UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

 

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

            For the quarterly period ended March 31,June 30, 2018

OR

 

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

Commission File Number:1-11859

 

 

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Massachusetts 04-2787865
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
One Rogers Street, Cambridge, MA 02142-1209
(Address of principal executive offices) (Zip Code)

(617)374-9600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒     No  ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes  ☒        No  ☐

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

 

Large accelerated filer ☒  Accelerated filer ☐  

Non-accelerated filer ☐

(Do not check if smaller reporting company)

  Smaller reporting company ☐  Emerging growth company ☐

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

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

There were 78,575,80378,645,411 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on MayAugust 1, 2018.

 

 


PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM10-Q

TABLE OF CONTENTS

 

           Page         
PART I - FINANCIAL INFORMATION 

Item 1. Unaudited Condensed Consolidated Financial Statements

  

 Unaudited Condensed Consolidated Balance Sheets as of March  31,June  30, 2018 and December 31, 2017

3

  Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017

   4 

  Unaudited Condensed Consolidated Statements of OperationsComprehensive (Loss)/Income for the three and six months ended March 31,June 30, 2018 and 2017

   5 

  Unaudited Condensed Consolidated Statements of Comprehensive IncomeCash Flows for the threesix months ended March 31,June 30, 2018 and 2017

   6

  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

7 

 Notes to Unaudited Condensed Consolidated Financial Statements

   87 

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

   2019 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   2726 

Item 4. Controls and Procedures

   2826 
PART II - OTHER INFORMATION 

Item 1A. Risk Factors

   2928 

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

   2928 

Item 6. Exhibits

   2928 

Signature

   3029 


PART I - FINANCIAL INFORMATION

ITEM 1.

         UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (1)

(in thousands)

 

        March 31,      
2018
   December 31,
2017
 
  

 

     As Adjusted(1)           June 30,      
2018
     December 31,  
2017
 

Assets

        

Current assets:

        

Cash and cash equivalents

  $165,790     $162,279     $144,291     $162,279   

Marketable securities

   89,047      61,469      99,292      61,469   
  

 

   

 

   

 

   

 

 

Total cash, cash equivalents, and marketable securities

   254,837      223,748      243,583      223,748   

Accounts receivable

   164,981      222,735      141,384      222,735   

Unbilled receivables

   153,657      158,898      151,354      158,898   

Other current assets

   50,692      41,135      63,864      41,135   
  

 

   

 

   

 

   

 

 

Total current assets

   624,167      646,516      600,185      646,516   

Long-term unbilled receivables

   180,077      160,708      169,330      160,708   

Goodwill

   73,017      72,952      72,911      72,952   

Other long-term assets

   128,694      131,391      130,614      131,391   
  

 

   

 

   

 

   

 

 

Total assets

  $1,005,955     $1,011,567     $973,040     $1,011,567   
  

 

   

 

   

 

   

 

 

Liabilities and stockholders’ equity

        

Current liabilities:

        

Accounts payable

  $12,175     $17,370     $14,411     $17,370   

Accrued expenses

   48,278      45,508      44,882      45,508   

Accrued compensation and related expenses

   44,093      66,040      48,691      66,040   

Deferred revenue

   175,586      166,297      163,525      166,297   
  

 

   

 

   

 

   

 

 

Total current liabilities

   280,132      295,215      271,509      295,215   

Deferred income tax liabilities

   39,932      38,463      38,208      38,463   

Other long-term liabilities

   23,768      23,652      24,151      23,652   
  

 

   

 

   

 

   

 

 

Total liabilities

   343,832      357,330      333,868      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   

Common stock, 200,000 shares authorized; 78,748 and 78,081 shares issued and outstanding at

June 30, 2018 and December 31, 2017, respectively

   787      781   

Additionalpaid-in capital

   145,962      152,097      141,400      152,097   

Retained earnings

   517,893      508,051      506,769      508,051   

Accumulated other comprehensive loss

   (2,517)     (6,692)     (9,784)     (6,692)  
  

 

   

 

   

 

   

 

 

Total stockholders’ equity

   662,123      654,237      639,172      654,237   
  

 

   

 

   

 

   

 

 

Total liabilities and stockholders’ equity

  $1,005,955     $1,011,567     $973,040     $1,011,567   
  

 

   

 

   

 

   

 

 

 

 (1) The

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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1)

(in thousands, except per share amounts)

 

  Three Months Ended
March 31,
 
  2018 2017   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  

 

 As Adjusted(1)   2018   2017   2018   2017 

Revenue

           

Software license

  $87,773   $127,008    $44,784    $51,150    $132,557    $178,158  

Maintenance

   64,525   58,713     65,906     59,424     130,431     118,137  

Services

   82,884   70,588     86,089     76,022     168,973     146,610  
  

 

  

 

   

 

   

 

   

 

   

 

 

Total revenue

   235,182   256,309     196,779     186,596     431,961     442,905  
  

 

  

 

   

 

   

 

   

 

   

 

 

Cost of revenue

           

Software license

   1,255   1,300     1,262     1,250     2,517     2,550  

Maintenance

   6,082   7,218     5,874     7,011     11,956     14,229  

Services

   68,277   59,572     66,681     59,614     134,958     119,186  
  

 

  

 

   

 

   

 

   

 

   

 

 

Total cost of revenue

   75,614   68,090     73,817     67,875     149,431     135,965  
  

 

  

 

   

 

   

 

   

 

   

 

 

Gross profit

   159,568   188,219     122,962     118,721     282,530     306,940  
  

 

  

 

   

 

   

 

   

 

   

 

 

Operating expenses

           

Selling and marketing

   88,383   69,681     93,972     75,200     182,355     144,881  

Research and development

   46,785   40,296     41,972     39,762     88,757     80,058  

General and administrative

   16,464   12,335     10,181     12,706     26,645     25,041  
  

 

  

 

   

 

   

 

   

 

   

 

 

Total operating expenses

   151,632   122,312     146,125     127,668     297,757     249,980  
  

 

  

 

   

 

   

 

   

 

   

 

 

Income from operations

   7,936   65,907  

(Loss)/income from operations

   (23,163)    (8,947)    (15,227)    56,960  

Foreign currency transaction gain/(loss)

   1,244     (2,242)    159     (1,497) 

Interest income, net

   629     202     1,393     407  

Other income, net

   —     566     363     287  
  

 

  

 

   

 

   

 

   

 

   

 

 

Foreign currency transaction (loss)/gain

   (1,085)  745  

Interest income, net

   764   205  

Other income/(expense), net

   363   (279) 

(Loss)/income before (benefit) from income taxes

   (21,290)    (10,421)    (13,312)    56,157  

(Benefit) from income taxes

   (10,881)    (14,123)    (15,103)    (508) 
  

 

  

 

   

 

   

 

   

 

   

 

 

Income before (benefit)/provision for income taxes

   7,978   66,578  

(Benefit)/provision for income taxes

   (4,222)  13,615  

Net (loss)/income

  $            (10,409)   $            3,702    $            1,791    $            56,665  
  

 

  

 

   

 

   

 

   

 

   

 

 

Net income

  $            12,200   $            52,963  
  

 

  

 

 

Earnings per share

   

(Loss)/earnings per share

        

Basic

  $0.16   $0.69    $(0.13)   $0.05    $0.02    $0.74  

Diluted

  $0.15   $0.65    $(0.13)   $0.04    $0.02    $0.69  

Weighted-average number of common shares outstanding

           

Basic

   78,236   76,761     78,635     77,313     78,436     77,039  

Diluted

   83,102   81,875     78,635     82,945     83,247     82,412  

Cash dividends declared per share

  $0.03   $0.03    $0.03    $0.03    $0.06    $0.06  

 

