SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

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

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

~~For the transition period from~~to

____________________________

(Address of principal executive offices, including zip 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 ~~registrant~~Registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the ~~registrant~~Registrant was required to submit ~~and post~~ such files). Yes ☒ x No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth ~~company,”~~company” inRule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

~~☐ (Do not check if smaller reporting company)~~

Smaller reporting company

☐

Emerging growth company

☐

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

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

There were ~~77,859,958~~80,089,203 shares of the Registrant’s common stock, ~~$.01~~$0.01 par value per share, outstanding on ~~October 27, 2017.~~

April 13, 2020.

PART I—I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	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.

~~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


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

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


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

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


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


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


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

Accumulated Other Comprehensive (Loss)

See notes to unaudited condensed consolidated financial statements.

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

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information ~~and footnotes~~ required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form10-K for the year ended December 31, ~~2016.~~

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

3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE


(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 ~~issued~~billed 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	%

PEGASYSTEMS INC.

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 quantifying~~change in deferred revenue in the ~~impact~~three 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 over~~partially 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 recognized~~2019.

4. DEFERRED CONTRACT COSTS


(in thousands)	March 31, 2020		December 31, 2019
Deferred contract costs ⁽¹⁾	$	81,452	$	85,314

(1) Included in ~~revenue~~other 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 2016~~selling and ~~2017 will be recognized in full~~marketing expenses.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Change in the ~~year that control~~carrying 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 of~~straight-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.~~

PEGASYSTEMS INC.

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

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 considered~~may 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 exposures~~principal amount, plus accrued and ~~mayre-initiate~~ ~~this program~~unpaid 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 value~~last reported sale price of the Company’s ~~outstanding forward contracts was $128.4 million.~~

~~The fair value~~common 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 September~~conversion 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.

PEGASYSTEMS INC.

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

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 contracts~~loans 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 Measured~~liabilities measured at ~~Fair Value~~fair value on a ~~Recurring Basis~~

recurring basis

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

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

•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 securities~~investments in privately-held companies are classified within Level ~~2 of~~3 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 2~~fair 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 ~~the~~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. The Company applies significant judgment in ~~which~~its 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 1~~underlying 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 ~~consisted~~were:


	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 Basis~~

~~Assets recorded at~~discounted 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.


	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 ~~nonrecurring~~collateralized basis ~~such as property and equipment and intangible assets, are recognized at fair value when they are impaired. During~~over the ~~nine months ended September 30, 2017 and 2016,~~term of the ~~Company did not recognize any impairments~~lease.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Intangible assets~~

(1) Lease liabilities are ~~recorded~~measured at ~~cost~~the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event.

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


	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	%


	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 related~~subject 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.

PEGASYSTEMS INC.

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 a~~one-year~~ ~~period beginning on the grant date.~~

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


	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 that~~which is expected to be recognized over a weighted-average period of ~~2.1~~2.3 years.

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

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. ~~EARNINGS~~INCOME 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”).

12. (LOSS) PER SHARE

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, using~~the 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 some~~The 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 could~~period presented. These awards may be dilutive in the future.

~~PEGASYSTEMS INC.~~

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

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

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

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








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








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








Diluted

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








Weighted-average effect of dilutive securities:

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








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








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








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








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

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

~~12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS~~

~~Geographic Information~~

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

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

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

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










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

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

~~PEGASYSTEMS INC.~~

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

~~Major Clients~~

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

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

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

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

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

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

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

FORWARD-LOOKING STATEMENTS

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 I~~management 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, ~~and~~including among clients in the ~~difficulty in predicting~~public sector, the ~~completion~~impact of ~~product acceptance and other factors affecting~~actual 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 ~~loss~~impact of ~~vendor specific objective evidence for~~ our ~~consulting services; the inherent risks associated with international operations~~convertible 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’s~~our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described ~~more completely~~further in Part I of ~~the Company’s~~our Annual Report on Form10-K for the year ended December 31, ~~2016 as well as~~2019, 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 ~~any~~these forward-looking statements whether as athe result of new information, future events, or ~~risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur or to materially change.~~

~~Business overview~~

otherwise.

We develop, market, license, 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, we~~process 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 ~~own~~business applications. ~~The~~Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified low-code Pega Platform, ~~assists our clients in building, deploying,~~empowering businesses to quickly design, extend, and ~~evolving~~scale their enterprise applications ~~creating an environment in which~~to meet strategic business ~~and IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service~~ needs. ~~We also provide consulting services, maintenance, and training for our software.~~

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

~~Our~~target clients ~~include~~are Global 3000 ~~companies~~organizations and government agencies that ~~seek~~require applications to ~~manage complex enterprise systems~~differentiate themselves in the markets they serve. Our applications achieve and ~~customer service issues with greater~~facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and ~~cost-effectiveness. Our strategy is~~retaining customers, and reducing risk. We deliver applications tailored to ~~sell~~our clients’ specific industry needs.

