PEGASYSTEMS INC, 10-Q filed on 07 Nov 19
v3.19.3
COVER PAGE - shares
9 Months Ended
Sep. 30, 2019
Oct. 31, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2019  
Document Transition Report false  
Entity File Number 1-11859  
Entity Registrant Name PEGASYSTEMS INC.  
Entity Incorporation, State or Country Code MA  
Entity Tax Identification Number 04-2787865  
Entity Address, Address Line One One Rogers Street  
Entity Address, City or Town Cambridge  
Entity Address, State or Province MA  
Entity Address, Postal Zip Code 02142-1209  
City Area Code 617  
Local Phone Number 374-9600  
Title of 12(b) Security Common Stock, $.01 par value per share  
Trading Symbol PEGA  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   79,332,662
Amendment Flag false  
Entity Central Index Key 0001013857  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Current Fiscal Year End Date --12-31  
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 92,104 $ 114,422
Marketable securities 20,465 93,001
Total cash, cash equivalents, and marketable securities 112,569 207,423
Accounts receivable 123,268 180,872
Unbilled receivables 172,090 172,656
Other current assets 58,204 49,684
Total current assets 466,131 610,635
Long-term unbilled receivables 123,962 151,237
Goodwill 78,862 72,858
Other long-term assets 248,069 147,823
Total assets 917,024 982,553
Current liabilities:    
Accounts payable 15,435 16,487
Accrued expenses 41,520 45,506
Accrued compensation and related expenses 88,349 84,671
Deferred revenue 159,849 185,145
Other current liabilities 15,742 0
Total current liabilities 320,895 331,809
Operating lease liabilities 56,904 0
Other long-term liabilities 10,393 29,213
Total liabilities 388,192 361,022
Stockholders’ equity:    
Preferred stock, 1,000 shares authorized; none issued 0 0
Common stock, 200,000 shares authorized; 79,324 and 78,526 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 793 785
Additional paid-in capital 129,559 123,205
Retained earnings 412,389 510,863
Accumulated other comprehensive (loss) (13,909) (13,322)
Total stockholders’ equity 528,832 621,531
Total liabilities and stockholders’ equity $ 917,024 $ 982,553
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares
Sep. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Preferred stock, shares authorized (in shares) 1,000,000 1,000,000
Preferred stock, shares issued (in shares) 0 0
Common stock, shares authorized (in shares) 200,000,000 200,000,000
Common stock, shares issued (in shares) 79,324,000 78,526,000
Common stock, shares outstanding (in shares) 79,324,000 78,526,000
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenue        
Total revenue $ 216,703 $ 203,263 $ 634,841 $ 635,224
Total revenue 216,703 203,263 634,841 635,224
Cost of revenue        
Total cost of revenue 80,898 74,423 232,415 223,854
Gross profit 135,805 128,840 402,426 411,370
Operating expenses        
Selling and marketing 115,237 87,490 341,064 269,845
Research and development 52,492 46,504 152,802 135,261
General and administrative 14,843 12,104 41,693 38,749
Total operating expenses 182,572 146,098 535,559 443,855
(Loss) from operations (46,767) (17,258) (133,133) (32,485)
Foreign currency transaction (loss) gain (1,970) 399 (3,577) 558
Interest income, net 556 683 1,823 2,076
Other income, net 323 0 378 363
(Loss) before (benefit from) income taxes (47,858) (16,176) (134,509) (29,488)
(Benefit from) income taxes (17,520) (8,589) (43,158) (23,692)
Net (loss) $ (30,338) $ (7,587) $ (91,351) $ (5,796)
(Loss) per share        
Basic (in dollars per share) $ (0.38) $ (0.10) $ (1.16) $ (0.07)
Diluted (in dollars per share) $ (0.38) $ (0.10) $ (1.16) $ (0.07)
Weighted-average number of common shares outstanding        
Basic (in shares) 79,200 78,700 78,928 78,525
Diluted (in shares) 79,200 78,700 78,928 78,525
Software license        
Revenue        
Total revenue $ 58,005 $ 52,342 $ 165,543 $ 184,899
Cost of revenue        
Total cost of revenue 676 1,255 2,982 3,772
Maintenance        
Revenue        
Total revenue 70,371 66,017 207,406 196,448
Cost of revenue        
Total cost of revenue 6,688 6,079 19,315 18,035
Services        
Revenue        
Total revenue 88,327 84,904 261,892 253,877
Cost of revenue        
Total cost of revenue $ 73,534 $ 67,089 $ 210,118 $ 202,047
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net (loss) $ (30,338) $ (7,587) $ (91,351) $ (5,796)
