SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

____________________

☒

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2019

~~For the quarterly period ended March 31, 2018~~

☐

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

____________________

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



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

QUARTERLY REPORT ON FORM10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

         March 31,
2018    December 31,
2017


     As Adjusted⁽¹⁾
Assets

Current assets:

  Cash and cash equivalents
   $ 165,790      $ 162,279
  Marketable securities
   89,047      61,469




   Total cash, cash equivalents, and marketable securities
   254,837      223,748
  Accounts receivable
   164,981      222,735
  Unbilled receivables
   153,657      158,898
  Other current assets
   50,692      41,135




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




   Total assets
   $ 1,005,955      $ 1,011,567




Liabilities and stockholders’ equity

Current liabilities:

  Accounts payable
   $ 12,175      $ 17,370
  Accrued expenses
   48,278      45,508
  Accrued compensation and related expenses
   44,093      66,040
  Deferred revenue
   175,586      166,297




Total current liabilities
   280,132      295,215
Deferred income tax liabilities
   39,932      38,463
Other long-term liabilities
   23,768      23,652




       Total liabilities
   343,832      357,330
Stockholders’ equity:

  Preferred stock, 1,000 shares authorized; no shares issued and outstanding
   —      —
  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
   145,962      152,097
  Retained earnings
   517,893      508,051
  Accumulated other comprehensive loss
   (2,517)    (6,692)




   Total stockholders’ equity
   662,123      654,237




   Total liabilities and stockholders’ equity
   $ 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.



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	110,367		$	114,422
Marketable securities	91,804			93,001
Total cash, cash equivalents, and marketable securities	202,171			207,423
Accounts receivable	135,352			180,872
Unbilled receivables	161,480			172,656
Other current assets	63,731			49,684
Total current assets	562,734			610,635
Long-term unbilled receivables	130,494			151,237
Goodwill	72,898			72,858
Other long-term assets	190,433			147,823
Total assets	$	956,559		$	982,553
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	11,559		$	16,487
Accrued expenses	40,947			45,506
Accrued compensation and related expenses	56,349			84,671
Deferred revenue	180,845			185,145
Other current liabilities	12,447			—
Total current liabilities	302,147			331,809
Operating lease liabilities	45,325			—
Deferred income tax liabilities	8,319			6,939
Other long-term liabilities	12,339			22,274
Total liabilities	368,130			361,022
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—			—
Common stock, 200,000 shares authorized; 78,896 and 78,526 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	789			785
Additional paid-in capital	119,182			123,205
Retained earnings	479,779			510,863
Accumulated other comprehensive loss	(11,321		)	(13,322		)
Total stockholders’ equity	588,429			621,531
Total liabilities and stockholders’ equity	$	956,559		$	982,553

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

   Three Months Ended
March 31,
   2018 2017


As Adjusted⁽¹⁾
Revenue

Software license
   $ 87,773 $ 127,008
Maintenance
   64,525 58,713
Services
   82,884 70,588


  Total revenue
   235,182 256,309


Cost of revenue

Software license
   1,255 1,300
Maintenance
   6,082 7,218
Services
   68,277 59,572


  Total cost of revenue
   75,614 68,090


Gross profit
   159,568 188,219


Operating expenses

Selling and marketing
   88,383 69,681
Research and development
   46,785 40,296
General and administrative
   16,464 12,335


  Total operating expenses
   151,632 122,312


Income from operations
   7,936 65,907


Foreign currency transaction (loss)/gain
   (1,085) 745
Interest income, net
   764 205
Other income/(expense), net
   363 (279)


Income before (benefit)/provision for income taxes
   7,978 66,578
(Benefit)/provision for income taxes
   (4,222) 13,615


        Net income
   $             12,200 $             52,963


Earnings per share

Basic
   $ 0.16 $ 0.69
Diluted
   $ 0.15 $ 0.65
Weighted-average number of common shares outstanding

Basic
   78,236 76,761
Diluted
   83,102 81,875
Cash dividends declared per share
   $ 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.~~



	Three Months Ended March 31,
	2019			2018
Revenue
Software license	$	63,264		$	87,773
Maintenance	67,706			64,525
Services	81,576			82,884
Total revenue	212,546			235,182
Cost of revenue
Software license	1,378			1,255
Maintenance	6,335			6,082
Services	66,724			68,277
Total cost of revenue	74,437			75,614
Gross profit	138,109			159,568
Operating expenses
Selling and marketing	108,865			88,383
Research and development	50,596			46,785
General and administrative	12,676			16,464
Total operating expenses	172,137			151,632
(Loss) income from operations	(34,028		)	7,936
Foreign currency transaction loss	(3,712		)	(1,085		)
Interest income, net	723			764
Other income, net	—			363
(Loss) income before benefit from income taxes	(37,017		)	7,978
Benefit from income taxes	(8,300		)	(4,222		)
Net (loss) income	$	(28,717	)	$	12,200
(Loss) earnings per share
Basic	$	(0.37	)	$	0.16
Diluted	$	(0.37	)	$	0.15
Weighted-average number of common shares outstanding
Basic	78,584			78,236
Diluted	78,584			83,102

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

   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.~~



	Three Months Ended March 31,
	2019			2018
Net (loss) income	$	(28,717	)	$	12,200
Other comprehensive income, net of tax
Unrealized gain (loss) on available-for-sale marketable securities, net of tax	374			(188		)
Foreign currency translation adjustments	1,627			4,450
Total other comprehensive income, net of tax	2,001			4,262
Comprehensive (loss) income	$	(26,716	)	$	16,462

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’ EQUITY

(in ~~thousands)~~

   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.~~

thousands, except per share amounts)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
	Number of Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
December 31, 2017	78,081		$	781		$	152,097		$	509,697		$	(6,705	)	$	655,870
Repurchase of common stock	(101	)	(1		)	(5,688		)	—			—			(5,689		)
Issuance of common stock for share-based compensation plans	566		5			(15,556		)	—			—			(15,551		)
Stock-based compensation	—		—			15,109			—			—			15,109
Cash dividends declared ($0.12 per share)	—		—			—			(2,355		)	—			(2,355		)
Other comprehensive income	—		—			—			—			4,262			4,262
Net income	—		—			—			12,200			—			12,200
March 31, 2018	78,546		$	785		$	145,962		$	519,542		$	(2,443	)	$	663,846

