PEGASYSTEMS INC, 10-Q filed on 28 Apr 21
v3.21.1
COVER PAGE - shares
3 Months Ended
Mar. 31, 2021
Apr. 19, 2021
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2021  
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 2021  
Document Fiscal Period Focus Q1  
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, $.01 par value per share  
Trading Symbol PEGA  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   81,281,726
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 172,708 $ 171,899
Marketable securities 269,650 293,269
Total cash, cash equivalents, and marketable securities 442,358 465,168
Accounts receivable 159,324 215,827
Unbilled receivables 228,603 207,155
Other current assets 91,868 88,760
Total current assets 922,153 976,910
Unbilled receivables 108,048 113,278
Goodwill 82,037 79,231
Other long-term assets 416,265 434,843
Total assets 1,528,503 1,604,262
Current liabilities:    
Accounts payable 24,426 24,028
Accrued expenses 59,765 59,261
Accrued compensation and related expenses 59,490 123,012
Deferred revenue 244,170 232,865
Other current liabilities 16,599 20,969
Total current liabilities 404,450 460,135
Convertible senior notes, net 588,418 518,203
Operating lease liabilities 36,471 59,053
Other long-term liabilities 20,239 24,699
Total liabilities 1,049,578 1,062,090
Stockholders’ equity:    
Preferred stock, 1,000 shares authorized; none issued 0 0
Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 812 809
Additional paid-in capital 140,558 204,432
Retained earnings 340,223 339,879
Accumulated other comprehensive (loss) (2,668) (2,948)
Total stockholders’ equity 478,925 542,172
Total liabilities and stockholders’ equity $ 1,528,503 $ 1,604,262
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares
Mar. 31, 2021
Dec. 31, 2020
Stockholders’ equity:    
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) 81,246,000 80,890,000
Common stock, shares outstanding (in shares) 81,246,000 80,890,000
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Revenue    
Total revenue $ 313,499 $ 265,591
Cost of revenue    
Total cost of revenue 82,447 79,528
Gross profit 231,052 186,063
Operating expenses    
Selling and marketing 148,739 136,024
Research and development 62,442 58,727
General and administrative 18,270 15,630
Total operating expenses 229,451 210,381
Income (loss) from operations 1,601 (24,318)
Foreign currency transaction (loss) (5,098) (5,947)
Interest income 153 607
Interest expense (1,880) (2,306)
(Loss) on capped call transactions (19,117) (18,592)
Other income, net 106 1,374
(Loss) before (benefit from) income taxes (24,235) (49,182)
(Benefit from) income taxes (17,618) (23,810)
Net (loss) $ (6,617) $ (25,372)
(Loss) per share    
Basic (in dollars per share) $ (0.08) $ (0.32)
Diluted (in dollars per share) $ (0.08) $ (0.32)
Weighted-average number of common shares outstanding    
Basic (in shares) 81,004 79,808
Diluted (in shares) 81,004 79,808
Software license    
Revenue    
Total revenue $ 116,961 $ 93,916
Cost of revenue    
Total cost of revenue 650 684
Maintenance    
Revenue    
Total revenue 75,561 73,695
Cost of revenue    
Total cost of revenue 5,786 5,576
Pega Cloud    
Revenue    
Total revenue 67,858 43,466
Cost of revenue    
Total cost of revenue 22,557 17,533
Consulting    
Revenue    
Total revenue 53,119 54,514
Cost of revenue    
Total cost of revenue $ 53,454 $ 55,735
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Statement of Comprehensive Income [Abstract]    
Net (loss) $ (6,617) $ (25,372)
Other comprehensive income (loss), net of tax    
Unrealized gain on available-for-sale securities 1,010 100
Foreign currency translation adjustments (730) (514)
Total other comprehensive income (loss), net of tax 280 (414)
Comprehensive (loss) $ (6,337) $ (25,786)
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Cumulative Effect, Period of Adoption, Adjustment
Common Stock
Additional Paid-In Capital
Additional Paid-In Capital
Cumulative Effect, Period of Adoption, Adjustment
Retained Earnings
Retained Earnings
Cumulative Effect, Period of Adoption, Adjustment
Accumulated Other Comprehensive (Loss)
Balance, beginning of period (in shares) at Dec. 31, 2019     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 stock 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 (loss) (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, 2020 80,890   80,890          
Balance, beginning of period at Dec. 31, 2020 $ 542,172 $ (52,205) $ 809 204,432 $ (61,604) 339,879 $ 9,399 (2,948)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Accounting standards update Accounting Standards Update 2020-06              
Repurchase of common stock (in shares)     (70)          
Repurchase of common stock $ (9,146)   $ (1) (9,145)        
