Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2024
OR
☐
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-11859
____________________________
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
____________________________
Massachusetts
04-2787865
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
One Main Street, Cambridge, MA02142
(Address of principal executive offices, including zip code)
(617) 374-9600
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
PEGA
NASDAQ Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
There were 85,031,165 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on April 17, 2024.
Common stock, 200,000 shares authorized; 85,011 and 83,840 shares issued and outstanding at
March 31, 2024 and December 31, 2023, respectively
850
838
Additional paid-in capital
432,217
379,584
(Accumulated deficit)
(20,829)
(8,705)
Accumulated other comprehensive (loss)
(22,052)
(17,879)
Total stockholders’ equity
390,186
353,838
Total liabilities and stockholders’ equity
$
1,511,728
$
1,510,736
See notes to unaudited condensed consolidated financial statements.
3
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended March 31,
2024
2023
Revenue
Subscription services
$
211,903
$
187,509
Subscription license
63,338
84,527
Consulting
54,047
53,033
Perpetual license
859
403
Total revenue
330,147
325,472
Cost of revenue
Subscription services
35,824
36,864
Subscription license
643
719
Consulting
58,182
60,348
Perpetual license
9
3
Total cost of revenue
94,658
97,934
Gross profit
235,489
227,538
Operating expenses
Selling and marketing
127,695
149,797
Research and development
72,113
75,376
General and administrative
23,527
23,110
Litigation settlement, net of recoveries
32,403
—
Restructuring
163
1,461
Total operating expenses
255,901
249,744
(Loss) from operations
(20,412)
(22,206)
Foreign currency transaction (loss)
(3,262)
(2,675)
Interest income
5,281
1,485
Interest expense
(1,752)
(1,918)
Gain on capped call transactions
3,299
3,206
Other income, net
1,684
6,583
(Loss) before (benefit from) provision for income taxes
(15,162)
(15,525)
(Benefit from) provision for income taxes
(3,038)
5,249
Net (loss)
$
(12,124)
$
(20,774)
(Loss) per share
Basic
$
(0.14)
$
(0.25)
Diluted
$
(0.14)
$
(0.25)
Weighted-average number of common shares outstanding
Basic
84,266
82,604
Diluted
84,266
82,604
See notes to unaudited condensed consolidated financial statements.
4
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
Three Months Ended March 31,
2024
2023
Net (loss)
$
(12,124)
$
(20,774)
Other comprehensive (loss) income, net of tax
Unrealized (loss) on available-for-sale securities
(746)
(46)
Foreign currency translation adjustments
(3,427)
1,589
Total other comprehensive (loss) income, net of tax
(4,173)
1,543
Comprehensive (loss)
$
(16,297)
$
(19,231)
See notes to unaudited condensed consolidated financial statements.
5
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
Common Stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive (loss)
Total
stockholders’ equity
Number
of shares
Amount
December 31, 2022
82,436
$
824
$
229,602
$
(76,513)
$
(23,070)
$
130,843
Issuance of common stock for stock compensation plans
452
4
668
—
—
672
Issuance of common stock under the employee stock purchase plan
52
1
2,142
—
—
2,143
Stock-based compensation
—
—
42,557
—
—
42,557
Cash dividends declared ($0.03 per share)
—
—
(2,488)
—
—
(2,488)
Other comprehensive income
—
—
—
—
1,543
1,543
Net (loss)
—
—
—
(20,774)
—
(20,774)
March 31, 2023
82,940
$
829
$
272,481
$
(97,287)
$
(21,527)
$
154,496
December 31, 2023
83,840
$
838
$
379,584
$
(8,705)
$
(17,879)
$
353,838
Issuance of common stock for stock compensation plans
1,139
12
18,644
—
—
18,656
Issuance of common stock under the employee stock purchase plan
32
—
1,758
—
—
1,758
Stock-based compensation
—
—
34,781
—
—
34,781
Cash dividends declared ($0.03 per share)
—
—
(2,550)
—
—
(2,550)
Other comprehensive (loss)
—
—
—
—
(4,173)
(4,173)
Net (loss)
—
—
—
(12,124)
—
(12,124)
March 31, 2024
85,011
$
850
$
432,217
$
(20,829)
$
(22,052)
$
390,186
See notes to unaudited condensed consolidated financial statements.
