PEGASYSTEMS INC, 10-Q filed on 27 Oct 21
v3.21.2
COVER PAGE - shares
9 Months Ended
Sep. 30, 2021
Oct. 19, 2021
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 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 Q3  
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 Main Street  
Entity Address, City or Town Cambridge  
Entity Address, State or Province MA  
Entity Address, Postal Zip Code 02142  
City Area Code 617  
Local Phone Number 374-9600  
Title of 12(b) Security Common Stock, $.01 par value per share  
Trading Symbol PEGA  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   81,675,315
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 116,411 $ 171,899
Marketable securities 235,437 293,269
Total cash, cash equivalents, and marketable securities 351,848 465,168
Accounts receivable 143,445 215,827
Unbilled receivables 239,774 207,155
Other current assets 93,819 88,760
Total current assets 828,886 976,910
Unbilled receivables 132,147 113,278
Goodwill 81,954 79,231
Other long-term assets 512,410 434,843
Total assets 1,555,397 1,604,262
Current liabilities:    
Accounts payable 25,604 24,028
Accrued expenses 46,583 59,261
Accrued compensation and related expenses 86,018 123,012
Deferred revenue 229,103 232,865
Other current liabilities 13,118 20,969
Total current liabilities 400,426 460,135
Convertible senior notes, net 589,769 518,203
Operating lease liabilities 87,088 59,053
Other long-term liabilities 18,482 24,699
Total liabilities 1,095,765 1,062,090
Stockholders’ equity:    
Preferred stock, 1,000 shares authorized; none issued 0 0
Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 817 809
Additional paid-in capital 148,098 204,432
Retained earnings 316,150 339,879
Accumulated other comprehensive (loss) (5,433) (2,948)
Total stockholders’ equity 459,632 542,172
Total liabilities and stockholders’ equity $ 1,555,397 $ 1,604,262
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares
shares in Thousands
Sep. 30, 2021
Dec. 31, 2020
Stockholders’ equity:    
Preferred stock, shares authorized (in shares) 1,000 1,000
Preferred stock, shares issued (in shares) 0 0
Common stock, shares authorized (in shares) 200,000 200,000
Common stock, shares issued (in shares) 81,670 80,890
Common stock, shares outstanding (in shares) 81,670 80,890
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Sep. 30, 2021
Sep. 30, 2020
Revenue        
Total revenue $ 256,268 $ 225,951 $ 895,469 $ 718,917
Cost of revenue        
Total cost of revenue 84,222 77,799 251,200 234,018
Gross profit 172,046 148,152 644,269 484,899
Operating expenses        
Selling and marketing 152,479 132,053 457,641 395,684
Research and development 64,728 60,024 191,565 177,620
General and administrative 20,176 17,907 57,607 49,192
Total operating expenses 237,383 209,984 706,813 622,496
(Loss) from operations (65,337) (61,832) (62,544) (137,597)
Foreign currency transaction gain (loss) 518 4,236 (4,983) 2,545
Interest income 166 243 555 1,092
Interest expense (1,908) (5,956) (5,747) (13,791)
(Loss) income on capped call transactions (14,735) 18,989 (7,543) 19,816
Other income, net 2 0 108 1,374
(Loss) before (benefit from) income taxes (81,294) (44,320) (80,154) (126,561)
(Benefit from) income taxes (24,826) (25,053) (54,360) (61,182)
Net (loss) $ (56,468) $ (19,267) $ (25,794) $ (65,379)
(Loss) per share        
Basic (in dollars per share) $ (0.69) $ (0.24) $ (0.32) $ (0.82)
Diluted (in dollars per share) $ (0.69) $ (0.24) $ (0.32) $ (0.82)
Weighted-average number of common shares outstanding        
Basic (in shares) 81,526 80,537 81,284 80,191
Diluted (in shares) 81,526 80,537 81,284 80,191
Pega Cloud        
Revenue        
Total revenue $ 78,369 $ 54,776 $ 219,520 $ 147,080
Cost of revenue        
Total cost of revenue 25,524 19,717 72,132 56,238
Maintenance        
Revenue        
Total revenue 83,188 74,670 237,531 220,587
Cost of revenue        
Total cost of revenue 5,293 5,478 16,074 16,645
Software license        
Revenue        
Total revenue 38,295 39,784 272,148 187,023
Cost of revenue        
Total cost of revenue 656 691 1,962 2,354