 (1)The

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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME(1)

(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  
  

 

 

  

 

 

 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 

Net (loss)/income

  $(10,409)   $3,702    $1,791    $56,665  

Other comprehensive (loss)/income, net of tax

        

 Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax

   73     (1)    (115)    126  

 Foreign currency translation adjustments

   (7,414)    4,043     (2,977)    6,272  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Total other comprehensive (loss)/income, net of tax

   (7,341)    4,042     (3,092)    6,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

  $        (17,750)   $        7,744    $        (1,301)   $        63,063  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 (1)The

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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (1)

(in thousands)

 

  Three Months Ended
March 31,
 
  2018 2017   Six Months Ended
June 30,
 
  

 

 As Adjusted(1)   2018   2017 

Operating activities:

       

Net income

  $12,200    $52,963     $1,791     $56,665   

Adjustments to reconcile net income to cash provided by operating activities:

       

Change in operating assets and liabilities, net

   19,591    (47,555)     30,158      (14,874)  

Stock-based compensation expense

   15,109    12,508      31,165      26,440   

Depreciation and amortization of intangible assets

   6,145    6,088      12,474      12,356   

Othernon-cash

   2,610    8,440      (156)     5,182   
  

 

  

 

   

 

   

 

 

Cash provided by operating activities

   55,655    32,444      75,432      85,769   

Investing activities:

       

Purchases of investments

   (35,204)   (3,322)     (51,395)     (16,656)  

Proceeds from maturities and called investments

   5,995    2,300      11,546      20,824   

Other

   (2,069)   (2,705)     (6,520)     (5,327)  
  

 

  

 

   

 

   

 

 

Cash used in investing activities

   (31,278)   (3,727)     (46,369)     (1,159)  

Financing activities:

       

Dividend payments to shareholders

   (2,344)   (2,298)     (4,702)     (4,613)  

Common stock repurchases

   (20,708)   (13,696)     (41,123)     (30,247)  
  

 

  

 

   

 

   

 

 

Cash used in financing activities

   (23,052)   (15,994)     (45,825)     (34,860)  

Effect of exchange rates on cash and cash equivalents

   2,186    521      (1,226)     1,282   
  

 

  

 

   

 

   

 

 

Net increase in cash and cash equivalents

   3,511    13,244   

Net (decrease)/increase in cash and cash equivalents

   (17,988)     51,032   

Cash and cash equivalents, beginning of period

   162,279    70,594      162,279      70,594   
  

 

  

 

   

 

   

 

 

Cash and cash equivalents, end of period

  $            165,790    $            83,838     $            144,291     $            121,626   
  

 

  

 

   

 

   

 

 

 

 (1)The

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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form10-K for the year ended December 31, 2017.

On January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the full retrospective method which required each prior reporting period presented to be adjusted to reflect the application of this ASU. See Note 2. “New Accounting Pronouncements” for additional information.

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

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

2. NEW ACCOUNTING PRONOUNCEMENTS

Financial Instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASUNo. 2016-13, “Financial Instruments - Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

Leases

In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities andright-of-use assets upon adoption with no material impact to its results of operations and cash flows.

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 onOn January 1, 2018 using the full retrospective method, which required the Company to retrospectively adjustadopted the ASC 606 revenue recognition standard and has adjusted prior periods presented.to conform.

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 licenselicenses with extended payment terms and term licenselicenses 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 or as either a cumulative adjustment to retained earnings as of December 31, 2015 or as revenue in periods thereafter.2015. Unbilled receivables in the Company’s unaudited condensed consolidated balance sheets increased significantly upon adoption due to the revenue from perpetual license with extended payment terms and term licenselicenses being recognized prior to amounts billed, or prepaid by, clients.clients and perpetual licenses with extended payment terms.

 

  

Allocation of future credits and significant discounts - The perpetualPerpetual 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

  

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 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   December 31, 2017 
(in thousands)     Previously reported               Adjustments                     As adjusted                 Previously reported                 Adjustments                       As adjusted           

Accounts receivable and unbilled receivables

 $248,331   $133,302   $381,633  

Contract assets

  —   914   914  

Assets

      

Accounts receivable, unbilled receivables, and contract assets

  $248,331    $134,216    $382,547  

Long-term unbilled receivables

  —   160,708   160,708     —     160,708     160,708  

Deferred income taxes

 57,127   (42,887)  14,240     57,127     (42,887)    14,240  

Deferred contract costs

  —   37,924   37,924     —     37,924     37,924  

Other assets(1)

 416,148    —   416,148     416,148     ���     416,148  
 

 

  

 

  

 

   

 

   

 

   

 

 

Total Assets

 721,606   289,961   1,011,567    $721,606    $289,961    $1,011,567  
 

 

  

 

  

 

   

 

   

 

   

 

 

Liabilities and stockholders’ equity

      

Deferred revenue

 195,073   (28,776)  166,297    $195,073    $(28,776)   $166,297  

Long-term deferred revenue

 6,591   (2,885)  3,706     6,591     (2,885)    3,706  

Deferred income tax liabilities

  —   38,463   38,463     —     38,463     38,463  

Other liabilities(2)

 148,864    —   148,864     148,864     —     148,864  
 

 

  

 

  

 

   

 

   

 

   

 

 

Total liabilities

 350,528   6,802   357,330     350,528     6,802     357,330  

Foreign currency translation adjustments

 (3,494)  (2,966)  (6,460)    (3,494)    (2,966)    (6,460) 

Retained earnings

 221,926   286,125   508,051     221,926     286,125     508,051  

Other equity(3)

 152,646    —   152,646     152,646     —     152,646  
 

 

  

 

  

 

   

 

   

 

   

 

 

Total stockholders’ equity

 371,078   283,159   654,237     371,078     283,159     654,237  
 

 

  

 

  

 

   

 

   

 

   

 

 

Total liabilities and stockholders’ equity

 $        721,606   $        289,961   $        1,011,567    $        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 Form10-K for the year ended December 31, 2017).

 (2) 

Includes accounts payable, accrued expenses, accrued compensation and related expenses, income taxes payable, and other long-term liabilities (as reflected in the consolidated balance sheets in the Annual Report on Form10-K for the year ended December 31, 2017).

 (3)

Includes common stock, additionalpaid-in capital, and net unrealized loss onavailable-for-sale marketable securities (as reflected in the consolidated balance sheets in the Annual Report on Form10-K for the year ended December 31, 2017).

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 Three Months Ended 
 March 31, 2017   Three months ended June 30, 2017   Six months ended June 30, 2017 
(in thousands, except per share amounts)     Previously reported             Adjustments                   As adjusted               Previously  
Reported
     Adjustments       As Adjusted       Previously  
Reported
     Adjustments       As Adjusted   

Revenue:

               

Software license

 $          92,390   $        34,618   $        127,008    $61,037    $(9,887)   $51,150    $153,427    $24,731    $178,158  

Maintenance

 58,965   (252)  58,713     59,590     (166)    59,424     118,555     (418)    118,137  

Services

 71,892   (1,304)  70,588     77,353     (1,331)    76,022     149,245     (2,635)    146,610  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total revenue

 223,247   33,062   256,309     197,980     (11,384)    186,596     421,227     21,678     442,905  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cost of revenue:

               

Software license

 1,300    —   1,300     1,250     —      1,250     2,550     —      2,550  

Maintenance

 7,218    —   7,218     7,011     —      7,011     14,229     —      14,229  

Services

 59,572    —   59,572     59,614     —      59,614     119,186     —      119,186  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total cost of revenue

