PEGASYSTEMS INC, 10-Q filed on 07 Nov 18
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Nov. 01, 2018
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol PEGA  
Entity Registrant Name PEGASYSTEMS INC.  
Entity Central Index Key 0001013857  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   78,700,651
Entity Emerging Growth Company false  
Entity Small Business false  
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents [1] $ 106,195 $ 162,279
Marketable securities [1] 99,782 61,469
Total cash, cash equivalents, and marketable securities [1] 205,977 223,748
Accounts receivable [1] 150,733 222,735
Unbilled receivables [1] 155,964 158,898
Other current assets [1] 73,464 41,135
Total current assets [1] 586,138 646,516
Long-term unbilled receivables [1] 168,929 160,708
Goodwill [1] 72,897 72,952
Other long-term assets [1] 134,679 131,391
Total assets [1] 962,643 1,011,567
Current liabilities:    
Accounts payable [1] 12,926 17,370
Accrued expenses [1] 39,829 45,508
Accrued compensation and related expenses [1] 71,318 66,040
Deferred revenue [1] 158,178 166,297
Total current liabilities [1] 282,251 295,215
Deferred income tax liabilities [1] 36,166 38,463
Other long-term liabilities [1] 23,371 23,652
Total liabilities [1] 341,788 357,330
Stockholders' equity:    
Preferred stock, 1,000 shares authorized; no shares issued and outstanding [1]
Common stock, 200,000 shares authorized; 78,816 and 78,081 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively [1] 788 781
Additional paid-in capital [1] 135,132 152,097
Retained earnings [1] 496,815 508,051
Accumulated other comprehensive loss [1] (11,880) (6,692)
Total stockholders' equity [1] 620,855 654,237
Total liabilities and stockholders' equity [1] $ 962,643 $ 1,011,567
[1] On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. "New Accounting Pronouncements" for additional information.
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares
Sep. 30, 2018
Dec. 31, 2017
Preferred stock, shares authorized [1] 1,000,000 1,000,000
Preferred stock, shares issued [1] 0 0
Preferred stock, shares outstanding [1] 0 0
Common stock, shares authorized [1] 200,000,000 200,000,000
Common stock, shares issued [1] 78,816,000 78,816,000
Common stock, shares outstanding [1] 78,081,000 78,081,000
[1] On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. "New Accounting Pronouncements" for additional information.
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenue        
Total revenue [1] $ 203,263 $ 190,957 $ 635,224 $ 633,862
Cost of revenue        
Total cost of revenue [1] 74,423 69,731 223,854 205,696
Gross profit [1] 128,840 121,226 411,370 428,166
Operating expenses        
Selling and marketing [1] 87,490 69,363 269,845 214,244
Research and development [1] 46,504 41,031 135,261 121,089
General and administrative [1] 12,104 13,133 38,749 38,174
Total operating expenses [1] 146,098 123,527 443,855 373,507
(Loss) income from operations [1] (17,258) (2,301) (32,485) 54,659
Foreign currency transaction gain (loss) [1] 399 (5,052) 558 (6,549)
Interest income, net [1] 683 140 2,076 547
Other income, net [1]     363 287
(Loss) income before benefit from income taxes [1] (16,176) (7,213) (29,488) 48,944
Benefit from income taxes [1] (8,589) (8,501) (23,692) (9,009)
Net (loss) income [1] $ (7,587) $ 1,288 $ (5,796) $ 57,953
(Loss) earnings per share        
Basic [1] $ (0.10) $ 0.01 $ (0.07) $ 0.75
Diluted [1] $ (0.10) $ 0.01 $ (0.07) $ 0.70
Weighted-average number of common shares outstanding        
Basic [1] 78,700 77,691 78,525 77,258
Diluted [1] 78,700 83,323 78,525 82,717
Cash dividends declared per share [1] $ 0.03 $ 0.03 $ 0.09 $ 0.09
Software license        
Revenue        
Total revenue [1] $ 52,342 $ 53,234 $ 184,899 $ 231,392
Cost of revenue        
Total cost of revenue [1] 1,255 1,276 3,772 3,826
Maintenance        
Revenue        
Total revenue [1] 66,017 61,812 196,448 179,949
Cost of revenue        
Total cost of revenue [1] 6,079 6,716 18,035 20,945
Services        
Revenue        
Total revenue [1] 84,904 75,911 253,877 222,521
Cost of revenue        
Total cost of revenue [1] $ 67,089 $ 61,739 $ 202,047 $ 180,925
[1] On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. "New Accounting Pronouncements" for additional information.
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Net (loss) income [1] $ (7,587) $ 1,288 $ (5,796) $ 57,953
Other comprehensive (loss) income, net of tax        
Unrealized (loss) gain on available-for-sale marketable securities, net of tax [1] (162) 22 (277) 148
Foreign currency translation adjustments [1] (1,934) 2,576 (4,911) 8,848
Total other comprehensive (loss) income, net of tax [1] (2,096) 2,598 (5,188) 8,996
Comprehensive (loss) income [1] $ (9,683) $ 3,886 $ (10,984) $ 66,949
[1] On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. "New Accounting Pronouncements" for additional information.
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Operating activities:    
Net (loss) income [1] $ (5,796) $ 57,953
Adjustment to reconcile net (loss) income to cash provided by operating activities:    
Change in operating assets and liabilities, net [1] 8,698 (15,455)
Stock-based compensation expense [1] 47,573 39,929
Amortization of intangible assets and depreciation [1] 18,692 18,703
Other non-cash [1] (2,079) 12,796
Cash provided by operating activities [1] 67,088 113,926
Investing activities:    
Purchases of investments [1] (68,177) (25,687)
Proceeds from maturities and called investments [1] 26,456 23,124
Other [1] (7,874) (9,403)
Cash used in investing activities [1] (49,595) (11,966)
Financing activities:    
Dividend payments to shareholders [1] (7,067) (6,941)
Common stock repurchases [1] (64,597) (37,099)
Cash used in financing activities [1] (71,664) (44,040)
Effect of exchange rates on cash and cash equivalents [1] (1,913) 2,054
Net (decrease) increase in cash and cash equivalents [1] (56,084) 59,974
Cash and cash equivalents, beginning of period [1] 162,279 70,594
Cash and cash equivalents, end of period [1] $ 106,195 $ 130,568
[1] On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. "New Accounting Pronouncements" for additional information.
v3.10.0.1
BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2018
BASIS OF PRESENTATION