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 focused~~material impact on ~~a specific purpose or area~~our results of operations ~~in support of longer term enterprise-wide digital transformation initiatives.~~

or financial condition.

Our ~~license~~shift towards subscription-based revenue ~~is primarily derived from sales~~streams, the industry mix of our ~~applications and~~clients, our ~~Pega Platform. Our cloud revenue is derived from~~product mix, the ~~licensing~~fact that many of our ~~hosted Pega Platform~~clients are well-known and ~~software application environments. Our consulting services revenue~~of 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 related~~not possible to ~~new license implementations.~~

~~Financial~~estimate 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 ~~Metrics~~

~~Management evaluates our financial performance, based a number of select financial and performance metrics. The~~metrics

We utilize several performance metrics ~~are periodically reviewed~~in analyzing and ~~revised to reflect any changes in~~assessing our ~~business. Historically, Recurring Revenue~~overall performance, making operating decisions, and ~~License~~forecasting and ~~Cloud Backlog have been~~planning 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 arrangements~~active 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:~~

~~Deferred~~term 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 and~~reported 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 Form~~10-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 contained~~following locations in our Annual Report on Form10-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

Revenue

~~Software~~

Our license revenue

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










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

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


(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 of~~total 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 value~~shift in client preferences to subscription arrangements from other types of ~~perpetual~~arrangements.

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 ~~executed~~has resulted in slower total gross profit growth as our cloud business continues to grow and ~~a lower percentage of perpetual~~scale. Revenue from cloud arrangements ~~executed~~is generally recognized over the service period, while revenue from term and ~~recognized in revenue in the current period. The decrease in~~ perpetual license ~~revenue~~arrangements is generally recognized upfront when the license rights become effective.

The increase in ~~the nine months ended September 30, 2017~~gross profit was primarily due to ~~a lower percentage of perpetual arrangements executed and recognized in revenue.~~

~~The decrease~~the increases in term ~~license~~and cloud revenue, which reflects the shift in ~~the three months ended September 30, 2017~~client 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 recognized~~the:

•increase in cloud gross profit percent, driven by cost efficiency gains as ~~revenue~~our 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 paid~~consulting 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 new~~sales 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 due~~attributable 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 by~~2020 as a ~~decrease in brand marketing program expenses~~result 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 ~~accounts~~accounts.

•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 %

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

~~The increases in the three and nine months ended September 30, 2017 were~~was primarily due to ~~increases~~an 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 were~~was primarily due to ~~increases~~an increase of $1.5 million in compensation and benefits ~~of $0.4 million and $4 million, respectively, attributable~~due 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 ~~increase~~change 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 decrease~~Capped Call Transactions, entered into in connection with our issuance of ~~$1.5 million~~the 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 ~~increases~~change in foreign currency transaction (loss) were primarily due to the ~~increased value~~impact 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 denominated~~currency-denominated cash, accounts receivable, and intercompany receivables and payables held ~~primarily~~ by ~~the U.S. parent company and its~~our United Kingdom (“U.K.”) subsidiary.

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

~~Liquidity~~

During the three months ended March 31, 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 program~~quarterly 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 ~~cash~~liquidity needs beyond that period will depend on our growth, operating results, and ~~cash equivalents was held in~~the 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 ~~becomes~~became necessary to repatriate ~~these~~foreign funds, we may be required to pay U.S. ~~tax, net of any applicable~~and foreign ~~tax credits,~~taxes upon repatriation. ~~We consider~~Due to the ~~earnings~~complexity of ~~our foreign subsidiaries to be permanently reinvested~~income tax laws and ~~as a result, U.S. taxes on such earnings are not provided. It~~regulations, and the effects of the Tax Reform Act, it is ~~impractical~~impracticable to estimate the amount of ~~U.S. tax~~taxes we ~~may be required~~would have to pay upon repatriation due to the complexity of the foreign tax credit calculations. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

pay.

Cash (used in) provided by operating activities

~~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 income~~near term. Cash from cloud and term arrangements is generally collected over an average service period of ~~$36.6 million and $80.6 million~~three years, while cash from ~~trade accounts receivable, largely due to increased cash collections and~~perpetual license arrangements is generally collected upfront, shortly after the ~~timing of billings.~~

license rights become effective.

