SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

☒
☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended June 30, 2021

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

____________________________

One Rogers Street, Cambridge, MA 02142-1209

(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~~81,455,672 shares of the Registrant’s common stock, ~~$.01~~$0.01 par value per share, outstanding on ~~October 27, 2017.~~

July 19, 2021.

PART I—I - FINANCIAL INFORMATION

~~ITEM 1.~~

~~UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(in thousands)~~

   September 30,
2017 December 31,
2016
Assets

Current assets:

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


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


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


Total assets
   $ 665,070 $ 654,656


Liabilities and Stockholders’ Equity

Current liabilities:

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


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


Total liabilities
   293,369 318,767


Stockholders’ equity:

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


Total stockholders’ equity
   371,701 335,889


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

ITEM 1. FINANCIAL STATEMENTS

Common stock, 200,000 shares authorized; 81,456 and 80,890 shares issued and outstanding at

June 30, 2021 and December 31, 2020, respectively

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in thousands, except per share amounts)~~

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

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


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


Cost of revenue:

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


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


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


Operating expenses:

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


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


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


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


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


(Loss)/earnings per share:

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

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

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(in thousands)~~

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

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




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




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

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


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, 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 stock 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
Repurchase of common stock	(23)	—		(2,199)		—		—		(2,199)
Issuance of common stock for stock compensation plans	349	3		(14,085)		—		—		(14,082)
Issuance of common stock under the employee stock purchase plan	18	—		1,403		—		—		1,403
Stock-based compensation	—	—		25,674		—��		—		25,674
Cash dividends declared ($0.03 per share)	—	—		—		(2,413)		—		(2,413)
Other comprehensive income	—	—		—		—		2,028		2,028
Net (loss)	—	—		—		(20,740)		—		(20,740)
June 30, 2020	80,420	$	804	$	207,103	$	359,989	$	(11,614)	$	556,282








December 31, 2020	80,890	$	809	$	204,432	$	339,879	$	(2,948)	$	542,172
Cumulative-effect adjustment from adoption of ASU 2020-06, net	—	—		(61,604)		9,399		—		(52,205)
Repurchase of common stock	(70)	(1)		(9,145)		—		—		(9,146)
Issuance of common stock for stock compensation plans	402	4		(25,513)		—		—		(25,509)
Issuance of common stock under the employee stock purchase plan	24	—		2,288		—		—		2,288
Stock-based compensation	—	—		30,100		—		—		30,100
Cash dividends declared ($0.03 per share)	—	—		—		(2,438)		—		(2,438)
Other comprehensive income	—	—		—		—		280		280
Net (loss)	—	—		—		(6,617)		—		(6,617)
March 31, 2021	81,246	$	812	$	140,558	$	340,223	$	(2,668)	$	478,925
Repurchase of common stock	(81)	(1)		(10,245)		—		—		(10,246)
Issuance of common stock for stock compensation plans	267	3		(16,199)		—		—		(16,196)
Issuance of common stock under the employee stock purchase plan	24	1		2,858		—		—		2,859
Stock-based compensation	—	—		30,698		—		—		30,698
Cash dividends declared ($0.03 per share)	—	—		—		(2,445)		—		(2,445)
Other comprehensive income	—	—		—		—		1,582		1,582
Net income	—	—		—		37,291		—		37,291
June 30, 2021	81,456	$	815	$	147,670	$	375,069	$	(1,086)	$	522,468

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Six Months Ended June 30,
	2021		2020
Operating activities
Net income (loss)	$	30,674	$	(46,112)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Stock-based compensation	60,788		48,831
(Gain) on capped call transactions	(7,192)		(827)
Deferred income taxes	(28,232)		(18,399)
Amortization of deferred commissions	21,202		16,061
Amortization of debt discount and issuance costs	1,348		6,033
Amortization of intangible assets and depreciation	15,504		10,134
Amortization of investments	1,988		0
Foreign currency transaction loss	5,501		1,691
Other non-cash	(4,869)		6,445
Change in operating assets and liabilities, net	(77,302)		(45,056)
Cash provided by (used in) operating activities	19,410		(21,199)
Investing activities
Purchases of investments	(51,601)		(1,769)
Proceeds from maturities and called investments	68,798		0
Sales of investments	2,450		1,424
Payments for acquisitions, net of cash acquired	(4,993)		0
Investment in property and equipment	(4,161)		(19,059)
Cash provided by (used in) investing activities	10,493		(19,404)
Financing activities
Proceeds from issuance of convertible senior notes	0		600,000
Purchase of capped calls related to convertible senior notes	0		(51,900)
Payment of debt issuance costs	0		(14,527)
Proceeds from employee stock purchase plan	5,146		1,403
Dividend payments to stockholders	(4,865)		(4,793)




Common stock repurchases	(60,998)		(44,890)
Cash (used in) provided by financing activities	(60,717)		485,293
Effect of exchange rate changes on cash and cash equivalents	(1,207)		(942)
Net (decrease) increase in cash and cash equivalents	(32,021)		443,748
Cash and cash equivalents, beginning of period	171,899		68,363
Cash and cash equivalents, end of period	$	139,878	$	512,111

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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. These 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.~~

2020.

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.

All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2017.~~

2021.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

~~Stock-Based Compensation~~

In ~~May 2017,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. ~~2017-09~~ ~~“Stock Compensation (Topic 718)~~2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), ~~Scope~~which simplifies the accounting for certain financial instruments with characteristics of ~~Modification Accounting” to clarify when to~~liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a ~~change to the terms or conditions of~~convertible debt instrument wholly as debt unless (1) a ~~share-based payment award~~convertible instrument contains features that require bifurcation as a ~~modification. Under~~derivative under ASC Topic 815, “Derivatives and Hedging”, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the ~~new guidance, modification accounting is required only if~~convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the ~~fair~~if-converted method.

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value ~~the vesting conditions, or the classification~~ of the ~~award (as equity or liability) changes as a result~~Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the ~~change in terms or conditions. The effective date for~~Notes and the ~~Company will be January 1, 2018. The Company does not expect~~embedded conversion feature before adoption and the ~~adoption of this standard to have a material effect on its financial position or results of operations.~~

~~Financial Instruments~~

~~In June 2016, the FASB issued ASUNo. 2016-13,~~ “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured atcombined convertible instrument's amortized cost ~~including trade accounts receivable, upon initial recognition~~after adoption.