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 Form 10-K for the year ended December 31, 2017.

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.

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the full retrospective method which required that each prior reporting period presented be adjusted to reflect the application of this ASU. See Note 2. “New Accounting Pronouncements” for additional information.

v3.10.0.1
NEW ACCOUNTING PRONOUNCEMENTS
9 Months Ended
Sep. 30, 2018
NEW ACCOUNTING PRONOUNCEMENTS

2. NEW ACCOUNTING PRONOUNCEMENTS

Financial instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-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 ASU No. 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 a right-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities and right-of-use assets upon adoption with a material impact to the Company’s balance sheet but an immaterial impact to its results of operations and cash flows. The Company expects to elect the optional transition method to apply the new lease standard prospectively at the adoption date, as opposed to recasting prior reporting periods. As a result, the Company expects to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

ASC 606 and ASC 340-40

On January 1, 2018, the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform.

The most significant adoption impacts were as follows:

 

   

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

 

   

Allocation of future credits and significant discounts - Perpetual or term licenses delivered are a separate performance obligation which now requires the Company to allocate any future credits and discounts to the performance obligations in the arrangement based upon their relative stand-alone selling prices.

 

   

Deferred contract costs - Sales incentive programs and other incremental costs to obtain a contract were previously expensed when incurred. ASC 340-40 requires these costs be recognized as an asset when incurred and 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 long-term term and perpetual licenses with client usage rights that increase over time.

 

   

Taxes - The corresponding effect on tax balances 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 ASC 340-40 see Note 4. “Receivables, Contract Assets, and Deferred Revenue”, Note 5. “Deferred Contract Costs”, and Note 9. “Revenue”.

The impact of the adoption of ASC 606 and ASC 340-40 on the Company’s unaudited condensed consolidated balance sheet and unaudited condensed consolidated statement of operations is:

 

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

Assets

        

Accounts receivable, unbilled receivables, and contract assets

   $ 248,331       $ 134,216       $ 382,547   

Long-term unbilled receivables

     —         160,708         160,708   

Deferred income taxes

     57,127         (42,887)        14,240   

Deferred contract costs

     —         37,924         37,924   

Other assets(1)

     416,148         —         416,148   
  

 

 

    

 

 

    

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

 

Liabilities and stockholders’ equity

        

Deferred revenue

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

Long-term deferred revenue

     6,591         (2,885)        3,706   

Deferred income tax liabilities

     —         38,463         38,463   

Other liabilities(2)

     148,864         —         148,864   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     350,528         6,802         357,330   

Foreign currency translation adjustments

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

Retained earnings

     221,926         286,125         508,051   

Other equity(3)

     152,646         —         152,646   
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     371,078         283,159         654,237   
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

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

 

 

    

 

 

    

 

 

 

 

  (1) 

Includes cash, cash equivalents, marketable securities, income taxes receivable, other current assets, property and equipment, intangible assets, goodwill, and other long-term assets (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

  (2) 

Includes accounts payable, accrued expenses, accrued compensation and related expenses, income taxes payable, and other long-term liabilities (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

  (3)

Includes common stock, additional paid-in capital, and net unrealized loss on available-for-sale marketable securities (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

 

     September 30, 2017  
     Three Months Ended      Nine Months Ended  
(in thousands, except per share amounts)      Previously  
Reported
       Adjustments          As Adjusted          Previously  
Reported
       Adjustments          As Adjusted    

Revenue:

                 

 Software license

   $ 41,793       $ 11,441       $ 53,234       $ 195,220       $ 36,172       $ 231,392   

 Maintenance

     62,204         (392)        61,812         180,759         (810)        179,949   

 Services

     75,818         93         75,911         225,063         (2,542)        222,521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total revenue

     179,815         11,142         190,957         601,042         32,820         633,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue:

                 

 Software license

     1,276         —          1,276         3,826         —          3,826   

 Maintenance

     6,716         —          6,716         20,945         —          20,945   

 Services

     61,739         —          61,739         180,925         —          180,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total cost of revenue

     69,731         —          69,731         205,696         —          205,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     110,084         11,142         121,226         395,346         32,820         428,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

                 

 Selling and marketing

     70,209         (846)        69,363         217,384         (3,140)        214,244   

 Research and development

     41,031         —          41,031         121,089         —          121,089   

 General and administrative

     13,133         —          13,133         38,174         —          38,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total operating expenses

     124,373         (846)        123,527         376,647         (3,140)        373,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     (14,289)        11,988         (2,301)        18,699         35,960         54,659   

Foreign currency transaction loss

     (552)        (4,500)        (5,052)        (793)        (5,756)        (6,549)  

