our common stock.
In connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions (“option counterparties”). The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the option counterparties that are parties to the capped call transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The option counterparties are financial institutions, and we will be subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Calls. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors disclosedbut, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Provisions in
our Annual Report on Form10-Kthe indenture for the
year ended December 31, 2016.Notes may deter or prevent a business combination that may be favorable to our stockholders. If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.
Conversion of the Notes may dilute the ownership interest of existing stockholders.
The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
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 commonEquity Securities
Common stock duringrepurchased in the three months ended SeptemberMarch 31, 2020 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) |
January 1, 2020 - January 31, 2020 | 33 | | | $ | 82.11 | | | — | | | $ | 45,484 | |
February 1, 2020 - February 29, 2020 | 181 | | | $ | 97.83 | | | — | | | $ | 45,484 | |
March 1, 2020 - March 31, 2020 | 299 | | | $ | 79.88 | | | 87 | | | $ | 39,484 | |
| 513 | | | $ | 86.35 | | | 87 | | |
(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2) On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30,
2017: | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (in thousands) | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (1) (in thousands) | | | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs (1) (in thousands) | |
July 1, 2017 - July 31, 2017 | | | 12 | | | $ | 58.54 | | | | — | | | $ | 36,399 | |
August 1, 2017 - August 31, 2017 | | | 55 | | | | 56.16 | | | | — | | | | 36,399 | |
September 1, 2017 - September 30, 2017 | | | 108 | | | | 56.56 | | | | — | | | | 36,399 | |
| | | | | | | | | | | | | | | | |
Total | | | 175 | | | $ | 56.57 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
1. | Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of the company’s stock compensation awards have been included in the above table. |
2. | Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 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 apre-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. |
2020 and increased the amount of common stock we are authorized to repurchase by $60 million. See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report for additional information.
ITEM 6. EXHIBITS
The following exhibits are filed or furnished, as the case may be, as part of this report.
EXHIBIT INDEX
| | | | | | |
Exhibit No. | | Description |
3.1 | | |
31.13.2 | | |
4.1 | | |
4.2 | | |
4.3 | | |
10.1 | | |
10.2 | | |
10.3 | | |
31.1 | | |
31.2 | |
31.2 | | |
32+ | |
32 | | |
101.INS | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document. |
101.PRE | |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document. |
++104 | Management contracts | Cover Page Interactive Data File (formatted as Inline XBRL and compensatory plan or arrangementscontained in Exhibit 101) |
+ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
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:Dated: | April 29, 2020 | November 8, 2017By: | | By: | | /s/ KENNETH STILLWELL |
| | | | | | Kenneth Stillwell |
| | | | | | Chief Financial Officer and Chief Administrative Officer |
| | | | | | (Principal Financial Officer) |
27