UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

~~(Mark One)~~

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2018

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

~~For the transition period from~~to

Commission File Number:1-11859

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)


Massachusetts		04-2787865
*(State or other jurisdiction of* *incorporation or organization)*		*(IRS Employer* *Identification No.)*

One Rogers Street, Cambridge, MA		02142-1209
*(Address of principal executive offices)*		*(Zip Code)*

(617)374-9600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 ☒ 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~~ (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~~78,575,803 shares of the Registrant’s common stock, ~~$.01~~$0.01 par value per share, outstanding on ~~October 27, 2017.~~

May 1, 2018.

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM10-Q

~~Index to Form10-Q~~TABLE OF CONTENTS


	Page
PART I—I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017		24

Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		35

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		46

Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~		57

Notes to Unaudited Condensed Consolidated Financial Statements		68

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1520

Item 3. Quantitative and Qualitative Disclosures About Market Risk		2527

Item 4. Controls and Procedures		2528

PART ~~II—~~II - OTHER INFORMATION

Item 1A. Risk Factors		2529

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2529

Item 6. Exhibits		2629

Signature		2730

PART I—I - FINANCIAL INFORMATION

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


							March 31, 2018		December 31, 2017
	September 30, 2017			December 31, 2016					As Adjusted⁽¹⁾
Assets
Current assets:
Cash and cash equivalents	$	130,568		$	70,594		$	165,790	$	162,279
Marketable securities		63,812			63,167			89,047		61,469

Total cash, cash equivalents, and marketable securities		194,380			133,761			254,837		223,748
Trade accounts receivable, net of allowance of $6,189 and $4,126		191,161			265,028
Income taxes receivable		34,864			14,155
Accounts receivable								164,981		222,735
Unbilled receivables								153,657		158,898
Other current assets		17,679			12,188			50,692		41,135

Total current assets		438,084			425,132			624,167		646,516
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
Long-term unbilled receivables								180,077		160,708
Goodwill		72,941			73,164			73,017		72,952
Other long-term assets								128,694		131,391

Total assets	$	665,070		$	654,656		$	1,005,955	$	1,011,567

Liabilities and Stockholders’ Equity
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	12,535		$	14,414		$	12,175	$	17,370
Accrued expenses		39,681			36,751			48,278		45,508
Accrued compensation and related expenses		53,869			60,660			44,093		66,040
Deferred revenue		160,931			175,647			175,586		166,297

Total current liabilities		267,016			287,472			280,132		295,215
Income taxes payable		4,774			4,263
Long-term deferred revenue		6,130			10,989
Deferred income tax liabilities								39,932		38,463
Other long-term liabilities		15,449			16,043			23,768		23,652

Total liabilities		293,369			318,767			343,832		357,330

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
Common stock, 200,000 shares authorized; 78,546 shares and 78,081 issued and outstanding at March 31, 2018 and December 31, 2017, respectively								785		781
Additionalpaid-in capital		146,728			143,903			145,962		152,097
Retained earnings		227,953			198,315			517,893		508,051
Accumulated other comprehensive loss		(3,758	)		(7,095	)		(2,517)		(6,692)

Total stockholders’ equity		371,701			335,889			662,123		654,237

Total liabilities and stockholders’ equity	$	665,070		$	654,656		$	1,005,955	$	1,011,567

⁽¹⁾

The Company adopted the new revenue recognition standard (“ASC 606”) on January 1, 2018 and has adjusted prior periods to conform. See Note 2. “New Accounting Pronouncements” for additional information.

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,						Three Months Ended March 31,
	2017			2016			2017			2016			2018		2017
Revenue:
															As Adjusted⁽¹⁾
Revenue
Software license	$	41,793		$	68,833		$	195,220		$	207,849		$	87,773	$	127,008
Maintenance		62,204			55,038			180,759			163,174			64,525		58,713
Services		75,818			58,931			225,063			179,633			82,884		70,588

Total revenue		179,815			182,802			601,042			550,656			235,182		256,309

Cost of revenue:
Cost of revenue
Software license		1,276			1,313			3,826			3,646			1,255		1,300
Maintenance		6,716			6,659			20,945			18,889			6,082		7,218
Services		61,739			52,465			180,925			154,512			68,277		59,572

Total cost of revenue		69,731			60,437			205,696			177,047			75,614		68,090

Gross profit		110,084			122,365			395,346			373,609			159,568		188,219

Operating expenses:
Operating expenses
Selling and marketing		70,209			67,032			217,384			202,126			88,383		69,681
Research and development		41,031			38,036			121,089			108,530			46,785		40,296
General and administrative		13,133			11,725			38,174			34,067			16,464		12,335
Acquisition-related		—			74			—			2,903

Total operating expenses		124,373			116,867			376,647			347,626			151,632		122,312

(Loss)/income from operations		(14,289	)		5,498			18,699			25,983
Income from operations														7,936		65,907

Foreign currency transaction (loss)/gain		(552	)		1,082			(793	)		2,764			(1,085)		745
Interest income, net		144			172			470			650			764		205
Other income/(expense), net		—			(1,237	)		287			(4,891	)		363		(279)

(Loss)/income before (benefit)/provision for income taxes		(14,697	)		5,515			18,663			24,506
Income before (benefit)/provision for income taxes														7,978		66,578
(Benefit)/provision for income taxes		(12,885	)		2,214			(17,952	)		6,269			(4,222)		13,615

Net (loss)/income	$	(1,812	)	$	3,301		$	36,615		$	18,237
Net income													$	12,200	$	52,963

(Loss)/earnings per share:
Earnings per share
Basic		(0.03	)		0.04			0.47			0.24		$	0.16	$	0.69
Diluted		(0.03	)		0.04			0.44			0.23		$	0.15	$	0.65
Weighted-average number of common shares outstanding:
Weighted-average number of common shares outstanding
Basic		77,691			76,278			77,258			76,323			78,236		76,761
Diluted		77,691			79,548			82,717			79,401			83,102		81,875
Cash dividends declared per share	$	0.03		$	0.03		$	0.09		$	0.09		$	0.03	$	0.03

⁽¹⁾

The Company adopted ASC 606 on January 1, 2018 and has adjusted prior periods to conform. See Note 2. “New Accounting Pronouncements” for additional information.

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




   Three Months Ended
March 31,
   2018 2017


As Adjusted⁽¹⁾
Net income
   $ 12,200 $ 52,963
Other comprehensive income, net of tax

Unrealized (loss)/gain onavailable-for-sale marketable securities, net of tax
   (188) 127
Foreign currency translation adjustments
   4,363 2,229


  Total other comprehensive income, net of tax
   4,175 2,356


Comprehensive income
   $             16,375 $             55,319


⁽¹⁾ The Company adopted ASC 606 on January 1, 2018 and has adjusted prior periods to conform. See Note 2. “New Accounting Pronouncements” for additional information.
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


   Three Months Ended
March 31,
   2018 2017


As Adjusted⁽¹⁾
Operating activities:

Net income
   $ 12,200   $ 52,963
Adjustments to reconcile net income to cash provided by operating activities:

  Change in operating assets and liabilities, net
   19,591   (47,555)
  Stock-based compensation expense
   15,109   12,508
  Depreciation and amortization of intangible assets
   6,145   6,088
  Othernon-cash
   2,610   8,440


     Cash provided by operating activities
   55,655   32,444
Investing activities:

Purchases of investments
   (35,204) (3,322)
Proceeds from maturities and called investments
   5,995   2,300
Other
   (2,069) (2,705)


     Cash used in investing activities
   (31,278) (3,727)
Financing activities:

Dividend payments to shareholders
   (2,344) (2,298)
Common stock repurchases
   (20,708) (13,696)


     Cash used in financing activities
   (23,052) (15,994)
Effect of exchange rates on cash and cash equivalents
   2,186   521


Net increase in cash and cash equivalents
   3,511   13,244
Cash and cash equivalents, beginning of period
   162,279   70,594


Cash and cash equivalents, end of period
   $             165,790   $             83,838


⁽¹⁾ The Company adopted ASC 606 on January 1, 2018 and has adjusted prior periods to conform. See Note 2. “New Accounting Pronouncements” for additional information.
See notes to unaudited condensed consolidated financial statements.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form10-K for the year ended December 31, ~~2016.~~2017.
On January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the full retrospective method which required each prior reporting period presented to be adjusted to reflect the application of this ASU. See Note 2. “New Accounting Pronouncements” for additional information.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2017.~~2018.
2. NEW ACCOUNTING PRONOUNCEMENTS
~~Stock-Based Compensation~~
~~In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2017-09~~ “Stock Compensation (Topic 718), Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date for the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
Financial Instruments
In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ASUNo. 2016-13, “Financial ~~Instruments—~~Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including ~~trade~~ accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities andright-of-use assets upon adoption with no material impact to its results of operations and cash flows.
~~Revenue~~ASC 606 and ASC340-40
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”).~~The Company adopted ASC 606 ~~requires entities to apportion consideration from contracts to performance obligations~~and ASC340-40 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~~January 1, 2018 using the full retrospective ~~adoption model, effective January 1, 2018. The Company’s quarterly results beginning with~~method, which required the ~~quarter ending March 31, 2018 and comparative~~Company to retrospectively adjust the prior periods ~~will be compliant with~~presented.
The most significant impacts of adopting ASC ~~606. The Company’s Annual Report on Form~~606 and ASC~~10-K~~340-40 ~~for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.~~were as follows:
• Perpetual licenses with extended payment terms and term licenses- Revenue from perpetual license with extended payment terms and term license is now recognized when control is transferred to the client, the point in time when the client can use and benefit from the license. Previously the Company recognized revenue over the term of the agreements as payments became due or earlier if prepaid. Any unrecognized license revenue from these arrangements is recognized in the period that control transfers, as either a cumulative adjustment to retained earnings as of December 31, 2015 or as revenue in periods thereafter. Unbilled receivables in the Company’s unaudited condensed consolidated balance sheets increased significantly due to the revenue from perpetual license with extended payment terms and term license being recognized prior to amounts billed, or prepaid by, clients.
• Allocation of future credits and significant discounts - The perpetual or term licenses delivered are a separate performance obligation which now requires us to allocate any future credits and discounts to the performance obligations in the arrangement based upon their relative stand-alone selling prices.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