 68,090    —   68,090     67,875     —      67,875     135,965     —      135,965  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Gross profit

 155,157   33,062   188,219     130,105     (11,384)    118,721     285,262     21,678     306,940  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Operating expenses:

               

Selling and marketing

 71,288   (1,607 69,681     75,887     (687)    75,200     147,175     (2,294)    144,881  

Research and development

 40,296    —   40,296     39,762     —      39,762     80,058     —      80,058  

General and administrative

 12,335    —   12,335     12,706     —      12,706     25,041     —      25,041  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total operating expenses

 123,919   (1,607 122,312     128,355     (687)    127,668     252,274     (2,294)    249,980  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Income from operations

 31,238   34,669   65,907  

Income/(loss) from operations

   1,750     (10,697)    (8,947)    32,988     23,972     56,960  

Foreign currency transaction loss

   (917)    (1,325)    (2,242)    (241)    (1,256)    (1,497) 

Interest income, net

   161     41     202     326     81     407  

Other income, net

   566     —      566     287     —      287  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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  

Income/(loss) before benefit from income taxes

   1,560     (11,981)    (10,421)    33,360     22,797     56,157  

Benefit from income taxes

   (9,846)    (4,277)    (14,123)    (5,067)    4,559     (508) 
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net income

 $27,021   $25,942   $52,963    $11,406    $(7,704)   $3,702    $38,427    $18,238    $56,665  
 

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Earnings per share:

               

Basic

 $0.35    $0.69    $0.15      $0.05    $0.50      $0.74  
 

 

   

 

   

 

     

 

   

 

     

 

 

Diluted

 $0.33    $0.65    $0.14      $0.04    $0.47      $0.69  
 

 

   

 

   

 

     

 

   

 

     

 

 

Weighted-average number of common shares outstanding:

               

Basic

 76,761    76,761     77,313       77,313     77,039       77,039  

Diluted

 81,875    81,875     82,945       82,945     82,412       82,412  

Adoption of ASC 606 and ASC340-40 had no impact on total cash from or used in operating, financing, or investing activities in the Company’s unaudited condensed consolidated statements of cash flows for the threesix months ended March 31,June 30, 2017.

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         (306)    38,456  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

  December 31, 2017   June 30, 2018 
(in thousands)      Amortized Cost           Unrealized Gains           Unrealized Losses               Fair Value               Amortized Cost           Unrealized Gains           Unrealized Losses               Fair Value         

Municipal bonds

  $32,996    $—    $(148)   $32,848    $55,466    $20    $(112)   $55,374  

Corporate bonds

   28,757         (137)    28,621     44,258         (342)    43,918  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $61,753    $   $(285)   $61,469    $99,724    $22    $(454)   $99,292  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

   December 31, 2017 
(in thousands)      Amortized Cost           Unrealized Gains           Unrealized Losses               Fair Value         

Municipal bonds

  $32,996    $—    $(148)   $32,848  

Corporate bonds

   28,757         (137)    28,621  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31,June 30, 2018, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

As of March 31,June 30, 2018, remaining maturities of marketable securities ranged from MayJuly 2018 to FebruaryAugust 2021, with a weighted-average remaining maturity of approximately 1.41.5 years.

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

 

(in thousands)

            March 31,          
2018
         December 31,      
2017
             June 30,          
2018
         December 31,      
2017
 

Accounts receivable

  $        164,981    $        222,735    $        141,384    $        222,735  

Unbilled receivables

   153,657     158,898     151,354     158,898  

Long-term unbilled receivables

   180,077     160,708     169,330     160,708  
  

 

   

 

   

 

   

 

 

Total receivables

  $498,715    $542,341  
  

 

   

 

   $462,068    $542,341  
  

 

   

 

 

Unbilled receivables is the amount due from clients where the only condition on the right of payment is the passage of time. The Company regularly reassessesassesses receivables for collectability. As of March 31,June 30, 2018 and December 31, 2017, the allowance for doubtful accounts was not material.

Long-term unbilledUnbilled 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  
  

 

 

 
(in thousands)        June 30,        
2018

1 Year or Less

$        151,354 

1-2 Years

79,654 

2-5 Years

89,676 

$320,684 

Contract assets and deferred revenue

 

(in thousands)

            March 31,          
2018
       December 31,      
2017
             June 30,          
2018
         December 31,      
2017
 

Contract assets(1)

  $788   $914    $2,425    $914  

Long-term contract assets(2)

   1,545     —  
  

 

   

 

 
  $3,970    $914  
  

 

   

 

 

Deferred revenue

   175,586   166,297    $163,525    $166,297  

Long-term deferred revenue(2)

  $3,277   $3,706  

Long-term deferred revenue(3)

   6,210     3,706  
  

 

   

 

 
  $169,735    $170,003  
  

 

   

 

 

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

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

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

Contract assets and deferred revenue are presented net at the contract level for each reporting period. Contract assets are unbilled amounts resulting fromunder 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The change in deferred revenue in the threesix months ended March 31,June 30, 2018, was primarily due to new billings in advance of revenue recognition and $168.2 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 recognizedduring the period that was included in deferred revenue at December 31, 2017.

Major clients

No client represented 10% or more of the Company’s total receivables as of March 31,June 30, 2018 or December 31, 2017.

5. DEFERRED CONTRACT COSTS

Sales incentives paid by the Company are considered incremental and recoverable costs of obtaining a contract with a client. These costs are deferred, as a long-term asset, and then amortized using the straight-line method over the period of benefit which is on average five years. The Company determined the period of benefit by taking into consideration client contracts, the Company’s technology, 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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

amortization period is one year or less. During

(in thousands)      June 30,    
2018
       December 31,    
2017
 

Deferred contract costs(1)

  $                        42,246     $                        37,924   

(1) Included in other long-term assets in the three months ended March 31, 2018 and 2017, impairmentunaudited condensed consolidated balance sheets.

Amortization of deferred contract costs was not material.as follows:

 

(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,

              Three Months Ended        
June 30,
           Six Months Ended        
June 30,
 
(in thousands) 

        2018        

 

        2017        

        2018               2017               2018               2017       

Amortization of deferred contract costs(1)

 $3,789 $2,594  $3,809    $2,902    $7,598    $5,496  

  (1)Included in selling and marketing expenses in the unaudited condensed consolidated statement of operations.

During the six months ended June 30, 2018 and 2017, impairment of deferred contract costs was not material.

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The changeschange in the carrying amount of goodwill werewas as follows:

 

(in thousands)             ThreeSix Months Ended             
March  31,June 30,
 
 2018 

Balance as of January 1,

 $72,952  

Purchase price adjustments to goodwill

— 

Currency translation adjustments

  65 (41) 
 

 

 

 

Balance as of March 31,June 30,

 $73,01772,911  
 

 

 

 

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives as follows:

 

 

March 31, 2018

 

June 30, 2018

(in thousands) 

        Useful Lives        

 

Cost

 

Accumulated
Amortization

 

Net Book Value(1)

 

        Useful Lives        

 

Cost

 

Accumulated
Amortization

 

Net Book Value(1)

Client-related intangibles

 9-10 years  $                63,197  $                (46,456) $                16,741  9-10 years  $                63,143  $                 (48,033) $                 15,110 

Technology

 7-10 years  58,942  (46,603) 12,339  7-10 years  58,942  (47,835) 11,107 

Other intangibles

 —  5,361  (5,361) —  —  5,361  (5,361) — 
  

 

 

 

 

 

  

 

 

 

 

 

  $              127,500  $                (98,420) $                29,080   $                  127,446  $                  (101,229) $                    26,217 
  

 

 

 

 

 

  

 

 

 

 

 

(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 
  

 

 

 

