PEGASYSTEMS INC, 10-Q filed on 28 Jul 20
v3.20.2
COVER PAGE - shares
6 Months Ended
Jun. 30, 2020
Jul. 14, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
Document Transition Report false  
Entity File Number 1-11859  
Entity Registrant Name PEGASYSTEMS INC.  
Amendment Flag false  
Entity Central Index Key 0001013857  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Current Fiscal Year End Date --12-31  
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, $.01 par value per share  
Trading Symbol PEGA  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   80,415,254
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
shares in Thousands, $ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 512,111 $ 68,363
Accounts receivable 181,686 199,720
Unbilled receivables 198,253 180,219
Other current assets 77,889 57,308
Total current assets 969,939 505,610
Unbilled receivables 109,308 121,736
Goodwill 78,675 79,039
Other long-term assets 338,363 278,427
Total assets 1,496,285 984,812
Current liabilities:    
Accounts payable 18,426 17,475
Accrued expenses 44,228 48,001
Accrued compensation and related expenses 78,834 104,126
Deferred revenue 195,996 190,080
Other current liabilities 18,613 18,273
Total current liabilities 356,097 377,955
Convertible senior notes, net 509,423 0
Operating lease liabilities 53,057 52,610
Other long-term liabilities 21,426 15,237
Total liabilities 940,003 445,802
Stockholders’ equity:    
Preferred stock, 1,000 shares authorized; none issued 0 0
Common stock, 200,000 shares authorized; 80,420 and 79,599 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively 804 796
Additional paid-in capital 207,103 140,523
Retained earnings 359,989 410,919
Accumulated other comprehensive (loss) (11,614) (13,228)
Total stockholders’ equity 556,282 539,010
Total liabilities and stockholders’ equity $ 1,496,285 $ 984,812
Common stock, shares issued 80,420 79,599
Common stock, shares outstanding 80,420 79,599
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares
Jun. 30, 2020
Dec. 31, 2019
Stockholders’ equity:    
Preferred stock, shares authorized 1,000,000 1,000,000
Preferred stock, shares issued 0 0
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 80,420,000 79,599,000
Common stock, shares outstanding 80,420,000 79,599,000
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Revenue        
Total revenue $ 227,375 $ 205,592 $ 492,966 $ 418,138
Cost of revenue        
Total cost of revenue 76,691 77,080 156,219 151,517
Gross profit 150,684 128,512 336,747 266,621
Operating expenses        
Selling and marketing 127,607 116,962 263,631 225,827
Research and development 58,869 49,714 117,596 100,310
General and administrative 15,655 14,174 31,285 26,850
Total operating expenses 202,131 180,850 412,512 352,987
(Loss) from operations (51,447) (52,338) (75,765) (86,366)
Foreign currency transaction gain (loss) 4,256 2,105 (1,691) (1,607)
Interest income 242 544 849 1,267
Interest expense (5,529) 0 (7,835) 0
Gain on capped call transactions 19,419 0 827 0
Other income, net 0 55 1,374 55
(Loss) before (benefit from) income taxes (33,059) (49,634) (82,241) (86,651)
(Benefit from) income taxes (12,319) (17,338) (36,129) (25,638)
Net (loss) $ (20,740) $ (32,296) $ (46,112) $ (61,013)
(Loss) per share        
Basic (in dollars per share) $ (0.26) $ (0.41) $ (0.58) $ (0.77)
Diluted (in dollars per share) $ (0.26) $ (0.41) $ (0.58) $ (0.77)
Weighted-average number of common shares outstanding        
Basic (in shares) 80,224 78,987 80,016 78,787
Diluted (in shares) 80,224 78,987 80,016 78,787
Software license        
Revenue        
Total revenue $ 53,323 $ 44,274 $ 147,239 $ 107,538
Cost of revenue        
Total cost of revenue 979 928 1,663 2,306
Maintenance        
Revenue        
Total revenue 72,222 69,329 145,917 137,035
Cost of revenue        
Total cost of revenue 5,591 6,292 11,167 12,627
Pega Cloud        
Revenue        
Total revenue 48,838 31,699 92,304 59,457
Cost of revenue        
Total cost of revenue 18,988 16,647 36,521 29,945
Consulting        