Interest income, net

     144         (4)        140         470         77         547   

Other income, net

     —          —          —          287         —          287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income before benefit from income taxes

     (14,697)        7,484         (7,213)        18,663         30,281         48,944   

Benefit from income taxes

     (12,885)        4,384         (8,501)        (17,952)        8,943         (9,009)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Net (loss) income

   $ (1,812)      $ 3,100       $ 1,288       $ 36,615       $ 21,338       $ 57,953   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) earnings per share:

                 

 Basic

   $ (0.03)         $ 0.01       $ 0.47          $ 0.75   
  

 

 

       

 

 

    

 

 

       

 

 

 

 Diluted

   $ (0.03)         $ 0.01       $ 0.44          $ 0.70   
  

 

 

       

 

 

    

 

 

       

 

 

 

Weighted-average number of common shares outstanding:

                 

 Basic

     77,691            77,691         77,258            77,258   

 Diluted

     77,691            83,323         82,717            82,717   

Adoption of ASC 606 and ASC 340-40 did not change the Company’s total cash provided by or used in operating, financing, or investing activities in the Company’s unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2017.

v3.10.0.1
MARKETABLE SECURITIES
9 Months Ended
Sep. 30, 2018
MARKETABLE SECURITIES

3. MARKETABLE SECURITIES

 

     September 30, 2018  
(in thousands)        Amortized Cost              Unrealized Gains              Unrealized Losses                  Fair Value          

Municipal bonds

   $ 46,633       $ —       $ (267)      $ 46,366   

Corporate bonds

     53,738                (323)        53,416   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 100,371       $      $ (590)      $ 99,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 September 30, 2018, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

 

As of September 30, 2018, remaining maturities of marketable securities ranged from October 2018 to August 2021, with a weighted-average remaining maturity of approximately 1.5 years.

v3.10.0.1
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
9 Months Ended
Sep. 30, 2018
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

 

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

Accounts receivable

   $ 150,733       $ 222,735   

Unbilled receivables

     155,964         158,898   

Long-term unbilled receivables

     168,929         160,708   
  

 

 

    

 

 

 
   $                         475,626       $                         542,341   
  

 

 

    

 

 

 

Unbilled receivables are the amounts due from clients where the only condition to the right of payment is the passage of time. As of September 30, 2018 and December 31, 2017, the allowance for doubtful accounts was not material.

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

 

(Dollars in thousands)            September 30,        
2018
 

1 Year or Less

   $         155,964                     48%   

1-2 Years

     89,177         27%   

2-5 Years

     79,752         25%   
  

 

 

    

 

 

 
   $ 324,893         100%   
  

 

 

    

 

 

 

Contract assets and deferred revenue

 

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

Contract assets(1)

   $ 2,888       $ 914   

Long-term contract assets(2)

     1,581         —   
  

 

 

    

 

 

 
   $ 4,469       $ 914   
  

 

 

    

 

 

 

Deferred revenue

   $ 158,178       $ 166,297   

Long-term deferred revenue(3)

     5,840         3,706   
  

 

 

    

 

 

 
   $ 164,018       $ 170,003   
  

 

 

    

 

 

 

  (1) Included in other current assets.

  (2) Included in other long-term assets.

  (3) Included in other long-term liabilities.

Contract assets are amounts under client contracts where revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.

The change in deferred revenue in the nine months ended September 30, 2018 was primarily due to $225.1 million of revenue recognized, excluding the impact of netting contract assets and deferred revenue at the contract level, during the period that was included in deferred revenue at December 31, 2017, partially offset by new billings in advance of revenue recognition.

Major clients

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

v3.10.0.1
DEFERRED CONTRACT COSTS
9 Months Ended
Sep. 30, 2018
DEFERRED CONTRACT COSTS

5. DEFERRED CONTRACT COSTS

The Company recognizes an asset for the incremental costs of obtaining a contract with a client if the Company expects the benefit of those costs to be longer than one year. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average five years.

 

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

Deferred contract costs(1)

   $                         50,799        $                         37,924    

  (1) Included in other long-term assets.

 

Amortization of deferred contract costs was as follows:

 

                 Three Months Ended        
September 30,
             Nine Months Ended        
September 30,
 
(in thousands)          2018                  2017                  2018                  2017        

Amortization of deferred contract costs(1)

   $             4,208       $             3,034       $             11,806       $             8,529   

  (1) Included in selling and marketing expenses.

v3.10.0.1
GOODWILL AND OTHER INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2018
GOODWILL AND OTHER INTANGIBLE ASSETS

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The change in the carrying amount of goodwill was as follows:

 

(in thousands)               Nine Months Ended             
September 30,
 
  2018  

Balance as of January 1,

  $ 72,952   

Currency translation adjustments

    (55)  
 

 

 

 

Balance as of September 30,

  $ 72,897   
 

 

 

 

Intangibles

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

 

          September 30, 2018  
(in thousands)           Useful Lives             Cost     Accumulated
Amortization
    Net Book Value(1)  

Client-related intangibles

    4-10 years      $                 63,136      $                 (49,633)      $                 13,503   

Technology

    3-10 years        58,942        (49,067)        9,875   

Other

    1-5 years        5,361        (5,361)        —   
   

 

 

   

 

 

   

 

 

 
    $               127,439      $               (104,061)      $                 23,378   
   

 

 

   

 

 

   

 

 

 

  (1) Included in other long-term assets.

 

          December 31, 2017  
(in thousands)           Useful Lives             Cost     Accumulated
Amortization
    Net Book Value(1)  

Client-related intangibles

    4-10 years      $                 63,164      $                 (44,835)      $                 18,329   

Technology

    3-10 years        58,942        (45,372)        13,570   

Other

    1-5 years        5,361        (5,361)        —   
   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

 

  (1) Included in other long-term assets.