 

 

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

 

  

 

 

  

 

 

 

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

Amortization of intangiblesintangible assets is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:

 

 Three Months Ended
March 31,
 
(in thousands)              Three Months Ended             
June 30,
               Six Months Ended             
June 30,
 
 2018 2017  2018   2017   2018   2017 

Cost of revenue

 

 

$

 

                      1,232 

 

 

 

 

$

 

                      1,334 

 

 

  $                1,231    $                1,305    $                2,463    $                2,639  

Selling and marketing

 1,605   1,866     1,605     1,869     3,210     3,735  
 

 

  

 

   

 

   

 

   

 

   

 

 
 $                2,837   $                3,200    $2,836    $3,174    $5,673    $6,374  
 

 

  

 

   

 

   

 

   

 

   

 

 

7. ACCRUED EXPENSES

 

(in thousands) March 31,
2018
 December 31,
2017
   June 30,
2018
   December 31,
2017
 

Outside professional services

 

 

$

 

                    15,152 

 

 

 

 

$

 

                    14,468 

 

 

  $                    10,143    $                    14,468  

Income and other taxes

 7,272   7,420     4,837     7,420  

Marketing and sales program expenses

 8,724   6,444     9,282     6,444  

Dividends payable

 2,358   2,344     2,365     2,344  

Employee-related expenses

 5,091   4,065     5,737     4,065  

Other

 9,681   10,767     12,518     10,767  
 

 

  

 

   

 

   

 

 
 $48,278   $45,508    $44,882    $45,508  
 

 

  

 

   

 

   

 

 

8. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a 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.

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

 

Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

Level 2 - significant other inputs that are observable either directly or indirectly; and

 

Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The Company’s cash equivalents are composed of money market funds and time deposits which are classified as 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 threesix months ended March 31,June 30, 2018.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

 

 March 31, 2018   June 30, 2018 
         Level 1                 Level 2                 Level 3                 Total                   Level 1                   Level 2                   Level 3                   Total         

Cash equivalents

 $                    130    $                    30,072    $                    —    $                    30,202     $                    28     $                    32,009     $                    —     $                    32,037   

Marketable securities:

            

Municipal bonds

 $—    $50,591    $—    $50,591      —      55,374      —      55,374   

Corporate bonds

  —    38,456     —    38,456      —      43,918      —      43,918   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total marketable securities

 $—    $89,047    $—    $89,047      —      99,292      —      99,292   

Investments in privately-held companies(1)

 $—    $—    $2,060    $2,060      —      —      2,060      2,060   

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

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

 

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

 

 December 31, 2017   December 31, 2017 
         Level 1                 Level 2                 Level 3                 Total                   Level 1                   Level 2                   Level 3                   Total         

Cash equivalents

 $2,720    $40,051    $—    $42,771     $2,720     $40,051     $—     $42,771   

Marketable securities:

            

Municipal bonds

 $—    $32,848    $—    $32,848      —      32,848      —      32,848   

Corporate bonds

  —    28,621     —    28,621      —      28,621      —      28,621   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total marketable securities

 $—    $61,469    $—    $61,469      —      61,469      —      61,469   

Investments in privately-held companies(1)

 $—    $—    $1,030    $1,030      —      —      1,030      1,030   

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

 

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

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

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded at fair value on a nonrecurring basis, including property and equipment and intangible assets, are recognized at fair value when they are impaired. During the threesix months ended March 31,June 30, 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

The Company’s revenue is primarily derived from sales of software licenses, maintenance fees related to the Company’s software licenses, and services.from:

 

License

Software 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

Services revenue is primarily derived from cloud revenue, which is sales of the Company’s hosted Pega Platform and software application environments.

Consultingenvironments and consulting revenue which is primarily related to new license implementations.

Contracts with multiple performance obligations

The Company’s license and cloud arrangements often contain multiple performance obligations, including maintenance, consulting, and training. For contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. If the transaction price contains discounts or the Company expects to provide a future price concession, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price will beare estimated and recognized in revenue as the Company satisfies itseach performance obligationsobligation to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional products or services, the Company assesses whether or not any discount on the included 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Software licenses

The Company has concluded that its software licenses are distinct performance obligations as the client can benefit from the software on its own. Software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. The Company’s license arrangements generally contain multiple performance obligations, including consulting, training, and maintenance. Stand-alone selling price for software licenses is determined using the residual approach. The Company utilizes the residual approach as license performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company evaluates whether the residual approach is appropriate for its license and cloud performance obligations when sold with other performance obligations. As a result, if the stand­alonestandalone selling price analysis illustrates that the license and cloud performance obligations are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.

Term license fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the license agreement, which is typically three to five years and may be renewed for additional terms at the client’s option. Perpetual license fees are usually payable when the contract is executed. The Company recognizes

Maintenance

Software maintenance contracts entitle clients to receive technical support and software license revenueupdates, on a when control is transferred, and if available basis, during the corresponding difference betweenterm of the amount invoicedmaintenance contract. Technical support and recognizedsoftware updates are considered distinct services but accounted for as a single performance obligation as they each constitute a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Software maintenance revenue is recorded as unbilled receivables, as the payment of consideration is subject only to the passage of time.

Maintenance

Maintenance revenue includes revenue from client support and related professional services. Client support includes software upgradesrecognized over time on a whenand-if availablestraight-line basis telephone support, and bug fixesover the contract period. Maintenance fees are usually payable in advance on a monthly, quarterly, or patches. Maintenance isannual basis over the term of the agreement.

Each of the performance obligations included in maintenance are priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price of each performance obligation included in maintenance based on this pricing relationship, which has remained constant within a narrow range, and observable data from standalone sales of maintenance, along with all other observable data.

The Company has identified two separate distinct performance obligations of maintenance:

1.software upgrades and updates; and

2.technical support.

These performance obligations are distinct within the contract and, although they are not sold separately, the components are not essential to the functionality of the other components. Each of the performance obligations included in maintenance revenue is a stand-alone obligation that is recognized over 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Contract modifications

The Company sometimes enters into amendments to previously executed contracts which constitute contract modifications. The Company assesses each of these contract modifications to determine:

 

 1.

If the additional products and services are distinct from the products and services in the original arrangement, and

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 2.

If the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.

A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:

 

 1.

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

 

 2.

a cumulativecatch-up basis.

Geographic revenue

 

 Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in thousands) 2018 2017   2018   2017   2018   2017 

U.S.

 $        113,985          48%  $        169,662          67%   $        110,349            55%   $        102,098            55%   $        224,334            52%   $        271,760            62% 

Other Americas

 17,715  8%  10,406  4%    9,627    5%    13,177    7%    27,342    6%    23,583    5% 

United Kingdom

 26,094  11%  26,342  10% 

Europe, Middle East, and Africa excluding the United Kingdom

 31,826  14%  24,211  9% 

United Kingdom (“U.K.”)