December 31, 2018	78,526		785			123,205			510,863			(13,322		)	621,531
Repurchase of common stock	(144	)	(1		)	(7,586		)	—			—			(7,587		)
Issuance of common stock for share-based compensation plans	514		5			(14,843		)	—			—			(14,838		)
Stock-based compensation	—		—			18,406			—			—			18,406
Cash dividends declared ($0.12 per share)	—		—			—			(2,367		)	—			(2,367		)
Other comprehensive income	—		—			—			—			2,001			2,001
Net loss	—		—			—			(28,717		)				(28,717		)
March 31, 2019	78,896		$	789		$	119,182		$	479,779		$	(11,321	)	$	588,429

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended
March 31,
2019 2018
Operating activities:
Net (loss) income $ (28,717 ) $ 12,200
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Stock-based compensation 18,350
15,109
Amortization and depreciation 18,774
10,322
Foreign currency transaction loss 3,712
1,085
Other non-cash 1,471
1,137
Change in operating assets and liabilities, net 9,113
15,802
Cash provided by operating activities 22,703
55,655
Investing activities:

Purchases of investments (7,224 ) (35,204 )
Proceeds from maturities and called investments 8,548
5,995
Other (2,790 ) (2,069 )
Cash used in investing activities (1,466 ) (31,278 )
Financing activities:
Dividend payments to shareholders (2,363 ) (2,344 )
Common stock repurchases (23,224 ) (20,708 )
Cash used in financing activities (25,587 ) (23,052 )
Effect of exchange rate changes on cash and cash equivalents 295
2,186
Net (decrease) increase in cash and cash equivalents (4,055 ) 3,511
Cash and cash equivalents, beginning of period 114,422
162,279
Cash and cash equivalents, end of period $ 110,367
$ 165,790

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, ~~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.

2018.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2018.~~

2019.

2. NEW ACCOUNTING PRONOUNCEMENTS

Financial ~~Instruments~~

instruments

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

On January 1, 2019, the Company adopted Accounting Standards Codifications 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with ~~early adoption permitted.~~ the Company’s historic accounting under ASC 840 “Leases”.

The Company ~~expects~~elected the permitted practical expedients to not reassess the following related to leases that ~~most~~commenced before the effective date of ~~its operating~~ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease ~~commitments will be subject to this ASU~~classification for any expired or existing leases; and ~~recognized as operating~~(iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities ~~andright-of-use~~of $54.2 million. The difference between the value of the right of use assets ~~upon adoption with no material impact~~and lease liabilities is due to ~~its results~~the reclassification of ~~operations~~existing deferred rent, prepaid rent, and ~~cash flows.~~

~~ASC 606 and ASC340-40~~

~~In May 2014, the FASB issued ASUNo. 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”. The Company adopted ASC 606 and ASC340-40~~ onunamortized lease incentives as of January 1, ~~2018 using the full retrospective method, which required the Company to retrospectively adjust the prior periods presented.~~

~~The most significant impacts of adopting ASC 606 and ASC340-40~~ ~~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.

•

~~Taxes~~ ~~- The corresponding effect on tax balances in relation to all of the above impacts has also been recognized.~~

~~For additional information on the Company’s accounting policies as a result of the adoption of ASC 606 and ASC340-40~~ ~~see Note 4. “Receivables, Contract Assets, and Deferred Revenue”, Note 5. “Deferred Contract Costs”, and~~2019.

See Note 9. ~~“Revenue”.~~

~~The impact of the adoption ASC 606 and ASC340-40~~ ~~on the Company’s unaudited condensed consolidated balance sheet and unaudited condensed consolidated statement of operations is:~~

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

⁽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 Form~~10-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 Form~~10-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).~~

~~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~~“Leases” for ~~the three months ended March 31, 2017.~~

additional information.

3. MARKETABLE SECURITIES

   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)~~



	March 31, 2019
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	42,693	$	86	$	(20	)	$	42,759
Corporate bonds	48,966		142		(63		)	49,045
	$	91,659	$	228	$	(83	)	$	91,804



	December 31, 2018
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	44,802	$	13	$	(110	)	$	44,705
Corporate bonds	48,499		23		(226		)	48,296
	$	93,301	$	36	$	(336	)	$	93,001

As of March 31, ~~2018,~~2019, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

As of March 31, ~~2018, remaining~~2019, maturities of marketable securities ranged from ~~May 2018~~April 2019 to ~~February 2021,~~August 2022, with a weighted-average remaining maturity of approximately 1.4 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

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



(in thousands)	March 31, 2019		December 31, 2018
Accounts receivable	$	135,352	$	180,872
Unbilled receivables	161,480		172,656
Long-term unbilled receivables	130,494		151,237
	$	427,326	$	504,765

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is ~~the amount due from clients where the only condition on the right of payment is~~solely subject to the passage of time. ~~The Company regularly reassesses receivables for collectability.~~

As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the allowance for doubtful accounts was not material.

~~Long-term unbilled~~

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

(in thousands)

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


   $ 180,077

(Dollars in thousands) March 31, 2019
1 year or less $ 161,480
55 %
1-2 years 86,496
30 %
2-5 years 43,998
15 %
$ 291,974
100 %

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



(in thousands)	March 31, 2019		December 31, 2018
Contract assets ⁽¹⁾	$	3,380	$	3,711
Long-term contract assets ⁽²⁾	1,818		2,543
	$	5,198	$	6,254
Deferred revenue	$	180,845	$	185,145
Long-term deferred revenue ⁽³⁾	5,866		5,344
	$	186,711	$	190,489

⁽¹⁾Included in other current ~~assets in the unaudited condensed consolidated balance sheets.~~

assets.⁽²⁾ Included in other long-term ~~liabilities~~assets.⁽³⁾Included in ~~the unaudited condensed consolidated balance sheets.~~

~~Contract assets and deferred revenue are presented net at the contract level for each reporting period.~~ other long-term liabilities.

Contract assets are ~~unbilled~~ amounts ~~resulting from~~under client contracts where revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition.

Contract assets and deferred revenue are netted at the contract level for each reporting period.

The change in deferred revenue in the three months ended March 31, ~~2018,~~2019 was primarily due to $89.4 million of revenue recognized, excluding the impact of ~~the~~ netting of contract assets and deferred revenue ~~was primarily due to new billings in advance of revenue recognition and $101.6 million of revenue recognized~~at the contract level, during the period that was included in deferred revenue at December 31, ~~2017.~~

~~Major clients~~

~~No client represented 10% or more~~2018, partially offset by new billings in advance of ~~the Company’s total receivables as of March 31, 2018 or December 31, 2017.~~

revenue recognition.