Amortization of intangible assets was as follows:

 

                 Three Months Ended             
September 30,
                 Nine Months Ended             
September 30,
 
(in thousands)    2018      2017      2018      2017  

Cost of revenue

   $                 1,232       $                 1,232       $                 3,695       $                 3,871   

Selling and marketing

     1,603         1,873         4,813         5,608   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,835       $ 3,105       $ 8,508       $ 9,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

v3.10.0.1
ACCRUED EXPENSES
9 Months Ended
Sep. 30, 2018
ACCRUED EXPENSES

7. ACCRUED EXPENSES

 

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

Outside professional services

   $ 11,638       $ 14,468   

Income and other taxes

     3,971         7,420   

Marketing and sales program expenses

     4,623         6,444   

Dividends payable

     2,365         2,344   

Employee-related expenses

     5,212         4,065   

Other

     12,020         10,767   
  

 

 

    

 

 

 
   $                     39,829       $                     45,508   
  

 

 

    

 

 

 
v3.10.0.1
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2018
FAIR VALUE MEASUREMENTS

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 within 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.

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 nine months ended September 30, 2018.

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

 

     September 30, 2018  
(in thousands)            Level 1                      Level 2                      Level 3                      Total          

Cash equivalents

   $                     10,212        $                     15,212        $                     —        $                     25,424    

Marketable securities:

           

Municipal bonds

   $ —        $ 46,366        $ —        $ 46,366    

Corporate bonds

     —          53,416          —          53,416    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ —        $ 99,782        $ —        $ 99,782    

Investments in privately-held companies(1)

   $ —        $ —        $ 2,890        $ 2,890    

  (1) Included in other long-term assets.

 

     December 31, 2017  
(in thousands)            Level 1                      Level 2                      Level 3                      Total          

Cash equivalents

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

Marketable securities:

                  

Municipal bonds

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

Corporate bonds

     —          28,621          —          28,621    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

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

Investments in privately-held companies(1)

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

  (1) Included in other long-term assets.

For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates 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 nine months ended September 30, 2018 and 2017, the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.

v3.10.0.1
REVENUE
9 Months Ended
Sep. 30, 2018
REVENUE

9. REVENUE

Revenue policy

The Company’s revenue is primarily derived from:

 

   

Software license revenue is primarily derived from sales of the Company’s Pega Platform and software applications.

 

   

Maintenance revenue includes revenue from client support including software upgrades on a when and-if available basis, telephone support, and bug fixes or patches.

 

   

Services revenue is primarily derived from cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications, 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. 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 are estimated and recognized in revenue as the Company satisfies each performance obligation 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 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.

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.

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 reevaluates whether the residual approach is appropriate for its license performance obligations when sold with other performance obligations. If the standalone selling price analysis illustrates that software license 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.

Maintenance

Maintenance contracts entitle clients to receive technical support and software updates, on a when and if available basis, during the term of the maintenance contract. Technical support and software 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. Maintenance revenue is recognized over time on a straight-line basis over the contract period.

The maintenance performance obligation is priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price 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.

Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.

Services

Services revenue is comprised of consulting, 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 other performance obligations.

 

   

The stand-alone selling price for time and materials consulting 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 stand-alone selling price for fixed price consulting is based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price consulting is recognized over time as the services are provided. Fees for fixed price consulting 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 other performance obligations 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. Cloud fees for production environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

 

   

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 the term of the service. Cloud fees for development and testing environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

Contract modifications

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

 

  1.

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

 

  2.

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

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

 

  1.

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

 

  2.

a cumulative catch-up basis.

 

Geographic revenue

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands)    2018      2017      2018      2017  

U.S.

   $ 103,075        51%      $ 105,059        55%      $ 327,409        51%      $ 376,819        59%  

Other Americas

     10,424        5%        9,307        5%        37,766        6%        32,890        5%  

United Kingdom (“U.K.”)

     19,277        9%        18,537        10%        68,450        11%        67,403        11%  

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

     42,254        21%        31,109        16%        101,150        16%        81,557        13%  

Asia-Pacific

     28,233        14%        26,945        14%        100,449        16%        75,193        12%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $       203,263              100%      $       190,957                100%      $       635,224              100%      $         633,862              100%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue streams

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands)                2018                              2017                              2018                              2017              

Perpetual license

   $         20,276       $         12,623       $         56,829       $         81,819   

Term license

     32,066         40,611         128,070         149,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue recognized at a point in time

     52,342         53,234         184,899         231,392   

Maintenance

     66,017         61,812         196,448         179,949   

Cloud

     22,184         13,280         57,967         36,207   

Consulting

     62,720         62,631         195,910         186,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue recognized over time

     150,921         137,723         450,325         402,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 203,263       $ 190,957       $ 635,224       $ 633,862   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands)                2018                              2017                              2018                              2017          

Term license

   $         32,066       $         40,611       $         128,070       $         149,573   

Cloud

     22,184         13,280         57,967         36,207   

Maintenance

     66,017         61,812         196,448         179,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subscription(1)

     120,267         115,703         382,485         365,729   

Perpetual license

     20,276         12,623         56,829         81,819   

Consulting

     62,720         62,631         195,910         186,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 203,263       $ 190,957       $ 635,224       $ 633,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

  (1) Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be subject to a renewal.

During the nine months ended September 30, 2018 and 2017, there were no material changes in the Company’s estimate of variable fees.