See "Note 8. Debt" for additional information.

NOTE 3. MARKETABLE SECURITIES


	June 30, 2021								December 31, 2020
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	2,000	$	0	$	0	$	2,000	$	39,996	$	0	$	(8)	$	39,988
Corporate debt	269,649		20		(210)		269,459		253,345		88		(152)		253,281
	$	271,649	$	20	$	(210)	$	271,459	$	293,341	$	88	$	(160)	$	293,269

As of ~~that financial asset using~~June 30, 2021, marketable securities’ maturities ranged from July 2021 to May 2024, with a ~~forward-looking expected loss model, rather than an incurred loss model for credit losses. 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~~weighted-average remaining maturity of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

~~Leases~~

~~In February 2016, the FASB issued ASUNo. 2016-02,~~ ~~“Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use~~ asset for the right to use the underlying asset for the lease term. The effective date for the Company will be 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, effective January 1, 2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form~~10-K~~ ~~for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.~~

approximately 1.3 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~The Company has made significant progress on quantifying~~

NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	June 30, 2021		December 31, 2020
Accounts receivable	$	166,226	$	215,827
Unbilled receivables	236,451		207,155
Long-term unbilled receivables	144,065		113,278
	$	546,742	$	536,260

Unbilled receivables

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the ~~impact~~passage of ~~its adoption and identifying necessary changes to our policies, processes, systems, and controls.~~

~~The Company expects the following impacts:~~

time.

~~Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term~~Unbilled receivables by expected billing date:


(Dollars in thousands)	June 30, 2021
1 year or less	$	236,451	62	%
1-2 years	88,350		23	%
2-5 years	55,715		15	%
	$	380,516	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	June 30, 2021
2021	$	140,395	37	%
2020	131,618		34	%
2019	55,282		15	%
2018	26,688		7	%
2017 and prior	26,533		7	%
	$	380,516	100	%

Clients accounting for 10% or more of the ~~agreement~~Company’s total receivables:


	June 30, 2021		December 31, 2020
Client A	13	%	*

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

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.


(in thousands)	June 30, 2021		December 31, 2020
Contract assets (1)	$	14,031	$	15,296
Long-term contract assets (2)	10,097		7,777
	$	24,128	$	23,073

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

Deferred revenue consists of billings and payments ~~become~~received in advance of revenue recognition.


(in thousands)	June 30, 2021		December 31, 2020
Deferred revenue	$	242,194	$	232,865
Long-term deferred revenue (1)	6,041		8,991
	$	248,235	$	241,856

(1) Included in other long-term liabilities.

The change in deferred revenue in the six months ended June 30, 2021 was primarily due ~~or earlier if prepaid, provided all other criteria for~~to new billings in advance of revenue recognition, ~~have been met, and any corresponding maintenance over the term~~offset by $172.1 million 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,that was included in deferred revenue atas of December 31, 2015, will not be recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016 and 2017 will be recognized in full in the year that control of the license is transferred to the customer instead of over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.2020.

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

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

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

NOTE 5. DEFERRED COMMISSIONS


(in thousands)	June 30, 2021		December 31, 2020
Deferred commissions (1)	$	109,803	$	108,624

(1) Included in other long-term assets.


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Amortization of deferred commissions (1)	$	9,706	$	7,564	$	21,202	$	16,061

(1) Included in selling and marketing expense.

NOTE 6. GOODWILL AND OTHER INTANGIBLES

Change in goodwill:


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	79,231	$	79,039
Acquisition	2,701		0
Currency translation adjustments	241		(364)
June 30,	$	82,173	$	78,675

Intangible assets 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

~~As of September 30, 2017,~~recorded at cost and amortized using the ~~Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.~~

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

~~4. DERIVATIVE INSTRUMENTS~~

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

~~The Company has historically used foreign currency forward contracts (“forward contracts”) to hedge its exposure to fluctuations~~straight-line method over their estimated useful lives.
June 30, 2021
(in thousands) Useful Lives Cost Accumulated Amortization
Net Book Value (1)
Client-related 4-10 years $ 63,186 $ (56,638) $ 6,548
Technology 2-10 years 67,142 (57,644) 9,498
Other 1-5 years 5,361 (5,361) 0
$ 135,689 $ (119,643) $ 16,046

(1) Included in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary.

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

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

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

Foreign currency forward contracts
   Other current assets    $ 628
Liability Derivatives

Foreign currency forward contracts
   Accrued expenses    $ 883

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

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

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

other long-term assets.


		December 31, 2020
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,168	$	(55,877)	$	7,291
Technology	2-10 years	64,843		(56,386)		8,457
Other	1-5 years	5,361		(5,361)		0
		$	133,372	$	(117,624)	$	15,748

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization of intangible assets:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	629	$	647	$	1,258	$	1,294
Selling and marketing	373		370		746		740

	$	1,002	$	1,017	$	2,004	$	2,034

Future estimated intangibles assets amortization:


(in thousands)	June 30, 2021
2021	$	1,983
2022	3,886
2023	3,618
2024	2,849
2025	2,509
2026 and thereafter	1,201
	$	16,046

In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company’s landlord of $18 million, which is being amortized over the remaining lease term. Upon modification, the Company reduced its lease liabilities by $21.1 million and accelerated depreciation related to its corporate headquarters.

Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Fixed lease costs (1)	$	(3,972)	$	4,943	$	(3,672)	$	9,761
Short-term lease costs	515		371		974		826
Variable lease costs	1,340		969		2,727		2,247
	$	(2,117)	$	6,283	$	29	$	12,834

(1) The ~~income statement impact~~decrease in fixed lease costs in three and six months ended June 30, 2021 was due to the modification of the Headquarters Lease.

Right of use assets and lease liabilities


(in thousands)	June 30, 2021		December 31, 2020
Right of use assets (1)	$	51,058	$	67,651
Lease liabilities (2)	$	13,682	$	18,541
Long-term lease liabilities	$	42,063	$	59,053

(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.