Consulting        
Revenue        
Total revenue 56,416 56,721 166,270 164,227
Cost of revenue        
Total cost of revenue $ 52,749 $ 51,913 $ 161,032 $ 158,781
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Sep. 30, 2021
Sep. 30, 2020
Statement of Comprehensive Income [Abstract]        
Net (loss) $ (56,468) $ (19,267) $ (25,794) $ (65,379)
Other comprehensive (loss) income, net of tax        
Unrealized gain (loss) on available-for-sale securities 53 (166) 1,184 (66)
Foreign currency translation adjustments (4,400) 113 (3,669) 1,627
Total other comprehensive (loss) income, net of tax (4,347) (53) (2,485) 1,561
Comprehensive (loss) $ (60,815) $ (19,320) $ (28,279) $ (63,818)
v3.21.2
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 income (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          
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 (loss) 1,561              
Net income (loss) (65,379)              
Balance, end of period (in shares) at Sep. 30, 2020     80,697          
Balance, end of period at Sep. 30, 2020 529,322   $ 807 201,882   338,300   (11,667)
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]                
Accounting standards update Accounting Standards Update 2020-06              
Balance, end of period (in shares) at Dec. 31, 2020 80,890   80,890          
Balance, end of period at Dec. 31, 2020 $ 542,172 $ (52,205) $ 809 204,432 $ (61,604) 339,879 $ 9,399 (2,948)
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)     (2,199)        
Issuance of common stock for share-based compensation plans (in shares)     349          
Issuance of common stock for stock 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 (loss) 2,028             2,028
Net income (loss) (20,740)         (20,740)    
Balance, end of period (in shares) at Jun. 30, 2020     80,420          
Balance, end of period at Jun. 30, 2020 556,282   $ 804 207,103   359,989   (11,614)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Repurchase of common stock (in shares)     (94)          
Repurchase of common stock (10,629)   $ (1) (10,628)        
Issuance of common stock for share-based compensation plans (in shares)     371          
Issuance of common stock for stock compensation plans (22,520)   $ 4 (22,524)        
Stock-based compensation 27,931     27,931        
Cash dividends declared ($0.03 per share) (2,422)         (2,422)    
Other comprehensive income (loss) (53)             (53)
Net income (loss) (19,267)         (19,267)    
Balance, end of period (in shares) at Sep. 30, 2020     80,697          
Balance, end of period at Sep. 30, 2020 $ 529,322   $ 807 201,882   338,300   (11,667)
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]                
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 income (loss) (6,617)         (6,617)    
Balance, end of period (in shares) at Mar. 31, 2021     81,246          
Balance, end of period at Mar. 31, 2021 $ 478,925   $ 812 140,558   340,223   (2,668)
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]                
Other comprehensive income (loss) (2,485)              
Net income (loss) $ (25,794)              
Balance, end of period (in shares) at Sep. 30, 2021 81,670   81,670          
Balance, end of period at Sep. 30, 2021 $ 459,632   $ 817 148,098   316,150   (5,433)
Balance, beginning of period (in shares) at Mar. 31, 2021     81,246          
Balance, beginning of period at Mar. 31, 2021 478,925   $ 812 140,558   340,223   (2,668)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Repurchase of common stock (in shares)     (81)          
Repurchase of common stock (10,246)   $ (1) (10,245)        
Issuance of common stock for share-based compensation plans (in shares)     267          
Issuance of common stock for stock compensation plans (16,196)   $ 3 (16,199)        
Issuance of common stock under the employee stock purchase plan (in shares)     24          
Issuance of common stock under the employee stock purchase plan 2,859   $ 1 2,858        
Stock-based compensation 30,698     30,698        