• Deferred contract costs - Sales incentive programs and other incremental and recoverable costs to obtain a contract were previously expensed when incurred. ASC340-40 requires these costs to be recognized as an asset when incurred and to be expensed over the period of expected benefit, which is on average five years. This change primarily impacts the Company’s contracts related to multi-year cloud offerings, maintenance on term and perpetual licenses, and those long-term term and perpetual licenses with client usage rights that increase over time.
~~The Company has made significant progress~~
• Taxes - The corresponding effect on tax balances in relation to all of the above impacts has also been recognized.
For additional information on ~~quantifying~~ the ~~impact of its adoption and identifying necessary changes to our~~Company’s accounting policies ~~processes, systems, and controls.~~
~~The Company expects the following impacts:~~
~~Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term~~as a result of the ~~agreement as payments become due or earlier if prepaid, provided all other criteria for revenue recognition have been met, and any corresponding maintenance over the term of the agreement. The~~ adoption of ASC 606 ~~will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term~~ and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the customer. Any unrecognized license revenue from these arrangements, included in deferred revenue at December 31, 2015, will not be recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016ASC340-40 see Note 4. “Receivables, Contract Assets, and ~~2017 will be recognized in full in the year that control~~Deferred Revenue”, Note 5. “Deferred Contract Costs”, and Note 9. “Revenue”.
The impact 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 termadoption ASC 606 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~~ASC340-40 on the Company’s unaudited condensed consolidated balance ~~sheet.~~
sheet and unaudited condensed consolidated statement of operations is:

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.
December 31, 2017
(in thousands)     Previously reported               Adjustments                     As adjusted
Accounts receivable and unbilled receivables
$ 248,331 $ 133,302 $ 381,633
Contract assets
— 914 914
Long-term unbilled receivables
— 160,708 160,708
Deferred income taxes
57,127 (42,887) 14,240
Deferred contract costs
— 37,924 37,924
Other assets⁽¹⁾
416,148 — 416,148

Total Assets
721,606 289,961 1,011,567

Deferred revenue
195,073 (28,776) 166,297
Long-term deferred revenue
6,591 (2,885) 3,706
Deferred income tax liabilities
— 38,463 38,463
Other liabilities⁽²⁾
148,864 — 148,864

Total liabilities
350,528 6,802 357,330
Foreign currency translation adjustments
(3,494) (2,966) (6,460)
Retained earnings
221,926 286,125 508,051
Other equity⁽³⁾
152,646 — 152,646

Total stockholders’ equity
371,078 283,159 654,237

Total liabilities and stockholders’ equity
$         721,606 $         289,961 $         1,011,567

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.
⁽¹⁾ Includes cash and cash equivalents, marketable securities, income taxes receivable, other current assets, property and equipment, intangible assets, goodwill, and other long-term assets (as reflected in the consolidated balance sheets in the Annual Report on Form10-K for the year ended December 31, 2017).
⁽²⁾ Includes accounts payable, accrued expenses, accrued compensation and related expenses, income taxes payable, and other long-term liabilities (as reflected in the consolidated balance sheets in the Annual Report on Form10-K for the year ended December 31, 2017).
⁽³⁾ Includes common stock, additionalpaid-in capital, and net unrealized loss onavailable-for-sale marketable securities (as reflected in the consolidated balance sheets in the Annual Report on Form10-K for the year ended December 31, 2017).
Sales commissions and other third party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. As a practical expedient, if the term of the contract is one year or less, the Company will expense these costs as incurred. The Company expects this change to impact its multi-year cloud offerings and term and perpetual licenses with additional rights of use that extend beyond one year.
ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract modifications are recognized currently.
~~There will be a corresponding effect on tax liabilities in relation to all of the above impacts.~~
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended
March 31, 2017
(in thousands, except per share amounts)     Previously reported             Adjustments                   As adjusted
Revenue:

Software license
$           92,390 $         34,618 $         127,008
Maintenance
58,965 (252) 58,713
Services
71,892 (1,304) 70,588

  Total revenue
223,247 33,062 256,309

Cost of revenue:

Software license
1,300 — 1,300
Maintenance
7,218 — 7,218
Services
59,572 — 59,572

  Total cost of revenue
68,090 — 68,090

Gross profit
155,157 33,062 188,219

Operating expenses:

Selling and marketing
71,288 (1,607 ) 69,681
Research and development
40,296 — 40,296
General and administrative
12,335 — 12,335

  Total operating expenses
123,919 (1,607 ) 122,312

Income from operations
31,238 34,669 65,907

Foreign currency transaction gain
676 69 745
Interest income, net
165 40 205
Other expense, net
(279) — (279)

Income before provision for income taxes
31,800 34,778 66,578
Provision for income taxes
4,779 8,836 13,615

  Net income
$ 27,021 $ 25,942 $ 52,963

Earnings per share:

Basic
$ 0.35 $ 0.69

Diluted
$ 0.33 $ 0.65

Weighted-average number of common shares outstanding:

Basic
76,761 76,761
Diluted
81,875 81,875
Adoption of ASC 606 had no impact on total cash from or used in operating, financing, or investing activities in the Company’s unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2017.
3. MARKETABLE SECURITIES
~~The Company’s marketable securities are as follows:~~
   March 31, 2018
(in thousands)        Amortized Cost            Unrealized Gains            Unrealized Losses                Fair Value
Municipal bonds
   $ 50,782    $ —    $ (191)    $ 50,591
Corporate bonds
   38,761    1    (306)    38,456








   $ 89,543    $ 1    $ (497)    $ 89,047








   December 31, 2017
(in thousands)        Amortized Cost            Unrealized Gains            Unrealized Losses                Fair Value
Municipal bonds
   $ 32,996    $ —    $ (148)    $ 32,848
Corporate bonds
   28,757    1    (137)    28,621








   $ 61,753    $ 1    $ (285)    $ 61,469








PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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,~~March 31, 2018, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.
As of ~~September 30, 2017,~~March 31, 2018, remaining maturities of marketable ~~debt~~ securities ranged from ~~October 2017~~May 2018 to ~~September 2020,~~February 2021, with a weighted-average remaining maturity of approximately ~~14 months.~~1.4 years.
4. ~~DERIVATIVE INSTRUMENTS~~RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
~~In May~~Receivables
(in thousands)

             March 31,
2018          December 31,
2017
Accounts receivable
   $         164,981    $         222,735
Unbilled receivables
   153,657    158,898
Long-term unbilled receivables
   180,077    160,708




   Total receivables
   $ 498,715    $ 542,341




Unbilled receivables is the amount due from clients where the only condition on the right of payment is the passage of time. The Company regularly reassesses receivables for collectability. As of March 31, 2018 and December 31, 2017, the ~~Company discontinued its forward~~allowance for doubtful accounts was not material.
Long-term unbilled receivables are expected to be billed as follows:
(in thousands)

           March 31,
2018
2019
   $         82,518
2020
   58,433
2021
   31,129
2022 and thereafter
   7,997


   $ 180,077


Contract assets and deferred revenue
(in thousands)

             March 31,
2018       December 31,
2017
Contract assets⁽¹⁾
   $ 788 $ 914
Deferred revenue
   175,586 166,297
Long-term deferred revenue⁽²⁾
   $ 3,277 $ 3,706
⁽¹⁾Included in other current assets in the unaudited condensed consolidated balance sheets.
⁽²⁾ Included in other long-term liabilities in the unaudited condensed consolidated balance sheets.
Contract assets and deferred revenue are presented net at the contract level for each reporting period. Contract assets are unbilled amounts resulting from client contracts ~~program; however, it will continue~~where revenue recognized exceeds the amount billed to ~~evaluate periodically its foreign exchange exposures~~the client and ~~mayre-initiate~~ ~~this program if it~~the right to payment is ~~deemed necessary.~~subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition.
The ~~Company has historically used foreign currency forward contracts (“forward contracts”)~~change in deferred revenue in the three months ended March 31, 2018, excluding the impact of the netting of contract assets and deferred revenue, was primarily due to ~~hedge its exposure to fluctuations~~new billings in ~~foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable,~~advance of revenue recognition and ~~intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary.~~
At$101.6 million of revenue recognized that was included in deferred revenue at December 31, ~~2016, the total notional value~~2017.
Major clients
No client represented 10% or more of the Company’s ~~outstanding forward~~total receivables as of March 31, 2018 or December 31, 2017.
5. DEFERRED CONTRACT COSTS
Sales incentives paid by the Company are considered incremental and recoverable costs of obtaining a contract with a client. These costs are deferred, as a long-term asset, and then amortized using the straight-line method over the period of benefit which is on average five years. The Company determined the period of benefit by taking into consideration client 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.~~
technology, and other factors. The Company ~~had forward contracts outstanding with total notional values~~utilizes a practical expedient available under ASC 606 to expense costs to obtain a contract as ~~of September 30, 2016 as follows:~~incurred when the original

(in thousands)
Euro
   € 21,810
British pound
   £ 5,919
Australian dollar
   A$     19,515
United States dollar
   $ 59,450
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
amortization period is one year or less. During the three months ended March 31, 2018 and 2017, impairment of deferred contract costs was not material.