Other comprehensive (loss), net of tax        
Unrealized (loss) gain on available-for-sale marketable securities (216) (162) 396 (277)
Foreign currency translation adjustments (2,201) (1,934) (983) (4,898)
Total other comprehensive (loss), net of tax (2,417) (2,096) (587) (5,175)
Comprehensive (loss) $ (32,755) $ (9,683) $ (91,938) $ (10,971)
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Balance, beginning of period (in shares) at Dec. 31, 2017   78,081,000      
Balance, beginning of period at Dec. 31, 2017 $ 655,870 $ 781 $ 152,097 $ 509,697 $ (6,705)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (101,000)      
Repurchase of common stock (5,689) $ (1) (5,688)    
Issuance of common stock for share-based compensation plans (in shares)   566,000      
Issuance of common stock for share-based compensation plans (15,551) $ 5 (15,556)    
Stock-based compensation 15,109   15,109    
Cash dividends declared ($0.12 per share) (2,355)     (2,355)  
Other comprehensive income (loss) 4,262       4,262
Net income (loss) 12,200     12,200  
Balance, end of period (in shares) at Mar. 31, 2018   78,546,000      
Balance, end of period at Mar. 31, 2018 663,846 $ 785 145,962 519,542 (2,443)
Balance, beginning of period (in shares) at Dec. 31, 2017   78,081,000      
Balance, beginning of period at Dec. 31, 2017 655,870 $ 781 152,097 509,697 (6,705)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Other comprehensive income (loss) (5,175)        
Net income (loss) (5,796)        
Balance, end of period (in shares) at Sep. 30, 2018   78,816,000      
Balance, end of period at Sep. 30, 2018 620,855 $ 788 135,132 496,815 (11,880)
Balance, beginning of period (in shares) at Mar. 31, 2018   78,546,000      
Balance, beginning of period at Mar. 31, 2018 663,846 $ 785 145,962 519,542 (2,443)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (171,000)      
Repurchase of common stock (10,181) $ (2) (10,179)    
Issuance of common stock for share-based compensation plans (in shares)   358,000      
Issuance of common stock for share-based compensation plans (11,391) $ 4 (11,395)    
Issuance of common stock under Employee Stock Purchase Plan (in shares)   15,000      
Issuance of common stock under Employee Stock Purchase Plan 849   849    
Stock-based compensation 16,163   16,163    
Cash dividends declared ($0.12 per share) (2,364)     (2,364)  
Other comprehensive income (loss) (7,341)       (7,341)
Net income (loss) (10,409)     (10,409)  
Balance, end of period (in shares) at Jun. 30, 2018   78,748,000      
Balance, end of period at Jun. 30, 2018 639,172 $ 787 141,400 506,769 (9,784)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (242,000)      
Repurchase of common stock (14,279) $ (2) (14,277)    
Issuance of common stock for share-based compensation plans (in shares)   310,000      
Issuance of common stock for share-based compensation plans (8,396) $ 3 (8,399)    
Stock-based compensation 16,408   16,408    
Cash dividends declared ($0.12 per share) (2,367)     (2,367)  
Other comprehensive income (loss) (2,096)       (2,096)
Net income (loss) (7,587)     (7,587)  
Balance, end of period (in shares) at Sep. 30, 2018   78,816,000      
Balance, end of period at Sep. 30, 2018 $ 620,855 $ 788 135,132 496,815 (11,880)
Balance, beginning of period (in shares) at Dec. 31, 2018 78,526,000 78,526,000      
Balance, beginning of period at Dec. 31, 2018 $ 621,531 $ 785 123,205 510,863 (13,322)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (144,000)      
Repurchase of common stock (7,587) $ (1) (7,586)    
Issuance of common stock for share-based compensation plans (in shares)   514,000      
Issuance of common stock for share-based compensation plans (14,838) $ 5 (14,843)    
Stock-based compensation 18,406   18,406    
Cash dividends declared ($0.12 per share) (2,367)     (2,367)  
Other comprehensive income (loss) 2,001       2,001
Net income (loss) (28,717)     (28,717)  
Balance, end of period (in shares) at Mar. 31, 2019   78,896,000      
Balance, end of period at Mar. 31, 2019 $ 588,429 $ 789 119,182 479,779 (11,321)
Balance, beginning of period (in shares) at Dec. 31, 2018 78,526,000 78,526,000      
Balance, beginning of period at Dec. 31, 2018 $ 621,531 $ 785 123,205 510,863 (13,322)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Other comprehensive income (loss) (587)        