Cash dividends declared ($0.03 per share) (2,445)         (2,445)    
Other comprehensive income (loss) 1,582             1,582
Net income (loss) 37,291         37,291    
Balance, end of period (in shares) at Jun. 30, 2021     81,456          
Balance, end of period at Jun. 30, 2021 522,468   $ 815 147,670   375,069   (1,086)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Repurchase of common stock (in shares)     (96)          
Repurchase of common stock (12,796)   $ (1) (12,795)        
Issuance of common stock for share-based compensation plans (in shares)     286          
Issuance of common stock for stock compensation plans (18,114)   $ 3 (18,117)        
Issuance of common stock under the employee stock purchase plan (in shares)     24          
Issuance of common stock under the employee stock purchase plan 2,639     2,639        
Stock-based compensation 28,701     28,701        
Cash dividends declared ($0.03 per share) (2,451)         (2,451)    
Other comprehensive income (loss) (4,347)             (4,347)
Net income (loss) $ (56,468)         (56,468)    
Balance, end of period (in shares) at Sep. 30, 2021 81,670   81,670          
Balance, end of period at Sep. 30, 2021 $ 459,632   $ 817 $ 148,098   $ 316,150   $ (5,433)
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended
Sep. 30, 2021
Jun. 30, 2021
Mar. 31, 2021
Sep. 30, 2020
Jun. 30, 2020
Mar. 31, 2020
Statement of Stockholders' Equity [Abstract]            
Cash dividend declared (in dollars per share) $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03
v3.21.2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Operating activities    
Net (loss) $ (25,794) $ (65,379)
Adjustments to reconcile net (loss) to cash (used in) operating activities    
Stock-based compensation 89,483 76,755
Loss (gain) on capped call transactions 7,543 (19,816)
Deferred income taxes (53,638) (43,476)
Amortization of deferred commissions 31,388 24,922
Amortization of debt discount and issuance costs 2,025 10,405
Amortization of intangible assets and depreciation 24,030 15,677
Amortization of investments 2,916 252
Foreign currency transaction loss (gain) 4,983 (2,545)
Other non-cash (8,421) 10,623
Change in operating assets and liabilities, net (79,836) (33,675)
Cash (used in) operating activities (5,321) (26,257)
Investing activities    
Purchases of investments (67,170) (190,319)
Proceeds from maturities and called investments 96,859 0
Sales of investments 25,123 1,424
Payments for acquisitions, net of cash acquired (4,993) 0
Investment in property and equipment (7,089) (21,806)
Cash provided by (used in) investing activities 42,730 (210,701)
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 7,786 1,403
Dividend payments to stockholders (7,310) (7,206)
Common stock repurchases (91,907) (78,140)
Cash (used in) provided by financing activities (91,431) 449,630
Effect of exchange rate changes on cash and cash equivalents (1,466) 183
Net (decrease) increase in cash and cash equivalents (55,488) 212,855
Cash and cash equivalents, beginning of period 171,899 68,363
Cash and cash equivalents, end of period $ 116,411 $ 281,218
v3.21.2
BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 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. These 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.
v3.21.2
NEW ACCOUNTING PRONOUNCEMENTS
9 Months Ended
Sep. 30, 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 separating 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.
v3.21.2
MARKETABLE SECURITIES
9 Months Ended
Sep. 30, 2021
Investments, Debt and Equity Securities [Abstract]  
MARKETABLE SECURITIES
NOTE 3. MARKETABLE SECURITIES
September 30, 2021December 31, 2020
(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debt$2,000 $— $— $2,000 $39,996 $— $(8)$39,988 
Corporate debt233,556 25 (144)233,437 253,345 88 (152)253,281 
$235,556 $25 $(144)$235,437 $293,341 $88 $(160)$293,269 
As of September 30, 2021, marketable securities’ maturities ranged from October 2021 to September 2024, with a weighted-average remaining maturity of 1.2 years.