The primary driver ~~during~~of the ~~nine~~decrease in the three months ended ~~September 30, 2016~~March 31, 2020 was ~~net income of $18.2 million.~~

~~Future Cash Receipts~~the 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 Arrangements~~

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

The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a result of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form~~10-Q~~operations. 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 future~~information.

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 repurchases~~several of our ~~common stock, share repurchases for tax withholdings for the net settlement~~office 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 annual~~Credit 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 ~~nine~~three months ended ~~September 30, 2017~~March 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 ~~this~~the 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 ~~market~~international 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.~~

~~Other~~monetary assets and liabilities that are denominated in currencies other than the ~~item discussed above, there were no significant~~functional 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 quantitative~~the Australian dollar, Euro, and ~~qualitative disclosures about market risk during~~U.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 Controls~~disclosure controls and ~~Procedures~~

procedures

Our management, with the participation of our Chief Executive Officer ~~or CEO,~~(“CEO”) and Chief Financial Officer ~~or CFO,~~(“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (“Exchange Act”)) as of ~~September 30, 2017.~~March 31, 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 Control~~internal control over ~~Financial Reporting~~

financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the ~~Securities~~ Exchange Act) during the quarter ended ~~September 30, 2017~~March 31, 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~~

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 during~~reduction 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, 2017~~Notes, 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 ~~disclosed~~but, 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-K~~the 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 common~~Equity Securities

Common stock ~~during~~repurchased in the three months ended ~~September~~March 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 a~~pre-arranged~~ ~~stock repurchase plan, intended to comply with the requirements of Rule10b5-1~~ ~~under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule10b-18~~ ~~under the Exchange Act (the“10b5-1~~ ~~Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1~~ ~~Plan.~~

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

~~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		Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)
~~31.1~~3.2		Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s September 8, 2017 Form 8-K and incorporated herein by reference.)
4.1		Indenture, dated as of February 24, 2020, between Pegasystems Inc. and U.S. Bank National Association, as trustee. (Filed as Exhibit 4.1 to the Registrant’s February 24, 2020 Form 8-K and incorporated herein by reference.)
4.2		Form of Form of certificate representing the 0.75% Convertible Senior Notes due 2025 (included as Exhibit A to Exhibit 4.1). (Filed as Exhibit 4.2 to the Registrant’s February 24, 2020 Form 8-K and incorporated herein by reference.)
4.3		Specimen Certificate Representing the Common Stock. (Filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-03807) or an amendment thereto and incorporated herein by reference.)
10.1		Form of Confirmation of Base Call Option Transaction. (Filed as Exhibit 10.1 to the Registrant’s February 24, 2020 Form 8-K and incorporated herein by reference.)
10.2		Form of Confirmation of Additional Call Option Transaction. (Filed as Exhibit 10.2 to the Registrant’s February 24, 2020 Form 8-K and incorporated herein by reference.)
10.3		Amendment to Loan Documents, dated February 18, 2020, between Pegasystems Inc. and PNC Bank, National Association. (Filed as Exhibit 10.3 to the Registrant’s February 24, 2020 Form 8-K and incorporated herein by reference.)
31.1		Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Executive Officer.
31.2
~~31.2~~	Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Financial Officer.
32+
32	Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.
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 arrangements~~contained in Exhibit 101)

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

SIGNATURE

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

Pegasystems Inc.

~~Date:~~Dated:

April 29, 2020

~~November 8, 2017~~By:

~~By:~~

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief Financial Officer and Chief Administrative Officer

(Principal Financial Officer)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017		2016
Net (loss)/income	$	(1,812	)	$	3,301		$	36,615	$	18,237
Other comprehensive income/(loss), net of tax
Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax		22			(174	)		148		168
Foreign currency translation adjustments		549			(169	)		3,189		(1,400	)

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

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


	Three Months Ended March 31,
	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)


		Page
PART I—I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~ 2019			2	3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~ 2019			3	4
Unaudited Condensed Consolidated Statements of Comprehensive ~~Income~~(Loss) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~ 2019			4	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019	6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~ 2019			5	7
Notes to Unaudited Condensed Consolidated Financial Statements			6	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25	23
Item 4. Controls and Procedures			25

~~PART II—OTHER INFORMATION~~		24

PART II - OTHER INFORMATION

Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25	28
Item 6. Exhibits			26	29

Signature			27	30


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

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

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

Total assets	$	665,070		$	654,656

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

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

Total liabilities		293,369			318,767

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

Total stockholders’ equity		371,701			335,889

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


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock					Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		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

















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


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

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

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

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


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


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


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

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

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

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


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

	$	34,755


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

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

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

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

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

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

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

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

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


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

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


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

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


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

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


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

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


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


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

Total		175	$	56.57