Issuance of common stock for share-based compensation plans (in shares)     402          
Issuance of common stock for stock compensation plans (25,509)   $ 4 (25,513)        
Issuance of common stock under the employee stock purchase plan (in shares)     24          
Issuance of common stock under the employee stock purchase plan 2,288     2,288        
Stock-based compensation 30,100     30,100        
Cash dividends declared ($0.03 per share) (2,438)         (2,438)    
Other comprehensive income (loss) 280             280
Net (loss) $ (6,617)         (6,617)    
Balance, end of period (in shares) at Mar. 31, 2021 81,246   81,246          
Balance, end of period at Mar. 31, 2021 $ 478,925   $ 812 $ 140,558   $ 340,223   $ (2,668)
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Statement of Stockholders' Equity [Abstract]    
Cash dividend declared (in dollars per share) $ 0.03 $ 0.03
v3.21.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Operating activities    
Net (loss) $ (6,617) $ (25,372)
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities    
Stock-based compensation 30,100 23,175
Loss on capped call transactions 19,117 18,592
Deferred income taxes (15,068) (9,231)
Amortization of deferred commissions 11,496 8,497
Amortization of debt discount and issuance costs 673 1,719
Amortization of intangible assets and depreciation 7,006 4,919
Amortization of investments 1,019 0
Foreign currency transaction loss 5,098 5,947
Other non-cash (556) 2,478
Change in operating assets and liabilities, net (30,618) (49,047)
Cash provided by (used in) operating activities 21,650 (18,323)
Investing activities    
Purchases of investments (21,051) (1,490)
Proceeds from maturities and called investments 40,867 0
Sales of investments 2,450 1,424
Payments for acquisitions, net of cash acquired (4,993) 0
Investment in property and equipment (1,784) (12,496)
Cash provided by (used in) investing activities 15,489 (12,562)
Financing activities    
Proceeds from issuance of convertible senior notes 0 600,000
Purchase of capped calls related to convertible senior notes 0 (51,900)
Payment of debt issuance costs 0 (14,527)
Proceeds from employee stock purchase plan 2,288 0
Dividend payments to stockholders (2,427) (2,388)
Common stock repurchases (34,655) (29,011)
Cash (used in) provided by financing activities (34,794) 502,174
Effect of exchange rate changes on cash and cash equivalents (1,536) (1,510)
Net increase in cash and cash equivalents 809 469,779
Cash and cash equivalents, beginning of period 171,899 68,363
Cash and cash equivalents, end of period $ 172,708 $ 538,142
v3.21.1
BASIS OF PRESENTATION
3 Months Ended
Mar. 31, 2021
Accounting Policies [Abstract]  
BASIS OF PRESENTATION
NOTE 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. The financial statements 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, 2020.
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 were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2021.
v3.21.1
NEW ACCOUNTING PRONOUNCEMENTS
3 Months Ended
Mar. 31, 2021
Accounting Policies [Abstract]  
NEW ACCOUNTING PRONOUNCEMENTS
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
Convertible debt
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.
See "Note 8. Debt" for additional information.
v3.21.1
MARKETABLE SECURITIES
3 Months Ended
Mar. 31, 2021
Investments, Debt and Equity Securities [Abstract]  
MARKETABLE SECURITIES
NOTE 3. MARKETABLE SECURITIES
March 31, 2021December 31, 2020
(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debt$13,000 $$— $13,001 $39,996 $— $(8)$39,988 
Corporate debt257,003 15 (369)256,649 253,345 88 (152)253,281 
$270,003 $16 $(369)$269,650 $293,341 $88 $(160)$293,269 
As of March 31, 2021, marketable securities’ maturities ranged from April 2021 to January 2024, with a weighted-average remaining maturity of approximately 1.4 years.
v3.21.1
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
3 Months Ended
Mar. 31, 2021
Receivables [Abstract]  
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
March 31, 2021December 31, 2020
Accounts receivable$159,324 $215,827 
Unbilled receivables228,603 207,155 
Long-term unbilled receivables108,048 113,278 
$495,975 $536,260 
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables by expected billing date:
(Dollars in thousands)
March 31, 2021
1 year or less$228,603 68 %
1-2 years80,688 24 %
2-5 years27,360 %
$336,651 100 %
Unbilled receivables by contract effective date:
(Dollars in thousands)
March 31, 2021
2021$46,625 14 %
2020163,226 48 %
201963,600 19 %
201828,885 %
2017 and prior34,315 10 %
$336,651 100 %
Major clients
No client represented 10% or more of the Company’s total receivables as of March 31, 2021 or December 31, 2020.