5. DEFERRED CONTRACT COSTS

~~Sales incentives paid by~~

The Company recognizes an asset for the ~~Company are considered~~ incremental ~~and recoverable~~ costs of obtaining a client contract, ~~with a client. These~~which primarily relate to sales commissions, if the Company expects to benefit from those costs for more than one year. Deferred costs are ~~deferred, as~~amortized on a ~~long-term asset, and then amortized using the~~ straight-line ~~method~~basis over the benefit period, ~~of benefit~~ which is on average ~~five~~5 years. ~~The Company determined the period of benefit by taking into consideration client contracts, the Company’s technology,~~



(in thousands)	March 31, 2019		December 31, 2018
Deferred contract costs ⁽¹⁾	$	64,869	$	64,367

⁽¹⁾ Included in other long-term assets.



	Three Months Ended March 31,
(in thousands)	2019		2018
Amortization of deferred contract costs ⁽¹⁾	$	8,301	$	3,789

⁽¹⁾Included in selling and ~~other factors. The Company utilizes a practical expedient available under ASC 606 to expense costs to obtain a contract as incurred when the original~~

marketing expenses.

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 ~~changes~~change in the carrying amount of goodwill ~~were as follows:~~


~~(in thousands)~~	~~Three Months Ended~~ ~~March 31,~~
~~(in thousands)~~	~~2018~~
~~Balance as of January 1,~~	$	~~72,952~~
~~Purchase price adjustments to goodwill~~		—
~~Currency translation adjustments~~		65

~~Balance as of March 31,~~	$	~~73,017~~

was:



(in thousands)	Three Months Ended March 31,
(in thousands)	2019
Balance as of January 1,	$	72,858
Currency translation adjustments	40
Balance as of March 31,	$	72,898

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.~~



		March 31, 2019
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,136	$	(52,839	)	$	10,297
Technology	2-10 years	59,742		(51,730		)	8,012
Other	1 - 5 years	5,361		(5,361		)	—
		$	128,239	$	(109,930	)	$	18,309

⁽¹⁾Included in other long-term assets.



		December 31, 2018
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,115	$	(51,224	)	$	11,891
Technology	2-10 years	59,742		(50,398		)	9,344
Other	1 - 5 years	5,361		(5,361		)	—
		$	128,218	$	(106,983	)	$	21,235

⁽¹⁾Included in other long-term assets.

Amortization of ~~intangibles~~intangible 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

was:



(in thousands)	Three Months Ended March 31,
(in thousands)	2019		2018
Cost of revenue	$	1,332	$	1,232
Selling and marketing	1,603		1,605
	$	2,935	$	2,837

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



(in thousands)	March 31, 2019		December 31, 2018
Outside professional services expenses	$	8,815	$	10,367
Income and other taxes	7,954		10,387
Marketing and sales program expenses	8,318		5,860
Dividends payable	2,367		2,363
Employee-related expenses	5,432		3,536
Other	8,061		12,993
	$	40,947	$	45,506

8. FAIR VALUE MEASUREMENTS

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

recurring basis

The Company records its cash equivalents, marketable securities, and 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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:

The Company’s cash equivalents are composed of money market funds and time deposits, which are classified aswithin Level 1 and 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 investments in privately-held companies are classified within Level 3 of the fair value ~~hierarchy and are valued using model-based techniques, including option pricing models and discounted cash flow models.~~

hierarchy.

If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between levels during the three months ended March 31, ~~2018.~~

~~PEGASYSTEMS INC.~~

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

2019.

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

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.

were:



	March 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	12,401	$	10,062	$	—	$	22,463
Marketable securities:
Municipal bonds	$	—	$	42,759	$	—	$	42,759
Corporate bonds	—		49,045		—		49,045
Total marketable securities	$	—	$	91,804	$	—	$	91,804
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,390	$	3,390

⁽¹⁾ Included in other long-term assets.



	December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	10,155	$	10,000	$	—	$	20,155
Marketable securities:
Municipal bonds	$	—	$	44,705	$	—	$	44,705
Corporate bonds	—		48,296		—		48,296
Total marketable securities	$	—	$	93,001	$	—	$	93,001
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,390	$	3,390

⁽¹⁾ Included in other long-term assets.

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

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

Assets recorded at fair value on a nonrecurring basis, including property and equipment and intangible assets, are recognized at fair value when they are impaired. During the three months ended March 31, 2018 and 2017, the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.

9. ~~REVENUE~~

~~Revenue policy~~

LEASES

The Company’s ~~revenue is derived from sales~~leases are primarily for office space used in the ordinary course of ~~software licenses, maintenance fees related to~~business.

All the Company’s ~~software licenses, and services.~~

~~License revenue is primarily 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 new license implementations.~~

~~Contracts with multiple performance obligations~~

leases are operating leases. 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~~a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if ~~they~~modified. Fixed lease costs are ~~distinct. The transaction price is allocated to the separate performance obligations~~recognized on a ~~relative stand-alone selling price basis. If~~straight-line basis over the ~~transaction price contains discounts or expects to provide a future price concession, these elements~~term of the lease. Variable lease costs 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 period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term, if the Company ~~satisfies its performance obligations to the extent~~is reasonably certain it ~~is probable that a significant reversal of cumulative revenue recognized~~ will exercise those options. The Company’s leases do not ~~occur when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional products~~contain any material residual value guarantees or services, the Company assesses whether or not any discount on the products and services is in excess of levels normally available to similar clients and, if so, accounts for that discount as an additional performance obligation.

restrictive covenants.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Software licenses~~



	Three Months Ended March 31,
(in thousands)	2019
Operating lease costs	$	4,300
Variable lease costs ⁽¹⁾	1,321
	$	5,621

⁽¹⁾ Lease costs that are not fixed at lease commencement.

Right of use assets and lease liabilities



(in thousands)	March 31, 2019
Right of use assets ⁽¹⁾	$	46,464
Lease liabilities ⁽²⁾	$	12,447
Long-term lease liabilities	$	45,325

⁽¹⁾An asset that represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. ⁽²⁾Included in other current liabilities.

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



	March 31, 2019
Weighted-average remaining lease term	4.3 years
Weighted-average discount rate ⁽¹⁾	5.7	%

⁽¹⁾The rate implicit in the lease is not readily determinable in most of the Company’s leases, and therefore the Company ~~has concluded that~~uses its ~~software licenses are distinct performance obligations~~incremental borrowing rate as the ~~client can benefit from~~discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the ~~software on its own. Software license revenue is typically recognized~~interest rate the Company would incur at ~~a point in time when control is transferred~~lease commencement to borrow an amount equal 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~~lease payments on a ~~monthly, quarterly, or annual~~collateralized basis over the term of the ~~license agreement, which is typically three to five years and may be renewed for additional terms~~lease.