(in thousands)

    March 31,
2018

    December 31,
2017
Deferred contract costs⁽¹⁾
$                        39,781   $                        37,924

⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheets.

Amortization of deferred contract costs was as follows:

                Three Months Ended
March 31,
(in thousands)
        2018

        2017
Amortization of deferred contract costs⁽¹⁾
$3,789 $2,594
⁽¹⁾ Included in selling and marketing expenses in the unaudited condensed consolidated statement of operations.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The ~~income statement impact~~changes in the carrying amount of ~~the Company’s outstanding forward contracts and foreign currency transactions was~~goodwill were 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 )








(in thousands)         Three Months Ended
March 31,
2018
Balance as of January 1,
$ 72,952
Purchase price adjustments to goodwill
—
Currency translation adjustments
65
Balance as of March 31,
$ 73,017
5.Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives as follows:

March 31, 2018
(in thousands)
        Useful Lives

Cost

Accumulated
Amortization

Net Book Value⁽¹⁾
Client-related intangibles
9-10 years $                63,197 $                (46,456) $                16,741
Technology
7-10 years 58,942 (46,603) 12,339
Other intangibles
— 5,361 (5,361) —

$              127,500 $                (98,420) $                29,080

⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheet.

December 31, 2017
(in thousands)
        Useful Lives

Cost

Accumulated
Amortization

Net Book Value⁽¹⁾
Client-related intangibles
9-10 years $                63,164 $                (44,835) $                18,329
Technology
7-10 years 58,942 (45,372) 13,570
Other intangibles
— 5,361 (5,361) —

$              127,467 $                (95,568) $                31,899

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheets.
Amortization of intangibles assets is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:
Three Months Ended
March 31,
   (in thousands) 2018 2017

   Cost of revenue

$

                      1,232

$

                      1,334

   Selling and marketing
1,605 1,866

$                 2,837 $                 3,200

7. ACCRUED EXPENSES
   (in thousands) March 31,
2018 December 31,
2017

   Outside professional services

$

                    15,152

$

                    14,468

   Income and other taxes
7,272 7,420
   Marketing and sales program expenses
8,724 6,444
   Dividends payable
2,358 2,344
   Employee-related expenses
5,091 4,065
   Other
9,681 10,767

$ 48,278 $ 45,508

8. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company records its ~~money market funds,~~cash equivalents, marketable securities, and ~~forward contracts~~investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: ~~(Level 1)~~
Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; ~~(Level 2)~~
Level 2 - significant other inputs that are observable either directly or indirectly; and ~~(Level 3)~~
Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s cash equivalents are composed of money market funds and time deposits which are classified ~~within~~as Level 1 ofand Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s ~~foreign currency forward contracts, which were all~~investments in privately-held companies are classified within Level 23 of the fair value hierarchy and are valued ~~based on the notional amounts~~using model-based techniques, including option pricing models and ~~rates under the contracts and observable market inputs such as currency exchange rates and credit risk.~~ discounted cash flow models.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between ~~Level 1 and Level 2~~levels during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

   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
March 31, 2018
        Level 1                 Level 2                 Level 3                 Total
Cash equivalents
$                     130   $                     30,072   $                     —   $                     30,202
Marketable securities:

Municipal bonds
$ —   $ 50,591   $ —   $ 50,591
Corporate bonds
—   38,456   —   38,456

Total marketable securities
$ —   $ 89,047   $ —   $ 89,047
Investments in privately-held companies⁽¹⁾
$ —   $ —   $ 2,060   $ 2,060

  ⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheets.

December 31, 2017
        Level 1                 Level 2                 Level 3                 Total
Cash equivalents
$ 2,720   $ 40,051   $ —   $ 42,771
Marketable securities:

Municipal bonds
$ —   $ 32,848   $ —   $ 32,848
Corporate bonds
—   28,621   —   28,621

Total marketable securities
$ —   $ 61,469   $ —   $ 61,469
  Investments in privately-held companies⁽¹⁾
$ —   $ —   $ 1,030   $ 1,030

  ⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheets.

For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates their fair value due to the relatively short maturity of these items.
Assets Measured at Fair Value on a Nonrecurring Basis
Assets recorded at fair value on a nonrecurring basis, ~~such as~~including property and equipment and intangible assets, are recognized at fair value when they are impaired. During the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ 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~~9. REVENUE
Revenue policy
The Company’s revenue is derived from sales of software licenses, maintenance fees related to the Company’s software licenses, and services.

(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~~
License revenue is primarily ~~relate~~derived from sales of the Company’s software applications and Pega Platform.
Maintenance revenue includes revenue from client support including software upgrades, on a whenand-if available basis, telephone support, and bug fixes or patches.
Cloud revenue is derived from sales of the Company’s hosted Pega Platform and software application environments.
Consulting revenue is primarily related to ~~services earned under time and materials arrangements and to~~new license ~~maintenance,~~implementations.
Contracts with multiple performance obligations
The Company’s license and cloud arrangements often contain multiple performance obligations, including maintenance, consulting, and training. For contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. If the transaction price contains discounts or expects to provide a future price concession, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price will be estimated and recognized in revenue as the Company satisfies its performance obligations to the extent it is probable that ~~have commenced~~a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional products or ~~been delivered~~services, the Company assesses whether or not any discount on the products and services is in excess of ~~scheduled invoicing.~~
~~7. GOODWILL AND OTHER INTANGIBLE ASSETS~~
~~The changes in the carrying amount of goodwill~~levels normally available to similar clients and, if so, accounts for ~~the nine months ended September 30, 2017~~that discount as ~~follows:~~an additional performance obligation.

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


Balance as of September 30,
   $ 72,941


PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Software licenses
The Company has concluded that its software licenses are distinct performance obligations as the client can benefit from the software on its own. Software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. The Company’s license arrangements generally contain multiple performance obligations, including consulting, training, and maintenance. Stand-alone selling price for software licenses is determined using the residual approach. The Company utilizes the residual approach as license performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company evaluates whether the residual approach is appropriate for its license and cloud performance obligations when sold with other performance obligations. As a result, if the standalone selling price analysis illustrates that the license and cloud performance obligations are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.
Term license fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the license agreement, which is typically three to five years and may be renewed for additional terms at the client’s option. Perpetual license fees are usually payable when the contract is executed. The Company recognizes software license revenue when control is transferred, and the corresponding difference between the amount invoiced and recognized as revenue is recorded as unbilled receivables, as the payment of consideration is subject only to the passage of time.
Maintenance
Maintenance revenue includes revenue from client support and related professional services. Client support includes software upgrades on a whenand-if available basis, telephone support, and bug fixes or patches. Maintenance is priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price of maintenance based on this pricing relationship, which has remained constant within a narrow range, and observable data from standalone sales of maintenance, along with all other observable data.
The Company has identified two separate distinct performance obligations of maintenance:

1. software upgrades and updates; and
~~Intangible assets~~
2. technical support.
These performance obligations are ~~recorded at cost~~distinct within the contract and, although they are ~~amortized using~~not sold separately, the ~~straight-line method~~components are not essential to the functionality of the other components. Each of the performance obligations included in maintenance revenue is a stand-alone obligation that is recognized over ~~their estimated useful lives as follows:~~the passage of the contractual term, which is typically one year. Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.
Services

(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~~The Company’s services revenue is comprised of ~~intangibles assets~~consulting and training, including software license implementations, training, reimbursable expenses, and cloud which is ~~reflected in~~derived from sales of the Company’s ~~unaudited condensed consolidated statements~~hosted Pega Platform and software application environments. The Company has concluded that most services are distinct performance obligations. Consulting may be provided on a stand-alone basis or bundled with license and software maintenance services.
The stand-alone selling price for consulting in time and materials contracts is determined by observable prices in similar transactions without multiple performance obligations and recognized as revenue as the services are performed. Fees for time and materials consulting contracts are usually payable shortly after the service is provided.
The Company estimates the stand-alone selling price for fixed price services based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price services is recognized over time as the services are provided. Fees for fixed price services consulting contracts are usually payable as contract milestones are achieved.
The stand-alone selling price of ~~operations~~cloud sales of production environments is determined based on the residual approach when sold with services and is recognized over the term of the service. The Company utilizes the residual approach 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~~cloud performance obligations are sold for a broad range of ~~September 30, 2017~~amounts (the selling price is ~~as follows:~~highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. The stand-alone selling price for cloud sales of development and testing environments is developed using observable prices in similar transactions without multiple performance obligations and is recognized over time over the term of the service. Cloud fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

(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




PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contract modifications
The Company sometimes enters into amendments to previously executed contracts which constitute contract modifications. The Company assesses each of these contract modifications to determine:
1. If the additional products and services are distinct from the products and services in the original arrangement, and
2. If the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.
A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:
1. a prospective basis as a termination of the existing contract and the creation of a new contract; or
2. a cumulativecatch-up basis.
Geographic revenue
Three Months Ended
March 31,
(in thousands) 2018 2017
U.S.
$         113,985         48% $         169,662         67%
Other Americas
17,715 8% 10,406 4%
United Kingdom
26,094 11% 26,342 10%
Europe, Middle East, and Africa excluding the United Kingdom
31,826 14% 24,211 9%
Asia-Pacific
45,562 19% 25,688 10%