Remaining performance obligations (formerly reported as “committed not yet recognized revenue”)

Revenue for the remaining performance obligations on existing contracts is expected to be recognized in the future as follows:

 

     September 30, 2018  
(Dollars in thousands)    Perpetual license      Term license      Maintenance      Cloud      Consulting      Total  

1 year or less

   $ 25,343       $ 44,283       $ 140,591       $ 88,529       $ 14,107       $ 312,853                     60%   

1-2 years

     6,490         10,063         8,877         70,815         1,830         98,075         19%   

2-3 years

     360         1,598         2,586         54,646         449         59,639         11%   

Greater than 3 years

     1,306         218         1,079         49,110         50         51,763         10%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $         33,499       $         56,162       $         153,133       $         263,100       $         16,436       $         522,330         100%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Major clients

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

 

                 Three Months Ended             
September 30,
                 Nine Months Ended             
September 30,
 
(in thousands)    2018      2017      2018      2017  

Total revenue

   $           203,263         $           190,957         $ 635,224      $ 633,862  

Client A

     10%        10%        *        *  

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

v3.10.0.1
STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2018
STOCK-BASED COMPENSATION

10. STOCK-BASED COMPENSATION

Expense

 

                     Three Months Ended                 
September 30,
                     Nine Months Ended                 
September 30,
 
(in thousands)    2018      2017      2018      2017  

Cost of revenues

   $ 4,319        $ 3,613        $ 12,277        $ 10,913    

Selling and marketing

     6,198          3,976          16,895          11,482    

Research and development

     3,917          3,420          11,356          10,306    

General and administrative

     1,974          2,480          7,045          7,228    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,408        $ 13,489        $ 47,573        $ 39,929    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit

   $           (3,555)       $           (4,129)       $           (10,037)       $           (12,231)   

The Company recognizes stock-based compensation using the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of September 30, 2018, the Company had, net of estimated forfeitures, $74.2 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 2.2 years.

Grants

The Company granted the following stock-based compensation awards:

 

                 Nine Months Ended             
September 30,
 
(in thousands)            Shares                     Total Fair Value          

RSUs(1)

     1,117      $ 65,569   

Non-qualified stock options

     1,623      $ 29,372   

 

(1) 

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

RSU vestings and stock option exercises

During the nine months ended September 30, 2018, 1.2 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.

v3.10.0.1
INCOME TAXES
9 Months Ended
Sep. 30, 2018
INCOME TAXES

11. INCOME TAXES

Effective income tax rate

 

     Nine Months Ended
September 30,
 
(Dollars in thousands)            2018                     2017          

Benefit from income taxes

   $ (23,692   $ (9,009

Effective income tax rate

     80     (18 )% 

 

During the nine months ended September 30, 2018, the Company’s effective income tax rate changed primarily due to the following factors:

 

   

excess tax benefits from stock-based compensation were disproportionately greater than the (loss) income before benefit 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;

 

   

an increase in utilization of U.S. research and development tax credits; and

 

   

a decrease in uncertain tax provisions as a result of the settlement of a foreign tax audit for 2012 through 2015.

Tax reform act

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was enacted into law, which significantly changed U.S. tax law and included many provisions, such as a reduction of the U.S. federal statutory tax rate, a one-time transition tax on deemed repatriation of deferred foreign earnings, and a provision to tax global intangible low-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.

In the three months ended December 31, 2017, the Company recognized, under SEC Staff Accounting Bulletin No. 118 (“SAB 118”), provisional income taxes, including $20.4 million of income tax expense to re-measure its net deferred tax assets to the 21% enacted rate. Also, during the same period, the Company reduced its provisional income taxes by a $12.6 million income tax benefit as a result of the remeasurement of its net deferred tax liabilities under the retrospective adoption of ASC 606.

The final income tax amounts may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions by the Company, 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 a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017. However, based on the Company’s provisional analysis performed as of that date, the Company does not expect to be subject to the one-time transition tax due to the Company’s foreign subsidiaries being in a net accumulated deficit position. During the nine months ended September 30, 2018, the Company recognized no material 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 September 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.

v3.10.0.1
EARNINGS PER SHARE
9 Months Ended
Sep. 30, 2018
EARNINGS PER SHARE

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          
September 30,
               Nine Months Ended          
September 30,
 
(in thousands, except per share amounts)    2018      2017      2018      2017  

Basic

           

Net (loss) income

   $             (7,587)      $             1,288       $             (5,796)      $             57,953   

Weighted-average common shares outstanding

                 78,700                     77,691                     78,525         77,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) earnings per share, basic

   $ (0.10)      $ 0.01       $ (0.07)      $ 0.75   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Diluted

           

Net (loss) income

   $ (7,587)      $ 1,288       $ (5,796)      $ 57,953   

Weighted-average effect of dilutive securities:

           

Stock options

     —         3,681         —         3,519   

RSUs

     —         1,951         —         1,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

Effect of dilutive securities

     —         5,632         —         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding, assuming dilution

     78,700         83,323         78,525         82,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) earnings per share, diluted

   $ (0.10)      $ 0.01       $ (0.07)      $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Outstanding anti-dilutive stock options and RSUs(1)

     6,119         105         6,380         219   

 

(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.

v3.10.0.1
Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2018
Deferred Contract Cost

The Company recognizes an asset for the incremental costs of obtaining a contract with a client if the Company expects the benefit of those costs to be longer than one year. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average five years.

Revenue

Revenue policy

The Company’s revenue is primarily derived from:

 

   

Software license revenue is primarily derived from sales of the Company’s Pega Platform and software applications.