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.
(in thousands)
March 31, 2021December 31, 2020
Contract assets (1)
$13,454 $15,296 
Long-term contract assets (2)
7,284 7,777 
$20,738 $23,073 
(1) Included in other current assets. (2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition.
(in thousands)
March 31, 2021December 31, 2020
Deferred revenue$244,170 $232,865 
Long-term deferred revenue (1)
7,565 8,991 
$251,735 $241,856 
(1) Included in other long-term liabilities.
The change in deferred revenue in the three months ended March 31, 2021 was primarily due to new billings in advance of revenue recognition offset by $107.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.
v3.21.1
DEFERRED COMMISSIONS
3 Months Ended
Mar. 31, 2021
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
DEFERRED COMMISSIONS
NOTE 5. DEFERRED COMMISSIONS
(in thousands)
March 31, 2021December 31, 2020
Deferred commissions (1)
$103,474 $108,624 
(1) Included in other long-term assets.
Three Months Ended
March 31,
(in thousands)20212020
Amortization of deferred commissions (1)
$11,496 $8,497 
(1) Included in selling and marketing expense.
v3.21.1
GOODWILL AND OTHER INTANGIBLE ASSETS
3 Months Ended
Mar. 31, 2021
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL AND OTHER INTANGIBLE ASSETS
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:
Three Months Ended
March 31,
(in thousands)
20212020
January 1,$79,231 $79,039 
Acquisition2,701 — 
Currency translation adjustments105 (541)
March 31,$82,037 $78,498 
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
March 31, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,180 $(56,260)$6,920 
Technology
2-10 years
67,142 (57,014)10,128 
Other
1-5 years
5,361 (5,361)— 
$135,683 $(118,635)$17,048 
(1) Included in other long-term assets.
December 31, 2020
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,168 $(55,877)$7,291 
Technology
2-10 years
64,843 (56,386)8,457 
Other
1-5 years
5,361 (5,361)— 
$133,372 $(117,624)$15,748 
(1) Included in other long-term assets.
Amortization of intangible assets:
Three Months Ended
March 31,
(in thousands)20212020
Cost of revenue
$629 $647 
Selling and marketing
373 371 
$1,002 $1,018 
Future estimated intangibles assets amortization:
(in thousands)
March 31, 2021
2021$2,985 
20223,886 
20233,618 
20242,849 
20252,509 
2026 and thereafter1,201 
$17,048 
v3.21.1
LEASES
3 Months Ended
Mar. 31, 2021
Leases [Abstract]  
LEASES
NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company’s landlord of $18 million. Upon modification, the Company reduced its lease liabilities by $21.1 million and accelerated depreciation of property, plant, and equipment related to the corporate headquarters.
Expense
Three Months Ended
March 31,
(in thousands)20212020
Fixed lease costs$300 $4,818 
Short-term lease costs459 455 
Variable lease costs1,387 1,278 
$2,146 $6,551 
Right of use assets and lease liabilities
(in thousands)March 31, 2021December 31, 2020
Right of use assets (1)
$44,330 $67,651 
Lease liabilities (2)
$14,161 $18,541 
Long-term lease liabilities$36,471 $59,053 

(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.
Weighted-average remaining lease term and discount rate for the Company’s leases were:
March 31, 2021December 31, 2020
Weighted-average remaining lease term5.1 years4.7 years
Weighted-average discount rate (1)
4.7 %5.4 %

(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 lease term in a similar economic environment.
Maturities of lease liabilities:
(in thousands)March 31, 2021
1 year or less$13,216 
1-2 years11,538 
2-3 years10,896 
3-4 years7,571 
Greater than 4 years14,274 
Total lease payments57,495 
Less: imputed interest (1)
(6,863)
$50,632 
(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 due to a lease reassessment event.
Cash flow information
Three Months Ended
March 31,
(in thousands)20212020
Cash paid for leases$6,716 $5,520 
Right of use assets recognized for new leases and amendments (non-cash)$714 $551 
v3.21.1
DEBT
3 Months Ended
Mar. 31, 2021
Debt Disclosure [Abstract]  
DEBT
NOTE 8. 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 of $600 million, due March 1, 2025, in a private placement. No principal payments are required before maturity. 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.