   23,079    12%    22,524    12%    49,173    11%    48,866    11% 

Europe (excluding U.K.), Middle East, and Africa

   27,070    14%    26,237    14%    58,896    14%    50,448    11% 

Asia-Pacific

 45,562  19%  25,688  10%    26,654    14%    22,560    12%    72,216    17%    48,248    11% 
 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

 $235,182  100%  $256,309  100% 

Total revenue

  $196,779    100%   $186,596    100%   $431,961    100%   $442,905    100% 
 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Major products and services

 

 Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in thousands)             2018                         2017                           2018                           2017                           2018                           2017             

Perpetual license

 $                23,078   $                37,899    $        13,475    $        31,297    $        36,553    $        69,196  

Term license

 64,695   89,109     31,309     19,853     96,004     108,962  
 

 

  

 

   

 

   

 

   

 

   

 

 

Performance obligations transferred at a point in time

 87,773   127,008  

Revenue recognized at a point in time

   44,784     51,150     132,557     178,158  

Maintenance

 64,525   58,713     65,906     59,424     130,431     118,137  

Cloud

 15,582   10,402     20,201     12,525     35,783     22,927  

Consulting and training

 67,302   60,186     65,888     63,497     133,190     123,683  
 

 

  

 

   

 

   

 

   

 

   

 

 

Performance obligations transferred over time

 147,409   129,301  

Revenue recognized over time

   151,995     135,446     299,404     264,747  
 

 

  

 

   

 

   

 

   

 

   

 

 

Total Revenue

 $235,182   $256,309  

Total revenue

  $196,779    $186,596    $431,961    $442,905  
 

 

  

 

   

 

   

 

   

 

   

 

 

During the threesix months ended March 31,June 30, 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 obligationsCommitted not yet recognized revenue

Transaction price allocated to remaining performance obligationsCommitted not recognized revenue represents contracted revenue that has not yet been recognized. Transaction price on remaining performance obligations was $291 millionrecognized in revenue. Committed not recognized revenue is expected to be recognized in the future as of March 31, 2018, of which the Company expects to recognize $198.3 million prior to January 1, 2020. These amounts do not include contracts that have an original expected duration of one year or less. follows:

(in thousands)  June 30,
2018
 

Remainder of 2018

  $213,244  

2019

   140,209  

2020

   63,603  

2021 and thereafter

   59,604  
  

 

 

 
  $            476,660  
  

 

 

 

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,
               Three Months Ended             
June 30,
               Six Months Ended             
June 30,
 
(in thousands)  2018   2017   2018   2017   2018   2017 
  

 

 

   

 

   

 

   

 

   

 

 

Total revenue

   $          235,182   $            256,309      $          196,779   $          186,596       $431,961   $442,905 

Client A

   *   14%    *    11%    *    * 

Client B

   *   11% 

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

10. STOCK-BASED COMPENSATION

Expense

 

                  Three Months Ended                 
March 31,
                   Three Months Ended                 
June 30,
                   Six Months Ended                 
June 30,
 
(in thousands)  2018 2017   2018   2017   2018   2017 
  

 

   

 

   

 

   

 

 

Cost of revenues

  $              3,701    $          3,622     $          4,257     $          3,677     $          7,958     $          7,299   

Selling and marketing

   4,658    3,405      6,038      4,101      10,696      7,506   

Research and development

   3,637    3,312      3,802      3,575      7,439      6,887   

General and administrative

   3,113    2,169      1,959      2,579      5,072      4,748   
  

 

  

 

   

 

   

 

   

 

   

 

 
  $15,109    $12,508     $16,056     $13,932     $31,165     $26,440   
  

 

  

 

   

 

   

 

   

 

   

 

 

Income tax benefit

  $(3,141)   $(3,815)    $(3,341)    $(4,287)    $(6,482)    $(8,102)  

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,June 30, 2018, the Company had, net of estimated forfeitures, $92.5$79.7 million of unrecognized stock-based compensation expense, related to all unvested restricted stock units (“RSUs”) and stock options, which was expected to be recognized over a weighted-average period of 2.32.2 years.

Grants

The Company granted the following stock-based compensation awards:

 

              Three Months Ended             
March 31,
               Six Months Ended             
June 30,
 
(in thousands)          Shares             Total Fair Value               Shares                 Total Fair Value     

RSUs(1)

   858   $                49,600     931   $54,100  

Non-qualified stock options

   1,377   $24,700     1,446   $26,000  

 

(1) 

Includes approximately 0.1 million RSUs which were granted in connection with the election by certain employees to receive 50% of their 2018 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $8.2 million associated with this RSU grant is expected to be recognized over aone-year period beginning on the grant date.

RSU vestings and stock option exercises

During the threesix months ended March 31,June 30, 2018, 0.60.9 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11. INCOME TAXES

Effective Tax Rateincome tax rate

The Company computes its (benefit)/provision forbenefit from income taxes by applying the estimated annual effective income tax rate to year to date (loss)/income before (benefit)/provision forbenefit from income taxes and adjusts for discrete tax items recorded in the period.

 

              Three Months Ended             
March 31,
               Six Months Ended             
June 30,
 
(Dollars in thousands)  2018 2017   2018   2017 

(Benefit)/provision for income taxes

  $            (4,222)     $            13,615    

(Benefit) from income taxes

  $            (15,103)      $                (508)    

Effective income tax rate

   (53)%  20%    113%     (1)% 

During the threesix months ended March 31,June 30, 2018, the Company’s effective tax rate changed primarily due to the following factors:

 

excess tax benefits from stock-based compensation were disproportionately greater relative to the (loss)/income before (benefit)/provision forbenefit from 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.credits; and

a decrease in uncertain tax benefits as a result of the settlement of a foreign tax audit for 2012, 2013, 2014, and 2015.

Tax Reform Actreform act

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was enacted into law, which significantly changed U.S. tax law and included many provisions, such as a reduction of the U.S. federal statutory tax rate, imposed aone-time transition tax on deemed repatriation of deferred foreign earnings, and included a provision to tax global intangiblelow-taxed income (“GILTI”) of foreign subsidiaries, a special tax deduction for foreign derived intangible income, and a base erosion anti-abuse tax measure (“BEAT”) that may tax payments between a U.S. corporation and its foreign subsidiaries, among other tax changes.

Under the SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recognized the provisional tax impacts in the three months ended December 31, 2017 that included $20.4 million of income tax expense tore-measure its net deferred tax assets to the 21% enacted rate. However, the Company has revised its provisional amount to reflect the impact of the retrospective adoption of ASC 606 and has recognized a $12.6 million income tax benefit for the remeasurement of its net deferred tax liabilities on a retrospective basis in the three months ended December 31, 2017.

The final amounts may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act.

The Tax Reform Act also provided for aone-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017. However, based on the Company’s provisional analysis performed as of that date, the Company does not expect to be subject to theone-time transition tax due to the Company’s foreign subsidiaries being in a net accumulated deficit position. During the threesix months ended March 31,June 30, 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,June 30, 2018, the Company has included an estimate of the effect of its GILTI provisions in its estimated annual effective tax rate. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.

 

The BEAT provisions in the Tax Reform Act impose an alternative minimum tax on taxpayers with substantial base-erosion payments. The Company’s preliminary assessment is that the Company will not be subject to the BEAT in 2018. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. 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,

            Three Months Ended          
June 30,
             Six Months Ended          
June 30,
 
(in thousands, except per share amounts)  

          2018          

 

          2017          

  2018   2017   2018   2017 

Basic

           

Net income

  $                12,200  $                52,963 

Net (loss)/income

  $            (10,409)   $            3,702    $            1,791    $            56,665  

Weighted-average common shares outstanding

  78,236  76,761                78,635                 77,313                 78,436     77,039  
  

 

 

 

  

 

   

 

   

 

   

 

 

Earnings per share, basic

  $                    0.16  $                    0.69 

(Loss)/earnings per share, basic

  $(0.13)   $0.05    $0.02    $0.74  
  

 

 

 

  

 

   

 

   

 

   

 

 
           

Diluted

           

Net income

  $                12,200  $                52,963 

Net (loss)/income

  $(10,409)   $3,702    $1,791    $56,665  

Weighted-average effect of dilutive securities:

           

Stock options

  3,119  3,184    —     3,694     3,132     3,439  

RSUs

  1,747  1,930    —     1,938     1,679     1,934  
  

 

 

 

  

 

   

 

   

 

   

 

 

Effect of dilutive securities

  4,866  5,114    —     5,632     4,811     5,373  
  

 

 

 

  

 

   

 

   

 

   

 

 

Weighted-average common shares outstanding, assuming dilution

  83,102  81,875    78,635     82,945     83,247     82,412  
  

 

 

 

  

 

   

 

   

 

   

 

 

Earnings per share, diluted

  $                    0.15  $                    0.65 

(Loss)/earnings per share, diluted

  $(0.13)   $0.04    $0.02    $0.69  
  

 

 

 

  

 

   

 

   

 

   

 

 
           

Outstanding anti-dilutive stock options and RSUs(1)

  397  314    6,500     237     242     276  

 

(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.