Total Revenue
$ 235,182 100% $ 256,309 100%

Major products and services
Three Months Ended
March 31,
(in thousands)             2018                         2017
Perpetual license
$                 23,078 $                 37,899
Term license
64,695 89,109

Performance obligations transferred at a point in time
87,773 127,008
Maintenance
64,525 58,713
Cloud
15,582 10,402
Consulting and training
67,302 60,186

Performance obligations transferred over time
147,409 129,301

Total Revenue
$ 235,182 $ 256,309

During the three months ended March 31, 2018 and 2017, there were no material changes in the Company’s estimate of variable fees. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Transaction price allocated to remaining performance obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized. Transaction price on remaining performance obligations was $291 million as of March 31, 2018, of which the Company expects to recognize $198.3 million prior to January 1, 2020. These amounts do not include contracts that have an original expected duration of one year or less. For reporting periods ending prior to January 1, 2018, the date of initial adoption of ASC 606, the Company has elected the practical expedient and not compiled and disclosed the amount of the transaction price allocated to the remaining performance obligations.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~9. DEFERRED REVENUE~~Major clients
Clients accounting for 10% or more of the Company’s total revenue were as follows:

(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




               Three Months Ended
March 31,
(in thousands)    2018 2017


Total revenue
   $          235,182 $           256,309
Client A
   * 14%
Client B
   * 11%
  *Client accounted for less than 10% of total revenue.
10. STOCK-BASED COMPENSATION
~~Stock-based compensation expense is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:~~Expense

   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.~~
                   Three Months Ended
March 31,
(in thousands)    2018 2017
Cost of revenues
   $               3,701   $           3,622
Selling and marketing
   4,658   3,405
Research and development
   3,637   3,312
General and administrative
   3,113   2,169


   $ 15,109   $ 12,508


Income tax benefit
   $ (3,141) $ (3,815)
The Company recognizes ~~stock based~~stock-based compensation on the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of ~~September 30, 2017,~~March 31, 2018, the Company had, ~~approximately $56.8~~net of estimated forfeitures, $92.5 million of unrecognized stock-based compensation expense, ~~net of estimated forfeitures,~~ related to all unvested ~~RSUs~~restricted stock units (“RSUs”) and ~~unvested~~ stock options, ~~that is~~which was expected to be recognized over a weighted-average period of ~~2.1~~2.3 years.
Grants
The Company granted the following stock-based compensation awards:
               Three Months Ended
March 31,
(in thousands)            Shares             Total Fair Value
RSUs⁽¹⁾
   858 $                 49,600
Non-qualified stock options
   1,377 $ 24,700
⁽¹⁾ Includes approximately 0.1 million RSUs which were granted in connection with the election by certain employees to receive 50% of their 2018 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $8.2 million associated with this RSU grant is expected to be recognized over aone-year period beginning on the grant date.
RSU vestings and stock option exercises
During the three months ended March 31, 2018, 0.6 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. INCOME TAXES
Effective Tax Rate
The Company computes its (benefit)/provision for income taxes by applying the estimated annual effective tax rate to year to date income before (benefit)/provision for income taxes and adjusts for discrete tax items recorded in the period.
               Three Months Ended
March 31,
(Dollars in thousands)    2018 2017
(Benefit)/provision for income taxes
   $             (4,222)    $             13,615
Effective income tax rate
   (53)% 20%
During the three months ended March 31, 2018, the Company’s effective tax rate changed primarily due to the following factors:
excess tax benefits from stock-based compensation were disproportionately greater relative to income before (benefit)/provision for income taxes;
a decrease in the estimated annual effective income tax rate primarily due to the reduction of the U.S. statutory federal tax rate from 35% to 21% pursuant to the Tax Reform Act; and
an increase in U.S. research and development tax credits.
Tax Reform Act
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was enacted into law, which significantly changed U.S. tax law and included many provisions such as a reduction of the U.S. federal statutory tax rate, imposed aone-time transition tax on deemed repatriation of deferred foreign earnings, and included a provision to tax global intangiblelow-taxed income (“GILTI”) of foreign subsidiaries, a special tax deduction for foreign derived intangible income, and a base erosion anti-abuse tax measure (“BEAT”) that may tax payments between a U.S. corporation and its foreign subsidiaries, among other tax changes.
Under the SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recognized the provisional tax impacts in the three months ended December 31, 2017 that included $20.4 million of income tax expense tore-measure its net deferred tax assets to the 21% enacted rate. However, the Company has revised its provisional amount to reflect the impact of the retrospective adoption of ASC 606 and has recognized a $12.6 million income tax benefit for the remeasurement of its net deferred tax liabilities on a retrospective basis in the three months ended December 31, 2017.
The final amounts may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act.
The Tax Reform Act also provided for aone-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017. However, based on the Company’s provisional analysis performed as of that date, the Company does not expect to be subject to theone-time transition tax due to the Company’s foreign subsidiaries being in a net accumulated deficit position. During the three months ended March 31, 2018, the Company recognized no significant adjustments to these estimates.
The Tax Reform Act provides the following new anti-abuse provisions beginning in 2018:
The GILTI provisions require the Company to include in its U.S. income tax base foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax resulting from GILTI inclusions beginning in 2018. As of March 31, 2018, the Company has included an estimate of the effect of its GILTI provisions in its estimated annual effective tax rate. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.
The BEAT provisions in the Tax Reform Act impose an alternative minimum tax on taxpayers with substantial base-erosion payments. The Company’s preliminary assessment is that the Company will not be subject to the BEAT in 2018. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. ~~Certain shares related to some~~In periods of ~~the Company’s outstanding~~loss, all stock options and RSUs ~~were~~are excluded, ~~from the computation of diluted earnings per share because they were anti-dilutive in the periods presented, but could~~as their inclusion would be ~~dilutive in the future.~~
~~PEGASYSTEMS INC.~~
~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~
anti-dilutive.
The calculation of the ~~Company’s~~ basic and diluted earnings per share is as follows:

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

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








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








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








Diluted

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








Weighted-average effect of dilutive securities:

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








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








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








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








Outstanding stock options and RSUs excluded as impact would be anti-dilutive
   7,232    296    219    368
~~In periods of loss, all equity awards are excluded, as the inclusion of any equity awards would be anti-dilutive.~~
~~12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS~~
~~Geographic Information~~
Operating segments are defined as components of an enterprise, about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.
~~The Company develops and licenses software applications for customer engagement and its Pega~~^® Platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services—software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one reportable segment—Customer Engagement Solutions and one reporting unit.
~~The Company’s international revenue, based upon the clients’ location, is as follows:~~

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










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











Three Months Ended
March 31,
(in thousands, except per share amounts)
          2018

          2017
Basic

Net income
   $                12,200 $                52,963
Weighted-average common shares outstanding
   78,236 76,761


Earnings per share, basic
   $                    0.16 $                    0.69



Diluted

Net income
   $                12,200 $                52,963
Weighted-average effect of dilutive securities:

Stock options
   3,119 3,184
RSUs
   1,747 1,930


Effect of dilutive securities
   4,866 5,114


Weighted-average common shares outstanding, assuming dilution
   83,102 81,875


Earnings per share, diluted
   $                    0.15 $                    0.65



Outstanding anti-dilutive stock options and RSUs⁽¹⁾
   397 314

⁽¹⁾ ~~Includes Europe,~~Certain outstanding stock options and RSUs were excluded from the ~~Middle East and Africa, but excludes~~computation of diluted earnings per share because they were anti-dilutive in the ~~United Kingdom.~~period presented. These awards may be dilutive in the future.
~~PEGASYSTEMS INC.~~
~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~
~~Major Clients~~
~~Clients accounting for 10% or more of the Company’s total revenue were as follows:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017 2016    2017    2016
Total revenue
   $ 179,815 $ 182,802    $ 601,042    $ 550,656
Client A
   10.6 % *    *    *
* ~~Client accounted for less than 10% of total revenue.~~
~~Clients accounting for 10% or more of the Company’s total trade accounts receivable were as follows:~~