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 $135.05 per share of common stock. The Company will settle conversions by paying or delivering 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 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 June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 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 certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert 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 in full on the redemption date, until the Company pays the redemption price).
As of March 31, 2021, the Notes were not 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” occur, each noteholder will have the right 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 a 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 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
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.
Until January 1, 2021, the Notes were separated into liability and equity components.
The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.
The equity component was recorded as an increase to additional paid-in capital and not remeasured.
Upon adoption of ASU 2020-06, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.
Carrying value of the Notes:
(in thousands)March 31, 2021December 31, 2020
Principal$600,000 $600,000 
Unamortized debt discount— (71,222)
Unamortized issuance costs(11,582)(10,575)
Convertible senior notes, net$588,418 $518,203 
Conversion options$— $84,120 
Issuance costs— (2,037)
Deferred taxes— (20,479)
Additional paid-in capital$— $61,604 

Interest expense related to the Notes:
Three Months Ended
March 31,
(in thousands)20212020
Contractual interest expense (0.75% coupon)
$1,125 $450 
Amortization of debt discount
— 1,497 
Amortization of issuance costs
673 222 
$1,798 $2,169 
Weighted-average effective interest rate1.2 %4.3 %
Future payments of principal and contractual interest:
March 31, 2021
(in thousands)PrincipalInterestTotal
2021$— $2,250 $2,250 
2022— 4,500 4,500 
2023— 4,500 4,500 
2024— 4,500 4,500 
2025600,000 1,488 601,488 
$600,000 $17,238 $617,238 
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. The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.
The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. 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 capped call transactions:
Three Months Ended
March 31,
(in thousands)20212020
January 1,$83,597 $— 
Issuance— 51,900 
Fair value adjustment(19,117)(18,592)
March 31,$64,480 $33,308 
Credit facility
In November 2019, and as amended as of February 2020, July 2020, and September 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 commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, 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:
Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021 at least $200 million in cash and investments held by Pegasystems Inc.
Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.
v3.21.1
FAIR VALUE MEASUREMENTS
3 Months Ended
Mar. 31, 2021
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 9. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, 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 minimize 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. The Company applies judgment when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security. The Company’s venture investments are recorded at fair value based on valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
Assets and liabilities measured at fair value on a recurring basis:
March 31, 2021December 31, 2020
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents$26,657 $— $— $26,657 $42,339 $14,000 $— $56,339 
Marketable securities $— $269,650 $— $269,650 $— $293,269 $— $293,269 
Capped Call Transactions (1)
$— $64,480 $— $64,480 $— $83,597 $— $83,597 
Venture investments (1) (2)
$— $— $9,756 $9,756 $— $— $8,345 $8,345 
(1) Included in other long-term assets. (2) Investments in privately-held companies.
Change in venture investments:
Three Months Ended
March 31,
(in thousands)20212020
January 1,$8,345 $4,871 
New investments500 1,490 
Sales of investments(400)(1,424)
Changes in foreign exchange rates(9)(73)
Changes in fair value:
included in other income100 1,374 
included in other comprehensive income1,220 100 
March 31,$9,756 $6,338 
The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ relatively short maturity.
Fair value of the Notes
The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $665.9 million as of March 31, 2021. 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 classified within Level 2 in the fair value hierarchy. See "Note 8. Debt" for additional information.
v3.21.1
REVENUE
3 Months Ended
Mar. 31, 2021
Revenue from Contract with Customer [Abstract]  
REVENUE
NOTE 10. REVENUE
Geographic revenue
Three Months Ended
March 31,
(Dollars in thousands)
20212020
U.S.$194,568 62 %$172,417 65 %
Other Americas11,901 %15,342 %
United Kingdom (“U.K.”)28,212 %21,837 %
Europe (excluding U.K.), Middle East, and Africa 51,659 16 %31,938 12 %
Asia-Pacific27,159 %24,057 %
$313,499 100 %$265,591 100 %
Revenue streams
Three Months Ended
March 31,
(in thousands)
20212020
Perpetual license$5,452 $3,659 
Term license111,509 90,257 
Revenue recognized at a point in time 116,961 93,916 
Maintenance75,561 73,695 
Pega Cloud67,858 43,466 
Consulting53,119 54,514 
Revenue recognized over time 196,538 171,675 
$313,499 $265,591 
(in thousands)Three Months Ended
March 31,
20212020
Pega Cloud$67,858 $43,466 
Maintenance75,561 73,695 
Term license111,509 90,257 
Subscription (1)
254,928 207,418 
Perpetual license5,452 3,659 
Consulting53,119 54,514 
$313,499 $265,591 
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).