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


	June 30, 2021		December 31, 2020
Weighted-average remaining lease term	4.9 years		4.7 years
Weighted-average discount rate (1)	4.6	%	5.4	%

(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 collateralized basis over the lease term in a similar economic environment.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maturities of lease liabilities:


(in thousands)	June 30, 2021
Remainder of 2021	$	8,783
2022	13,888
2023	13,300
2024	10,021
2025	6,913
2026	2,653
Thereafter	7,170
Total lease payments	62,728
Less: imputed interest (1)	(6,983)
	$	55,745

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement, unless the discount rate is updated due to a lease reassessment event.

Cash flow information


	Six Months Ended June 30,
(in thousands)	2021		2020
Cash paid for leases	$	11,605	$	10,945
Right of use assets recognized for new leases and amendments (non-cash)	$	10,160	$	10,077

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are required before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering 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 certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

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 June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

•During the 5 consecutive business days immediately after any 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 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 certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert 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 in full on the redemption date, until the Company pays the redemption price).

As of June 30, 2021, the Notes were not eligible for conversion at the noteholders’ election.

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right 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 a 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 mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.

Until January 1, 2021, the Notes were separated into liability and equity components.

•The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.

•The equity component was recorded as an increase to additional paid-in capital and not remeasured.

Upon adoption of ASU 2020-06, the book value of the Notes increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

Carrying value of the Notes:


(in thousands)	June 30, 2021		December 31, 2020
Principal	$	600,000	$	600,000
Unamortized debt discount	0		(71,222)
Unamortized issuance costs	(10,908)		(10,575)
Convertible senior notes, net	$	589,092	$	518,203

Conversion options	$	—	$	84,120
Issuance costs	0		(2,037)
Deferred taxes	0		(20,479)
Additional paid-in capital	$	0	$	61,604

Interest expense related to the Notes:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	2,250	$	1,575
Amortization of debt discount	0		3,757		0		5,253
Amortization of issuance costs	675		558		1,348		780
	$	1,800	$	5,440	$	3,598	$	7,608

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effective interest rate for the Notes:


	Six Months Ended June 30,
	2021		2020
Weighted-average effective interest rate	1.2	%	4.3	%

Future payments of principal and contractual interest:


	June 30, 2021
(in thousands)	Principal		Interest		Total
2021	$	0	$	2,250	$	2,250
2022	0		4,500		4,500
2023	0		4,500		4,500
2024	0		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	17,238	$	617,238

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “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. The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as other long-term assets and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	83,597	$	0
Issuance	0		51,900
Fair value adjustment	7,192		827
June 30,	$	90,789	$	52,727

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding ~~forward contracts~~loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, 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.affiliate transactions.

The Company is also required to comply with financial covenants, including:

•Beginning with the fiscal quarter ended September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $200 million in cash and investments held by Pegasystems Inc.

•Beginning with the quarter ended March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of June 30, 2021 and December 31, 2020, the Company had 0 outstanding borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. FAIR VALUE MEASUREMENTS

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

recurring basis

The Company records its ~~money market funds,~~cash equivalents, marketable securities, Capped Call Transactions, and ~~forward contracts~~venture investments 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 money market funds are classified within Level 1~~fair value of the fair value hierarchy. The Company’s marketable securities classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s foreign currency forward contracts, which were all classified within Level 2 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 ~~in which~~is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining 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 and Level 2 during the nine months ended September 30, 2017.~~

~~PEGASYSTEMS INC.~~

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

underlying equity security. The Company’s ~~assets~~venture investments are recorded at fair value based on valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

Assets and liabilities measured at fair value on a recurring ~~basis consisted~~basis:


	June 30, 2021								December 31, 2020
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	4,650	$	0	$	0	$	4,650	$	42,339	$	14,000	$	0	$	56,339
Marketable securities	$	0	$	271,459	$	0	$	271,459	$	0	$	293,269	$	0	$	293,269
Capped Call Transactions (1)	$	0	$	90,789	$	0	$	90,789	$	0	$	83,597	$	0	$	83,597
Venture investments (1) (2)	$	0	$	0	$	9,779	$	9,779	$	0	$	0	$	8,345	$	8,345

(1) Included in other long-term assets. (2) Investments in privately-held companies.

Changes in venture investments:


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	8,345	$	4,871
New investments	500		1,769
Sales of investments	(400)		(1,424)
Changes in foreign exchange rates	14		(50)
Changes in fair value:
included in other income	100		1,374
included in other comprehensive income	1,220		100
June 30,	$	9,779	$	6,640

The carrying value 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

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

Fair value of ~~these items.~~

~~Assets Measured at Fair Value on a Nonrecurring Basis~~

~~Assets recorded at~~the Notes

The Notes’ fair value ~~on a nonrecurring basis, such~~(inclusive of the conversion feature embedded in the Notes) was $726.2 million as ~~property~~of June 30, 2021 and ~~equipment and intangible assets, are recognized at~~$706.5 million as of December 31, 2020. The fair value ~~when they are impaired. During~~was determined based on the ~~nine months ended September 30, 2017~~Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and ~~2016,~~classified within Level 2 in the ~~Company did not recognize any impairments of its assets recorded at~~ fair value ~~on a nonrecurring basis.~~

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

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




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




   $ 191,161    $ 265,028

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

~~7. GOODWILL AND OTHER INTANGIBLE ASSETS~~

~~The changes in the carrying amount of goodwill~~hierarchy. See "Note 8. Debt" 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

additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Intangible assets are recorded at cost~~

Geographic revenue


	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2021				2020				2021				2020
U.S.	$	189,297	58	%	$	142,811	63	%	$	383,865	60	%	$	315,228	63	%
Other Americas	14,058		4	%	8,930		4	%	25,959		4	%	24,272		5	%
United Kingdom (“U.K.”)	32,553		10	%	21,259		9	%	60,765		10	%	43,096		9	%
Europe (excluding U.K.), Middle East, and Africa	45,798		14	%	34,878		15	%	97,457		15	%	66,816		14	%
Asia-Pacific	43,996		14	%	19,497		9	%	71,155		11	%	43,554		9	%
	$	325,702	100	%	$	227,375	100	%	$	639,201	100	%	$	492,966	100	%