v3.21.2
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
9 Months Ended
Sep. 30, 2021
Receivables [Abstract]  
RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
September 30, 2021December 31, 2020
Accounts receivable$143,445 $215,827 
Unbilled receivables239,774 207,155 
Long-term unbilled receivables132,147 113,278 
$515,366 $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)
September 30, 2021
1 year or less$239,774 64 %
1-2 years80,980 22 %
2-5 years51,167 14 %
$371,921 100 %
Unbilled receivables by contract effective date:
(Dollars in thousands)
September 30, 2021
2021$168,237 45 %
2020109,904 29 %
201947,058 13 %
201822,169 %
2017 and prior24,553 %
$371,921 100 %
Major clients
Clients accounting for 10% or more of the Company’s total receivables:
September 30, 2021December 31, 2020
Client A12 %*
* Client accounted for less than 10% of total receivables.
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)
September 30, 2021December 31, 2020
Contract assets (1)
$11,495 $15,296 
Long-term contract assets (2)
8,485 7,777 
$19,980 $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)
September 30, 2021December 31, 2020
Deferred revenue$229,103 $232,865 
Long-term deferred revenue (1)
5,682 8,991 
$234,785 $241,856 
(1) Included in other long-term liabilities.
The change in deferred revenue in the nine months ended September 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $212.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.
v3.21.2
DEFERRED COMMISSIONS
9 Months Ended
Sep. 30, 2021
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
DEFERRED COMMISSIONS
NOTE 5. DEFERRED COMMISSIONS
(in thousands)
September 30, 2021December 31, 2020
Deferred commissions (1)
$114,503 $108,624 
(1) Included in other long-term assets.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Amortization of deferred commissions (1)
$10,186 $8,861 $31,388 $24,922 
(1) Included in selling and marketing expense.
v3.21.2
GOODWILL AND OTHER INTANGIBLES
9 Months Ended
Sep. 30, 2021
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL AND OTHER INTANGIBLES
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:
Nine Months Ended
September 30,
(in thousands)
2021
January 1,$79,231 
Acquisition2,701 
Currency translation adjustments22 
September 30,$81,954 
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
September 30, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,163 $(56,988)$6,175 
Technology
2-10 years
67,142 (58,273)8,869 
Other
1-5 years
5,361 (5,361)— 
$135,666 $(120,622)$15,044 
(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
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Cost of revenue
$629 $647 $1,887 $1,940 
Selling and marketing
373 371 1,119 1,111 
$1,002 $1,018 $3,006 $3,051 
Future estimated intangibles assets amortization:
(in thousands)
September 30, 2021
2021$981 
20223,886 
20233,618 
20242,849 
20252,509 
2026 and thereafter1,201 
$15,044 
v3.21.2
LEASES
9 Months Ended
Sep. 30, 2021
Leases [Abstract]  
LEASES
NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was amortized over the remaining lease term. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million and accelerated corporate headquarters-related depreciation. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.
New Waltham Office
On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3 percent annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
Expense
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Fixed lease costs (1)
$(3,108)$5,172 $(6,780)$14,933 
Short-term lease costs542 422 1,516 1,248 
Variable lease costs1,099 1,259 3,826 3,506 
$(1,467)$6,853 $(1,438)$19,687 
(1) The decrease in fixed lease costs in three and nine months ended September 30, 2021 was due to the modification of the corporate headquarters lease.
Right of use assets and lease liabilities
(in thousands)September 30, 2021December 31, 2020
Right of use assets (1)
$91,349 $67,651 
Operating lease liabilities (2)
$10,668 $18,541 
Long-term operating lease liabilities$87,088 $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:
September 30, 2021December 31, 2020
Weighted-average remaining lease term7.8 years4.7 years
Weighted-average discount rate (1)
4.4 %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)September 30, 2021
Remainder of 2021$961 
20229,948 
202319,607 
202416,482 
202513,607 
20269,866 
Thereafter48,515 
Total lease payments118,986 
Less: imputed interest (1)
(21,230)
$97,756 
(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
Nine Months Ended
September 30,
(in thousands)20212020
Cash paid for leases$14,403 $15,503 
Right of use assets recognized for new leases and amendments (non-cash)$54,716 $24,276 
v3.21.2
DEBT
9 Months Ended
Sep. 30, 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 due 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 beginning 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 September 30, 2021, the Notes were not eligible for conversion.