Net income (loss) $ (91,351)        
Balance, end of period (in shares) at Sep. 30, 2019 79,324,000 79,324,000      
Balance, end of period at Sep. 30, 2019 $ 528,832 $ 793 129,559 412,389 (13,909)
Balance, beginning of period (in shares) at Mar. 31, 2019   78,896,000      
Balance, beginning of period at Mar. 31, 2019 588,429 $ 789 119,182 479,779 (11,321)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (88,000)      
Repurchase of common stock (6,302) $ (1) (6,301)    
Issuance of common stock for share-based compensation plans (in shares)   320,000      
Issuance of common stock for share-based compensation plans (11,214) $ 3 (11,217)    
Issuance of common stock under Employee Stock Purchase Plan (in shares)   16,000      
Issuance of common stock under Employee Stock Purchase Plan 1,103   1,103    
Stock-based compensation 20,113   20,113    
Cash dividends declared ($0.12 per share) (2,375)     (2,375)  
Other comprehensive income (loss) (171)       (171)
Net income (loss) (32,296)     (32,296)  
Balance, end of period (in shares) at Jun. 30, 2019   79,144,000      
Balance, end of period at Jun. 30, 2019 557,287 $ 791 122,880 445,108 (11,492)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (88,000)      
Repurchase of common stock (6,397) $ (1) (6,396)    
Issuance of common stock for share-based compensation plans (in shares)   268,000      
Issuance of common stock for share-based compensation plans (8,801) $ 3 (8,804)    
Stock-based compensation 21,879   21,879    
Cash dividends declared ($0.12 per share) (2,381)     (2,381)  
Other comprehensive income (loss) (2,417)       (2,417)
Net income (loss) $ (30,338)     (30,338)  
Balance, end of period (in shares) at Sep. 30, 2019 79,324,000 79,324,000      
Balance, end of period at Sep. 30, 2019 $ 528,832 $ 793 $ 129,559 $ 412,389 $ (13,909)
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Statement of Stockholders' Equity [Abstract]            
Dividend declared (in dollars per share) $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
v3.19.3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Operating activities    
Net (loss) $ (91,351) $ (5,796)
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities    
Stock-based compensation 60,242 47,573
Amortization and depreciation 50,622 31,742
Deferred income taxes (40,531) (1,388)
Foreign currency transaction loss (gain) 3,577 (558)
Other non-cash (363) (1,377)
Change in operating assets and liabilities, net 4,342 (3,108)
Cash (used in) provided by operating activities (13,462) 67,088
Investing activities    
Purchases of investments (11,182) (68,177)
Proceeds from maturities and called investments 13,066 26,456
Sales of investments 68,937 0
Payments for acquisitions, net of cash acquired (10,934) 0
Investment in property and equipment (6,439) (7,874)
Cash provided by (used in) investing activities 53,448 (49,595)
Financing activities    
Dividend payments to shareholders (7,105) (7,067)
Common stock repurchases (54,836) (64,597)
Cash (used in) financing activities (61,941) (71,664)
Effect of exchange rate changes on cash and cash equivalents (363) (1,913)
Net (decrease) in cash and cash equivalents (22,318) (56,084)
Cash and cash equivalents, beginning of period 114,422 162,279
Cash and cash equivalents, end of period $ 92,104 $ 106,195
v3.19.3
BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
BASIS OF PRESENTATION 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 the information 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, 2018.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2019.
v3.19.3
NEW ACCOUNTING PRONOUNCEMENTS
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
NEW ACCOUNTING PRONOUNCEMENTS NEW ACCOUNTING PRONOUNCEMENTS
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 840 “Leases”.
The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities of $54.2 million. The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.
See Note 9. “Leases” for additional information.
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. 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 does not expect the adoption of this standard will have a material effect on its financial position or results of operations.
v3.19.3
MARKETABLE SECURITIES
9 Months Ended
Sep. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
MARKETABLE SECURITIES MARKETABLE SECURITIES
 