Maturities of lease liabilities were:



(in thousands)	March 31, 2019
Remainder of 2019	$	11,324
2020	15,784
2021	13,764
2022	12,761
2023	11,604
Total lease payments	65,237
Less: imputed interest ⁽¹⁾	(7,465		)
	$	57,772

⁽¹⁾Lease liabilities are measured at the ~~client’s option. Perpetual license fees are usually payable when~~present value of the ~~contract~~remaining lease payments using a discount rate determined at lease commencement unless the discount rate is ~~executed. The Company recognizes software license revenue when control is transferred, and~~updated as a result of a lease reassessment event.

As of December 31, 2018, the ~~corresponding difference between the amount invoiced and recognized~~Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as ~~revenue is recorded as unbilled receivables, as the payment of consideration is subject only~~determined prior to the ~~passage~~adoption of ~~time.~~

~~Maintenance~~

~~Maintenance revenue includes revenue from client support and related professional services. Client support includes software upgrades on a when~~ASC 842 were:



(in thousands)	Operating Leases ⁽¹⁾
2019	$	15,993
2020	14,807
2021	13,262
2022	12,279
2023	11,084
	$	67,425

~~and-if~~⁽¹⁾ ~~available basis, telephone support, and bug fixes or patches. Maintenance is priced as a percentage~~Operating leases include future minimum rent payments, net of estimated sublease income for facilities that 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:~~

~~software upgrades and updates; and~~

~~technical support.~~

~~These performance obligations are distinct within the contract and, although they are not sold separately, the components are not essential~~vacated pursuant 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 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~~

The Company’s services revenue is comprised of consulting and training, including software license implementations, training, reimbursable expenses, and cloud which is derived from sales of the Company’s 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 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 cloud 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. 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.

its restructuring activities.

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:~~

Cash flow information



	1.Three Months Ended March 31,
(in thousands)	~~If the additional products and services are distinct from the products and services in the original arrangement, and~~2019
Cash paid for leases	5,197
Right of use assets recognized for new leases (non-cash)	8,034

~~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~~



	Three Months Ended March 31,
(Dollars in thousands)	2019				2018
U.S.	$	103,991	48	%	$	113,985	48	%
Other Americas	28,829		14	%	17,715		8	%
United Kingdom (“U.K.”)	24,549		12	%	26,094		11	%
Europe (excluding U.K.), Middle East, and Africa	34,186		16	%	31,826		14	%
Asia-Pacific	20,991		10	%	45,562		19	%
	$	212,546	100	%	$	235,182	100	%

Revenue streams



	Three Months Ended March 31,
(in thousands)	2019		2018
Perpetual license	$	14,950	$	23,078
Term license	48,314		64,695
Revenue recognized at a point in time	63,264		87,773
Maintenance	67,706		64,525
Cloud	27,758		15,582
Consulting	53,818		67,302
Revenue recognized over time	149,282		147,409
	$	212,546	$	235,182



(in thousands)	Three Months Ended March 31,
(in thousands)	2019		2018
Term license	$	48,314	$	64,695
Cloud	27,758		15,582
Maintenance	67,706		64,525
Subscription ⁽¹⁾	143,778		144,802
Perpetual license	14,950		23,078
Consulting	53,818		67,302
	$	212,546	$	235,182

⁽¹⁾Reflects client arrangements (term license, cloud, and maintenance) that are subject to ~~the original contract and is accounted for~~renewal.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remaining performance obligations

Revenue recognition timing on ~~either:~~

~~a prospective basis as a termination of the existing contract and the creation of a new contract; or~~

~~a cumulative~~existing contracts:



	March 31, 2019
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	10,263	$	44,404	$	187,324	$	115,548	$	13,251	$	370,790	58	%
1-2 years	998		4,274		9,350		91,539		1,363		107,524		17	%
2-3 years	2,180		756		4,438		71,509		473		79,356		13	%
Greater than 3 years	—		135		2,008		72,742		27		74,912		12	%
	$	13,441	$	49,569	$	203,120	$	351,338	$	15,114	$	632,582	100	%



	March 31, 2018
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	33,859	$	21,087	$	156,702	$	47,764	$	9,403	$	268,815	59	%
1-2 years	14,106		7,877		21,381		52,849		1,098		97,311		21	%
2-3 years	1,204		5,634		4,924		37,844		—		49,606		11	%
Greater than 3 years	382		853		1,825		40,478		—		43,538		9	%
	$	49,551	$	35,451	$	184,832	$	178,935	$	10,501	$	459,270	100	%

~~catch-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. Theseabove 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)~~

~~Major clients~~

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

               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.~~

11. STOCK-BASED COMPENSATION

Expense

                   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)



	Three Months Ended March 31,
(in thousands)	2019			2018
Cost of revenues	$	4,519		$	3,701
Selling and marketing	7,374			4,658
Research and development	4,560			3,637
General and administrative	1,897			3,113
	$	18,350		$	15,109
Income tax benefit	$	(3,740	)	$	(3,141	)

The Company recognizes stock-based compensation onusing the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of March 31, ~~2018,~~2019, the Company had ~~net of estimated forfeitures, $92.5~~$114.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested restricted stock units (“RSUs”) and stock ~~options, which was~~options. These amounts are expected to be recognized over a weighted-average period of 2.3 years.

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

Three Months Ended
March 31,
2019
(in thousands) Shares Total Fair Value
RSUs 839
$ 53,184
Non-qualified stock options 1,770
$ 33,344

RSU vestings and stock option exercises

During the three months ended March 31, ~~2018, 0.6~~2019, 0.5 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.~~

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%



	Three Months Ended March 31,
(Dollars in thousands)	2019			2018
Benefit from income taxes	$	(8,300	)	$	(4,222	)
Effective income tax rate	22		%	(53		)%

During the three months ended March 31, ~~2018,~~2019, the Company’s effective income tax rate changed primarily due to the ~~following factors:~~

Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by 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 a~~one-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,~~credits, and a ~~base erosion anti-abuse~~decrease in uncertain 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 to~~re-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 takepositions 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 the~~one-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 estimatelapse of the ~~effect~~statute 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~~limitations 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.certain foreign reserves.