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 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)September 30, 2021December 31, 2020
Principal$600,000 $600,000 
Unamortized debt discount— (71,222)
Unamortized issuance costs(10,231)(10,575)
Convertible senior notes, net$589,769 $518,203 
Conversion options$— $84,120 
Issuance costs— (2,037)
Deferred taxes— (20,479)
Additional paid-in capital$— $61,604 

Interest expense related to the Notes:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Contractual interest expense (0.75% coupon)
$1,125 $1,125 $3,375 $2,700 
Amortization of debt discount
— 3,807 — 9,060 
Amortization of issuance costs
677 565 2,025 1,345 
$1,802 $5,497 $5,400 $13,105 
The effective interest rate for the Notes:
Nine Months Ended
September 30,
20212020
Weighted-average effective interest rate1.2 %4.3 %
Future payments of principal and contractual interest:
September 30, 2021
(in thousands)PrincipalInterestTotal
Remainder of 2021$— $— $— 
2022— 4,500 4,500 
2023— 4,500 4,500 
2024— 4,500 4,500 
2025600,000 1,488 601,488 
$600,000 $14,988 $614,988 
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover 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 expected to reduce common stock dilution and/or offset any potential cash payments the Company must 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 following 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:
Nine Months Ended
September 30,
(in thousands)20212020
January 1,$83,597 $— 
Issuance— 51,900 
Fair value adjustment(7,543)19,816 
September 30,$76,054 $71,716 
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. 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 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 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 September 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.
v3.21.2
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 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:
September 30, 2021December 31, 2020
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents$11,087 $— $— $11,087 $42,339 $14,000 $— $56,339 
Marketable securities $— $235,437 $— $235,437 $— $293,269 $— $293,269 
Capped Call Transactions (1)
$— $76,054 $— $76,054 $— $83,597 $— $83,597 
Venture investments (1) (2)
$— $— $9,713 $9,713 $— $— $8,345 $8,345 
(1) Included in other long-term assets. (2) Investments in privately-held companies.
Changes in venture investments:
Nine Months Ended
September 30,
(in thousands)20212020
January 1,$8,345 $4,871 
New investments500 3,006 
Sales of investments(400)(1,424)
Changes in foreign exchange rates(52)— 
Changes in fair value:
included in other income100 1,374 
included in other comprehensive income1,220 100 
September 30,$9,713 $7,927 
The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturity.
Fair value of the Notes
The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $676.2 million as of September 30, 2021 and $706.5 million as of December 31, 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 classified within Level 2 in the fair value hierarchy. See "Note 8. Debt" for additional information.