(in thousands)    September 30,
2017 December 31,
2016
Total trade accounts receivable
   197,350 269,154
Client A
   12.4 % *
* ~~Client accounted for less than 10% of total trade account receivable~~
~~ITEM 2.~~ ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~
~~Forward-Looking Statements~~
ITEM 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, ~~by the Company,~~ and the timing of revenue recognition ~~under license and cloud arrangements~~ and are described more completely in Part I of our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2017.
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services and the difficulty in predicting ~~the completion of product acceptance and other~~ factors affecting the timing of license revenue recognition; reliance on third party relationships; our beliefs and the ~~potential loss~~timing of ~~vendor specific objective evidence for~~the completion of our ~~consulting services;~~analysis regarding the impact of the Tax Cuts and Jobs Act of 2017, including its impact on income tax expense and deferred tax assets; the inherent risks associated with international operations and the continued uncertainties in ~~international economies;~~ the ~~Company’s~~global economy; our continued effort to market and sell both domestically and internationally; foreign currency exchange rates; the financial impact of any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of ~~the Company’s~~our growth. These risks, and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements, are described more completely in Part I of ~~the Company’s~~our Annual Report on Form10-K for the year ended December 31, ~~2016~~2017 as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
~~We have~~Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise ~~any~~these forward-looking statements whether as athe result of new information, future events or ~~risks. New information, future events or risks may cause the forward-looking events we discuss in this report not to occur or to materially change.~~otherwise.
~~Business overview~~BUSINESS OVERVIEW
We develop, market, license, and support software applications for ~~marketing, sales, service,~~customer engagement and ~~operations. In~~digital process automation, in addition ~~we license~~to licensing our Pega^® Platform application development product for clients that wish to build and extend their own applications. The Pega Platform ~~assists our clients~~and applications help connect enterprises to their customers in ~~building, deploying,~~real-time across channels, streamline business operations, and ~~evolving enterprise applications, creating an environment in which business and IT can collaborate~~adapt 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.meet changing requirements.
Our clients include Global 3000 companies and government agencies that seek to manage complex enterprise systems and customer service issues with greater agility and cost-effectiveness. Our strategy is to sell a client a series of licenses, each focused on a specific purpose or area of operations in support of longer term enterprise-wide digital transformation initiatives.
Our license revenue is primarily derived from sales of our applications and ~~our~~ Pega Platform. Our cloud revenue is derived from ~~the licensing of~~ our hosted software application and 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 ofWe adopted the new revenue ~~accounting~~recognition standard ~~(See~~(“ASC 606”) effective January 1, 2018 using the full retrospective method. See Note 2)2. “New Accounting Pronouncements” included in Item 1. “Unaudited Condensed Consolidated Financial Statements” for additional information.
(Dollars in thousands, except per share amounts) Three Months Ended
March 31,
        2018                 2017                         Change
Total revenue
$ 235,182 $ 256,309 $ (21,127 ) (8)%
Net income
$ 12,200 $ 52,963 $ (40,763 ) (77)%
Diluted earnings per share
$ 0.15 $ 0.65 $ (0.50 ) (77)%
Cash provided by operating activities
$ 55,655 $ 32,444 $ 23,211 72%
The decrease in total revenue in the ~~first quarter~~three months ended March 31, 2018 was primarily due to a large term license arrangement recognized in revenue in the three months ended March 31, 2017 and a shift in client preferences to cloud arrangements. Cloud arrangements are generally recognized in revenue over the term of ~~2018, we have started tracking~~ the cloud contract, as compared to other arrangements, which are generally recognized in revenue on the contract effective date.
Annual Contract Value (“ACV”)~~, a new performance measure.~~
~~Select Financial Metrics~~

(Dollars in thousands,
except per share amounts)
   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 Change 2017 2016 Change
Total revenue
   $ 179,815 $ 182,802 (2,987 ) (2 )% $ 601,042 $ 550,656 $ 50,386    9 %
Operating margin
   (8 )% 3 % 3 % 5 %
Diluted (loss)/earnings per share
   $ (0.03 ) $ 0.04 $ (0.07 ) (175 )% $ 0.44 $ 0.23 $ 0.21    91 %
Cash flow provided by operating activities
   113,926 20,556 93,370    454 %
~~Select Performance Metrics~~
~~Annual Contract Value (“ACV”)~~⁽¹⁾
The change in ACV measures the growth and predictability of future cash flows from committed term, ~~license,~~ cloud, and maintenance arrangements as of the end of the particular reporting period.
March 31,
(in thousands)         2018                 2017                         Change
Term and Cloud ACV
$ 236,025 $ 193,004 $ 43,021 22%
Maintenance ACV
258,100 234,852 $ 23,248 10%

Total ACV
$ 494,125 $ 427,856 $ 66,269 15%

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

~~Term~~The sum of the annual value of each term and ~~Cloud~~cloud contract in effect on such date, with the annual value of a term or cloud contract being equal to the total value of the contract divided by the total number of ~~committed contract~~ years of the contract.

~~Quarterly~~ Maintenance revenue reported for the ~~current three months~~quarter ended ~~period~~on such date, multiplied by 4.four.

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





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





~~Recurring Revenue~~
~~A measure of the predictability and repeatability of our revenue.~~

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

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



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



Recurring revenue as a percent of total revenue
   54 % 52 % 54 % 54 %
~~License and Cloud Backlog~~
~~A measure of the continued growth of our business as a result of future contractual commitments by our clients.~~
~~License and Cloud Backlog is the sum of the following two components:~~
~~Deferred license and cloud revenue as recorded on the Company’s balance sheet. (See Note 9 “Deferred Revenue”)~~
License and cloud contractual commitments, which are not recorded on our balance sheet because we have not yet invoiced our clients, nor have we recognized the associated revenue. (See “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources” contained elsewhere in this Quarterly Report on Form~~10-Q~~ ~~for additional information)~~
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 POLICES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the ~~U.S.~~United States (U.S.) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given available information.
~~There~~Revenue
We account for revenue in accordance with ASC 606. Our revenue recognition policies require us to make significant judgments and estimates.
Our clients’ contracts typically contain promises to transfer multiple products and services. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to the distinct performance obligations based on relative stand-alone selling price. We estimate stand-alone selling price based on the prices charged to clients, or by using information such as market conditions and other observable inputs. However, the selling price of our software licenses and cloud performance obligations are highly variable. Thus, we estimate stand-alone selling price for software licenses and cloud performance obligations using the residual approach, determined based on total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.
In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently and which portions must be deferred and recognized in future periods. We analyze various factors including, but not limited to, the selling price of undelivered services when sold on a stand-alone basis, our pricing policies, and contractual terms and conditions in helping us to make such judgments about revenue recognition. Changes in judgment on any of these factors could materially impact the timing and amount of revenue recognized in a given period.
Deferred Contract Costs
Sales incentives paid by us are considered incremental and recoverable costs of obtaining a contract with a client. These costs are deferred and then amortized over the period of benefit, which is on average five years. We determined the period of benefit by taking into consideration our client contracts, our technology, and other factors.
Except as described above, 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.~~ 2017.
For more information regarding our critical accounting policies, we encourage you to read the discussion contained in ~~Item 7 under~~ the ~~heading “Critical~~following locations:
“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22. “Significant Accounting Policies” ~~included~~ in ~~the notes to the Consolidated Financial~~Item 8. “Financial Statements and Supplementary Data” both of which are contained in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2017.
~~Results~~
Note 2. “New Accounting Pronouncements”, Note 4. “Receivables, Contract Assets, and Deferred Revenue”, and Note 9. “Revenue” contained in Item 1. “Unaudited Condensed Consolidated Financial Statements” of ~~Operations~~this Quarterly Reporting on Form10-Q for the three months ended March 31, 2018.
RESULTS OF OPERATIONS

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Total revenue
   $ 179,815 $ 182,802 $ (2,987 ) (2 )% $ 601,042 $ 550,656 $ 50,386 9 %
Gross profit
   $ 110,084 $ 122,365 $ (12,281 ) (10 )% $ 395,346 $ 373,609 $ 21,737 6 %
Total operating expenses
   $ 124,373 $ 116,867 $ 7,506 6 % $ 376,647 $ 347,626 $ 29,021 8 %
(Loss)/income from operations
   $ (14,289 ) $ 5,498 $ (19,787 ) (360 )% $ 18,699 $ 25,983 $ (7,284 ) (28 )%
Operating margin
   (8 )% 3 % 3 % 5 %
(Loss)/income before (benefit)/provision for income taxes
   $ (14,697 ) $ 5,515 $ (20,212 ) (366 )% $ 18,663 $ 24,506 $ (5,843 ) (24 )%
Three Months Ended
March 31,
(Dollars in thousands)         2018                 2017                          Change
Total revenue
$ 235,182 $ 256,309 $ (21,127 ) (8)%
Gross profit
$ 159,568 $ 188,219 $ (28,651 ) (15)%
Income from operations
$ 7,936 $ 65,907 $ (57,971 ) (88)%
Net income
$ 12,200 $ 52,963 $ (40,763 ) (77)%
Revenue
~~Revenue~~Software license
~~Software 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 and term license arrangements executed in a particular period varies based on clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed will generally result in license revenue being recognized over longer periods. Additionally, some of our perpetual license arrangements include extended payment terms or additional rights of use, which may also result in the recognition of revenue over longer periods.
(Dollars in thousands)    Three Months Ended
March 31,
                   2018                                  2017                                         Change
Perpetual license
   $ 23,078    26% $ 37,899    30%    $ (14,821 )         (39)%
Term license
   64,695    74% 89,109    70%    (24,414 ) (27)%



Total software license
   $             87,773    100% $             127,008    100%    $           (39,235 ) (31)%



The decrease in perpetual license revenue in the three months ended ~~September 30, 2017~~March 31, 2018 was primarily due to a decrease in the ~~average~~ value of perpetual arrangements executed ~~and a lower percentage of perpetual arrangements executed and recognized in revenue~~ in the ~~current period. The decrease in perpetual license revenue in the nine~~three months ended ~~September 30, 2017 was~~March 31, 2018 driven primarily ~~due~~by a shift in client preferences to ~~a lower percentage of perpetual arrangements executed and recognized in revenue.~~cloud arrangements.
The decrease in term license revenue in the three months ended ~~September 30, 2017~~March 31, 2018 was primarily due to a large term 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 and recognized in revenue in the three months ended March 31, ~~2016. If this term license arrangement was not prepaid~~2017 and ~~recognized~~a shift in ~~revenue in the three months ended March 31, 2016 term license revenue would have increased 26%.~~client preferences to cloud arrangements.
The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable perpetual arrangements not reflected in deferred revenue was $13.3 million as of September 30, 2017 compared to $3.9 million as of September 30, 2016.
The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable term and cloud arrangements not reflected in deferred revenue was $37.7 million as of September 30, 2017 compared to $26.7 million as of September 30, 2016. For additional information see “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources.”
Maintenance ~~revenue~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
March 31,
(Dollars in thousands)    2017    2016    Change 2017    2016    Change         2018                 2017                         Change
Maintenance
   $ 62,204    $ 55,038    $ 7,166    13 % $ 180,759    $ 163,174    $ 17,585    11 % $ 64,525 $ 58,713 $ 5,812    10%
The ~~increases were~~increase in maintenance revenue was primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates significantly in excess of 90%.
Services ~~revenue~~