Remaining performance obligations ("Backlog")
Expected future revenue on existing non-cancellable contracts:
March 31, 2021
(Dollars in thousands)
Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$9,649 $41,025 $220,100 $252,104 $21,068 $543,946 55 %
1-2 years629 9,874 52,366 187,456 914 251,239 26 %
2-3 years— 7,055 33,337 91,861 1,756 134,009 14 %
Greater than 3 years— 377 16,834 32,895 510 50,616 %
$10,278 $58,331 $322,637 $564,316 $24,248 $979,810 100 %

March 31, 2020
(Dollars in thousands)
Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal
1 year or less$3,995 $30,962 $205,083 $174,277 $18,945 $433,262 58 %
1-2 years2,168 5,088 34,633 125,473 1,215 168,577 22 %
2-3 years— 6,504 19,411 81,187 107 107,209 14 %
Greater than 3 years— 635 10,596 33,537 10 44,778 %
$6,163 $43,189 $269,723 $414,474 $20,277 $753,826 100 %
v3.21.1
STOCK-BASED COMPENSATION
3 Months Ended
Mar. 31, 2021
Share-based Payment Arrangement [Abstract]  
STOCK-BASED COMPENSATION
NOTE 11. STOCK-BASED COMPENSATION
Expense
Three Months Ended
March 31,
(in thousands)20212020
Cost of revenue
$5,925 $5,152 
Selling and marketing
13,720 9,718 
Research and development
6,770 5,496 
General and administrative
3,685 2,809 
$30,100 $23,175 
Income tax benefit
$(5,991)$(4,582)
As of March 31, 2021, the Company had $183.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.
Grants
Three Months Ended
March 31, 2021
(in thousands)SharesTotal Fair Value
RSUs
684 $89,291 
Non-qualified stock options
1,248 $47,380 
v3.21.1
INCOME TAXES
3 Months Ended
Mar. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 12. INCOME TAXES
Effective income tax rate

Three Months Ended
March 31,
(Dollars in thousands)20212020
(Benefit from) income taxes$(17,618)$(23,810)
Effective income tax benefit rate73 %48 %
The increase in the Company’s effective income tax benefit rate was primarily due to excess tax benefits from stock-based compensation and fair value adjustments for the capped call transactions, which were proportionally larger on a lower loss before income taxes.
v3.21.1
(LOSS) PER SHARE
3 Months Ended
Mar. 31, 2021
Earnings Per Share [Abstract]  
(LOSS) PER SHARE
NOTE 13. (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 convertible senior notes.
Calculation of (loss) per share:
Three Months Ended
March 31,
(in thousands, except per share amounts)20212020
Net (loss)$(6,617)$(25,372)
Weighted-average common shares outstanding81,004 79,808 
(Loss) per share, basic$(0.08)$(0.32)
Net (loss)$(6,617)$(25,372)
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
81,004 79,808 
(Loss) per share, diluted$(0.08)$(0.32)
Outstanding anti-dilutive stock options and RSUs (4)
6,465 5,948 
(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue an additional 4.4 million shares.
(3) The Company’s Capped Call Transactions cover approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded in all periods as their effect would be anti-dilutive.
(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may be dilutive in the future.
v3.21.1
NEW ACCOUNTING PRONOUNCEMENTS (Policies)
3 Months Ended
Mar. 31, 2021
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. The financial statements 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, 2020.
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 were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2021.
New Accounting Pronouncements
Convertible debt
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.