Revenue        
Total revenue 52,992 60,290 107,506 114,108
Cost of revenue        
Total cost of revenue $ 51,133 $ 53,213 $ 106,868 $ 106,639
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Comprehensive Income [Abstract]        
Net (loss) $ (20,740) $ (32,296) $ (46,112) $ (61,013)
Other comprehensive income (loss), net of tax        
Unrealized gain on available-for-sale securities 0 238 100 612
Foreign currency translation adjustments 2,028 (409) 1,514 1,218
Total other comprehensive income (loss), net of tax 2,028 (171) 1,614 1,830
Comprehensive (loss) $ (18,712) $ (32,467) $ (44,498) $ (59,183)
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Balance, beginning of period (in shares) at Dec. 31, 2018   78,526      
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)      
Repurchase of common stock (7,587) $ (1) (7,586)    
Issuance of common stock for share-based compensation plans (in shares)   514      
Issuance of common stock for share-based compensation plans (14,838) $ 5 (14,843)    
Stock-based compensation 18,406   18,406    
Cash dividends declared ($0.03 per share) (2,367)     (2,367)  
Other comprehensive income 2,001       2,001
Net (loss) (28,717)     (28,717)  
Balance, end of period (in shares) at Mar. 31, 2019   78,896      
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      
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 1,830        
Net (loss) (61,013)        
Balance, end of period (in shares) at Jun. 30, 2019   79,144      
Balance, end of period at Jun. 30, 2019 557,287 $ 791 122,880 445,108 (11,492)
Balance, beginning of period (in shares) at Mar. 31, 2019   78,896      
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)      
Repurchase of common stock (6,302) $ (1) (6,301)    
Issuance of common stock for share-based compensation plans (in shares)   320      
Issuance of common stock for share-based compensation plans (11,214) $ 3 (11,217)    
Issuance of common stock under the employee stock purchase plan (in shares)   16      
Issuance of common stock under the employee stock purchase plan 1,103   1,103    
Stock-based compensation 20,113   20,113    
Cash dividends declared ($0.03 per share) (2,375)     (2,375)  
Other comprehensive income (171)       (171)
Net (loss) (32,296)     (32,296)  
Balance, end of period (in shares) at Jun. 30, 2019   79,144      
Balance, end of period at Jun. 30, 2019 $ 557,287 $ 791 122,880 445,108 (11,492)
Balance, beginning of period (in shares) at Dec. 31, 2019 79,599 79,599      
Balance, beginning of period at Dec. 31, 2019 $ 539,010 $ 796 140,523 410,919 (13,228)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Equity component of convertible senior notes, net 61,604   61,604    
Repurchase of common stock (in shares)   (87)      
Repurchase of common stock (6,000) $ (1) (5,999)    
Issuance of common stock for share-based compensation plans (in shares)   564      
Issuance of common stock for share-based compensation plans (23,011) $ 6 (23,017)    
Stock-based compensation 23,199   23,199    
Cash dividends declared ($0.03 per share) (2,405)     (2,405)  
Other comprehensive income (414)       (414)
Net (loss) (25,372)     (25,372)  
Balance, end of period (in shares) at Mar. 31, 2020   80,076      
Balance, end of period at Mar. 31, 2020 $ 566,611 $ 801 196,310 383,142 (13,642)
Balance, beginning of period (in shares) at Dec. 31, 2019 79,599 79,599      
Balance, beginning of period at Dec. 31, 2019 $ 539,010 $ 796 140,523 410,919 (13,228)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Other comprehensive income 1,614        
Net (loss) $ (46,112)        
Balance, end of period (in shares) at Jun. 30, 2020 80,420 80,420      
Balance, end of period at Jun. 30, 2020 $ 556,282 $ 804 207,103 359,989 (11,614)
Balance, beginning of period (in shares) at Mar. 31, 2020   80,076      
Balance, beginning of period at Mar. 31, 2020 566,611 $ 801 196,310 383,142 (13,642)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Repurchase of common stock (in shares)   (23)      