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change                    2018                                    2017                                      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 %    $ 15,582 19% $ 10,402 15%    $ 5,180            50%
Training
   929    1 % 1,229    2 % (300 ) (24 )% 4,702    2 % 4,730    3 % (28 ) (1 )%
Consulting and training
   67,302 81% 60,186 85%    7,116    12%













Total services
   $ 75,818    100 % $ 58,931    100 % $ 16,887 29 % $ 225,063    100 % $ 179,633    100 % $ 45,430 25 %    $             82,884     100% $             70,588     100%    $         12,296    17%













~~Consulting services~~The increase in cloud revenue iswas primarily ~~generated from new license implementations.~~due to the continued growth of our cloud client base driven by a shift in client preferences to cloud arrangements.
The increase in consulting and training revenue was primarily due to higher billable hours during the three months ended March 31, 2018. Our consulting ~~services~~and training revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.
The increases in consulting services revenue were primarily due to higher billable hours during the three and nine months ended September 30, 2017 driven by a large project which began in the second half of 2016.
~~Cloud revenue represents revenue from our Pega Cloud offerings. The increases in cloud revenue were primarily due to continued growth of our cloud client base.~~
Gross profit

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change                    2018                                     2017                                     Change
Software license
   $ 40,517 $ 67,520 $ (27,003 ) (40 )% $ 191,394 $ 204,203 $ (12,809 ) (6 )%    $ 86,518    99%    $ 125,708    99%    $ (39,190 ) (31)%
Maintenance
   55,488 48,379 7,109 15 % 159,814 144,285 15,529 11 %    58,443    91%    51,495    88%    6,948         13 %
Cloud
   7,861    50%    4,669    45%    3,192 68 %
Consulting and training
   6,746    10%    6,347    11%    399 6 %





Services
   14,079 6,466 7,613 118 % 44,138 25,121 19,017 76 %    14,607    18%    11,016    16%    3,591 33 %







Total gross profit
   $ 110,084 $ 122,365 $ (12,281 ) (10 )% $ 395,346 $ 373,609 $ 21,737 6 %    $             159,568        68%    $             188,219        73%    $           (28,651 ) (15) %
Software license gross profit %
   97 % 98 % 98 % 98 %
Maintenance gross profit %
   89 % 88 % 88 % 88 %
Services gross profit %
   19 % 11 % 20 % 14 %







Total gross profit %
   61 % 67 % 66 % 68 %
The decrease in total gross profit in the three months ended ~~September 30, 2017~~March 31, 2018 was primarily due to a large term license arrangement recognized in revenue in the three months ended March 31, 2017. Additionally we have experienced a shift in client preferences to cloud arrangements, which are generally recognized in revenue over the ~~mix~~term of ~~license~~the cloud contract, as compared to other arrangements, ~~executed from perpetual to term licenses and an increase~~which are generally recognized in ~~lower margin services revenue.~~revenue on the contract effective date.
The increase in ~~total gross profit in the nine months ended September 30, 2017 was primarily due to increased total revenue.~~
~~The increases in service~~maintenance gross profit percent in the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 was driven by a ~~large project which began~~$0.5 million decrease in client support expenses as we transferred client support resources to support our growing cloud business.
The increase in cloud gross profit percent in the ~~second half of 2016~~three months ended March 31, 2018 was driven by cost efficiency gains as our cloud business continues to grow and ~~several additional large projects for which costs were recognized~~scale, partially offset by a $0.5 million increase in ~~2016 but whose associated revenue was not recognized until after September 30, 2016.~~client support expenses as we expanded our cloud client support function to sustain our growing cloud business.
If we had transferred these resources on January 1, 2017, the change in maintenance and cloud gross profit and gross profit percent would have been as follows:
                   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
Maintenance
   $             58,443          91%    $             51,995          89%    $             6,448                12%
Cloud
   $ 7,861    50%    $ 4,169    40%    $ 3,692    89%
Operating expenses
~~Operating expenses~~
Selling and marketing

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,    Change
(Dollars in thousands)    2017 2016 Change 2017 2016 Change    2018    2017
Selling and marketing
   $ 70,209 $ 67,032 $ 3,177    5 % $ 217,384 $ 202,126 $ 15,258    8 %    $             88,383       $             69,681       $             18,702                    27%
As a percent of total revenue
   39 % 37 %    36 % 37 %       38%    27%
Selling and marketing headcount, end of period
      934 875 59    7 %    1,082       900       182    20%
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~~client-related intangibles.
The increase in the three months ended ~~September 30, 2017~~March 31, 2018 was primarily due to an increase in compensation and benefits of ~~$1.8~~$11.6 million, driven by increased headcount and equity compensation, ~~partially offset by a decrease in sales~~amortization of deferred commissions, increased spending on event marketing and digital advertising, and the expenses associated with ~~the lower value of new license arrangements executed during the three months ended September 30, 2017.~~
~~The increase~~assigning contract negotiation resources to drive efficiencies in the ~~nine months ended September 30, 2017 was primarily due to an increase~~sales process in ~~compensation and benefits~~support 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.our long-term growth.
The increase in headcount reflects our efforts to increase our sales capacity to target new accounts in existing industries, as well as to expand coverage in new industries and geographies, and to increase the number of sales opportunities.
Research and development

   Three Months Ended
September 30, Nine Months Ended
September 30,
(Dollars in thousands)    2017 2016 Change 2017 2016 Change
Research and development
   $ 41,031 $ 38,036 $ 2,995    8 % $ 121,089 $ 108,530 $ 12,559    12 %
As a percent of total revenue
   23 % 21 %    20 % 20 %
Research and Development headcount, end of period
      1,474 1,437 37    3 %
   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
Research and development
   $             46,785       $             40,296       $             6,489                    16%
As a percent of total revenue
   20%    16%
Research and Development headcount, end of period
   1,602       1,441       161    11%
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 the integration of acquired technologies.
The ~~increases~~increase in the three ~~and nine~~ months ended ~~September 30, 2017 were~~March 31, 2018 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$2.9~~$4.6 million ~~and $12.6 million, respectively,~~ attributable to increased headcount, and ~~equity compensation.~~the expansion of our application development team to support the continued development of our software.
General and administrative

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,    Change
(Dollars in thousands)    2017 2016 Change 2017 2016 Change    2018    2017
General and administrative
   $ 13,133 $ 11,725 $ 1,408    12 % $ 38,174 $ 34,067 $ 4,107    12 %    $               16,464       $               12,335       $               4,129               33 %
As a percent of total revenue
   7 % 6 %    6 % 6 %       7%    5%
General and administrative headcount, end of period
      407 371 36    10 %    299       384       (85 ) (22)%
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 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~~increase in the three ~~and nine~~ months ended ~~September 30, 2017 were~~March 31, 2018 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$0.4~~$1.1 million, ~~and $4 million, respectively,~~ attributable to ~~increased headcount~~equity compensation, and ~~equity compensation. The~~an increase ~~in the nine months ended September 30, 2017 was partially offset by a decrease~~ of ~~$1.5~~$1 million in legal fees. The decrease in headcount reflects the realignment of contract negotiation and product development resources to augment our selling and marketing and research development functions, respectively.
Stock-based compensation

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,    Change
(in thousands)    2017 2016 Change 2017 2016 Change    2018    2017
Cost of revenues
   $ 3,613 $ 3,117 $ 496 16 % $ 10,913 $ 8,711 $ 2,202 25 %    $                   3,701    $                   3,622    $                     79                    2 %
Selling and marketing
   3,976 3,468 508 15 % 11,482 9,395 2,087 22 %    4,658    3,405    1,253    37 %
Research and development
   3,420 2,260 1,160 51 % 10,306 7,480 2,826 38 %    3,637    3,312    325    10 %
General and administrative
   2,480 1,983 497 25 % 7,228 4,706 2,522 54 %    3,113    2,169    944    44 %
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 %
   $ 15,109    $ 12,508    $ 2,601    21 %







Income tax benefit
   $ (4,129 ) $ (3,227 ) $ (902 ) 28 % $ (12,231 ) $ (8,917 ) $ (3,314 ) 37 %    $ (3,141)    $ (3,815)    $ 674    (18)%
The ~~increases were~~increase was primarily due to the increased value of our annual periodic equity awards granted in March ~~2016~~2018 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 income/(expense)~~/income,~~, net

   Three Months Ended
September 30, Nine Months Ended
September 30,    Three Months Ended
March 31,    Change
(Dollars in thousands)    2017 2016 Change 2017 2016 Change    2018    2017
Foreign currency transaction (loss)/gain
   $ (552 ) $ 1,082 $ (1,634 ) n/m $ (793 ) $ 2,764 $ (3,557 ) n/m    $                   (1,085)    $                   745    $               (1,830)                    n/m
Interest income, net
   144 172 $ (28 ) (16 )% 470 650 (180 ) (28 )%    764    205    559    273 %
Other (expense)/income, net
   —   (1,237 ) $ 1,237 (100 )% 287 (4,891 ) 5,178 n/m
Other income/(expense), net
   363    (279)    642    n/m