~~PEGASYSTEMS INC.~~

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

~~12.~~

13. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.

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

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⁾	Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.

was:



	Three Months Ended March 31,
(in thousands, except per share amounts)	2019			2018
Basic
Net (loss) income	$	(28,717	)	$	12,200
Weighted-average common shares outstanding	78,584			78,236
(Loss) earnings per share, basic	$	(0.37	)	$	0.16

Diluted
Net (loss) income	$	(28,717	)	$	12,200
Weighted-average effect of dilutive securities:
Stock options	—			3,119
RSUs	—			1,747
Effect of dilutive securities	—			4,866
Weighted-average common shares outstanding, assuming dilution	78,584			83,102
(Loss) earnings per share, diluted	$	(0.37	)	$	0.15

Outstanding anti-dilutive stock options and RSUs ⁽¹⁾	5,563			397

⁽¹⁾ Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.

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, ~~and~~ the timing of revenue recognition, and are described more completely in Part I of our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

2018.

These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.

~~These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict.~~

Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services, ~~and the difficulty in predicting factors affecting the timing of license revenue recognition;~~ reliance on third party ~~relationships; our beliefs and the timing of the completion of our analysis regarding the impact of the Tax Cuts and Jobs Act of 2017, including its impact~~relationships, reliance on ~~income tax expense and deferred tax assets;~~key personnel, the inherent risks associated with international operations and the continued uncertainties in the global ~~economy;~~economy, our continued effort to market and sell both domestically and ~~internationally;~~internationally, foreign currency exchange ~~rates; the financial impact of any future acquisitions;~~rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security ~~breaches;~~breaches, and management of 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 our Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the ~~matters~~results contained in such statements will be achieved. Although ~~subsequent~~new information, future events, or risks may cause ~~our view~~actual results to ~~change,~~differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

BUSINESS OVERVIEW

We develop, market, license, and support enterprise software applications that help organizations transform the way they engage with their customers and process and complete work across their enterprise. We license our no-code Pega Platform™ for ~~customer engagement and digital process automation, in addition to licensing our Pega Platform~~rapid application development ~~product for~~to clients that wish to build and extend their own business applications. ~~The~~Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified no-code Pega Platform, empowering businesses to quickly design, extend, and ~~applications help connect enterprises to~~scale their ~~customers in real-time across channels, streamline business operations, and adapt~~enterprise applications to meet ~~changing requirements.~~

strategic business needs.

Our target clients ~~include~~are Global 3000 ~~companies~~organizations and government agencies that ~~seek~~require applications 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 Pega Platform. Our cloud revenue is derived from our hosted software application and Pega Platform environments. Our consulting revenue is primarily related to new license implementations.

~~Financial and Performance Metrics~~

We adopted the new revenue recognition standard (“ASC 606”) effective January 1, 2018 using the full retrospective method. See Note 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~~differentiate themselves in the ~~three months ended March 31, 2018 was primarily due~~markets they serve. Our applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.

Performance metrics

We utilize a ~~large term~~number of different performance measures in analyzing and assessing our overall performance, making operating decisions, and forecasting and planning for future periods.



(Dollars in thousands, except per share amounts)	Three Months Ended March 31,					Change
(Dollars in thousands, except per share amounts)	2019			2018		Change
Total revenue	$	212,546		$	235,182	$	(22,636	)	(10	)%
Subscription revenue ⁽¹⁾	$	143,778		$	144,802	$	(1,024	)	(1	)%
Net (loss) income	$	(28,717	)	$	12,200	$	(40,917	)	*
(Loss) earnings per share, diluted	$	(0.37	)	$	0.15	$	(0.52	)	*

* not meaningful

⁽¹⁾ Reflects client arrangements (term license, ~~arrangement recognized in revenue in the three months ended March 31, 2017~~cloud, and ~~a shift in client preferences~~maintenance) that are subject to cloud arrangements. Cloud arrangements are generally recognized in revenue over the term of the cloud contract, as compared to other arrangements, which are generally recognized in revenue on the contract effective date.

renewal.

Annual Contract Value (“ACV”)⁽¹⁾

The change in ACV measures the growth and predictability of future cash flows from ~~committed term,~~Pega cloud and ~~maintenance~~client cloud committed 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%



	March 31,				Change
(Dollars in thousands)	2019		2018		Change
Pega Cloud ACV	$	128,636	$	72,966	$	55,670	76	%
Client Cloud ACV	462,130		421,159		40,971		10	%
Total ACV	$	590,766	$	494,125	$	96,641	20	%

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

~~The~~Client Cloud: the sum of (1) the annual value of each term ~~and cloud~~license contract in effect on such date, ~~with the annual value of a term or cloud contract being~~which is equal to ~~the~~its total value ~~of the contract~~ divided by the total number of years ~~of the contract.~~

~~Maintenance~~and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting for Client Cloud arrangements

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

Remaining performance obligations

Revenue recognition timing on existing contracts:



	March 31, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	10,263	$	44,404	$	187,324	$	115,548	$	13,251	$	370,790	58	%
1-2 years	998		4,274		9,350		91,539		1,363		107,524		17	%
2-3 years	2,180		756		4,438		71,509		473		79,356		13	%
Greater than 3 years	—		135		2,008		72,742		27		74,912		12	%
	$	13,441	$	49,569	$	203,120	$	351,338	$	15,114	$	632,582	100	%



	March 31, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	33,859	$	21,087	$	156,702	$	47,764	$	9,403	$	268,815	59	%
1-2 years	14,106		7,877		21,381		52,849		1,098		97,311		21	%
2-3 years	1,204		5,634		4,924		37,844		—		49,606		11	%
Greater than 3 years	382		853		1,825		40,478		—		43,538		9	%
	$	49,551	$	35,451	$	184,832	$	178,935	$	10,501	$	459,270	100	%

The above amounts include contracts that have an original expected duration of one year or less.

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 United States ~~(U.S.~~

(“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.

~~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, 2017.~~

For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following ~~locations:~~

locations in our Annual Report on Form 10-K for the year ended December 31, 2018:

“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and

Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data” ~~both of which are contained~~.

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

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 this Quarterly Reporting on Form~~10-Q~~ ~~for the three months ended March 31,~~ 2018.