Repurchase of common stock (2,199) $ 0 (2,199)    
Issuance of common stock for share-based compensation plans (in shares)   349      
Issuance of common stock for share-based compensation plans (14,082) $ 3 (14,085)    
Issuance of common stock under the employee stock purchase plan (in shares)   18      
Issuance of common stock under the employee stock purchase plan 1,403   1,403    
Stock-based compensation 25,674   25,674    
Cash dividends declared ($0.03 per share) (2,413)     (2,413)  
Other comprehensive income 2,028       2,028
Net (loss) $ (20,740)     (20,740)  
Balance, end of period (in shares) at Jun. 30, 2020 80,420 80,420      
Balance, end of period at Jun. 30, 2020 $ 556,282 $ 804 $ 207,103 $ 359,989 $ (11,614)
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2019
Mar. 31, 2019
Statement of Stockholders' Equity [Abstract]        
Cash dividend declared (in dollars per share) $ 0.03 $ 0.03 $ 0.03 $ 0.03
v3.20.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Operating activities    
Net (loss) $ (46,112) $ (61,013)
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities    
Stock-based compensation 48,831 38,397
(Gain) on capped call transactions (827) 0
Deferred income taxes (18,399) (190)
Amortization of deferred commissions 16,061 14,179
Lease expense 7,819 6,718
Amortization of debt discount and issuance costs 6,033 0
Amortization of intangible assets and depreciation 10,134 12,268
Amortization of investments 0 623
Foreign currency transaction loss 1,691 1,607
Other non-cash (1,374) (40)
Change in operating assets and liabilities, net (45,056) (4,829)
Cash (used in) provided by operating activities (21,199) 7,720
Investing activities    
Purchases of investments (1,769) (10,497)
Proceeds from maturities and called investments 0 13,545
Sales of investments 1,424 29,965
Payments for acquisitions, net of cash acquired 0 10,921
Investment in property and equipment (19,059) (4,882)
Cash (used in) provided by investing activities (19,404) 17,210
Financing activities    
Proceeds from issuance of convertible senior notes 600,000 0
Purchase of capped calls related to convertible senior notes (51,900) 0
Payment of debt issuance costs (14,527) 0
Dividend payments to shareholders (4,793) (4,730)
Common stock repurchases (43,487) (39,637)
Cash provided by (used in) financing activities 485,293 (44,367)
Effect of exchange rate changes on cash and cash equivalents (942) 515
Net increase (decrease) in cash and cash equivalents 443,748 (18,922)
Cash and cash equivalents, beginning of period 68,363 114,422
Cash and cash equivalents, end of period $ 512,111 $ 95,500
v3.20.2
BASIS OF PRESENTATION
6 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
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 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, 2019.
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.
All intercompany transactions and balances have been eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.
v3.20.2
NEW ACCOUNTING PRONOUNCEMENTS
6 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
NEW ACCOUNTING PRONOUNCEMENTS
2. NEW ACCOUNTING PRONOUNCEMENTS
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.
v3.20.2
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
June 30, 2020December 31, 2019
Accounts receivable$181,686  $199,720  
Unbilled receivables198,253  180,219  
Long-term unbilled receivables109,308  121,736  
$489,247  $501,675  
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. They are expected to be billed in the future as follows:
(Dollars in thousands)
June 30, 2020
1 year or less$198,253  64 %
1-2 years91,929  30 %
2-5 years17,379  %
$307,561  100 %
Unbilled receivables based upon contract effective date:
(Dollars in thousands)
June 30, 2020
2020$75,893  25 %
2019100,671  32 %
201846,700  15 %
201738,899  13 %
2016 and prior45,398  15 %
$307,561  100 %
Major clients
Clients accounting for 10% or more of the Company’s receivables:
June 30, 2020December 31, 2019
Client A11 %*
* Client accounted for less than 10% of total receivables.