   $ (408 ) $ 17 $ (425 ) n/m $ (36 ) $ (1,477 ) $ 1,441 (98 )%    $ 42    $ 671    $ (629)    (94)%







n/m - not meaningful
~~In May 2017, we discontinued our forward contracts program; however, we will continue~~The change in foreign currency transaction (loss)/gain is primarily due to ~~evaluate periodically our~~unrealized losses on foreign ~~exchange exposures and mayre-initiate~~ ~~this program if it is deemed necessary.~~
~~Historically,~~currency denominated receivables. The adoption of ASC 606 materially increased the unbilled receivables we have ~~used foreign currency forward contracts (“forward contracts”) to hedge our exposure to~~recorded, which has increased the impact of fluctuations in foreign ~~currency~~ exchange rates ~~associated with~~reported in our ~~foreign currency denominated cash, accounts receivable,~~unaudited condensed consolidated statements of operations. See Item 3. “Quantitative and intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary. See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-QQualitative Disclosures about Market Risk” for additional information.
The total change in the fair value of our foreign currency forward contracts recorded in other income (expense), net, during the three months ended September 30, 2016 was a loss of $1.2 million. The total change in the fair value of our foreign currency forward contracts recorded in other (expense)/income, net, during the nine months ended September 30, 2017 and 2016 was a gain of $0.3 million and a loss of $5 million, respectively.
(Benefit)/provision for income taxes

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
March 31,    Change
(Dollars in thousands)    2017 2016 Change    2017 2016 Change    2018    2017
(Benefit)/provision for income taxes
   $ (12,885 ) $ 2,214 $ (15,099 ) n/m    $ (17,952 ) $ 6,269 $ (24,221 ) n/m    $             (4,222)       $             13,615       $               (17,837)                    n/m
Effective income tax rate
   88 % 40 %    (96 )% 26 %    (53)%    20%
n/m - not meaningful
~~The (benefit)/provision for income taxes represents current and future amounts for federal, state, and foreign taxes.~~
~~The increase in the effective income tax rate in~~During the three months ended ~~September 30, 2017 is~~March 31, 2018, our effective tax rate changed primarily due to the ~~significant increase of $3.5 million in~~ following factors:
excess tax benefits ~~generated by our stock~~from stock-based compensation ~~plans on significantly lower~~were disproportionately greater relative to income before (benefit)/provision for income ~~taxes, which decreased by $20.2 million.~~taxes;
~~The~~
a decrease in the estimated annual effective income tax rate ~~in the nine months ended September 30, 2017 is~~ primarily due to the ~~significant~~reduction of the U.S. statutory federal tax rate from 35% to 21% pursuant to the Tax Reform Act; and
an increase ~~of $19.1 million~~ in ~~excess~~U.S. research and development tax ~~benefits generated by our stock compensation plans, on significantly lower income before (benefit)/provision for income taxes, which decreased by $5.8 million.~~
credits.
The inclusion of excess tax benefits from stock-based compensation as a component of the provision for income taxes ~~may increase~~has increased the volatility inof the effective tax rates ofin recent periods, and may continue to do so in future periods, as the amount of excess tax benefits from ~~share-based~~stock-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU ~~vesting and~~vestings, exercise behavior of our stock option holders, and the total value of future grants of ~~share-based~~stock-based compensation awards.
~~Liquidity and capital resources~~LIQUIDITY AND CAPITAL RESOURCES

   Nine Months Ended
September 30,    Three Months Ended
March 31,
(in thousands)    2017    2016    2018    2017
Cash provided by (used in):

Operating activities
   $ 113,926    $ 20,556    $                 55,655    $                 32,444
Investing activities
   (11,966 )    (2,859 )    (31,278)    (3,727)
Financing activities
   (44,040 )    (43,031 )    (23,052)    (15,994)
Effect of exchange rate on cash
   2,054    (1,309 )
Effect of exchange rates on cash and cash equivalents
   2,186    521








Net increase/(decrease) in cash and cash equivalents
   $ 59,974    $ (26,643 )
Net increase in cash and cash equivalents
   $                   3,511    $                   13,244








(in thousands)    September 30,
2017    December 31,
2016    March 31,
2018    December 31,
2017
Held in U.S. entities
   $                 168,135    $                 136,444
Held in foreign entities
   86,702    87,304




Total cash, cash equivalents, and marketable securities
   $ 194,380    $ 133,761    $                 254,837    $                 223,748




We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, ~~our dividend payments,~~quarterly cash dividends, and ~~our share repurchase program~~stock repurchases for at least the next 12 months.
~~As of September 30, 2017, approximately $61.1 million of our cash and cash equivalents was held in our foreign subsidiaries.~~ If it ~~becomes~~became necessary to repatriate ~~these~~foreign funds, we may be required to pay U.S. ~~tax, net of any applicable~~state and local taxes, as well as foreign ~~tax credits,~~taxes, upon repatriation. ~~We consider~~Due to the ~~earnings~~complexity of ~~our foreign subsidiaries to be permanently reinvested~~the income tax laws and ~~as a result, U.S. taxes on such earnings are not provided. It~~the effects of the Tax Reform Act, it is ~~impractical~~impracticable to estimate the amount of ~~U.S. tax~~taxes we ~~may be required~~would have to pay upon repatriation due to the complexity of the foreign tax credit calculations. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.pay.
Cash provided by operating activities
The primary drivers during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 were net income of ~~$36.6~~$12.2 million and ~~$80.6~~$49.6 million from ~~trade accounts receivable,~~receivables and contract assets, largely due to increased cash collections and the timing of billings.
The primary driver during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 was net income of ~~$18.2~~$53.0 million.
~~Future Cash Receipts from Committed License and Cloud Arrangements~~
~~As of September 30, 2017, none of the amounts shown in the table below had been billed and no revenue had been recognized.~~
The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a result of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form~~10-Q~~ ~~for additional information)~~

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






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






⁽¹⁾ ~~These amounts are for perpetual licenses with extended payment terms and/or additional rights of use.~~
~~Total contractual future cash receipts due from our existing license and cloud arrangements were approximately $376.3 million as of September 30, 2016.~~
Cash used in investing activities
During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we purchased ~~$25.7~~investments of $35.2 million ~~of marketable debt securities~~ and made investments of ~~$9.1~~$2.1 million in property and equipment, partially offset by proceeds received from maturities of ~~marketable debt securities~~investments (including called marketable debt securities) of ~~$23.1~~$6 million.
During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, we ~~acquired OpenSpan for $48.8~~purchased investments of $3.3 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~~maturities of investments (including called marketable debt ~~securities~~securities) of ~~$62.3~~$2.3 million. We also invested $2.4 million primarily for leasehold improvements for the build out of additional office space at our Hyderabad, India location.
Cash used in financing activities
We used cash primarily for repurchases of our common stock ~~share~~under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.
Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $195 million of our common stock. Purchases under these programs have been made on the open market. As of March 31, 2018, $159.2 million had been repurchased, $29.2 million remained available for repurchase, and $6.4 million had expired.
~~The following table is a summary of our repurchase activity:~~Common stock repurchases

   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




Three Months Ended
March 31,
2018 2017
    (in thousands)             Shares                         Amount                         Shares                         Amount
Tax withholdings for net settlement of equity awards
270   $ 15,575   289   $ 12,504
    Stock repurchase program⁽¹⁾

    Repurchases paid
89   4,998   29   1,260
    Repurchases unsettled at period end
12   690   5   238

    Activity in Period⁽²⁾
                      371   $                     21,263                         323   $                     14,002

In addition to the share 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.
During the nine months ended September 30, 2017 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, instead of receiving cash from the equity holders, we withheld shares with a value of $23.7 million and $10.1 million, respectively, for the exercise price of options.
⁽¹⁾ Represents activity under our publicly announced stock repurchase programs.
⁽²⁾ During the three months ended March 31, 2018 and 2017, instead of receiving cash from the equity holders, we withheld shares with a value of $11.2 million and $7.7 million for the exercise price of options. These amounts have been excluded from the table above.
Dividends

   Nine Months Ended
September 30,
(per share)    2017    2016
Dividends Declared
   $ 0.09    $ 0.09
Dividends Paid
   $ 0.09    $ 0.09
              Three Months Ended
March 31,
    (per share) 2018 2017
    Dividends declared
$                      0.03 $                      0.03
During the three months ended March 31, 2018 and 2017, we paid cash dividends of $2.3 million. It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without prior notice.
~~ITEM 3.~~ ITEM 3. QUANTITATIVE AND QUALITATIVE ~~DISCLOSURE~~DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates.
~~As of September 30, 2017, we did not have any forward contracts outstanding. See Note 4 “Derivative Instruments” of this Quarterly Report on Form10-Q~~ ~~for further discussion.~~
Other than the item discussed ~~above,~~below, there were no significant changes to our ~~quantitative and qualitative disclosures about~~ market risk exposure during the first ~~nine~~three months ended ~~September 30, 2017.~~ March 31, 2018.
See ~~Part II,~~ Item 7A. ~~Quantitative~~“Quantitative and Qualitative Disclosures about Market ~~Risk~~Risk” and Item 1A. “Risk Factors - We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” included in our Annual Report on Form10-K for the year ended December 31, ~~2016~~2017 for a more complete discussion of our market risk exposure.
Foreign currency exposure
Translation Risk
Our international sales are usually denominated in foreign currencies. However, the operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in the following impact:

Three Months Ended
March 31,

            2018

            2017
Revenue
(4)% (3)%
Net Income
(13)% (4)%
Remeasurement Risk⁽¹⁾
We have experienced and expect to continue to experience fluctuations in our results of operations as a result of transaction gains or losses related to remeasuring monetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded. We are primarily exposed to changes in foreign currency exchange rates associated with Australian dollar, Euro, and U.S. dollar denominated cash and cash equivalents, accounts receivable, unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would result in the following impact:
    (Dollars in thousands)         March 31,
2018         December 31,
2017
    Foreign currency transaction (loss)/gain
$ (8,200) $ (5,800)
⁽¹⁾ The adoption of ASC 606 materially increased the unbilled receivables we have recorded, which has increased the impact of fluctuations in foreign exchange rates reported in our unaudited condensed consolidated statements of operations.
~~ITEM 4.~~ ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer ~~or CEO,~~(“CEO”) and Chief Financial Officer ~~or CFO,~~(“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (“Exchange Act”)) as of ~~September 30, 2017.~~March 31, 2018. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2017.~~March 31, 2018.
(b) Changes in Internal Control over 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)~~Act during the quarter ended ~~September 30, 2017~~March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART ~~II—~~II - OTHER INFORMATION

~~ITEM 1A.~~ ITEM 1A. RISK FACTORS
We encourage you to carefully consider the risk factors identified in ~~Part I,~~ Item 1A. “Risk Factors” inof our Annual Report onForm 10-K for the year ended December 31, ~~2016.~~2017. These risk factors could materially affect our business, financial condition, and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form10-Q or elsewhere by management from time to time. There have been no material changes during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2017.