September 30, 2019
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
10,680

 
$
69

 
$

 
$
10,749

Corporate bonds
9,611

 
105

 

 
9,716

 
$
20,291

 
$
174

 
$

 
$
20,465

 
December 31, 2018
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
44,802

 
$
13

 
$
(110
)
 
$
44,705

Corporate bonds
48,499

 
23

 
(226
)
 
48,296

 
$
93,301

 
$
36

 
$
(336
)
 
$
93,001


As of September 30, 2019, maturities of marketable securities ranged from May 2020 to August 2022, with a weighted-average remaining maturity of approximately 1.5 years.
v3.19.3
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
September 30, 2019
 
December 31, 2018
Accounts receivable
$
123,268

 
$
180,872

Unbilled receivables
172,090

 
172,656

Long-term unbilled receivables
123,962

 
151,237


$
419,320

 
$
504,765


Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables are expected to be billed in the future as follows:
(Dollars in thousands)
September 30, 2019
1 year or less
$
172,090

59
%
1-2 years
84,045

28
%
2-5 years
39,917

13
%
 
$
296,052

100
%

Contract assets and deferred revenue
(in thousands)
September 30, 2019
 
December 31, 2018
Contract assets (1)
$
5,046

 
$
3,711

Long-term contract assets (2)
2,381

 
2,543

 
$
7,427

 
$
6,254

(1) Included in other current assets. (2) Included in other long-term assets.
(in thousands)
September 30, 2019
 
December 31, 2018
Deferred revenue
$
159,849

 
$
185,145

Long-term deferred revenue (1)
4,029

 
5,344

 
$
163,878

 
$
190,489

(1) Included in other long-term liabilities.
Contract assets are client committed amounts for which 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, 2019 was primarily due to revenue recognized during the period that was included in deferred revenue at December 31, 2018, partially offset by new billings in advance of revenue recognition.
v3.19.3
DEFERRED CONTRACT COSTS
9 Months Ended
Sep. 30, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
DEFERRED CONTRACT COSTS DEFERRED CONTRACT COSTS
The Company recognizes an asset for the incremental costs of obtaining a client contract, which relate to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company generally only pays sales commissions on the initial contract and not any subsequent contract renewals. As a result, there are no commensurate commissions paid on contract renewals. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average 5 years.
(in thousands)
September 30, 2019
 
December 31, 2018
Deferred contract costs (1)
$
67,182

 
$
64,367

(1) Included in other long-term assets.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Amortization of deferred contract costs (1)
$
8,193

 
$
4,208

 
$
22,372

 
$
11,806

(1) Included in selling and marketing expenses.
v3.19.3
GOODWILL AND OTHER INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL AND OTHER INTANGIBLE ASSETS GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill was:
(in thousands)
Nine Months Ended
September 30, 2019
Balance as of January 1,
$
72,858

Acquisition (1)
6,179

Currency translation adjustments
(175
)
Balance as of September 30,
$
78,862


(1) In May 2019, the Company acquired In the Chat Communications Inc., a privately-held software provider of digital customer service software, for $10.9 million, net of cash acquired. The Company also expects to issue up to approximately 15 thousand shares in retention-based bonus payments to a key employee upon the achievement of specified retention milestones. The principal assets and liabilities acquired as part of the business combination were additional goodwill and technology intangible assets of $6.2 million and $5.1 million.
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
 
 
 
September 30, 2019
(in thousands)
Useful Lives
 
Cost
 
Accumulated
Amortization
 
Net Book Value (1)
Client-related
4-10 years
 
$
63,089

 
$
(53,960
)
 
$
9,129

Technology
2-10 years
 
64,843

 
(53,252
)
 
11,591

Other
1 - 5 years
 
5,361

 
(5,361
)
 

 
 
 
$
133,293

 
$
(112,573
)
 
$
20,720

(1) Included in other long-term assets.
 