Revenue streams


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Perpetual license	$	12,596	$	9,057	$	18,048	$	12,716
Term license	104,296		44,266		215,805		134,523
Revenue recognized at a point in time	116,892		53,323		233,853		147,239
Maintenance	78,782		72,222		154,343		145,917
Pega Cloud	73,293		48,838		141,151		92,304
Consulting	56,735		52,992		109,854		107,506
Revenue recognized over time	208,810		174,052		405,348		345,727
	$	325,702	$	227,375	$	639,201	$	492,966


(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Pega Cloud	$	73,293	$	48,838	$	141,151	$	92,304
Client Cloud	$	183,078	$	116,488	$	370,148	$	280,440
Maintenance	78,782		72,222		154,343		145,917
Term license	104,296		44,266		215,805		134,523
Subscription (1)	256,371		165,326		511,299		372,744
Perpetual license	12,596		9,057		18,048		12,716
Consulting	56,735		52,992		109,854		107,506
	$	325,702	$	227,375	$	639,201	$	492,966

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and ~~are amortized using the straight-line method over their estimated useful lives as follows:~~

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

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






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






December 31, 2016

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






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

~~Amortization expense of intangibles assets is reflected in 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 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

term license).

Remaining performance obligations ("Backlog")

Expected future revenue on existing non-cancellable contracts:


	June 30, 2021
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	6,707	$	46,146	$	214,645	$	281,793	$	17,863	$	567,154	56	%
1-2 years	234		15,708		59,164		194,841		2,675		272,622		26	%
2-3 years	0		909		36,076		88,855		762		126,602		12	%
Greater than 3 years	0		255		26,564		37,246		693		64,758		6	%
	$	6,941	$	63,018	$	336,449	$	602,735	$	21,993	$	1,031,136	100	%


	June 30, 2020
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	8,120	$	53,550	$	186,618	$	191,187	$	21,923	$	461,398	57	%
1-2 years	1,700		6,187		40,153		140,860		1,986		190,886		23	%
2-3 years	0		6,460		20,671		88,273		631		116,035		14	%
Greater than 3 years	0		646		10,517		37,071		626		48,860		6	%
	$	9,820	$	66,843	$	257,959	$	457,391	$	25,166	$	817,179	100	%

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

~~10.~~

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


	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2021			2020		2021		2020
Total revenue	$	325,702		$	227,375	$	639,201	$	492,966
Client A	13		%	*		*		*

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

NOTE 11. STOCK-BASED COMPENSATION

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

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








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








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

~~During the nine months ended September 30, 2017, the Company issued approximately 1,299,000 shares of common stock to its employees and 18,000 shares of common stock to itsnon-employee~~ ~~directors under the Company’s stock-based compensation plans.~~

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

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

Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	5,849	$	5,384	$	11,774	$	10,536
Selling and marketing	14,748		11,592		28,468		21,310
Research and development	6,343		5,805		13,113		11,302
General and administrative	3,748		2,874		7,433		5,683
	$	30,688	$	25,655	$	60,788	$	48,831
Income tax benefit	$	(6,192)	$	(5,107)	$	(12,183)	$	(9,689)

As of ~~September~~June 30, ~~2017,~~2021, the Company had ~~approximately $56.8~~$157.3 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~~2.2 years.

~~11.~~

Grants


	Six Months Ended June 30, 2021
(in thousands)	Shares	Total Fair Value
RSUs	753	$	97,483
Non-qualified stock options	1,368	$	51,594

NOTE 12. INCOME TAXES

Effective income tax rate


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(11,916)	$	(12,319)	$	(29,534)		$	(36,129)
Effective income tax benefit rate	0		0		(2,591)		%	44		%

The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger income (loss) before income taxes in the prior period. The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

NOTE 13. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is ~~computed~~calculated using the weighted-average number of common shares outstanding during the ~~applicable~~ period. Diluted earnings (loss) per share is ~~computed~~calculated using the weighted-average number of common shares outstanding during the ~~applicable~~ period, plus the dilutive effect of outstanding stock options, RSUs, and ~~RSUs,~~convertible senior notes.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of earnings (loss) per share:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2021		2020		2021		2020
Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Weighted-average common shares outstanding	81,316		80,224		81,161		80,016
Earnings (loss) per share, basic	$	0.46	$	(0.26)	$	0.38	$	(0.58)

Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Interest expense associated with convertible debt instruments, net of tax	1,351		0		0		0
Numerator for diluted EPS	$	38,642	$	(20,740)	$	30,674	$	(46,112)
Weighted-average effect of dilutive securities:
Convertible debt (1)	4,443		0		0		0
Stock options	3,266		0		3,416		0
RSUs	1,295		0		1,429		0
Effect of dilutive securities (2)	9,004		0		4,845		0
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	90,320		80,224		86,006		80,016
Earnings (loss) per share, diluted	$	0.43	$	(0.26)	$	0.36	$	(0.58)

Outstanding anti-dilutive stock options and RSUs (4)	19		5,929		22		5,939

(1) The shares underlying the conversion options in the Company’s Notes are included using the ~~treasury stock method. Certain~~if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue an additional 4.4 million shares.

(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

(3) The Company’s Capped Call Transactions convert to approximately 4.4 million shares ~~related to some~~ of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted earnings (loss) per ~~share because they were anti-dilutive in the periods presented, but could~~share. These awards may be dilutive in the future.

~~PEGASYSTEMS INC.~~

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

NOTE 14. SUBSEQUENT EVENTS

On July 6, 2021, the Company entered into an office space lease (the “Lease”) for 131 thousand square feet in Waltham, Massachusetts. The ~~calculation~~lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date. The annual rent equals the base rent plus the Company’s ~~basic~~portion of building operating costs and ~~diluted earnings per share~~real estate taxes for the year. Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date. Base rent for the first year 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

$6 million and will increase by 3% annually. In ~~periods of loss, all equity awards are excluded, as~~addition, 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~~Company will receive 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~~improvement allowance from the ~~sale and support~~landlord 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~~

$11.8 million.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. ~~These~~

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, ~~include,~~which are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but ~~are~~ not limited ~~to, statements about~~ to:

•our future financial performance and business ~~plans,~~ plans;

•the adequacy of our liquidity and capital ~~resources,~~ resources;

•the continued payment of our quarterly ~~dividends by the Company, and~~ dividends;

•the timing of revenue ~~recognition under license and cloud arrangements and are described more completely in Part I~~recognition;

•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 covenants;

•the potential ~~loss~~impact of ~~vendor specific objective evidence for~~ our ~~consulting services;~~ convertible senior notes and Capped Call Transactions;

•reliance on key personnel;

•the ~~inherent risks associated with international operations and~~ relocation of our corporate headquarters;

•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;~~

•the potential legal and financial liabilities and reputation damage due to ~~cyber-attacks~~cyber-attacks;

•security breaches and security ~~breaches;~~flaws;

•our ability to protect our intellectual property rights and costs associated with defending such rights;

•our client retention rate; and

•management of ~~the Company’s~~our growth.