~~ITEM 2.~~ ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding our repurchases of our common stock during the three months ended ~~September 30, 2017:~~March 31, 2018:

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



(in thousands, except per share

amounts)

Total Number
of Shares
Purchased⁽¹⁾
Average
Price Paid
per
Share⁽¹⁾

Total Number
of Shares Purchased as Part
of Publicly Announced Share
Repurchase Program
Approximate Dollar
Value of Shares That
May Yet Be Purchased at Period End
Under Publicly Announced Share
Repurchase Programs⁽²⁾
January 1, 2018 - January 31, 2018
58      $     49.63      21   $                                                    33,855
February 1, 2018 - February 28, 2018
68      55.06      17   32,985
March 1, 2018 - March 31, 2018
435      59.37      63   29,204


  Total
561      57.84



1. ⁽¹⁾ Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of ~~the company’s~~our stock compensation awards have been included in ~~the above table.~~these amounts.
2. ⁽²⁾ Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2018 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established apre-arranged stock repurchase plan, intended to comply with the requirements of Rule10b5-1 under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”),~~ and Rule10b-18 under the Exchange Act (the“10b5-1 Plan”). All ~~share~~stock 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 this report.~~
~~EXHIBIT INDEX~~

Exhibit No.

Description
10.1++
2018 Executive Officers Base Salaries and Target Bonsus Percentages and Incentives (Filed as Exhibit 99.1 to the Registrant’s March 9, 2018 Form8-K and incorporated herein by reference).
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
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.
   + Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
⁺⁺ ~~Management contracts and compensatory plan or arrangements~~
   ++Management contracts and compensatory plan or arrangements
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: May 10, 2018 ~~November 8, 2017~~ By: /s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Financial Officer and Chief Administrative Officer
(Principal Financial Officer)

2730


	December 31, 2017
(in thousands)	Previously reported		Adjustments		As adjusted
Accounts receivable and unbilled receivables	$	248,331	$	133,302	$	381,633
Contract assets		—		914		914
Long-term unbilled receivables		—		160,708		160,708
Deferred income taxes		57,127		(42,887)		14,240
Deferred contract costs		—		37,924		37,924
Other assets⁽¹⁾		416,148		—		416,148

Total Assets		721,606		289,961		1,011,567

Deferred revenue		195,073		(28,776)		166,297
Long-term deferred revenue		6,591		(2,885)		3,706
Deferred income tax liabilities		—		38,463		38,463
Other liabilities⁽²⁾		148,864		—		148,864

Total liabilities		350,528		6,802		357,330
Foreign currency translation adjustments		(3,494)		(2,966)		(6,460)
Retained earnings		221,926		286,125		508,051
Other equity⁽³⁾		152,646		—		152,646

Total stockholders’ equity		371,078		283,159		654,237

Total liabilities and stockholders’ equity	$	721,606	$	289,961	$	1,011,567


	Three Months Ended
	March 31, 2017
(in thousands, except per share amounts)	Previously reported		Adjustments			As adjusted
Revenue:
Software license	$	92,390	$	34,618		$	127,008
Maintenance		58,965		(252)			58,713
Services		71,892		(1,304)			70,588

Total revenue		223,247		33,062			256,309

Cost of revenue:
Software license		1,300		—			1,300
Maintenance		7,218		—			7,218
Services		59,572		—			59,572

Total cost of revenue		68,090		—			68,090

Gross profit		155,157		33,062			188,219

Operating expenses:
Selling and marketing		71,288		(1,607	)		69,681
Research and development		40,296		—			40,296
General and administrative		12,335		—			12,335

Total operating expenses		123,919		(1,607	)		122,312

Income from operations		31,238		34,669			65,907

Foreign currency transaction gain		676		69			745
Interest income, net		165		40			205
Other expense, net		(279)		—			(279)

Income before provision for income taxes		31,800		34,778			66,578
Provision for income taxes		4,779		8,836			13,615

Net income	$	27,021	$	25,942		$	52,963

Earnings per share:
Basic	$	0.35				$	0.69

Diluted	$	0.33				$	0.65

Weighted-average number of common shares outstanding:
Basic		76,761					76,761
Diluted		81,875					81,875


	March 31, 2018
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Municipal bonds	$	50,782	$	—	$	(191)	$	50,591
Corporate bonds		38,761		1		(306)		38,456

	$	89,543	$	1	$	(497)	$	89,047


(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


(in thousands)	March 31, 2018		December 31, 2017
Accounts receivable	$	164,981	$	222,735
Unbilled receivables		153,657		158,898
Long-term unbilled receivables		180,077		160,708

Total receivables	$	498,715	$	542,341


(in thousands)	March 31, 2018
2019	$	82,518
2020		58,433
2021		31,129
2022 and thereafter		7,997

	$	180,077


	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


		March 31, 2018
(in thousands)	Useful Lives	Cost	Accumulated Amortization	Net Book Value⁽¹⁾
Client-related intangibles	9-10 years	$ 63,197	$ (46,456)	$ 16,741
Technology	7-10 years	58,942	(46,603)	12,339
Other intangibles	—	5,361	(5,361)	—

		$ 127,500	$ (98,420)	$ 29,080


⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheet.

		December 31, 2017
(in thousands)	Useful Lives	Cost	Accumulated Amortization	Net Book Value⁽¹⁾
Client-related intangibles	9-10 years	$ 63,164	$ (44,835)	$ 18,329
Technology	7-10 years	58,942	(45,372)	13,570
Other intangibles	—	5,361	(5,361)	—

		$ 127,467	$ (95,568)	$ 31,899


	Three Months Ended March 31,
(in thousands)	2018		2017
Cost of revenue	$	1,232	$	1,334
Selling and marketing		1,605		1,866

	$	2,837	$	3,200


	Fair Value Measurements at Reporting Date Using				Total
(in thousands)	Level 1		Level 2		Total
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


(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 March 31,
(in thousands)	Shares		Total Fair Value
RSUs⁽¹⁾		858	$	49,600
Non-qualified stock options		1,377	$	24,700


	Three Months Ended March 31,
(Dollars in thousands)	2018		2017
(Benefit)/provision for income taxes	$	(4,222)	$	13,615
Effective income tax rate		(53)%		20%


(Dollars in thousands, except per share amounts)	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2018		2017		Change
Total revenue	$	235,182	$	256,309	$	(21,127	)	(8)%
Net income	$	12,200	$	52,963	$	(40,763	)	(77)%
Diluted earnings per share	$	0.15	$	0.65	$	(0.50	)	(77)%
Cash provided by operating activities	$	55,655	$	32,444	$	23,211		72%


(Dollars in thousands, except per share amounts)	Three Months Ended September 30,											Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	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	%


	March 31,
(in thousands)	2018		2017		Change
Term and Cloud ACV	$	236,025	$	193,004	$	43,021	22%
Maintenance ACV		258,100		234,852	$	23,248	10%

Total ACV	$	494,125	$	427,856	$	66,269	15%


	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,													Three Months Ended March 31,
(Dollars in thousands)	2017				2016				Change					2017				2016				Change					2018			2017			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	%	$	15,582	19%	$	10,402	15%	$	5,180	50%
Training		929	1	%		1,229	2	%		(300	)	(24	)%		4,702	2	%		4,730	3	%		(28	)	(1	)%
Consulting and training																												67,302	81%		60,186	85%		7,116	12%

Total services	$	75,818	100	%	$	58,931	100	%	$	16,887		29	%	$	225,063	100	%	$	179,633	100	%	$	45,430		25	%	$	82,884	100%	$	70,588	100%	$	12,296	17%


	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


(in thousands, except per share amounts)	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share⁽¹⁾	Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs⁽²⁾
January 1, 2018 - January 31, 2018	58	$ 49.63	21	$	33,855
February 1, 2018 - February 28, 2018	68	55.06	17		32,985
March 1, 2018 - March 31, 2018	435	59.37	63		29,204

Total	561	57.84


Exhibit No.		Description

10.1++		2018 Executive Officers Base Salaries and Target Bonsus Percentages and Incentives (Filed as Exhibit 99.1 to the Registrant’s March 9, 2018 Form8-K and incorporated herein by reference).

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 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.


		Pegasystems Inc.

~~Date:~~ Dated: May 10, 2018	~~November 8, 2017~~	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Financial Officer and Chief Administrative Officer
			(Principal Financial Officer)