 
 
December 31, 2018
(in thousands)
Useful Lives
 
Cost
 
Accumulated Amortization
 
Net Book Value (1)
Client-related
4-10 years
 
$
63,115

 
$
(51,224
)
 
$
11,891

Technology
2-10 years
 
59,742

 
(50,398
)
 
9,344

Other
1 - 5 years
 
5,361

 
(5,361
)
 

 
 
 
$
128,218

 
$
(106,983
)
 
$
21,235

(1) Included in other long-term assets.
Amortization of intangible assets was:
(in thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
Cost of revenue
$
647

 
$
1,232

 
$
2,854

 
$
3,695

Selling and marketing
370

 
1,603

 
2,754

 
4,813

 
$
1,017

 
$
2,835

 
$
5,608

 
$
8,508


v3.19.3
ACCRUED EXPENSES
9 Months Ended
Sep. 30, 2019
Payables and Accruals [Abstract]  
ACCRUED EXPENSES ACCRUED EXPENSES
(in thousands)
September 30, 2019
 
December 31, 2018
Outside professional services expenses
$
8,568

 
$
10,367

Income and other taxes
5,418

 
10,387

Marketing and sales program expenses
5,969

 
5,860

Dividends payable
2,381

 
2,363

Employee-related expenses
4,785

 
3,536

Cloud hosting expenses
10,158

 
4,604

Other
4,241

 
8,389

 
$
41,520

 
$
45,506


v3.19.3
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS 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.
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, 2019.
The Company’s assets and liabilities measured at fair value on a recurring basis were:
 
September 30, 2019
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
88

 
$

 
$

 
$
88

Marketable securities:
 
 
 
 
 
 
 
Municipal bonds
$

 
$
10,749

 
$

 
$
10,749

Corporate bonds

 
9,716

 

 
9,716

Total marketable securities
$

 
$
20,465

 
$

 
$
20,465

Investments in privately-held companies (1)
$

 
$

 
$
4,583

 
$
4,583

(1) Included in other long-term assets.
 
December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
10,155

 
$
10,000

 
$

 
$
20,155

Marketable securities:
 
 
 
 
 
 
 
Municipal bonds
$

 
$
44,705

 
$

 
$
44,705

Corporate bonds

 
48,296

 

 
48,296

Total marketable securities
$

 
$
93,001

 
$

 
$
93,001

Investments in privately-held companies (1)
$

 
$

 
$
3,390

 
$
3,390

(1) Included in other long-term assets.
For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates fair value due to the relatively short maturity of these items.
v3.19.3
LEASES
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
LEASES LEASES
The Company’s leases are primarily for office space used in the ordinary course of business.
Accounting policy
All the Company’s leases are operating leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is
reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
Expense
(in thousands)
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Fixed lease costs
$
4,763

 
$
13,344

Variable lease costs
1,470

 
4,153

 
$
6,233

 
$
17,497


Right of use assets and lease liabilities
(in thousands)
September 30, 2019
Right of use assets (1)
$
62,296

Lease liabilities (2)
$
15,742

Long-term lease liabilities
$
56,904

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. (2) Included in other current liabilities.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
 
September 30, 2019
Weighted-average remaining lease term
4.2 years

Weighted-average discount rate (1)
5.8
%
(1) The rates implicit in most of the Company’s leases are not readily determinable, therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Maturities of lease liabilities are:
(in thousands)
September 30, 2019
Remainder of 2019
$
3,402

2020
21,061

2021
18,800

2022
17,642

2023 and thereafter
21,375

Total lease payments
82,280

Less: imputed interest (1)
(9,634
)
Total short and long-term lease liabilities
$
72,646

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event.
As of December 31, 2018, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as determined before the adoption of ASC 842 were:
(in thousands)
Operating Leases (1)
2019
$
15,993

2020
14,807

2021
13,262

2022
12,279

2023
11,084

 
$
67,425

(1) Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the Company has vacated pursuant to its restructuring activities.
Cash flow information
(in thousands)
Nine Months Ended
September 30, 2019
Cash paid for leases
14,586

Right of use assets recognized for new leases and amendments (non-cash)
31,126


v3.19.3
REVENUE
9 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
REVENUE REVENUE
Geographic revenue
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
U.S.
$
123,447