6
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
2024
2023
Operating activities
Net (loss)
$
(12,124)
$
(20,774)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation
34,781
42,557
Amortization of deferred commissions
17,282
14,277
Amortization of intangible assets and depreciation
4,254
4,724
Lease expense
3,472
4,594
Foreign currency transaction (loss)
3,262
2,675
(Gain) on capped call transactions
(3,299)
(3,206)
Deferred income taxes
(646)
(126)
(Gain) on investments
(1,628)
(3,802)
(Gain) on repurchases of convertible senior notes
—
(2,781)
Other non-cash
(1,886)
854
Change in operating assets and liabilities, net
136,678
29,115
Cash provided by operating activities
180,146
68,107
Investing activities
Purchases of investments
(161,438)
(39,401)
Proceeds from maturities and called investments
29,643
36,475
Investment in property and equipment
(604)
(11,487)
Cash (used in) investing activities
(132,399)
(14,413)
Financing activities
Repurchases of convertible senior notes
—
(29,901)
Dividend payments to stockholders
(2,515)
(2,474)
Proceeds from employee stock plans
22,419
3,922
Common stock repurchases for tax withholdings for net settlement of equity awards
(2,005)
(1,107)
Other
—
188
Cash provided by (used in) financing activities
17,899
(29,372)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(2,803)
782
Net increase in cash, cash equivalents, and restricted cash
62,843
25,104
Cash, cash equivalents, and restricted cash, beginning of period
232,827
145,054
Cash, cash equivalents, and restricted cash, end of period
$
295,670
$
170,158
Cash and cash equivalents
$
291,905
$
168,318
Restricted cash included in other current assets
775
—
Restricted cash included in other long-term assets
2,990
1,840
Total cash, cash equivalents, and restricted cash
$
295,670
$
170,158
See notes to unaudited condensed consolidated financial statements.
7
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023.
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 do not necessarily indicate the expected results for 2024.
NOTE 2. MARKETABLE SECURITIES
March 31, 2024
December 31, 2023
(in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Government debt
$
15,857
$
10
$
(15)
$
15,852
$
11,471
$
33
$
(1)
$
11,503
Corporate debt
311,733
17
(558)
311,192
181,960
200
(227)
181,933
$
327,590
$
27
$
(573)
$
327,044
$
193,431
$
233
$
(228)
$
193,436
As of March 31, 2024, marketable securities’ maturities ranged from April 2024 to January 2026, with a weighted-average remaining maturity of 0.5 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
March 31, 2024
December 31, 2023
Accounts receivable, net
$
191,987
$
300,173
Unbilled receivables, net
170,458
237,379
Long-term unbilled receivables, net
72,814
85,402
$
435,259
$
622,954
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing. Billing is solely subject to the passage of time.
Unbilled receivables by expected collection date:
(Dollars in thousands)
March 31, 2024
1 year or less
$
170,458
70
%
1-2 years
54,111
22
%
2-5 years
18,703
8
%
$
243,272
100
%
Unbilled receivables by contract effective date:
(Dollars in thousands)
March 31, 2024
2024
$
19,018
8
%
2023
144,525
59
%
2022
38,025
16
%
2021
35,988
15
%
2020 and prior
5,716
2
%
$
243,272
100
%
8
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major clients
Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:
March 31, 2024
December 31, 2023
Client A
Accounts receivable
10
%
*
Unbilled receivables
12
%
*
Total receivables
11
%
*
* Client accounted for less than 10% of 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 the completion of a related performance obligation.
(in thousands)
March 31, 2024
December 31, 2023
Contract assets (1)
$
10,853
$
16,238
Long-term contract assets (2)
20,909
20,635
$
31,762
$
36,873
(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, 2024
December 31, 2023
Deferred revenue
$
382,765
$
377,845
Long-term deferred revenue (1)
1,784
2,478
$
384,549
$
380,323
(1) Included in other long-term liabilities.
The increase in deferred revenue in the three months ended March 31, 2024, was primarily due to new billings in advance of revenue recognized. In the three months ended March 31, 2024, $168.3 million in revenue was recognized from deferred revenue as of December 31, 2023.
NOTE 4. DEFERRED COMMISSIONS
(in thousands)
March 31, 2024
December 31, 2023
Deferred commissions (1)
$
102,855
$
114,119
(1) Included in other long-term assets.
Three Months Ended March 31,
(in thousands)
2024
2023
Amortization of deferred commissions (1)
$
17,282
$
14,277
(1) Included in selling and marketing.