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;services; 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 on income tax expense and deferred tax assets; the inherent risks associated with international operations and the continued uncertainties in the global economy; our continued effort to market and sell both domestically and internationally; foreign currency exchange rates; the financial impact of any future acquisitions; the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches; and management of 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 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 mattersresults contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

BUSINESS OVERVIEW

We develop, market, license, and support software applications for customer engagement and digital process automation, in addition to licensing our Pega Platform application development product for clients that wish to build and extend their own applications. The Pega Platform and applications help connect enterprises to their customers in real-time across channels, streamline business operations, and adapt to meet changing requirements.

Our clients include Global 3000 companies and government agencies that seek to manage complex enterprise systems and customer service issues with greater agility and cost-effectiveness. Our strategy is to sell a client a series of licenses, each focused on a specific purpose or area of operations in support of longer term enterprise-wide digital transformation initiatives.

Our license revenue is primarily derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted software applicationapplications 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
June 30,
           Six Months Ended
June 30,
         
  2018   2017   Change   2018   2017   Change 

Total revenue

  $    196,779    $    186,596    $    10,183     5%   $    431,961    $    442,905    $    (10,944)    (2)% 

Net (loss)/income

  $(10,409)   $3,702    $(14,111)    n/m   $1,791    $56,665    $(54,874)    (97)% 

Diluted (loss)/earnings per share

  $(0.13)   $0.04    $(0.17)    n/m   $0.02    $0.69    $(0.67)    (97)% 

Cash provided by operating activities

          $75,432    $85,769    $(10,337)    (12)% 

n/m - not meaningful

(Dollars in thousands, except per share amounts) Three Months Ended
March 31,
       
         2018                  2017                          Change                  

Total revenue

 $235,182   $256,309   $(21,127  (8)% 

Net income

 $12,200   $52,963   $(40,763  (77)% 

Diluted earnings per share

 $0.15   $0.65   $(0.50  (77)% 

Cash provided by operating activities

 $55,655   $32,444   $23,211   72% 

The decrease in total revenue in the three months ended March 31, 2018 was primarily due to a large term license arrangement recognized in revenue in the three months ended March 31, 2017 and a shift in client preferences to cloud arrangements. Cloud arrangements are generally recognized in revenue over the term of the cloud contract, as compared to other arrangements, which are generally recognized in revenue on the contract effective date.

Annual Contract Value (“ACV”)(1)

The change in ACV measures the growth and predictability of future cash flows from committed term, cloud, and maintenance arrangements as of the end of the particular reporting period.

 

 March 31,       June 30,         
(in thousands)         2018                 2017                         Change                    2018   2017   Change 

Term and Cloud ACV

 $236,025   $193,004   $43,021  22%   $        250,904    $        191,634    $        59,270             31% 

Maintenance ACV

 258,100   234,852   $23,248  10%    263,624     237,696     25,928     11% 
 

 

  

 

     

 

   

 

     

Total ACV

 $494,125   $427,856   $66,269  15%   $514,528    $429,330    $85,198     20% 
 

 

  

 

     

 

   

 

     

 

LOGO

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

 

(1)

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

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

 

Maintenance revenue reported for the quarter ended on such date, multiplied by four.

Committed not yet recognized revenue

We expect to recognize revenue from existing contracts as follows:

   June 30,
2018
 
(in thousands)  Perpetual license       Term license           Maintenance       Cloud   Consulting and
training
   Total 

Remainder of 2018

  $        28,626    $20,457    $111,086    $41,036    $12,039    $213,244  

2019

   15,862     9,878     43,837     66,529     4,103     140,209  

2020

   2,423     5,665     5,265     50,250     —     63,603  

2021 and thereafter

   362     944     2,103     55,995     200     59,604  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $47,273    $        36,944    $        162,291    $        213,810    $        16,342    $        476,660  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.) 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.

Except as described below, 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:

“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 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 Form10-Q for the three months ended June 30, 2018.

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 with us typically contain promises by us to transferprovide 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 helpingto help 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:

“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 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 Form10-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)% 

   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017   Change   2018   2017   Change 

Total revenue

  $    196,779    $    186,596    $10,183     5 %   $    431,961    $    442,905    $    (10,944)    (2)% 

Gross profit

  $122,962    $118,721    $4,241     4 %   $282,530    $306,940    $(24,410)    (8)% 

(Loss)/income from operations

  $(23,163)   $(8,947)   $    (14,216)    159 %   $(15,227)   $56,960    $(72,187)    (127)% 

Net (loss)/income

  $(10,409)   $3,702    $(14,111)    (381)%   $1,791   $56,665    $(54,874)    (97)% 

Revenue

Software licenseLicense and Cloud Revenue

 

(Dollars in thousands)  Three Months Ended
March 31,
       
 Three Months Ended
June 30,
     Six Months Ended
June 30,
     
(Dollars in thousands)                 2018                                  2017                                        Change                   2018 2017 Change 2018 2017 Change 
  $23,078    26%  $37,899    30%   $(14,821         (39)%  $    13,475  21%  $    31,297  49%  $    (17,822)  (57)%  $36,553  22%  $69,196  34%  $(32,643)  (47)% 

Term license

   64,695    74%  89,109    70%    (24,414 (27)%  31,309  48%  19,853  31%  $11,456   58 %  96,004  57%  108,962  55%  $(12,958)  (12)% 

Cloud

 20,201  31%  12,525  20%  $7,676   61 %  35,783  21%  22,927  11%  $12,856   56 % 
  

 

 

  

 

 

     

 

 

  

 

 

    

 

 

  

 

 

   

Total software license

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

Total license and cloud

 $64,985  100%  $63,675  100%  $1,310   2 %  $    168,340  100%  $    201,085  100%  $    (32,745)  (16)% 
  

 

 

  

 

 

     

 

 

  

 

 

    

 

 

  

 

 

   

The decrease in perpetual license revenue in the three months ended March 31, 2018 was primarily due

We continue to a decrease in the value of perpetual arrangements executed in the three months ended March 31, 2018 driven primarily byexperience a shift in client preferences from perpetual arrangements to term and cloud arrangements. Revenue for cloud arrangements is recognized over the service period of the cloud contract, as compared to license arrangements, which is generally recognized at the contract effective date.

The decrease in term license revenue in the threesix months ended March 31,June 30, 2018 was primarily due to a large term license arrangement recognized$35.3 million in revenue recognized in the three months ended March 31, 2017 andfrom a shift in client preferences to cloud arrangements.large term license renewal.

Maintenance

 

 Three Months Ended
March 31,
         Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)         2018                 2017                         Change                            2018                   2017                   Change                   2018                   2017                   Change         

Maintenance

 $64,525   $58,713   $5,812    10%   $    65,906    $    59,424    $    6,482    11%   $    130,431    $    118,137    $    12,294     10% 

The increaseincreases in maintenance revenue waswere 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%.