57
%
 
$
103,075

51
%
 
$
347,120

55
%
 
$
327,409

51
%
Other Americas
11,748

5
%
 
10,424

5
%
 
49,450

8
%
 
37,766

6
%
United Kingdom (“U.K.”)
23,034

11
%
 
19,277

9
%
 
64,269

10
%
 
68,450

11
%
Europe (excluding U.K.), Middle East, and Africa
34,761

16
%
 
42,254

21
%
 
102,342

16
%
 
101,150

16
%
Asia-Pacific
23,713

11
%
 
28,233

14
%
 
71,660

11
%
 
100,449

16
%
 
$
216,703

100
%
 
$
203,263

100
%
 
$
634,841

100
%
 
$
635,224

100
%

Revenue streams
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Perpetual license
$
9,016

 
$
20,276

 
$
43,286

 
$
56,829

Term license
48,989

 
32,066

 
122,257

 
128,070

Revenue recognized at a point in time
58,005

 
52,342

 
165,543

 
184,899

Maintenance
70,371

 
66,017

 
207,406

 
196,448

Cloud
35,153

 
22,184

 
94,610

 
57,967

Consulting
53,174

 
62,720

 
167,282

 
195,910

Revenue recognized over time
158,698

 
150,921

 
469,298

 
450,325

 
$
216,703

 
$
203,263

 
$
634,841

 
$
635,224

(in thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
Term license
$
48,989

 
$
32,066

 
$
122,257

 
$
128,070

Cloud
35,153

 
22,184

 
94,610

 
57,967

Maintenance
70,371

 
66,017

 
207,406

 
196,448

Subscription (1)
154,513

 
120,267

 
424,273

 
382,485

Perpetual license
9,016

 
20,276

 
43,286

 
56,829

Consulting
53,174

 
62,720

 
167,282

 
195,910

 
$
216,703

 
$
203,263

 
$
634,841

 
$
635,224

(1)  Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
Remaining performance obligations (“RPO”)
Expected future revenue on existing contracts:
 
September 30, 2019
(Dollars in thousands)
Perpetual license
 
Term license
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
7,689

 
$
25,948

 
$
158,220

 
$
133,785

 
$
13,145

 
$
338,787

56
%
1-2 years
853

 
3,798

 
18,590

 
105,081

 
863

 
129,185

21
%
2-3 years
1,306

 
591

 
8,323

 
72,915

 
841

 
83,976

14
%
Greater than 3 years

 
85

 
4,959

 
51,591

 

 
56,635

9
%
 
$
9,848

 
$
30,422

 
$
190,092

 
$
363,372

 
$
14,849

 
$
608,583

100
%
 
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:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Total revenue
$
216,703

 
$
203,263

 
$
634,841

 
$
635,224

Client A
*

 
10
%
 
*

 
*

*Client accounted for less than 10% of total revenue.
v3.19.3
STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK-BASED COMPENSATION STOCK-BASED COMPENSATION
Expense
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Cost of revenues
$
4,787


$
4,319

 
$
14,216


$
12,277

Selling and marketing
8,317


6,198

 
24,055


16,895

Research and development
4,858


3,917

 
13,990


11,356

General and administrative
3,884


1,974

 
7,981


7,045

 
$
21,846


$
16,408

 
$
60,242


$
47,573

Income tax benefit
$
(4,430
)

$
(3,555
)
 
$
(12,226
)

$
(10,037
)

As of September 30, 2019, the Company had $95.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is 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, 2019
(in thousands)
Shares
 
Total Fair Value
RSUs
1,153

 
$
75,510

Non-qualified stock options
2,165

 
$
41,260

Common stock
11

 
$
800


Common stock issued
During the nine months ended September 30, 2019, the Company issued 1.1 million shares of common stock under the Company’s stock-based compensation plans.
v3.19.3
INCOME TAXES
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Effective income tax rate
 
Nine Months Ended
September 30,
(Dollars in thousands)
2019
 
2018
(Benefit from) income taxes
$
(43,158
)
 
$
(23,692
)
Effective income tax rate
32
%
 
80
%

During the nine months ended September 30, 2019, the Company’s effective income tax rate decreased primarily due to the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation and an increase in U.S. research and development tax credits.
v3.19.3
EARNINGS PER SHARE
9 Months Ended
Sep. 30, 2019
Earnings Per Share [Abstract]  
EARNINGS PER SHARE 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 was:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Basic
 