Contract assets and deferred revenue
(in thousands)
June 30, 2020December 31, 2019
Contract assets (1)
$5,323  $5,558  
Long-term contract assets (2)
4,903  5,420  
$10,226  $10,978  
Deferred revenue$195,996  $190,080  
Long-term deferred revenue (3)
6,587  5,407  
$202,583  $195,487  
(1) Included in other current assets. (2) Included in other long-term assets. (3) 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 six months ended June 30, 2020 was primarily due to new billings in advance of revenue recognition, partially offset by $136.8 million of revenue recognized during the period that was included in deferred revenue at December 31, 2019.
v3.20.2
DEFERRED COMMISSIONS
6 Months Ended
Jun. 30, 2020
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
DEFERRED COMMISSIONS
4. DEFERRED COMMISSIONS
(in thousands)
June 30, 2020December 31, 2019
Deferred commissions (1)
$84,770  $85,314  
(1) Included in other long-term assets.
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2020201920202019
Amortization of deferred commissions (1)
$7,564  $5,878  $16,061  $14,179  
(1) Included in selling and marketing expenses.
v3.20.2
DEBT
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
DEBT
5. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no required principal payments prior to the maturity of the Notes. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.
Proceeds from the Notes and Capped Call Transactions:
(in thousands)Amount
Principal$600,000  
Less: issuance costs(14,527) 
Less: Capped Call Transactions(51,900) 
$533,573  
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).
As of June 30, 2020, no Notes were eligible for conversion at the noteholders’ election.
Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental change relates to events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
Impact of the Notes
In accounting for the transaction, the Notes have been separated into liability and equity components.
The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The excess of the principal amount of the Notes over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the contractual term of the Notes.
The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred issuance costs of $14.5 million related to the Notes, which were allocated between the liability and equity components of the Notes proportionate to the initial carrying amount of the liability and equity components.
Issuance costs attributable to the liability component are recorded as an offset to the principal balance of the Notes and are amortized as interest expense using the effective interest method over the contractual term of the Notes.
Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.
Net carrying amount of the liability component:
(in thousands)June 30, 2020
Principal$600,000  
Unamortized debt discount(78,867) 
Unamortized issuance costs(11,710) 
$509,423  
Net carrying amount of the equity component, included in additional paid-in capital:
(in thousands)June 30, 2020
Conversion options (1)
$61,604  
(1) Net of issuance costs and taxes.
Interest expense related to the Notes:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2020201920202019
Contractual interest expense (0.75% coupon)
$1,125  $—  $1,575  $—  
Amortization of debt discount (1)
3,757  —  5,253  —  
Amortization of issuance cost (1)
558  —  780  —  
$5,440  $—  $7,608  $—  
(1) Amortized based upon an effective interest rate of 4.31%.
Future payments of principal and contractual interest:
June 30, 2020
(in thousands)PrincipalInterestTotal
2020$—  $2,338  $2,338  
2021—  4,500  4,500  
2022—  4,500  4,500  
2023—  4,500  4,500  
2024—  4,500  4,500  
2025600,000  1,488  601,488  
$600,000  $21,826  $621,826  
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock and are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is $196.44, subject to adjustment upon the occurrence of specified extraordinary events affecting us, including merger events and tender offers. The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
Change in value of Capped Call Transactions:
(in thousands)Six Months Ended
June 30, 2020
Value at issuance$51,900  
Fair value adjustment827  
Balance as of June 30,$52,727  
Credit Facility
In November 2019, and as amended in February 2020 and July 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million.
The Credit Facility contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. The Company is also required to comply with financial covenants including 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.
As of June 30, 2020 and December 31, 2019, the Company had no outstanding borrowings under the Credit Facility.
v3.20.2
FAIR VALUE MEASUREMENTS
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
6. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, Capped Call Transactions, and venture investments 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 fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. The Company applies judgment in its determination of expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security and to a lesser extent historical peer group volatility levels. The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs including the volatility, rights, and obligations of the securities the Company holds.
The Company’s assets and liabilities measured at fair value on a recurring basis:
June 30, 2020December 31, 2019
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents (1)
$450,465  $—  $—  $450,465  $—  $—  $—  $—  
Capped Call Transactions (2) (3)
$—  $52,727  $—  $52,727  $—  $—  $—  $—  
Venture investments (2) (4)
$—  $—  $6,640  $6,640  $—  $—  $4,871  $4,871  
(1) Composed of investments in money market funds. (2) Included in other long-term assets. (3) See "5. Debt" for additional information. (4) Composed of investments in privately-held companies.