These risks and ~~other factors~~others that ~~could~~may 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~~2020, 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 publicly, whether ~~as a result of~~from new information, future events, or ~~risks. New information, future events or risks may cause the~~otherwise.

The forward-looking ~~events we discuss~~statements contained in this ~~report not to occur or to materially change.~~

~~Business overview~~

Quarterly Report represent our views as of July 28, 2021.

We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity. Our intelligent technology and scalable architecture enables the world’s leading brands and government agencies to solve problems quickly and transform for ~~marketing, sales,~~tomorrow. Our clients are able to make better decisions and get work done using real-time artificial intelligence (“AI”) and intelligent automation on applications built on the low-code, cloud-native Pega Platform™, enabling our clients to streamline service, increase customer lifetime value, and ~~operations. In addition, we license~~boost efficiency. Our consulting and client success teams, along with our world-class partners, leverage our Pega^® ~~Platform for~~ Express™ methodology and low code to allow clients ~~that wish~~ to ~~build~~design and ~~extend their own applications. The Pega Platform assists our~~deploy critical applications quickly and collaboratively.

Our target clients in building, deploying, and evolving enterprise applications, creating an environment in which 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 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 our clients’ specific industry needs.

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Until we substantially complete our Cloud Transition, which we anticipate will occur in 2023, we may experience lower revenue growth and lower operating cash flow growth or negative cash flow. Operating performance and the actual mix of revenue and new arrangements in a given period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Coronavirus (“COVID-19”)

As of June 30, 2021, COVID-19 has not had a ~~series of licenses, each focused~~material impact on ~~a specific purpose or area~~our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in ~~support of longer term enterprise-wide digital transformation initiatives.~~

~~Our license revenue is primarily derived from sales~~the “Risk Factors” section of our ~~applications~~Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

We utilize performance metrics to analyze and assess our ~~Pega Platform. Our cloud revenue is derived from~~overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased 22% since June 30, 2020

•ACV, as reported, represents the ~~licensing~~annualized value of our ~~hosted Pega Platform and software application environments. Our consulting services revenue is primarily related to new license implementations.~~

~~Financial and Performance Metrics~~

Management evaluates our financial performance, based a number of select financial and performance metrics. The performance metrics are periodically reviewed and revised to reflect any changes in our business. Historically, Recurring Revenue and License and Cloud Backlog have been our primary performance metrics. However, due to the change in the revenue recognition patterns of term license arrangements as a result of the expected implementation of the new revenue accounting standard (See Note 2) in the first quarter of 2018, we have started tracking 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~~measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the ~~particular reporting period.~~

quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and term license ACV. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition.

* Foreign currency exchange rate changes contributed 3-4% to total ACV growth in 2021.

Remaining performance obligations (“Backlog”) | Increased 26% since June 30, 2020

•Backlog represents expected future revenue on existing non-cancellable contracts.

Year to date Pega Cloud revenue | Increased 53% since 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~~six months ended ~~period multiplied by 4.~~June 30, 2020

   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~~

•Pega 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~~revenue is ~~the sum of the following two components:~~

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

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

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~~following accounting principles generally accepted in the ~~U.S.~~United States 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 the 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.~~

~~Results~~2020:

•“Critical Accounting Estimates and Significant Judgments” in Item 7; and

•“Note 2. Significant Accounting Policies” in Item 8.

There have been no significant changes other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 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 )%

this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

RESULTS OF OPERATIONS

Revenue

~~Software~~

Cloud Transition

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Revenue growth has been slower because of this transition. Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract term. In contrast, revenue from 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 mix between perpetual~~sales is recognized when the license rights become effective, typically upfront.
(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2021 2020 2021 2020
Pega Cloud $ 73,293 23 % $ 48,838 21 % $ 24,455 50 % $ 141,151 22 % $ 92,304 19 % $ 48,847 53 %
Client Cloud $ 183,078 56 % $ 116,488 52 % $ 66,590 57 % $ 370,148 58 % $ 280,440 57 % $ 89,708 32 %
Maintenance 78,782 24 % 72,222 33 % 6,560 9 % 154,343 24 % 145,917 30 % 8,426 6 %
Term license 104,296 32 % 44,266 19 % 60,030 136 % 215,805 34 % 134,523 27 % 81,282 60 %
Subscription (1)
$ 256,371 79 % $ 165,326 73 % 91,045 55 % 511,299 80 % 372,744 76 % 138,555 37 %
Perpetual license 12,596 4 % 9,057 4 % 3,539 39 % 18,048 3 % 12,716 3 % 5,332 42 %
Consulting 56,735 17 % 52,992 23 % 3,743 7 % 109,854 17 % 107,506 21 % 2,348 2 %
$ 325,702 100 % $ 227,375 100 % $ 98,327 43 % $ 639,201 100 % $ 492,966 100 % $ 146,235 30 %

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term ~~license arrangements executed in a particular period varies based on clients’ deployment preferences. A change~~license).

The total revenue changes in the ~~mix may cause~~three and six months ended June 30, 2021 generally reflect our ~~revenues to vary materially from period to period. A higher proportion~~Cloud Transition. Other factors impacting our revenue include:

•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance. Under multi-year committed maintenance arrangements, ~~executed will generally result in~~a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than as term license revenue ~~being recognized over longer periods. Additionally, some~~upon the effectiveness of ~~our perpetual~~the license ~~arrangements include extended payment terms or additional rights of use, which may also result in the recognition of revenue over longer periods.~~

~~The decrease in perpetual license revenue in~~rights. In the three months ended ~~September~~June 30, ~~2017 was primarily due~~2021, multi-year committed maintenance contributed $4.3 million to ~~a decrease in~~maintenance revenue growth and reduced term revenue growth by $15.4 million. In the average value of perpetual arrangements executed and a lower percentage of perpetual arrangements executed and recognized in revenue in the current period. The decrease in perpetual license revenue in the ninesix months ended ~~September~~June 30, ~~2017 was primarily due~~2021, multi-year committed maintenance contributed $7.8 million to ~~a lower percentage~~maintenance revenue growth and reduced term revenue growth by $20.9 million.