 

   

Maintenance revenue includes revenue from client support including software upgrades on a when and-if available basis, telephone support, and bug fixes or patches.

 

   

Services revenue is primarily derived from cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications, 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. 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 are estimated and recognized in revenue as the Company satisfies each performance obligation 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 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.

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.

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 reevaluates whether the residual approach is appropriate for its license performance obligations when sold with other performance obligations. If the standalone selling price analysis illustrates that software license 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.

Maintenance

Maintenance contracts entitle clients to receive technical support and software updates, on a when and if available basis, during the term of the maintenance contract. Technical support and software 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. Maintenance revenue is recognized over time on a straight-line basis over the contract period.

The maintenance performance obligation is priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price 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.

Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.

Services

Services revenue is comprised of consulting, 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 other performance obligations.

 

   

The stand-alone selling price for time and materials consulting 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 stand-alone selling price for fixed price consulting is based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price consulting is recognized over time as the services are provided. Fees for fixed price consulting 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 other performance obligations 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. Cloud fees for production environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

 

   

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 the term of the service. Cloud fees for development and testing environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

Contract modifications

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

 

  1.

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

 

  2.

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

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

 

  1.

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

 

  2.

a cumulative catch-up basis.

v3.10.0.1
NEW ACCOUNTING PRONOUNCEMENTS (Tables)
9 Months Ended
Sep. 30, 2018
Accounting Standards Update 2014-09  
Summary of Impact of Adoption of ASU 606

The impact of the adoption of ASC 606 and ASC 340-40 on the Company’s unaudited condensed consolidated balance sheet and unaudited condensed consolidated statement of operations is:

 

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

Assets

        

Accounts receivable, unbilled receivables, and contract assets

   $ 248,331       $ 134,216       $ 382,547   

Long-term unbilled receivables

     —         160,708         160,708   

Deferred income taxes

     57,127         (42,887)        14,240   

Deferred contract costs

     —         37,924         37,924   

Other assets(1)

     416,148         —         416,148   
  

 

 

    

 

 

    

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

 

Liabilities and stockholders’ equity

        

Deferred revenue

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

Long-term deferred revenue

     6,591         (2,885)        3,706   

Deferred income tax liabilities

     —         38,463         38,463   

Other liabilities(2)

     148,864         —         148,864   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     350,528         6,802         357,330   

Foreign currency translation adjustments

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

Retained earnings

     221,926         286,125         508,051   

Other equity(3)

     152,646         —         152,646   
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     371,078         283,159         654,237   
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

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

 

 

    

 

 

    

 

 

 

 

  (1) 

Includes cash, cash equivalents, marketable securities, income taxes receivable, other current assets, property and equipment, intangible assets, goodwill, and other long-term assets (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

  (2) 

Includes accounts payable, accrued expenses, accrued compensation and related expenses, income taxes payable, and other long-term liabilities (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

  (3)

Includes common stock, additional paid-in capital, and net unrealized loss on available-for-sale marketable securities (as reflected in the consolidated balance sheets in the Annual Report on Form 10-K for the year ended December 31, 2017).

 

     September 30, 2017  
     Three Months Ended      Nine Months Ended  
(in thousands, except per share amounts)      Previously  
Reported
       Adjustments          As Adjusted          Previously  
Reported
       Adjustments          As Adjusted    

Revenue:

                 

 Software license

   $ 41,793       $ 11,441       $ 53,234       $ 195,220       $ 36,172       $ 231,392   

 Maintenance

     62,204         (392)        61,812         180,759         (810)        179,949   

 Services

     75,818         93         75,911         225,063         (2,542)        222,521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total revenue

     179,815         11,142         190,957         601,042         32,820         633,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue:

                 

 Software license

     1,276         —          1,276         3,826         —          3,826   

 Maintenance

     6,716         —          6,716         20,945         —          20,945   

 Services

     61,739         —          61,739         180,925         —          180,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total cost of revenue

     69,731         —          69,731         205,696         —          205,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     110,084         11,142         121,226         395,346         32,820         428,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

                 

 Selling and marketing

     70,209         (846)        69,363         217,384         (3,140)        214,244   

 Research and development

     41,031         —          41,031         121,089         —          121,089   

 General and administrative

     13,133         —          13,133         38,174         —          38,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total operating expenses

     124,373         (846)        123,527         376,647         (3,140)        373,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     (14,289)        11,988         (2,301)        18,699         35,960         54,659   

Foreign currency transaction loss

     (552)        (4,500)        (5,052)        (793)        (5,756)        (6,549)  

Interest income, net

     144         (4)        140         470         77         547   

Other income, net

     —          —          —          287         —          287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income before benefit from income taxes

     (14,697)        7,484         (7,213)        18,663         30,281         48,944   

Benefit from income taxes

     (12,885)        4,384         (8,501)        (17,952)        8,943         (9,009)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Net (loss) income

   $ (1,812)      $ 3,100       $ 1,288       $ 36,615       $ 21,338       $ 57,953   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) earnings per share:

                 

 Basic

   $ (0.03)         $ 0.01       $ 0.47          $ 0.75   
  

 

 

       

 

 

    

 

 

       

 

 

 

 Diluted

   $ (0.03)         $ 0.01       $ 0.44          $ 0.70   
  

 

 

       

 

 

    

 

 

       

 

 

 

Weighted-average number of common shares outstanding:

                 