Change in venture investments:
(in thousands)Six Months Ended
June 30, 2020
December 31, 2019$4,871  
New investments1,769  
Sales of investments(1,424) 
Changes in foreign exchange rates(50) 
Fair value adjustment1,474  
June 30, 2020$6,640  

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to the relatively short maturity of these items.
Fair value of the Notes
The fair value of the Company’s Notes was recorded at $515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature. The fair value of the debt component was determined based on a discounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $600 million.
The fair value of the Notes (inclusive of the conversion feature which is embedded in the Notes) was $602 million as of June 30, 2020. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and has been classified within Level 2 in the fair value hierarchy. See "5. Debt" for additional information.
v3.20.2
REVENUE
6 Months Ended
Jun. 30, 2020
Revenue from Contract with Customer [Abstract]  
REVENUE
7. REVENUE
Geographic revenue
Three Months Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)
2020201920202019
U.S.$142,811  63 %$119,682  59 %$315,228  63 %$223,673  54 %
Other Americas8,930  %8,873  %24,272  %37,702  %
United Kingdom (“U.K.”)21,259  %16,686  %43,096  %41,235  10 %
Europe (excluding U.K.), Middle East, and Africa 34,878  15 %33,395  16 %66,816  14 %67,581  16 %
Asia-Pacific19,497  %26,956  13 %43,554  %47,947  11 %
$227,375  100 %$205,592  100 %$492,966  100 %$418,138  100 %
Revenue streams
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2020201920202019
Perpetual license$9,057  $19,320  $12,716  $34,270  
Term license44,266  24,954  134,523  73,268  
Revenue recognized at a point in time 53,323  44,274  147,239  107,538  
Maintenance72,222  69,329  145,917  137,035  
Pega Cloud48,838  31,699  92,304  59,457  
Consulting52,992  60,290  107,506  114,108  
Revenue recognized over time 174,052  161,318  345,727  310,600  
$227,375  $205,592  $492,966  $418,138  

(in thousands)Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Term license$44,266  $24,954  $134,523  $73,268  
Pega Cloud48,838  31,699  92,304  59,457  
Maintenance72,222  69,329  145,917  137,035  
Subscription (1)
165,326  125,982  372,744  269,760  
Perpetual license9,057  19,320  12,716  34,270  
Consulting52,992  60,290  107,506  114,108  
$227,375  $205,592  $492,966  $418,138  
(1) Reflects client arrangements (term license, Pega Cloud, and maintenance) that are subject to renewal.
Remaining performance obligations ("Backlog")
Expected future revenue on existing contracts:
June 30, 2020
(Dollars in thousands)
Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$8,120  $53,550  $186,618  $191,187  $21,923  $461,398  57 %
1-2 years1,700  6,187  40,153  140,860  1,986  190,886  23 %
2-3 years—  6,460  20,671  88,273  631  116,035  14 %
Greater than 3 years—  646  10,517  37,071  626  48,860  %
$9,820  $66,843  $257,959  $457,391  $25,166  $817,179  100 %

June 30, 2019
(Dollars in thousands)
Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$8,429  $38,080  $173,421  $124,134  $16,259  $360,323  57 %
1-2 years915  4,678  12,530  98,842  942  117,907  19 %
2-3 years1,306  641  5,801  75,828  227  83,803  13 %
Greater than 3 years—  185  2,812  63,259  —  66,256  11 %
$10,650  $43,584  $194,564  $362,063  $17,428  $628,289  100 %
v3.20.2
STOCK-BASED COMPENSATION
6 Months Ended
Jun. 30, 2020
Share-based Payment Arrangement [Abstract]  
STOCK-BASED COMPENSATION
8. STOCK-BASED COMPENSATION
Expense
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2020201920202019
Cost of revenues
$5,384  $4,911  $10,536  $9,430  
Selling and marketing
11,592  8,364  21,310  15,738  
Research and development
5,805  4,572  11,302  9,132  
General and administrative
2,874  2,200  5,683  4,097  
$25,655  $20,047  $48,831  $38,397  
Income tax benefit
$(5,107) $(4,056) $(9,689) $(7,796) 
As of June 30, 2020, the Company had $130.3 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:
Six Months Ended
June 30, 2020
(in thousands)SharesTotal Fair Value
RSUs
939  $82,823  
Non-qualified stock options
1,696  $38,551  
v3.20.2
INCOME TAXES
6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
INCOME TAXES
9. INCOME TAXES
Effective income tax rate

Three Months Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)2020201920202019
(Benefit from) income taxes$(12,319) $(17,338) $(36,129) $(25,638) 
Effective income tax rate44 %30 %
During the six months ended June 30, 2020, the Company’s effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).