•Maintenance renewal rates of ~~perpetual arrangements executed and recognized in revenue.~~

higher than 90%.

•The ~~decrease~~increases in term license revenue in the three and six months ended ~~September~~June 30, ~~2017 was~~2021 were driven by a large, existing customer that expanded their use of our software, renewed an existing multi-year contract, and extended the term of the agreement earlier in the year than anticipated.

•The increases in perpetual license revenue were primarily due to aseveral large ~~term~~perpetual license renewal for which the second year of the term was recognized as revenue in the three months ended September 30, 2016. If the second year of this term license arrangement was not paid in advance in the three months ended September 30, 2016, term license revenue would have decreased 2%. The increase in term license revenue in the nine months ended September 30, 2017 was primarily due to broad based growth amongst new and existing customers offset by a large term license arrangement which was prepaid andcontracts recognized in revenue in the three and six months ended ~~March 31, 2016. If this term license arrangement was not prepaid and recognized~~June 30, 2021.

•The increases in consulting revenue in the three and six 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 SeptemberJune 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~~2021 were primarily due to ~~the continued growth~~increases in ~~the aggregate value of the installed base~~billable hours. As part of our ~~software~~long-term strategy, we intend to continue growing and ~~strong renewal rates significantly in excess~~leveraging our ecosystem 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~~partners on ~~the mix of new~~ implementation projects, ~~we perform as compared to those performed by~~potentially reducing our ~~enabled clients or led by our partners.~~

~~The increases in~~future 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.~~

growth.

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 %

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
(Dollars in thousands) 2021 2020 2021 2020
Software license $ 116,236 99 % $ 52,344 98 % $ 63,892 122 % $ 232,547 99 % $ 145,576 99 % $ 86,971 60 %
Maintenance 73,787 94 % 66,631 92 % 7,156 11 % 143,562 93 % 134,750 92 % 8,812 7 %
Pega Cloud 49,242 67 % 29,850 61 % 19,392 65 % 94,543 67 % 55,783 60 % 38,760 69 %
Consulting 1,906 3 % 1,859 4 % 47 3 % 1,571 1 % 638 1 % 933 146 %
$ 241,171 74 % $ 150,684 66 % $ 90,487 60 % $ 472,223 74 % $ 336,747 68 % $ 135,476 40 %

•The ~~decrease~~changes in ~~total~~ gross profit in the three and six months ended ~~September~~June 30, ~~2017 was~~2021 were primarily due to ~~a shift in the mix of license arrangements executed from perpetual to term licenses~~our Cloud Transition, revenue growth, 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.~~

cost-efficiency gains as Pega Cloud grows and scales.

Operating expenses


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2021				2020								2021				2020
			% of Revenue				% of Revenue								% of Revenue				% of Revenue
Selling and marketing	$	156,423	48	%	$	127,607	56	%	$	28,816	23	%	$	305,162	48	%	$	263,631	53	%	$	41,531	16	%
Research and development	$	64,395	20	%	$	58,869	26	%	$	5,526	9	%	$	126,837	20	%	$	117,596	24	%	$	9,241	8	%
General and administrative	$	19,161	6	%	$	15,655	7	%	$	3,506	22	%	$	37,431	6	%	$	31,285	6	%	$	6,146	20	%

•The increases in ~~service gross profit percent~~selling and marketing in the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was driven by a large project which began in the second half of 2016 and several additional large projects for which costs~~2021 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~~increases in compensation and benefits of ~~$1.8~~$22.6 million ~~driven by increased~~and $48.0 million, attributable to increases in headcount and equity ~~compensation, partially offset by a decrease in sales commissions associated with the lower value of new license arrangements executed during the three months ended September 30, 2017.~~

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

compensation. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new ~~accounts~~accounts.

•The increases in ~~existing industries, as well as to expand coverage in new industries~~research and ~~geographies and to increase the number of sales opportunities.~~

~~Research and~~ development

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

Research and development expenses include 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~~six months ended ~~September~~June 30, ~~2017~~2021 were primarily due to increases in compensation and benefits of ~~$2.9~~$7.2 million and ~~$12.6~~$11.8 million, ~~respectively,~~ attributable to ~~increased~~increases in 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 increases 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~~six months ended ~~September~~June 30, ~~2017~~2021 were primarily due to increases in compensation and benefits of ~~$0.4~~$2.2 million and $4$3.5 million, ~~respectively,~~ attributable to ~~increased~~increases in headcount and equity ~~compensation. The increase~~compensation, and increases in professional services fees of $1.8 million and $3.4 million.

•In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to decreases in facilities expenses of $2.1 million and $3.3 million in selling and marketing, $2.4 million and $3.6 million in research and development, and $1.1 million and $1.6 million in general and administrative, in the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 was partially offset by a decrease of $1.5 million~~2021.

Other income (expense), net


(Dollars in thousands)	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2021		2020						2021		2020
Foreign currency transaction (loss) gain	$	(403)	$	4,256	$	(4,659)	*		$	(5,501)	$	(1,691)	$	(3,810)	(225)	%
Interest income	236		242		(6)		(2)	%	389		849		(460)		(54)	%
Interest expense	(1,959)		(5,529)		3,570		65	%	(3,839)		(7,835)		3,996		51	%
Gain on capped call transactions	26,309		19,419		6,890		35	%	7,192		827		6,365		770	%
Other income, net	—		—		—		*		106		1,374		(1,268)		(92)	%
	$	24,183	$	18,388	$	5,795	32	%	$	(1,653)	$	(6,476)	$	4,823	74	%

* not meaningful

•The changes in ~~legal fees.~~

~~Stock-based compensation~~

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


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


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

~~The increases~~foreign currency transaction (loss) gain in the three and six months ended June 30, 2021 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,~~receivables, and intercompany ~~receivables~~balances held by our subsidiary in the United Kingdom.