 Basic

     77,691            77,691         77,258            77,258   

 Diluted

     77,691            83,323         82,717            82,717   

v3.10.0.1
MARKETABLE SECURITIES (Tables)
9 Months Ended
Sep. 30, 2018
Schedule of Marketable Securities
     September 30, 2018  
(in thousands)        Amortized Cost              Unrealized Gains              Unrealized Losses                  Fair Value          

Municipal bonds

   $ 46,633       $ —       $ (267)      $ 46,366   

Corporate bonds

     53,738                (323)        53,416   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 100,371       $      $ (590)      $ 99,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 
v3.10.0.1
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE (Tables)
9 Months Ended
Sep. 30, 2018
Summary of Receivable

Receivables

 

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

Accounts receivable

   $ 150,733       $ 222,735   

Unbilled receivables

     155,964         158,898   

Long-term unbilled receivables

     168,929         160,708   
  

 

 

    

 

 

 
   $                         475,626       $                         542,341   
  

 

 

    

 

 

 
Summary of Unbilled Receivables

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

 

(Dollars in thousands)            September 30,        
2018
 

1 Year or Less

   $         155,964                     48%   

1-2 Years

     89,177         27%   

2-5 Years

     79,752         25%   
  

 

 

    

 

 

 
   $ 324,893         100%   
  

 

 

    

 

 

 
Summary of Contract Assets and Deferred Revenue

Contract assets and deferred revenue

 

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

Contract assets(1)

   $ 2,888       $ 914   

Long-term contract assets(2)

     1,581         —   
  

 

 

    

 

 

 
   $ 4,469       $ 914   
  

 

 

    

 

 

 

Deferred revenue

   $ 158,178       $ 166,297   

Long-term deferred revenue(3)

     5,840         3,706   
  

 

 

    

 

 

 
   $ 164,018       $ 170,003   
  

 

 

    

 

 

 

  (1) Included in other current assets.

  (2) Included in other long-term assets.

  (3) Included in other long-term liabilities.

v3.10.0.1
DEFERRED CONTRACT COSTS (Tables)
9 Months Ended
Sep. 30, 2018
Schedule of Impairment of Deferred Contract Costs
(in thousands)        September 30,    
2018
         December 31,    
2017
 

Deferred contract costs(1)

   $                         50,799        $                         37,924    

  (1) Included in other long-term assets.

Schedule of amortization of deferred contract costs

Amortization of deferred contract costs was as follows:

 

                 Three Months Ended        
September 30,
             Nine Months Ended        
September 30,
 
(in thousands)          2018                  2017                  2018                  2017        

Amortization of deferred contract costs(1)

   $             4,208       $             3,034       $             11,806       $             8,529   

  (1) Included in selling and marketing expenses.

v3.10.0.1
GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)
9 Months Ended
Sep. 30, 2018
Change in Carrying Amount of Goodwill

The change in the carrying amount of goodwill was as follows:

 

(in thousands)               Nine Months Ended             
September 30,
 
  2018  

Balance as of January 1,

  $ 72,952   

Currency translation adjustments

    (55)  
 

 

 

 

Balance as of September 30,

  $ 72,897   
 

 

 

 
Schedule of Amortizable Intangible Assets

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

 

          September 30, 2018  
(in thousands)           Useful Lives             Cost     Accumulated
Amortization
    Net Book Value(1)  

Client-related intangibles

    4-10 years      $                 63,136      $                 (49,633)      $                 13,503   

Technology

    3-10 years        58,942        (49,067)        9,875   

Other

    1-5 years        5,361        (5,361)        —   
   

 

 

   

 

 

   

 

 

 
    $               127,439      $               (104,061)      $                 23,378   
   

 

 

   

 

 

   

 

 

 

  (1) Included in other long-term assets.

 

          December 31, 2017  
(in thousands)           Useful Lives             Cost     Accumulated
Amortization
    Net Book Value(1)  

Client-related intangibles

    4-10 years      $                 63,164      $                 (44,835)      $                 18,329   

Technology

    3-10 years        58,942        (45,372)        13,570   

Other

    1-5 years        5,361        (5,361)        —   
   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

 

  (1) Included in other long-term assets.

Amortization of Intangible Assets

Amortization of intangible assets was as follows:

 

                 Three Months Ended             
September 30,
                 Nine Months Ended             
September 30,
 
(in thousands)    2018      2017      2018      2017  

Cost of revenue

   $                 1,232       $                 1,232       $                 3,695       $                 3,871   

Selling and marketing

     1,603         1,873         4,813         5,608   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,835       $ 3,105       $ 8,508       $ 9,479   
  

 

 

    

 

 

    

 

 

    

 

 

 
v3.10.0.1
ACCRUED EXPENSES (Tables)
9 Months Ended
Sep. 30, 2018
Schedule of Accrued Expenses
(in thousands)    September 30,
2018
     December 31,
2017
 

Outside professional services

   $ 11,638       $ 14,468   

Income and other taxes

     3,971         7,420   

Marketing and sales program expenses

     4,623         6,444   

Dividends payable

     2,365         2,344   

Employee-related expenses

     5,212         4,065   

Other

     12,020         10,767   
  

 

 

    

 

 

 
   $                     39,829       $                     45,508   
  

 

 

    

 

 

 
v3.10.0.1
FAIR VALUE MEASUREMENTS (Tables)
9 Months Ended
Sep. 30, 2018
Assets and Liabilities Measured at Fair Value

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

 

     September 30, 2018  
(in thousands)            Level 1                      Level 2                      Level 3                      Total          

Cash equivalents

   $                     10,212        $                     15,212        $                     —        $                     25,424    

Marketable securities:

           

Municipal bonds

   $ —        $ 46,366        $ —        $ 46,366    

Corporate bonds

     —          53,416          —          53,416    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ —        $ 99,782        $ —        $ 99,782    

Investments in privately-held companies(1)

   $ —        $ —        $ 2,890        $ 2,890    

  (1) Included in other long-term assets.