9
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. GOODWILL AND OTHER INTANGIBLES
Goodwill
Three Months Ended March 31,
(in thousands)
2024
2023
January 1,
$
81,611
$
81,399
Currency translation adjustments
(144)
35
March 31,
$
81,467
$
81,434
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
March 31, 2024
(in thousands)
Useful Lives
Cost
Accumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$
63,111
$
(60,371)
$
2,740
Technology
2-10 years
68,105
(64,820)
3,285
Other
1-5 years
5,361
(5,361)
—
$
136,577
$
(130,552)
$
6,025
(1) Included in other long-term assets.
December 31, 2023
(in thousands)
Useful Lives
Cost
Accumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$
63,117
$
(60,035)
$
3,082
Technology
2-10 years
68,138
(64,218)
3,920
Other
1-5 years
5,361
(5,361)
—
$
136,616
$
(129,614)
$
7,002
(1) Included in other long-term assets.
Future estimated amortization of intangible assets:
(in thousands)
March 31, 2024
Remainder of 2024
$
2,208
2025
2,616
2026
874
2027
327
$
6,025
Amortization of intangible assets:
Three Months Ended March 31,
(in thousands)
2024
2023
Cost of revenue
$
621
$
706
Selling and marketing
343
343
$
964
$
1,049
NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets
(in thousands)
March 31, 2024
December 31, 2023
Income tax receivables
$
9,058
$
4,804
Contract assets
10,853
16,238
Insurance receivable
8,305
1,954
Capped call transactions
4,192
—
Restricted cash
775
—
Other
45,010
45,141
$
78,193
$
68,137
10
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other long-term assets
(in thousands)
March 31, 2024
December 31, 2023
Deferred commissions
$
102,855
$
114,119
Right of use assets
61,512
64,198
Property and equipment
44,856
47,279
Venture investments
20,946
19,450
Contract assets
20,909
20,635
Intangible assets
6,025
7,002
Capped call transactions
—
893
Deferred income taxes
3,666
3,678
Restricted cash
2,990
2,925
Other
34,101
34,517
$
297,860
$
314,696
Accrued expenses
(in thousands)
March 31, 2024
December 31, 2023
Litigation settlements
$
35,000
$
—
Cloud hosting
12,736
1,358
Outside professional services
13,352
10,419
Marketing and sales program
3,888
2,557
Income and other taxes
6,676
15,428
Employee related
4,466
4,486
Other
4,524
5,693
$
80,642
$
39,941
Other current liabilities
(in thousands)
March 31, 2024
December 31, 2023
Operating lease liabilities
$
14,184
$
15,000
Dividends payable
2,550
2,515
Other
2,362
3,828
$
19,096
$
21,343
Other long-term liabilities
(in thousands)
March 31, 2024
December 31, 2023
Deferred revenue
$
1,784
$
2,478
Income taxes payable
2,175
859
Other
9,659
10,233
$
13,618
$
13,570
NOTE 7. LEASES
Expense
Three Months Ended March 31,
(in thousands)
2024
2023
Fixed lease costs
$
4,262
$
5,766
Short-term lease costs
543
781
Variable lease costs
1,609
1,975
$
6,414
$
8,522
11
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Right of use assets and lease liabilities
(in thousands)
March 31, 2024
December 31, 2023
Right of use assets (1)
$
61,512
$
64,198
Operating lease liabilities (2)
$
14,184
$
15,000
Long-term operating lease liabilities
$
63,645
$
66,901
(1) 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, 2024
December 31, 2023
Weighted-average remaining lease term
6.7 years
6.8 years
Weighted-average discount rate (1)
4.0
%
4.0
%
(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, 2024
Remainder of 2024
$
12,700
2025
16,024
2026
11,246
2027
10,066
2028
9,334
2029
8,500
Thereafter
21,647
Total lease payments
89,517
Less: imputed interest (1)
(11,688)
$
77,829
(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)
2024
2023
Cash paid for operating leases, net of tenant improvement allowances
$
5,069
$
5,038
Right of use assets recognized for new leases and amendments (non-cash)
$
1,095
$
721
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 September 1, 2020.
In the three months ended March 31, 2023, the Company recorded a gain of $2.8 million in other income, net from the repurchase of Notes representing $33 million in aggregate principal amount.
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 conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. 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.
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:
12
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
•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 March 31, 2024, 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.
Carrying value of the Notes:
(in thousands)
March 31, 2024
December 31, 2023
Principal
$
502,270
$
502,270
Unamortized issuance costs
(2,285)
(2,902)
Convertible senior notes, net
$
499,985
$
499,368
Interest expense related to the Notes:
Three Months Ended March 31,
(in thousands)
2024
2023
Contractual interest expense (0.75% coupon)
$
942
$
1,125
Amortization of issuance costs
617
728
$
1,559
$
1,853
The average interest rate on the Notes in the three months ended March 31, 2024 and 2023 was 1.2%.