RESULTS OF OPERATIONS

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

~~Software~~

(Dollars in thousands) Three Months Ended
March 31, Change
2019 2018
Term license $ 48,314
23 % $ 64,695
28 % $ (16,381 ) (25 )%
Cloud 27,758
13 % 15,582
7 % 12,176
78 %
Maintenance 67,706
32 % 64,525
27 % 3,181
5 %
Subscription revenue ⁽¹⁾
143,778
68 % 144,802
62 % (1,024 ) (1 )%
Perpetual license 14,950
7 % 23,078
10 % (8,128 ) (35 )%
Consulting 53,818
25 % 67,302
28 % (13,484 ) (20 )%
$ 212,546
100 % $ 235,182
100 % $ (22,636 ) (10 )%

⁽¹⁾ Reflects client arrangements (term license,

(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~~ cloud, and maintenance) that are subject to renewal.

Our license revenue is derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software applications.

We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud arrangements, which could result in slower total revenue growth in the near term. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license ~~revenue in~~arrangements is generally recognized upfront when the three months ended March 31, 2018 was primarily due to a decrease in the value of perpetual arrangements executed in the three months ended March 31, 2018 driven primarily by a shift in client preferences to cloud arrangements.

license rights become effective.

Subscription revenue

The decrease in term license revenue in the three months ended March 31, ~~2018~~2019 was primarily due to ~~a large term license arrangement recognized~~lower average revenue per arrangement. The increase in cloud revenue in the three months ended March 31, ~~2017 and a~~2019 reflects the shift in client preferences to cloud arrangements from other types of arrangements.

~~Maintenance~~

Three Months Ended
March 31,
(Dollars in thousands)         2018                 2017                         Change
Maintenance
$ 64,525 $ 58,713 $ 5,812    10%

The 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~~

   Three Months Ended
March 31,
(Dollars in thousands)                    2018                                    2017                                      Change
Cloud
   $ 15,582 19% $ 10,402 15%    $ 5,180            50%
Consulting and training
   67,302 81% 60,186 85%    7,116    12%



Total services
   $             82,884     100% $             70,588     100%    $         12,296    17%

Perpetual license

The ~~increase~~decrease in ~~cloud~~perpetual license revenue ~~was primarily 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.~~ 2019 reflects the shift in client preferences in favor of our cloud offerings and away from perpetual license arrangements.

Consulting

Our consulting ~~and training~~ revenue ~~may fluctuate in future periods~~fluctuates depending onupon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.

The decrease in consulting revenue in the three months ended March 31, 2019 was primarily due to a decrease in billable hours.

Gross profit

   Three Months Ended
March 31,
(Dollars in thousands)                    2018                                     2017                                     Change
Software license
   $ 86,518    99%    $ 125,708    99%    $ (39,190 ) (31)%
Maintenance
   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
   14,607    18%    11,016    16%    3,591 33 %





Total gross profit
   $             159,568        68%    $             188,219        73%    $           (28,651 ) (15) %



	Three Months Ended March 31,								Change
(Dollars in thousands)	2019				2018				Change
Software license	$	61,886	98	%	$	86,518	99	%	$	(24,632	)	(28	)%
Maintenance	61,371		91	%	58,443		91	%	2,928			5	%
Cloud	14,460		52	%	7,861		50	%	6,599			84	%
Consulting	392		1	%	6,746		10	%	(6,354		)	(94	)%
	$	138,109	65	%	$	159,568	68	%	$	(21,459	)	(13	)%

The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.

The decrease in total gross profit in the three months ended March 31, ~~2018~~2019 was primarily due to ~~a large~~the decrease in term and perpetual license ~~arrangement recognized in~~ revenue inreflecting the ~~three months ended March 31, 2017. Additionally we have experienced a~~ shift in client preferences totoward our cloud ~~arrangements, which are generally recognized~~offerings.

The decrease in ~~revenue over the term of the cloud contract, as compared to other arrangements, which are generally recognized in revenue on the contract effective date.~~

~~The increase in maintenance~~total gross profit percent in the three months ended March 31, ~~2018~~2019 was driven by a ~~$0.5 million decrease~~shift in ~~client support expenses as we transferred client support resources to support~~favor of cloud arrangements, which are lower margin than our ~~growing cloud business.~~

term and perpetual license revenue streams. The increase in cloud gross profit percent ~~in the three months ended March 31, 2018~~ was driven by cost efficiency gains as our cloud business continues to grow and ~~scale, partially offset by a $0.5 million increase~~scale. The decrease in ~~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~~consulting gross profit percent ~~would have been~~was driven by a decrease in billable hours 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%

consulting resources were transitioning to new projects after completing a large project which began in the second half of 2016 and an increase in consulting resource availability in Europe as we continue growing and leveraging our partner network.

Operating expenses

Selling and marketing

   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
Selling and marketing
   $             88,383       $             69,681       $             18,702                    27%
As a percent of total revenue
   38%    27%
Selling and marketing headcount, end of period
   1,082       900       182    20%

~~Selling and marketing expenses include~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Selling and marketing ⁽¹⁾	$	108,865		$	88,383		$	20,482	23	%
As a percent of total revenue	51		%	38		%
Selling and marketing headcount, end of period	1,282			1,082			200		18	%

⁽¹⁾ Includes 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 client-related intangibles.

The increase in the three months ended March 31, ~~2018~~2019 was primarily due to an increase in compensation and benefits of ~~$11.6~~$17.7 million, ~~driven by~~attributable to increased headcount, and ~~equity compensation, amortization~~an increase of $4.5 million in deferred ~~commissions, increased spending on event marketing and digital advertising, and the expenses associated with assigning~~ contract ~~negotiation resources to drive efficiencies in the sales process in support of our long-term growth.~~

commission amortization. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts ~~in existing industries, as well as to expand coverage in new industries and geographies, and to increase the number of sales opportunities.~~

Research and development

   Three Months Ended
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~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Research and development ⁽¹⁾	$	50,596		$	46,785		$	3,811	8	%
As a percent of total revenue	24		%	20		%
Research and development headcount, end of period	1,638			1,602			36		2	%

⁽¹⁾ Includes compensation, benefits, contracted services, and other headcount-related expenses associated with the ~~creation and~~ development of our products, as well as enhancements and design changes to existing products and the integration of acquired technologies.

The increase in the three months ended March 31, ~~2018~~2019 was primarily due to an increase in compensation and benefits of ~~$4.6~~$2.1 million, attributable to ~~increased~~an increase in headcount, and ~~the expansion~~an increase of $1.6 million in cloud hosting expenses as we expand our ~~application~~cloud-focused research and development ~~team to support the continued development of our software.~~

activities.