 

     December 31, 2017  
(in thousands)            Level 1                      Level 2                      Level 3                      Total          

Cash equivalents

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

Marketable securities:

                  

Municipal bonds

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

Corporate bonds

     —          28,621          —          28,621    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

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

Investments in privately-held companies(1)

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

  (1) Included in other long-term assets.

v3.10.0.1
REVENUE (Tables)
9 Months Ended
Sep. 30, 2018
Disaggregation of Revenue

Geographic revenue

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands)    2018      2017      2018      2017  

U.S.

   $ 103,075        51%      $ 105,059        55%      $ 327,409        51%      $ 376,819        59%  

Other Americas

     10,424        5%        9,307        5%        37,766        6%        32,890        5%  

United Kingdom (“U.K.”)

     19,277        9%        18,537        10%        68,450        11%        67,403        11%  

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

     42,254        21%        31,109        16%        101,150        16%        81,557        13%  

Asia-Pacific

     28,233        14%        26,945        14%        100,449        16%        75,193        12%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $       203,263              100%      $       190,957                100%      $       635,224              100%      $         633,862              100%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue streams

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands)                2018                              2017                              2018                              2017              

Perpetual license

   $         20,276       $         12,623       $         56,829       $         81,819   

Term license

     32,066         40,611         128,070         149,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue recognized at a point in time

     52,342         53,234         184,899         231,392   

Maintenance

     66,017         61,812         196,448         179,949   

Cloud

     22,184         13,280         57,967         36,207   

Consulting

     62,720         62,631         195,910         186,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue recognized over time

     150,921         137,723         450,325         402,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 203,263       $ 190,957       $ 635,224       $ 633,862   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands)                2018                              2017                              2018                              2017          

Term license

   $         32,066       $         40,611       $         128,070       $         149,573   

Cloud

     22,184         13,280         57,967         36,207   

Maintenance

     66,017         61,812         196,448         179,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subscription(1)

     120,267         115,703         382,485         365,729   

Perpetual license

     20,276         12,623         56,829         81,819   

Consulting

     62,720         62,631         195,910         186,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 203,263       $ 190,957       $ 635,224       $ 633,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

  (1) Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be dependent on a renewal for a client to receive continued benefit.

Revenue for Remaining Performance Obligations Expected to be Recognized

Revenue for the remaining performance obligations on existing contracts is expected to be recognized in the future as follows:

 

     September 30, 2018  
(Dollars in thousands)    Perpetual license      Term license      Maintenance      Cloud      Consulting      Total  

1 year or less

   $ 25,343       $ 44,283       $ 140,591       $ 88,529       $ 14,107       $ 312,853                     60%   

1-2 years

     6,490         10,063         8,877         70,815         1,830         98,075         19%   

2-3 years

     360         1,598         2,586         54,646         449         59,639         11%   

Greater than 3 years

     1,306         218         1,079         49,110         50         51,763         10%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $         33,499       $         56,162       $         153,133       $         263,100       $         16,436       $         522,330         100%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 


 

Total Revenue of Major Clients

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

 

                 Three Months Ended             
September 30,
                 Nine Months Ended             
September 30,
 
(in thousands)    2018      2017      2018      2017  

Total revenue

   $           203,263         $           190,957         $ 635,224      $ 633,862  

Client A

     10%        10%        *        *  

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

v3.10.0.1
STOCK-BASED COMPENSATION (Tables)
9 Months Ended
Sep. 30, 2018
Summary of Stock Based Compensation Expense

Expense

 

                     Three Months Ended                 
September 30,
                     Nine Months Ended                 
September 30,
 
(in thousands)    2018      2017      2018      2017  

Cost of revenues

   $ 4,319        $ 3,613        $ 12,277        $ 10,913    

Selling and marketing

     6,198          3,976          16,895          11,482    

Research and development

     3,917          3,420          11,356          10,306    

General and administrative

     1,974          2,480          7,045          7,228    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,408        $ 13,489        $ 47,573        $ 39,929    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit

   $           (3,555)       $           (4,129)       $           (10,037)       $           (12,231)   

Summary of stock based compensation award granted

Grants

The Company granted the following stock-based compensation awards:

 

                 Nine Months Ended             
September 30,
 
(in thousands)            Shares                     Total Fair Value          

RSUs(1)

     1,117      $ 65,569   

Non-qualified stock options

     1,623      $ 29,372   

 

(1) 

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

v3.10.0.1
INCOME TAXES (Tables)
9 Months Ended
Sep. 30, 2018
Summary of Benefit from Income Taxes and Discrete Tax Items

Effective income tax rate

 

     Nine Months Ended
September 30,
 
(Dollars in thousands)            2018                     2017          

Benefit from income taxes

   $ (23,692   $ (9,009

Effective income tax rate

     80     (18 )% 
v3.10.0.1
EARNINGS PER SHARE (Tables)
9 Months Ended
Sep. 30, 2018
Summary of Basic and Diluted Earnings Per Share

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

 

               Three Months Ended          
September 30,
               Nine Months Ended          
September 30,
 
(in thousands, except per share amounts)    2018      2017      2018      2017  

Basic

           

Net (loss) income

   $             (7,587)      $             1,288       $             (5,796)      $             57,953   

Weighted-average common shares outstanding

                 78,700                     77,691                     78,525         77,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) earnings per share, basic