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, 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 minimize 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. The Company applies judgment when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security. The Company’s venture investments are recorded at fair value based on valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
v3.21.1
MARKETABLE SECURITIES (Tables)
3 Months Ended
Mar. 31, 2021
Investments, Debt and Equity Securities [Abstract]  
Schedule of marketable securities
March 31, 2021December 31, 2020
(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debt$13,000 $$— $13,001 $39,996 $— $(8)$39,988 
Corporate debt257,003 15 (369)256,649 253,345 88 (152)253,281 
$270,003 $16 $(369)$269,650 $293,341 $88 $(160)$293,269 
v3.21.1
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE (Tables)
3 Months Ended
Mar. 31, 2021
Receivables [Abstract]  
Summary of receivable
Receivables
(in thousands)
March 31, 2021December 31, 2020
Accounts receivable$159,324 $215,827 
Unbilled receivables228,603 207,155 
Long-term unbilled receivables108,048 113,278 
$495,975 $536,260 
Summary of unbilled receivables
(Dollars in thousands)
March 31, 2021
1 year or less$228,603 68 %
1-2 years80,688 24 %
2-5 years27,360 %
$336,651 100 %
Summary of unbilled receivables based upon contract effective date
(Dollars in thousands)
March 31, 2021
2021$46,625 14 %
2020163,226 48 %
201963,600 19 %
201828,885 %
2017 and prior34,315 10 %
$336,651 100 %
Summary of contract assets and deferred revenue
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.
(in thousands)
March 31, 2021December 31, 2020
Contract assets (1)
$13,454 $15,296 
Long-term contract assets (2)
7,284 7,777 
$20,738 $23,073 
(1) Included in other current assets. (2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition.
(in thousands)
March 31, 2021December 31, 2020
Deferred revenue$244,170 $232,865 
Long-term deferred revenue (1)
7,565 8,991 
$251,735 $241,856 
(1) Included in other long-term liabilities.
v3.21.1
DEFERRED COMMISSIONS (Tables)
3 Months Ended
Mar. 31, 2021
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Schedule of impairment of deferred contract costs
(in thousands)
March 31, 2021December 31, 2020
Deferred commissions (1)
$103,474 $108,624 
(1) Included in other long-term assets.
Schedule of amortization of deferred contract costs
Three Months Ended
March 31,
(in thousands)20212020
Amortization of deferred commissions (1)
$11,496 $8,497 
(1) Included in selling and marketing expense
v3.21.1
GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)
3 Months Ended
Mar. 31, 2021
Goodwill and Intangible Assets Disclosure [Abstract]  
Changes in Carrying Amount of Goodwill
Change in goodwill:
Three Months Ended
March 31,
(in thousands)
20212020
January 1,$79,231 $79,039 
Acquisition2,701 — 
Currency translation adjustments105 (541)
March 31,$82,037 $78,498 
Schedule of Amortizable Intangible Assets
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
March 31, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,180 $(56,260)$6,920 
Technology
2-10 years
67,142 (57,014)10,128 
Other
1-5 years
5,361 (5,361)— 
$135,683 $(118,635)$17,048 
(1) Included in other long-term assets.
December 31, 2020
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,168 $(55,877)$7,291 
Technology
2-10 years
64,843 (56,386)8,457 
Other
1-5 years
5,361 (5,361)— 
$133,372 $(117,624)$15,748 
(1) Included in other long-term assets.
Amortization Expense of Acquired Intangibles
Amortization of intangible assets:
Three Months Ended
March 31,
(in thousands)20212020
Cost of revenue
$629 $647 
Selling and marketing
373 371 
$1,002 $1,018 
Estimated Future Amortization Expense Related to Intangible Assets
Future estimated intangibles assets amortization:
(in thousands)
March 31, 2021
2021$2,985 
20223,886 
20233,618 
20242,849 
20252,509 
2026 and thereafter1,201 
$17,048 
v3.21.1
LEASES (Tables)
3 Months Ended
Mar. 31, 2021
Leases [Abstract]  
Schedule of lease expense
Three Months Ended
March 31,
(in thousands)20212020
Fixed lease costs$300 $4,818 
Short-term lease costs459 455 
Variable lease costs1,387 1,278 
$2,146 $6,551 
Schedule of right of use asset and lease liabilities
(in thousands)March 31, 2021December 31, 2020
Right of use assets (1)
$44,330 $67,651 
Lease liabilities (2)
$14,161 $18,541 
Long-term lease liabilities$36,471 $59,053 

(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.
Schedule of weighted average and discount rate
Weighted-average remaining lease term and discount rate for the Company’s leases were:
March 31, 2021December 31, 2020
Weighted-average remaining lease term5.1 years4.7 years
Weighted-average discount rate (1)
4.7 %5.4 %

(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 lease term in a similar economic environment.
Schedule of lease maturities after adoption of 842
Maturities of lease liabilities:
(in thousands)March 31, 2021
1 year or less$13,216 
1-2 years11,538 
2-3 years10,896 
3-4 years7,571 
Greater than 4 years14,274 
Total lease payments