General and administrative

   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
General and administrative
   $               16,464       $               12,335       $               4,129               33 %
As a percent of total revenue
   7%    5%
General and administrative headcount, end of period
   299       384       (85 ) (22)%

~~General and administrative expenses include~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
General and administrative ⁽¹⁾	$	12,676		$	16,464		$	(3,788	)	(23	)%
As a percent of total revenue	6		%	7		%
General and administrative headcount, end of period ⁽²⁾	373			299			74			25	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. ~~They also include~~Also includes accounting, legal, and other professional consulting and administrative fees. ⁽²⁾The ~~general and administrative~~ headcount includes employees in ~~human resources,~~ information technology and corporate services departments, whose costs are partially allocated to other operating expense areas.

The decrease in the three months ended March 31, 2019 was primarily due to a decrease in compensation and benefits of $1.2 million, due to a decrease in equity compensation, and a decrease of $1.9 million in legal and other professional services fees. Despite the headcount increase, associated compensation and benefits did not increase because these costs are primarily allocated to other operating expense areas.

Stock-based compensation



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Cost of revenues	$	4,519		$	3,701		$	818		22	%
Selling and marketing	7,374			4,658			2,716			58	%
Research and development	4,560			3,637			923			25	%
General and administrative	1,897			3,113			(1,216		)	(39	)%
	$	18,350		$	15,109		$	3,241		21	%
Income tax benefit	$	(3,740	)	$	(3,141	)	$	(599	)	19	%

The increase in the three months ended March 31, 2018 was primarily due to an increase in compensation and benefits of $1.1 million, attributable to equity compensation, and an increase of $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
March 31,    Change
(in thousands)    2018    2017
Cost of revenues
   $                   3,701    $                   3,622    $                     79                    2 %
Selling and marketing
   4,658    3,405    1,253    37 %
Research and development
   3,637    3,312    325    10 %
General and administrative
   3,113    2,169    944    44 %





   $ 15,109    $ 12,508    $ 2,601    21 %





Income tax benefit
   $ (3,141)    $ (3,815)    $ 674    (18)%

~~The increase~~2019 was primarily due to the increased value of our annual periodic equity awards granted in March ~~2018~~2019 and ~~2017.~~2018. These awards generally have a five-year vesting schedule.

Non-operating (expense) income, net ~~income/(expense), net~~

   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
Foreign currency transaction (loss)/gain
   $                   (1,085)    $                   745    $               (1,830)                    n/m
Interest income, net
   764    205    559    273 %
Other income/(expense), net
   363    (279)    642    n/m





   $ 42    $ 671    $ (629)    (94)%

~~n/m -~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Foreign currency transaction loss	$	(3,712	)	$	(1,085	)	$	(2,627	)	242	%
Interest income, net	723			764			(41		)	(5	)%
Other income, net	—			363			(363		)	(100	)%
	$	(2,989	)	$	42		$	(3,031	)	*

* not meaningful

The change in foreign currency transaction ~~(loss)/gain is~~loss was primarily due to unrealized losses on foreign currency denominated ~~receivables. The adoption~~cash and receivables of ~~ASC 606 materially increased the unbilled receivables we have recorded, which has increased the impact of~~our U.K subsidiary due to fluctuations in foreign currency exchange rates ~~reported in our unaudited condensed consolidated statements of operations. See Item 3. “Quantitative~~as the British Pound strengthened against the Euro and ~~Qualitative Disclosures about Market Risk” for additional information.~~

~~(Benefit)/provision for~~U.S. dollar.

Benefit from income taxes

   Three Months Ended
March 31,    Change
(Dollars in thousands)    2018    2017
(Benefit)/provision for income taxes
   $             (4,222)       $             13,615       $               (17,837)                    n/m
Effective income tax rate
   (53)%    20%

~~n/m - not meaningful~~

~~During the three months ended March 31, 2018, our 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~~



	Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change
Benefit from income taxes	$	(8,300	)	$	(4,222	)	$	(4,078	)	97	%
Effective income tax rate	22		%	(53		)%

~~an increase in U.S. research and development tax credits.~~

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

During the three months ended March 31, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.

LIQUIDITY AND CAPITAL RESOURCES

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

Operating activities
   $                 55,655    $                 32,444
Investing activities
   (31,278)    (3,727)
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




(in thousands)    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
   $                 254,837    $                 223,748



	Three Months Ended March 31,
(in thousands)	2019			2018
Cash provided by (used in):
Operating activities	$	22,703		$	55,655
Investing activities	(1,466		)	(31,278		)
Financing activities	(25,587		)	(23,052		)
Effect of exchange rates on cash and cash equivalents	295			2,186
Net (decrease) increase in cash and cash equivalents	$	(4,055	)	$	3,511



(in thousands)	March 31, 2019		December 31, 2018
Held by U.S. entities	$	141,051	$	143,533
Held by foreign entities	61,120		63,890
Total cash, cash equivalents, and marketable securities	$	202,171	$	207,423

We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, quarterly cash dividends, and stock repurchases for at least the next 12 months.

If it became necessary to repatriate foreign funds, we may be required to pay U.S. state and local taxes, as well as foreign taxes, upon repatriation. Due to the complexity of ~~the~~ income tax laws and regulations, and the effects of the Tax Reform Act, it is impracticable to estimate the amount of taxes we would have to pay.

Cash provided by operating activities

~~The primary drivers during~~

As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth in the near term. Cash from cloud arrangements is generally collected throughout the service period of three ~~months ended March 31, 2018 were net income of $12.2 million and $49.6 million~~to five years, while cash from ~~receivables and contract assets, largely due to increased cash collections and~~perpetual license arrangements is generally collected upfront, shortly after the ~~timing of billings.~~

license rights become effective.

The primary driver during the three months ended March 31, ~~2017~~2019 was ~~net income~~$78.1 million in cash generated from client receivables, largely due to cash collections and the timing of ~~$53.0 million.~~

billings.

Cash used in investing activities

~~During~~

Cash used in investing activities is primarily driven by the ~~three months ended March 31, 2018, we purchased investments~~timing of ~~$35.2 million~~investment maturities and ~~made investments~~purchases of ~~$2.1 million in property and equipment, partially offset by proceeds received from maturities of investments (including called marketable debt securities) of $6 million.~~

During the three months ended March 31, 2017, we purchased investments of $3.3 million, partially offset by proceeds received from maturities of investments (including called marketable debt securities) of $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.

new investments.

Cash used in financing activities

We used cash primarily for repurchases of our common stock under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.