•The decreases in interest income in the three and ~~payables held~~six months ended June 30, 2021 were primarily bydue to declines in market interest rates.

•The decreases in interest expense in the ~~U.S. parent company~~three and ~~its United Kingdom (“U.K.”) subsidiary.~~six months ended June 30, 2021 were primarily due to our adoption of ASU 2020-06 on January 1, 2021. See ~~Note 4 “Derivative Instruments”~~"Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report ~~on Form 10-Q~~ for additional information.

Interest expense related to the Notes:


	Three Months Ended June 30,				Change		Six Months Ended June 30,				Change
(in thousands)	2021		2020				2021		2020
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	—	$	2,250	$	1,575	$	675
Amortization of debt discount	—		3,757		(3,757)		—		5,253		(5,253)
Amortization of issuance costs	675		558		117		1,348		780		568
	$	1,800	$	5,440	$	(3,640)	$	3,598	$	7,608	$	(4,010)

•The ~~total change~~increases in the gain on capped call transactions in the three and six months ended June 30, 2021, were due to fair value ofadjustments driven by increases in our ~~foreign currency forward contracts recorded~~stock price.

•The decrease in other income, ~~(expense),~~ net ~~during~~in the ~~three~~six months ended ~~September~~June 30, ~~2016~~2021, was ~~a loss of $1.2 million. The total~~due to larger fair value adjustments on equity securities held in our venture investments portfolio in the six months ended June 30, 2020.

(Benefit from) income taxes


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(11,916)	$	(12,319)	$	(29,534)		$	(36,129)
Effective income tax benefit rate					(2,591)		%	44		%

During the six months ended June 30, 2021, the 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 benefit rate ~~in the three months ended September 30, 2017 is~~was primarily due to the ~~significant increase~~impact of ~~$3.5 million in excess~~discrete tax ~~benefits generated by our stock compensation plans~~items on ~~significantly lower~~a proportionately larger income (loss) 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~~prior period. The most 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.

~~The inclusion of excess tax benefits as a component of the provision for income taxes may increase volatility in the effective tax rates of future periods as the amount of~~discrete items were excess tax benefits from ~~share-based~~stock-based compensation ~~awards varies depending~~and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a given period depends on our ~~future stock price in relation to~~profitability, the ~~fair value of awards, the timing of RSU vesting and exercise behavior~~attributes of our stock ~~option holders,~~compensation awards we grant, and ~~the total value of future grants of share-based compensation awards.~~

~~Liquidity 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

award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


	Six Months Ended June 30,
(in thousands)	2021		2020
Cash provided by (used in):
Operating activities	$	19,410	$	(21,199)
Investing activities	10,493		(19,404)
Financing activities	(60,717)		485,293
Effect of exchange rates on cash and cash equivalents	(1,207)		(942)
Net (decrease) increase in cash and cash equivalents	$	(32,021)	$	443,748


(in thousands)	June 30, 2021		December 31, 2020
Held by U.S. entities	$	306,754	$	399,138
Held by foreign entities	104,583		66,030
Total cash, cash equivalents, and marketable securities	$	411,337	$	465,168

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,~~stock repurchases, 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 future growth, operating results, and ~~cash equivalents was held in~~the investments required to support our ~~foreign subsidiaries.~~ operations. 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 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, it is ~~impractical~~impracticable to estimate the amount of ~~U.S. tax~~taxes we ~~may be required~~would have to ~~pay upon repatriation due~~pay.

Operating activities

We are in the process of transitioning our business 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.

~~Cash provided by operating activities~~

~~The primary drivers during the nine months ended September 30, 2017 were net income of $36.6 million~~sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has impacted and ~~$80.6 million from trade accounts receivable, largely due~~is expected to ~~increased cash collections and~~continue to impact the timing of ~~billings.~~

our billings and cash collections. Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective. As client preferences shift in favor of Pega Cloud arrangements, we could experience slower operating cash flow growth, or negative cash flow, in the near term.

The ~~primary driver during~~change in cash provided by (used in) operating activities in the ~~nine~~six months ended June 30, 2021 was primarily due to a significant increase in client collections.

Corporate headquarters

In February 2021, we agreed to accelerate our exit from our existing Cambridge, Massachusetts corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which is expected to be paid in the last quarter of 2021. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million. On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our future corporate headquarters. The approximately 4.5 year lease includes base rent of approximately $2 million per year.

New Waltham Office

On July 6, 2021, we entered into an office space lease (the “Lease”) for 131 thousand square feet in Waltham, Massachusetts. The lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date. The annual rent equals the base rent plus our portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date. Base rent for the first year is $6 million and will increase by 3% annually. In addition, we will receive an improvement allowance from the landlord of $11.8 million.

Investing activities

The change in cash provided by (used in) investing activities in the six months ended June 30, 2021 was primarily driven by investments in financial instruments, an acquisition, and a decrease in office space related capital expenditures.

Financing activities

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes due March 1, 2025.

In November 2019, and as amended as of February 2020, July 2020, and September ~~30, 2016 was net income of $18.2 million.~~

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

2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of ~~September~~June 30, ~~2017, none~~2021, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Item 1 of ~~the amounts shown in the table below had been billed and no revenue had been recognized.~~

The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a result of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report ~~on Form10-Q~~for additional ~~information)~~

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






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

information.

Stock repurchase program

Changes in the remaining stock repurchase authority:

⁽¹⁾	~~These amounts are for perpetual licenses with extended payment terms and/or additional rights of use.~~
(in thousands)		Six Months Ended June 30, 2021
December 31, 2020		$	37,726
Authorizations (1)		38,467
Repurchases (2)		(19,392)
June 30, 2021		$	56,801

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

~~Cash used in investing activities~~

~~During the nine months ended September 30, 2017,~~

(1) On June 8, 2021, we purchased $25.7 million of marketable debt securities and made 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 of our common stock, share repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.~~

~~Since 2004,~~announced that our Board of Directors ~~has approved annual~~extended the current stock repurchase ~~programs that have authorized~~program’s expiration date to June 30, 2022 and increased the remaining common stock repurchase ~~in the aggregate of up~~authority to ~~$195 million of our common stock.~~$60 million.