v3.21.2
REVENUE
9 Months Ended
Sep. 30, 2021
Revenue from Contract with Customer [Abstract]  
REVENUE
NOTE 10. REVENUE
Geographic revenue
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)
2021202020212020
U.S.$132,016 52 %$120,971 53 %$515,881 58 %$436,199 61 %
Other Americas17,510 %10,737 %43,469 %35,009 %
United Kingdom (“U.K.”)25,982 10 %25,150 11 %86,747 10 %68,246 %
Europe (excluding U.K.), Middle East, and Africa 46,306 18 %39,656 18 %143,763 15 %106,472 15 %
Asia-Pacific34,454 13 %29,437 13 %105,609 12 %72,991 10 %
$256,268 100 %$225,951 100 %$895,469 100 %$718,917 100 %
Revenue streams
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)
2021202020212020
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Maintenance83,188 74,670 237,531 220,587 
Consulting56,416 56,721 166,270 164,227 
Revenue recognized over time 217,973 186,167 623,321 531,894 
Perpetual license2,874 3,852 20,922 16,568 
Term license35,421 35,932 251,226 170,455 
Revenue recognized at a point in time 38,295 39,784 272,148 187,023 
$256,268 $225,951 $895,469 $718,917 
(in thousands)Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Client Cloud118,609 110,602 488,757 391,042 
Maintenance83,18874,670237,531220,587
Term license35,42135,932251,226170,455
Cloud subscription (1)
196,978 165,378 708,277 538,122 
Perpetual license2,874 3,852 20,922 16,568 
Consulting56,416 56,721 166,270 164,227 
$256,268 $225,951 $895,469 $718,917 
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of September 30, 2021:
Pega CloudClient CloudConsultingTotal
(Dollars in thousands)MaintenanceTerm licensePerpetual license
1 year or less
$284,359 $196,667 $49,265 $15,686 $31,673 $577,650 56 %
1-2 years
177,214 59,360 16,872 1,064 6,561 261,071 25 %
2-3 years
79,775 37,734 420 4,094 5,165 127,188 12 %
Greater than 3 years
30,113 33,935 245 2,127 1,697 68,117 %
$571,461 $327,696 $66,802 $22,971 $45,096 $1,034,026 100 %
As of September 30, 2020:
Pega CloudClient CloudConsultingTotal
(Dollars in thousands)MaintenanceTerm licensePerpetual license
1 year or less
$211,661 $170,643 $50,788 $8,708 $14,977 $456,777 54 %
1-2 years
157,500 40,631 5,341 1,700 2,042 207,214 25 %
2-3 years
93,283 18,277 7,052 — 770 119,382 14 %
Greater than 3 years
44,363 9,597 — 653 54,617 %
$506,807 $239,148 $63,185 $10,408 $18,442 $837,990 100 %
v3.21.2
STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2021
Share-based Payment Arrangement [Abstract]  
STOCK-BASED COMPENSATION
NOTE 11. STOCK-BASED COMPENSATION
Expense
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Cost of revenue
$5,114 $5,100 $16,889 $15,636 
Selling and marketing
13,376 12,658 41,844 33,968 
Research and development
6,231 5,765 19,343 17,066 
General and administrative
3,974 4,402 11,407 10,085 
$28,695 $27,925 $89,483 $76,755 
Income tax benefit
$(5,845)$(5,604)$(18,028)$(15,293)
As of September 30, 2021, the Company had $131.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.
Grants
Nine Months Ended
September 30, 2021
(in thousands)SharesTotal Fair Value
Restricted stock units
819 $106,286 
Non-qualified stock options
1,472 $55,643 
Common stock
$601 
v3.21.2
INCOME TAXES
9 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 12. INCOME TAXES
Effective income tax rate
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2021202020212020
(Benefit from) income taxes$(24,826)$(25,053)$(54,360)$(61,182)
Effective income tax benefit rate68 %48 %
The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, 2020. The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.
As of September 30, 2021 and December 31, 2020, the Company’s deferred tax assets were $157.9 million and $88.1 million, respectively.
v3.21.2
(LOSS) PER SHARE
9 Months Ended
Sep. 30, 2021
Earnings Per Share [Abstract]  
(LOSS) PER SHARE
NOTE 13. (LOSS) PER SHARE
Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.
Calculation of (loss) per share:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts)2021202020212020
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
Weighted-average common shares outstanding81,526 80,537 81,284 80,191 
(Loss) per share, basic$(0.69)$(0.24)$(0.32)$(0.82)
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
81,526 80,537 81,284 80,191 
(Loss) per share, diluted$(0.69)$(0.24)$(0.32)$(0.82)
Outstanding anti-dilutive stock options and RSUs (4)
5,815 6,622 6,136 6,166 
(1) 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.
(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(3) The Company’s Capped Call Transactions convert to 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 expected to reduce common stock dilution and/or offset any potential cash payments the Company must 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 from weighted-average common shares outstanding, assuming dilution, 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.