v3.20.2
(LOSS) PER SHARE
6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
(LOSS) PER SHARE
10. (LOSS) PER SHARE
Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and the conversion spread of the Company’s convertible senior notes.
Calculation of the basic and diluted earnings per share:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands, except per share amounts)2020201920202019
Net (loss)$(20,740) $(32,296) $(46,112) $(61,013) 
Weighted-average common shares outstanding80,224  78,987  80,016  78,787  
(Loss) per share, basic$(0.26) $(0.41) $(0.58) $(0.77) 
Net (loss)$(20,740) $(32,296) $(46,112) $(61,013) 
Weighted-average common shares outstanding, assuming dilution (1) (2)
80,224  78,987  80,016  78,787  
(Loss) per share, diluted$(0.26) $(0.41) $(0.58) $(0.77) 
Outstanding anti-dilutive stock options and RSUs (3)
5,929  6,253  5,939  5,908  
(1) The Company expects to settle the principal amount of the Notes in cash. As a result, only the amount by which the conversion value exceeds the aggregated principal amount of the Notes is included in the diluted earnings per share computation under the treasury stock method. The conversion spread has a dilutive impact on diluted net income per share when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $135.05 per share for the Notes. In connection with the Notes’ issuance, the Company entered into Capped Call Transactions, which were not included in calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive.
(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(3) 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.
v3.20.2
NEW ACCOUNTING PRONOUNCEMENTS (Policies)
6 Months Ended
Jun. 30, 2020
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, 2019.
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.
All intercompany transactions and balances have been eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.
Financial instruments
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s 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, Capped Call Transactions, and venture investments 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 fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. The Company applies judgment in its determination of expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security and to a lesser extent historical peer group volatility levels. The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs including the volatility, rights, and obligations of the securities the Company holds.
v3.20.2
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE (Tables)
6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Summary of Receivable
Receivables
(in thousands)
June 30, 2020December 31, 2019
Accounts receivable$181,686  $199,720  
Unbilled receivables198,253  180,219  
Long-term unbilled receivables109,308  121,736  
$489,247  $501,675  
Summary of Unbilled Receivables
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. They are expected to be billed in the future as follows:
(Dollars in thousands)
June 30, 2020
1 year or less$198,253  64 %
1-2 years91,929  30 %
2-5 years17,379  %
$307,561  100 %
Summary of Unbilled Receivables Based Upon Contract Effective Date
Unbilled receivables based upon contract effective date:
(Dollars in thousands)
June 30, 2020
2020$75,893  25 %
2019100,671  32 %
201846,700  15 %
201738,899  13 %
2016 and prior45,398  15 %
$307,561  100 %
Schedules of Concentration of Risk, by Risk Factor
Major clients
Clients accounting for 10% or more of the Company’s receivables:
June 30, 2020December 31, 2019
Client A11 %*
* Client accounted for less than 10% of total receivables.
Summary of Contract Assets and Deferred Revenue
Contract assets and deferred revenue
(in thousands)
June 30, 2020December 31, 2019
Contract assets (1)
$5,323  $5,558  
Long-term contract assets (2)
4,903  5,420  
$10,226  $10,978  
Deferred revenue$195,996  $190,080  
Long-term deferred revenue (3)
6,587  5,407  
$202,583  $195,487  
(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.