Future payments:
March 31, 2024
(in thousands)
Principal
Interest
Total
Remainder of 2024
$
—
$
1,883
$
1,883
2025
502,270
1,884
504,154
$
502,270
$
3,767
$
506,037
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 initially covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock. In 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $0.3 million. As of March 31, 2024, Capped Call Transactions covering approximately 3.7 million shares were outstanding.
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 specified extraordinary events affecting the Company, including mergers and tender offers.
13
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 calculated following the governing documents may not represent a fair value measurement. The Capped Call Transactions are remeasured to fair value each reporting period, resulting in a non-operating gain or loss.
Change in capped call transactions:
Three Months Ended March 31,
(in thousands)
2024
2023
January 1,
$
893
$
2,582
Settlements
—
(188)
Fair value adjustment
3,299
3,206
March 31,
$
4,192
$
5,600
Credit facility
In November 2019, and as since amended, 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 for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025.The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.
As of March 31, 2024 and December 31, 2023, the Company had $27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings.
NOTE 9. RESTRUCTURING
The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:
(in thousands)
Three months ended
Expense
Office space reduction
March 31, 2023
$
1,241
Employee severance and related benefits
June 30, 2023
$
1,581
Employee severance and related benefits and office space reduction
September 30, 2023
$
17,236
Office space reduction
December 31, 2023
$
1,497
Accrued employee severance and related benefits:
Change for all restructuring actions:
Three Months Ended March 31,
(in thousands)
2024
2023
January 1,
$
8,095
$
18,573
Costs incurred
384
220
Cash disbursements
(3,347)
(14,458)
Currency translation adjustments
(131)
181
March 31,
$
5,001
$
4,516
Note: Accrued employee severance and related benefits is included in accrued compensation and related expenses.
NOTE 10. 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.
14
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 with 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 model uses 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 the underlying equity security’s historical and implied volatility levels. The Company’s venture investments are recorded at fair value based on multiple 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, 2024
December 31, 2023
(in thousands)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Cash equivalents
$
93,135
$
—
$
—
$
93,135
$
54,357
$
—
$
—
$
54,357
Marketable securities
$
—
$
327,044
$
—
$
327,044
$
—
$
193,436
$
—
$
193,436
Capped Call Transactions (1)
$
—
$
4,192
$
—
$
4,192
$
—
$
893
$
—
$
893
Venture investments (1) (2)
$
—
$
—
$
20,946
$
20,946
$
—
$
—
$
19,450
$
19,450
(1) Included in other long-term assets.
(2) Investments in privately-held companies.
Changes in venture investments:
Three Months Ended March 31,
(in thousands)
2024
2023
January 1,
$
19,450
$
13,069
New investments
250
400
Changes in foreign exchange rates
(20)
58
Changes in fair value:
included in other income, net
1,628
3,802
included in other comprehensive (loss)
(362)
(1,064)
March 31,
$
20,946
$
16,265
The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities.
Fair value of the Convertible Senior Notes
The fair value of the Notes outstanding (including the embedded conversion feature) was $481.7 million as of March 31, 2024, and $466.5 million as of December 31, 2023.
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.
NOTE 11. REVENUE
Geographic revenue
Three Months Ended March 31,
(Dollars in thousands)
2024
2023
U.S.
$
180,983
54
%
$
184,519
56
%
Other Americas
21,786
7
%
15,011
5
%
United Kingdom (“U.K.”)