(2) Purchases under ~~these programs~~this program 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 under our 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.

Six Months Ended
June 30,
2021 2020
(in thousands) Shares Amount Shares Amount
Tax withholdings for net settlement of equity awards 328 $ 41,706 411 $ 37,093
Stock repurchase program 151 19,392 110 8,199
479 $ 61,098 521 $ 45,292

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 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 2016,2020, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$23.7~~$27.8 million and ~~$10.1~~$31.2 million, respectively, for the exercise price of options.

These amounts are not included in 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~~

We intend to pay a quarterly cash dividend of $0.03 per ~~share, however,~~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~~

Six Months Ended
June 30,
(in thousands) 2021 2020
Dividend payments to stockholders $ 4,865 $ 4,793

Contractual obligations

As of June 30, 2021, our contractual obligations were:


	Payments due by period
(in thousands)	2021		2022		2023		2024		2025		2026 and thereafter		Other		Total
Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	4,500	$	601,488	$	—	$	—	$	617,238
Purchase obligations (2)	28,215		60,242		12,539		1,938		429		—		—		103,363
Operating lease obligations (3)	8,783		13,888		13,300		10,021		6,913		9,823		—		62,728
Liability for uncertain tax positions (4)	—		—		—		—		—		—		1,665		1,665
	$	39,248	$	78,630	$	30,339	$	16,459	$	608,830	$	9,823	$	1,665	$	784,994

(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs

(3) Excludes the Waltham lease, which we entered into on July 6, 2021. See "Note 14. Subsequent Events" in Item 1 of this Quarterly Report for additional information.

(4) 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss ~~that may affect us due to~~from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our ~~market~~foreign operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales 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 have resulted in:


	Six Months Ended June 30,
	2021		2020
(Decrease) increase in revenue	(4)	%	(3)	%
(Decrease) increase in net income	(1)	%	(15)	%

Remeasurement risk ~~exposure is primarily related to~~

We experience fluctuations in ~~foreign exchange rates.~~

Astransaction gains and losses from the 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 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, 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 have resulted 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:


	Six Months Ended June 30,
(in thousands)	2021		2020
Foreign currency gain (loss)	$	(5,676)	$	8,932

~~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~~June 30, ~~2017.~~2021. 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~~June 30, ~~2017.~~

2021.

(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~~June 30, ~~2017~~2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART ~~II—~~II - OTHER INFORMATION

~~ITEM 1A.~~

~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

We encourage you to consider carefully ~~consider~~ the risk factors identified in ~~Part I,~~ Item 1A. “Risk Factors” inof our Annual Report onForm 10-K for the year ended December 31, ~~2016.~~2020, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and ~~could~~may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form10-Q or elsewhere by ~~management from time to time. There have been no material changes during the nine months ended September 30, 2017 to the risk factors disclosed in our Annual Report on Form10-K~~ ~~for the year ended December 31, 2016.~~

management.

~~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~~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 amounts2021:
(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)
April 1, 2021 - April 30, 2021 53 $ 125.24 25 $ 25,430
May 1, 2021 - May 31, 2021 96 121.41 25 $ 22,431
June 1, 2021 - June 30, 2021 204 126.99 31 $ 56,801
353 $ 125.20 81
(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 June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report for additional information.
ITEM 6. EXHIBITS
Exhibit No. Description Incorporation by Reference Filed Herewith
Form Exhibit Filing Date
3.1
Restated Articles of Organization of the Registrant and Amendments thereto
10-Q 3.1 November 4, 2014
3.2
Amended and Restated Bylaws of Pegasystems Inc.
8-K 3.2 June 15, 2020
10.1
Sublease, dated March 31, 2021 for Office Space at One Main Street, Cambridge, MA
X
10.2**
Lease between Pegasystems Inc. and 275 Wyman LLC
8-K 10.1 July 9, 2021
31.1
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
X
31.2
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
X
32++
Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.
X
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. X
101.SCH Inline XBRL Taxonomy Extension Schema Document. X
101.CAL Inline XBRL Taxonomy Calculation Linkbase Document. X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X
101.LAB Inline XBRL Taxonomy Label Linkbase Document. X
101.PRE Inline XBRL Taxonomy Presentation Linkbase Document. X
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) X
++ Indicates that the exhibit is being furnished with this report and is not filed as ~~market conditions warrant, subject to regulatory and other considerations. We have established~~ a~~pre-arranged~~ ~~stock repurchase plan, intended to comply with the requirements of Rule10b5-1~~ ~~under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule10b-18~~ ~~under the Exchange Act (the“10b5-1~~ ~~Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1~~ ~~Plan.~~

~~ITEM 6.~~

~~EXHIBITS~~

~~The following exhibits are filed or furnished, as the case may be, as~~ part of it.

** Certain portions of this ~~report.~~

~~EXHIBIT INDEX~~


~~Exhibit No.~~		~~Description~~

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

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

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

~~101.INS~~		~~XBRL Instance document.~~

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document.~~

~~101.CAL~~		~~XBRL Taxonomy Calculation Linkbase Document.~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document.~~

~~101.LAB~~		~~XBRL Taxonomy Label Linkbase Document.~~

~~101.PRE~~		~~XBRL Taxonomy Presentation Linkbase Document.~~

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

exhibit are considered confidential and have been omitted as permitted under SEC rules and regulations.

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:

July 28, 2021

~~November 8, 2017~~By:

~~By:~~

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief ~~Financial~~Operating Officer and Chief ~~Administrative~~Financial Officer

(Principal Financial Officer)

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


		Page
PART I—I - FINANCIAL INFORMATION

Item 1. ~~Unaudited Condensed Consolidated~~ Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~ 2020			2	3
Unaudited Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~ 2020			3	4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~ 2020			4	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2021 and 2020	6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~ 2020			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	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25	26
Item 4. Controls and Procedures			25

~~PART II—OTHER INFORMATION~~		26

PART II - OTHER INFORMATION

Item 1A. Risk Factors			25	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25	27
Item 6. Exhibits			26	27

Signature			27	28


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

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

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

Total assets	$	665,070		$	654,656

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

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

Total liabilities		293,369			318,767

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

Total stockholders’ equity		371,701			335,889

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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


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


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


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

Balance as of September 30,	$	72,941


(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