ServicesConsulting and training

 

  Three Months Ended
March 31,
           Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)                  2018                                    2017                                     Change                            2018                   2017                   Change                   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%   $    65,888    $    63,497    $    2,391    4%   $    133,190    $    123,683    $    9,507    8% 
  

 

 

  

 

 

     

Total services

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

 

 

  

 

 

     

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

The increases in consulting and training revenue were primarily due to higher billable hours driven by an increase in the number of projects during the three and six months ended June 30, 2018.

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
June 30,
        Six Months Ended
June 30,
       
(Dollars in thousands) 2018  2017  Change  2018  2017  Change 

Software license

 $43,522   97%  $49,900   98%  $  (6,378)   (13)%  $  130,040   98%  $  175,608   99%  $  (45,568)   (26)% 

Maintenance

  60,032   91%   52,413   88%   7,619    15 %   118,475   91%   103,908   88%   14,567    14 % 

Cloud

  11,423   57%   7,000   56%   4,423    63 %   19,284   54%   11,669   51%   7,615    65 % 

Consulting and training

  7,985   12%   9,408   15%   (1,423)   (15)%   14,731   11%   15,755   13%   (1,024)   (6)% 
 

 

 

  

 

 

    

 

 

  

 

 

   

Services

  19,408   23%   16,408   22%   3,000    18 %   34,015   20%   27,424   19%   6,591    24 % 
 

 

 

  

 

 

    

 

 

  

 

 

   

Total gross profit

 $  122,962   62%  $  118,721   64%  $4,241    4 %  $282,530   65%  $306,940   69%  $(24,410)   (8)% 
 

 

 

  

 

 

    

 

 

  

 

 

   

The decreaseincrease in total gross profit in the three months ended March 31,June 30, 2018 was primarily due to a large term license arrangement recognized in revenue in the three months ended March 31, 2017. Additionally we have experienced a shift in client preferences toJune 30, 2018.

Maintenance and cloud arrangements, which 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.gross profit percent

The increaseincreases in maintenance gross profit percent in the three and six months ended March 31,June 30, 2018 waswere driven by decreases of $0.7 million and $1 million, respectively, in compensation and benefits due to decreased headcount and a $0.5 million decrease in client support expenses as we transferred client support resources to provide dedicated support to our growing cloud business.

The increaseincreases in cloud gross profit percent in the three and six months ended March 31,June 30, 2018 waswere driven by cost efficiency gains as our cloud business continues to grow and scale, partially offset by a $0.5 millionan increase 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 maintenanceConsulting and cloudtraining gross profit percent

The decreases in consulting and training gross profit percent would have been as follows:in the three and six months ended June 30, 2018 were driven primarily by lower utilization rates and the impact of our policy introduced late in the three months ended June 30, 2017 to offer ourweb-based training free of charge to users which reduced training revenue for the three and six months ended June 30, 2018 by $0.9 million and $1.6 million, respectively.

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

Maintenance

  $            58,443          91%   $            51,995          89%   $            6,448                12% 

Cloud

  $7,861    50%   $4,169    40%   $3,692    89% 

Operating expenses

Selling and marketing

 

  Three Months Ended
March 31,
   Change   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017             2018                   2017                   Change                   2018                   2017                   Change         

Selling and marketing

  $            88,383      $            69,681      $            18,702                    27%   $    93,972      $    75,200      $    18,772    25%   $    182,355   $    144,881       $    37,474    26% 

As a percent of total revenue

   38%    27%        48%    40%        42%    33%     

Selling and marketing headcount, end of period

   1,082       900       182    20%            1,159    916       243    27% 

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of client-related intangibles.

The increase in the three months ended March 31, 2018 was primarily due to an increase in compensation and benefits of $11.6 million, driven by increased headcount and equity compensation, amortization of 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.

The increase in headcount reflects our efforts to increase our sales capacity to target new accounts in existing industries, as well as to expand coverage in new industries and geographies, and to increase the number of sales opportunities.

The increases in the three and six months ended June 30, 2018 were primarily due to increases in compensation and benefits of $13.7 million and $25.4 million, increased employee travel and entertainment, and increased expenses related to the realignment of contract negotiation resources.

Research and development

 

  Three Months Ended
March 31,
   Change   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017             2018                   2017                   Change                   2018                   2017                   Change         

Research and development

  $            46,785      $            40,296      $            6,489                    16%   $    41,972       $    39,762       $    2,210    6%   $    88,757       $    80,058       $    8,699    11% 

As a percent of total revenue

   20%    16%        21%    21%        21%    18%     

Research and Development headcount, end of period

   1,602       1,441       161    11%            1,563      1,455        108    7% 

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

The increaseincreases in the three and six months ended March 31,June 30, 2018 waswere primarily due to an increaseincreases in compensation and benefits of $4.6$1 million and $5.5 million, respectively, attributable to increased headcount and the expansion of our application development team to support the continued development of our expanding suite of software.

General and administrative

 

  Three Months Ended
March 31,
   Change   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017             2018                   2017                   Change                   2018                   2017                   Change         

General and administrative

  $              16,464      $              12,335      $              4,129                33 %   $10,181       $12,706       $(2,525)    (20)%   $26,645       $25,041       $1,604     6 % 

As a percent of total revenue

   7%    5%       5%    7%        6%    6%     

General and administrative headcount, end of period

   299       384       (85 (22)%            310        401       (91)    (23)% 

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

The increasedecrease in the three months ended March 31,June 30, 2018 was primarily due to an increasea decrease in compensation and benefits of $1.1$1.6 million, attributabledue to equity compensation, and an increase of $1 million in legal fees. The decrease indecreased headcount reflectsreflecting the realignment of contract negotiation and product development resources to augment our selling and marketing and research development functions, respectively.

The increase in the six months ended June 30, 2018 was primarily due to an increase of $1.2 million in legal fees.

Stock-based compensation

 

  Three Months Ended
March 31,
   Change   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(in thousands)  2018   2017     2018   2017   Change   2018   2017   Change 

Cost of revenues

  $                  3,701    $                  3,622    $                    79                    2 %   $        4,257    $        3,677    $        580             16 %   $        7,958    $        7,299    $        659             9 % 

Selling and marketing

   4,658     3,405     1,253    37 %    6,038     4,101     1,937     47 %    10,696     7,506     3,190     42 % 

Research and development

   3,637     3,312     325    10 %    3,802     3,575     227     6 %    7,439     6,887     552     8 % 

General and administrative

   3,113     2,169     944    44 %    1,959     2,579     (620)    (24)%    5,072     4,748     324     7 % 
  

 

   

 

       

 

   

 

       

 

   

 

     
  $15,109    $12,508    $2,601    21 %   $16,056    $13,932    $2,124     15 %   $31,165    $26,440    $4,725     18 % 
  

 

   

 

       

 

   

 

       

 

   

 

     

Income tax benefit

  $(3,141)   $(3,815)   $674    (18)%   $(3,341)   $(4,287)   $946     (22)%   $(6,482)   $(8,102)   $1,620     (20)% 

The increase in the three and six months ended June 30, 2018 was primarily due to the increased value of our annual periodic equity awards granted in March 2018 and 2017. These awards generally have a five-year vesting schedule.