 
 
 
 
 
 
Net (loss)
$
(30,338
)
 
$
(7,587
)
 
$
(91,351
)
 
$
(5,796
)
Weighted-average common shares outstanding
79,200


78,700


78,928


78,525

(Loss) per share, basic
$
(0.38
)
 
$
(0.10
)
 
$
(1.16
)
 
$
(0.07
)
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Net (loss)
$
(30,338
)
 
$
(7,587
)
 
$
(91,351
)
 
$
(5,796
)
Weighted-average effect of dilutive securities:
 
 
 
 
 
 
 
Stock options

 

 

 

RSUs

 

 

 

Effect of dilutive securities

 

 

 

Weighted-average common shares outstanding, assuming dilution
79,200

 
78,700

 
78,928

 
78,525

(Loss) per share, diluted
$
(0.38
)
 
$
(0.10
)
 
$
(1.16
)
 
$
(0.07
)

 
 
 
 
 
 
 
Outstanding anti-dilutive stock options and RSUs (1)
5,953

 
6,119

 
5,923

 
6,380

(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.
v3.19.3
SUBSEQUENT EVENTS
9 Months Ended
Sep. 30, 2019
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS SUBSEQUENT EVENTS
On November 6, 2019, the Company entered into a five-year $100 million, senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Agreement allows the Company to increase the aggregate commitment up to $200 million.
The Credit Agreement contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestures and affiliate transactions. The Company is also required to comply with financial covenants that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.
v3.19.3
NEW ACCOUNTING PRONOUNCEMENTS (Policies)
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
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 the information 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, 2018.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
Leases
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 840 “Leases”.
The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities of $54.2 million. The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.
See Note 9. “Leases” for additional information.
All the Company’s leases are operating leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is
reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
Financial Instruments
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. 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 does not expect the adoption of this standard will have a material effect on its financial position or results of operations.
Assets and liabilities measured at fair value on a recurring basis
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.
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.
v3.19.3
MARKETABLE SECURITIES (Tables)
9 Months Ended
Sep. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
Schedule of Marketable Securities
 
September 30, 2019
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
10,680

 
$
69

 
$

 
$
10,749

Corporate bonds
9,611

 
105

 

 
9,716

 
$
20,291

 
$
174

 
$

 
$
20,465

 
December 31, 2018
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
44,802

 
$
13

 
$
(110
)
 
$
44,705

Corporate bonds
48,499

 
23

 
(226
)
 
48,296

 
$
93,301

 
$
36

 
$
(336
)
 
$
93,001


v3.19.3
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE (Tables)
9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
Summary of Receivable
Receivables
(in thousands)
September 30, 2019
 
December 31, 2018
Accounts receivable
$
123,268

 
$
180,872

Unbilled receivables
172,090

 
172,656

Long-term unbilled receivables
123,962

 
151,237


$
419,320

 
$
504,765


Summary of Unbilled Receivables
Unbilled receivables are expected to be billed in the future as follows:
(Dollars in thousands)
September 30, 2019
1 year or less
$
172,090

59
%
1-2 years
84,045

28
%
2-5 years
39,917

13
%
 
$
296,052

100
%

Summary of Contract Assets and Deferred Revenue
Contract assets and deferred revenue
(in thousands)
September 30, 2019
 
December 31, 2018
Contract assets (1)
$
5,046

 
$
3,711

Long-term contract assets (2)
2,381

 
2,543

 
$
7,427

 
$
6,254

(1) Included in other current assets. (2) Included in other long-term assets.
(in thousands)
September 30, 2019
 
December 31, 2018
Deferred revenue
$
159,849

 
$
185,145

Long-term deferred revenue (1)
4,029

 
5,344

 
$
163,878

 
$
190,489

(1) Included in other long-term liabilities.
v3.19.3
DEFERRED CONTRACT COSTS (Tables)
9 Months Ended
Sep. 30, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Schedule of Impairment of Deferred Contract Costs
(in thousands)
September 30, 2019
 
December 31, 2018
Deferred contract costs (1)
$
67,182

 
$
64,367

(1) Included in other long-term assets.
Schedule of Amortization of Deferred Contract Costs
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Amortization of deferred contract costs (1)
$
8,193