~~Since 2004, our Board of Directors has approved annual~~

Stock repurchase program ⁽¹⁾

The changes in the remaining stock repurchase ~~programs that have authorized the repurchase in the aggregate of up to $195 million of our common stock.~~authority was:



	Three Months Ended March 31,
(in thousands)	2019
January 1	$	6,620
Authorizations ⁽²⁾	60,000
Repurchases	(7,586		)
March 31,	$	59,034

⁽¹⁾ Purchases under these programs have been made on the open market. As⁽²⁾ On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March ~~31, 2018, $159.2 million had been repurchased, $29.2 million remained available for repurchase,~~15, 2019 and ~~$6.4 million had expired.~~

June 30, 2020.

Common stock repurchases

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

⁽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~~

              Three Months Ended
March 31,
    (per share) 2018 2017
    Dividends declared
$                      0.03 $                      0.03



	Three Months Ended March 31,
	2019			2018
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	232	$	14,838	270	$	15,575
Stock repurchase program ⁽¹⁾
Repurchases paid	141	7,387		89	4,998
Repurchases unsettled at period end	3	199		12	690
Activity in period ⁽²⁾	376	$	22,424	371	$	21,263

⁽¹⁾ Represents activity under our publicly announced stock repurchase programs. ⁽²⁾During the three months ended March 31, 2019 and 2018, instead of receiving cash from the equity holders, we withheld shares with a value of $12.2 million and ~~2017, we paid cash dividends~~$11.2 million, respectively, for the exercise price of ~~$2.3 million.~~ options. These amounts have been excluded from the table above.



	Three Months Ended March 31,
(in thousands)	2019		2018
Dividend payments to shareholders	$	2,363	$	2,344

It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify ~~this~~the dividend program at any time without prior notice.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates. Other than the item discussed below, there were no significant changes to our market risk exposure during the ~~first~~ three months ended March 31, ~~2018.~~

~~See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” and Item 1A. “Risk Factors - We are exposed~~2019 to ~~fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” included~~the market risk exposure disclosed in our Annual Report on Form10-K for the year ended December 31, ~~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.

2018.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of ~~Disclosure Controls~~disclosure controls and ~~Procedures~~

procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of March 31, ~~2018.~~2019. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, ~~2018.~~

2019.

(b) Changes in ~~Internal Control~~internal control over ~~Financial Reporting~~

financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange ~~Act~~Act) during the quarter ended March 31, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report onForm 10-K for the year ended December 31, ~~2017.~~2018. 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 three months ended March 31, ~~2018~~2019 to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

2018.

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 March 31, ~~2018:~~

(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

2019.



(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, 2019 - January 31, 2019	153	$	51.30	129	$	18
February 1, 2019 - February 28, 2019	129	$	63.81	—	$	18
March 1, 2019 - March 31, 2019	285	$	64.97	15	$	59,034
	567	$	61.03

⁽¹⁾Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

⁽²⁾ On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of Rule 10b5-1 under the Exchange Act, and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All stock repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

+ 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~~

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.~~

~~Dated: May 10, 2018~~		Pegasystems Inc.
			~~By:~~
Dated:	May 7, 2019	By:	/s/ KENNETH STILLWELL
					Kenneth Stillwell
					Chief Financial Officer and Chief Administrative Officer
					(Principal Financial Officer)



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

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



Large accelerated filer ☒x	Accelerated filer ☐¨	Non-accelerated filer ☐ ~~(Do not check if smaller reporting company)~~ ¨	Smaller reporting company ☐¨	Emerging growth company ☐¨



		Page
PART I - FINANCIAL INFORMATION


Item 1. Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 and December 31, ~~2017~~ 2018			4	3

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2018~~2019 and ~~2017~~ 2018			5	4

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, ~~2018~~2019 and ~~2017~~ 2018			6	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	6
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2018~~2019 and ~~2017~~ 2018			7

Notes to Unaudited Condensed Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk			27	22

Item 4. Controls and Procedures	22
	28

PART II - OTHER INFORMATION


Item 1A. Risk Factors			29	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6. Exhibits	23
29
Signature
~~Item 6. Exhibits~~24			29

~~Signature~~			30


	March 31, 2018		December 31, 2017
			As Adjusted⁽¹⁾
Assets
Current assets:
Cash and cash equivalents	$	165,790	$	162,279
Marketable securities		89,047		61,469

Total cash, cash equivalents, and marketable securities		254,837		223,748
Accounts receivable		164,981		222,735
Unbilled receivables		153,657		158,898
Other current assets		50,692		41,135

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

Total assets	$	1,005,955	$	1,011,567

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	12,175	$	17,370
Accrued expenses		48,278		45,508
Accrued compensation and related expenses		44,093		66,040
Deferred revenue		175,586		166,297

Total current liabilities		280,132		295,215
Deferred income tax liabilities		39,932		38,463
Other long-term liabilities		23,768		23,652

Total liabilities		343,832		357,330
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—		—
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		145,962		152,097
Retained earnings		517,893		508,051
Accumulated other comprehensive loss		(2,517)		(6,692)

Total stockholders’ equity		662,123		654,237

Total liabilities and stockholders’ equity	$	1,005,955	$	1,011,567


	Three Months Ended March 31,
	2018		2017
			As Adjusted⁽¹⁾
Revenue
Software license	$	87,773	$	127,008
Maintenance		64,525		58,713
Services		82,884		70,588

Total revenue		235,182		256,309

Cost of revenue
Software license		1,255		1,300
Maintenance		6,082		7,218
Services		68,277		59,572

Total cost of revenue		75,614		68,090

Gross profit		159,568		188,219

Operating expenses
Selling and marketing		88,383		69,681
Research and development		46,785		40,296
General and administrative		16,464		12,335

Total operating expenses		151,632		122,312

Income from operations		7,936		65,907

Foreign currency transaction (loss)/gain		(1,085)		745
Interest income, net		764		205
Other income/(expense), net		363		(279)

Income before (benefit)/provision for income taxes		7,978		66,578
(Benefit)/provision for income taxes		(4,222)		13,615

Net income	$	12,200	$	52,963

Earnings per share
Basic	$	0.16	$	0.69
Diluted	$	0.15	$	0.65
Weighted-average number of common shares outstanding
Basic		78,236		76,761
Diluted		83,102		81,875
Cash dividends declared per share	$	0.03	$	0.03


	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


(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


	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%


	Three Months Ended March 31,
(per share)	2018	2017
Dividends declared	$ 0.03	$ 0.03


(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++~~ 31.1		~~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+		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.