Non-operating income/(expense), net

 

  Three Months Ended
March 31,
   Change   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017     2018   2017   Change   2018   2017   Change 

Foreign currency transaction (loss)/gain

  $                  (1,085)   $                  745    $              (1,830)                    n/m 

Foreign currency transaction gain/(loss)

  $        1,244    $        (2,242)   $        3,486             n/m   $        159    $        (1,497)   $        1,656             n/m 

Interest income, net

   764     205     559     273 %    629     202    $427     211 %    1,393     407     986     242 % 

Other income/(expense), net

   363     (279)    642     n/m 

Other income, net

   —     566    $(566)    (100)%    363     287     76     26 % 
  

 

   

 

       

 

   

 

       

 

   

 

     
  $42    $671    $(629)    (94)%   $1,873    $(1,474)   $3,347     n/m   $1,915    $(803)   $2,718     n/m 
  

 

   

 

       

 

   

 

       

 

   

 

     

n/m - not meaningful

The change in foreign currency transaction gain/(loss)/gain is was primarily due to unrealized lossesgains on foreign currency denominated receivables. The adoptionchange in interest income was primarily due to an increase in prevailing interest rates and an increase in the size of ASC 606 materially increased the unbilled receivables we have recorded, which has increased the impact of fluctuationsour holdings in foreign exchange rates reported in our unaudited condensed consolidated statements of operations. See Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for additional information.marketable securities.

(Benefit)/provision for 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

   Three Months Ended
June 30,
           Six Months Ended
June 30,
         
(Dollars in thousands)  2018   2017   Change   2018   2017   Change 

(Benefit) from income taxes

  $         (10,881)   $        (14,123)   $        3,242    (23)%   $        (15,103)       $        (508)       $        (14,595)            2,873% 

Effective income tax rate

           113%    (1)%     

During the threesix months ended March 31,June 30, 2018, our effective income tax rate changed primarily due to the following factors:

 

excess tax benefits from stock-based compensation for the six months ended June 30, 2018 and 2017 of $11.4 million and $18.1 million were disproportionately greater relative to income before (benefit)/provision forbenefit from 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.credits; and

a decrease in the balance of our uncertain tax positions as a result of the settlement of a foreign tax audit for 2012, 2013, 2014, and 2015.

The inclusion of excess tax benefits from stock-based compensation as a component ofin the provision for income taxes has increased the volatilityfluctuation of the effective tax rates in recent periods, andperiods. 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, exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.

LIQUIDITY AND CAPITAL RESOURCES

 

  Three Months Ended
March 31,
   Six Months Ended
June 30,
 
(in thousands)  2018   2017   2018   2017 

Cash provided by (used in):

        

Operating activities

  $                55,655    $                32,444    $                75,432    $                85,769  

Investing activities

   (31,278)    (3,727)    (46,369)    (1,159) 

Financing activities

   (23,052)    (15,994)    (45,825)    (34,860) 

Effect of exchange rates on cash and cash equivalents

   2,186     521     (1,226)    1,282  
  

 

   

 

   

 

   

 

 

Net increase in cash and cash equivalents

  $                  3,511    $                  13,244  

Net (decrease)/increase in cash and cash equivalents

  $(17,988)   $51,032  
  

 

   

 

   

 

   

 

 
(in thousands)  March 31,
2018
   December 31,
2017
   June 30,
2018
   December 31,
2017
 

Held in U.S. entities

  $                168,135    $                136,444    $160,384    $136,444  

Held in foreign entities

   86,702     87,304     83,199     87,304  
  

 

   

 

   

 

   

 

 

Total cash, cash equivalents, and marketable securities

  $                254,837    $                223,748    $243,583    $223,748  
  

 

   

 

   

 

   

 

 

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 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 the threesix months ended March 31,June 30, 2018 were net income of $12.2was $71.8 million and $49.6 millionin cash generated from receivables and contract assets, largely due to increased cash collections and the timing of billings.

The primary driver during the threesix months ended March 31,June 30, 2017 was net income of $53.0$56.7 million.

Cash used in investing activities

DuringCash used in investing activities is primarily driven by the three months ended March 31, 2018, we purchased investmentstiming of $35.2 millioninvestment maturities and made investmentspurchases 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.new investments.

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.

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.

Stock Repurchase Program

Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase inwith the aggregate ofauthority to repurchase up to $195$221.8 million of our common stock. Purchases under these programs have been made on the open market. As of March 31,June 30, 2018, $159.2$169.4 million had been repurchased, $29.2$46 million remained available for repurchase, and $6.4 million had expired.

Common stock repurchases

 

                                                                                                            
 Three Months Ended
March 31,
   Six Months Ended
June 30,
 
 2018 2017   2018   2017 
(in thousands)             Shares                         Amount                         Shares                         Amount               Shares   Amount   Shares   Amount 

Tax withholdings for net settlement of equity awards

 270    $15,575    289    $12,504     $454     $26,992     $560     $27,900   

Stock repurchase program(1)

            

Repurchases paid

 89    4,998    29    1,260      254      14,871      68      2,986   

Repurchases unsettled at period end

 12    690    5    238      18      998      —      —   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Activity in Period(2)

                       371    $                    21,263                          323    $                    14,002      726     $42,861      628     $30,886   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

 

 (1) 

Represents activity under our publicly announced stock repurchase programs.

 (2) 

During the threesix months ended March 31,June 30, 2018 and 2017, instead of receiving cash from the equity holders, we withheld shares with a value of $11.2$21.1 million and $7.7$20.7 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

During the threesix months ended March 31,June 30, 2018 and 2017, we paid cash dividends of $2.3$4.7 million and $4.6 million. It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify this dividend program at any time without prior notice.

 

ITEM 3.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates. Other than the item discussed below, there were no significant changes to our market risk exposure during the first threesix months ended March 31,June 30, 2018.

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

  

Six Months Ended
June 30,

  

            2018             

 

            2017             

Revenue

 (4)% (3)%

Net Income

 (31)% (1)%

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) 
    (in millions)         June 30,        
2018
          December 31,         
2017
 

    Foreign currency transaction gain/(loss)

 $(4)  $(6) 

 

    (1)The adoption of ASC 606 materially increased the unbilled receivables we have recorded, which has increased the impact of fluctuations in foreign exchange rates reported in our unaudited condensed consolidated statements of operations.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and 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,June 30, 2018. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2018.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act during the quarter ended March 31,June 30, 2018 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. 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 threesix months ended March 31,June 30, 2018 to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, 2017.

 

ITEM 2.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding our repurchases of our common stock during the three months ended March 31,June 30, 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      
 

 

      

 (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)
 

 April 1, 2018 - April 30, 2018

 111    $     61.60    48     $                                                   26,291 

 May 1, 2018 - May 31, 2018

 140    62.18    35     24,092 

 June 1, 2018 - June 30, 2018

 263    60.85    88     46,026 
 

 

      

 Total

 514    61.37      
 

 

      

 

 (1)

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

 (2) 

Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195$221.8 million of our common stock. On May 30, 2017,June 21, 2018, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2019 and increased the amount of common stock we are authorized to repurchase to $50 million between June 15, 2018 and June 30, 2019 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established apre-arranged stock repurchase plan, intended to comply with the requirements of Rule10b5-1 under the Exchange Act, and Rule10b-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 the10b5-1 Plan.

 

ITEM 6.

EXHIBITS

 

 Exhibit No.  

 

Description

 10.1++

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

31.1

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

31.2

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

32+

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

101.INS

 XBRL Instance document.

101.SCH

 XBRL Taxonomy Extension Schema Document.

101.CAL

 XBRL Taxonomy Calculation Linkbase Document.

101.DEF

 XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 XBRL Taxonomy Label Linkbase Document.

101.PRE

 XBRL Taxonomy Presentation Linkbase Document.

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

   ++Management contracts and compensatory plan or arrangements

SIGNATURE

 

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

 

  Pegasystems Inc.
  Dated:  May 10,August 8, 2018  By:   /s/ KENNETH STILLWELL
   Kenneth Stillwell
   Chief Financial Officer and Chief Administrative Officer
   (Principal Financial Officer)

 

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