32,117
10
%
42,237
13
%
Europe (excluding U.K.), Middle East, and Africa
61,847
19
%
51,318
16
%
Asia-Pacific
33,414
10
%
32,387
10
%
$
330,147
100
%
$
325,472
100
%
15
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue streams
Three Months Ended March 31,
(in thousands)
2024
2023
Subscription license
$
63,338
$
84,527
Perpetual license
859
403
Revenue recognized at a point in time
64,197
84,930
Maintenance
81,001
79,630
Pega Cloud
130,902
107,879
Consulting
54,047
53,033
Revenue recognized over time
265,950
240,542
Total revenue
$
330,147
$
325,472
Three Months Ended March 31,
(in thousands)
2024
2023
Pega Cloud
$
130,902
$
107,879
Maintenance
81,001
79,630
Subscription services
211,903
187,509
Subscription license
63,338
84,527
Subscription
275,241
272,036
Consulting
54,047
53,033
Perpetual license
859
403
$
330,147
$
325,472
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of March 31, 2024:
(Dollars in thousands)
Subscription services
Subscription license
Perpetual license
Consulting
Total
Pega Cloud
Maintenance
1 year or less
$
461,928
$
225,598
$
33,985
$
2,727
$
34,716
$
758,954
53
%
1-2 years
292,787
65,605
10,008
—
1,604
370,004
26
%
2-3 years
149,797
32,307
2,903
—
2,428
187,435
13
%
Greater than 3 years
86,601
21,650
98
—
—
108,349
8
%
$
991,113
$
345,160
$
46,994
$
2,727
$
38,748
$
1,424,742
100
%
As of March 31, 2023:
(Dollars in thousands)
Subscription services
Subscription license
Perpetual license
Consulting
Total
Pega Cloud
Maintenance
1 year or less
$
389,632
$
235,315
$
35,346
$
5,262
$
41,203
$
706,758
54
%
1-2 years
239,228
66,272
3,215
2,252
6,653
317,620
24
%
2-3 years
131,085
29,295
6,777
—
2,292
169,449
13
%
Greater than 3 years
106,778
7,479
—
—
—
114,257
9
%
$
866,723
$
338,361
$
45,338
$
7,514
$
50,148
$
1,308,084
100
%
16
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12. STOCK-BASED COMPENSATION
Expense
Three Months Ended March 31,
(in thousands)
2024
2023
Cost of revenue
$
6,572
$
8,912
Selling and marketing
13,888
17,661
Research and development
7,646
9,060
General and administrative
6,675
6,924
$
34,781
$
42,557
Income tax benefit
$
(311)
$
(672)
As of March 31, 2024, the Company had $184.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.8 years.
Grants
Three Months Ended March 31, 2024
(in thousands)
Quantity
Total Fair Value
Restricted stock units (1)
1,239
$
76,466
Non-qualified stock options
1,718
$
44,377
Performance stock options (2)
566
$
13,921
(1) Includes units issued when employees elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.
(2) Performance stock options allow the holder to purchase a specified number of common stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date. For the performance stock options granted in three months ended March 31, 2024, 25% can vest on the first anniversary of the grant date, and 75% can vest on the second anniversary of the grant date, based on the achievement of specific performance conditions. The options expire ten years from the grant date.
NOTE 13. INCOME TAXES
Effective income tax rate
Three Months Ended March 31,
(Dollars in thousands)
2024
2023
(Benefit from) provision for income taxes
$
(3,038)
$
5,249
Effective income tax rate
20
%
(34)
%
The Company’s effective income tax rate in the three months ended March 31, 2024, was primarily driven by the valuation allowance on the Company’s deferred tax assets in the U.S. and U.K., and forecasted taxable income, offset by an income tax benefit for discrete items in the three months ended March 31, 2024.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. A deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income. Quarterly, the Company reassesses the need for a valuation allowance on its net deferred tax assets by weighting all available and objectively verifiable negative and positive evidence, including projected future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income, including the impact of enacted legislation, tax-planning strategies, and recent operating results.
The Company intends to maintain a valuation allowance on its U.S. and U.K. net deferred tax assets until sufficient evidence exists to support their realization.
NOTE 14. (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.
17
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Calculation of (loss) per share:
Three Months Ended March 31,
(in thousands, except per share amounts)
2024
2023
Net (loss)
$
(12,124)
$
(20,774)
Weighted-average common shares outstanding
84,266
82,604
(Loss) per share, basic
$
(0.14)
$
(0.25)
Net (loss)
$
(12,124)
$
(20,774)
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
84,266
82,604
(Loss) per share, diluted
$
(0.14)
$
(0.25)
Outstanding anti-dilutive stock options and RSUs (4)
3,171
1,348
(1) All dilutive securities are excluded in periods of loss 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 approximately 3.7 million shares as of March 31, 2024.
(3) The Company’s Capped Call Transactions represent the equivalent of approximately 3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are convertible) as of March 31, 2024. 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.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Commitments
See "Note 7. Leases" for additional information.
Legal proceedings
In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.
In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material.
In the three months ended March 31, 2024 the Company recorded a $32.4 million litigation settlement net of insurance recoveries, which is comprised of an agreed in principle $35 million litigation settlement reduced by $2.6 million of expected insurance coverage recovery. The Company had no accrued loss for litigation as of December 31, 2023.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and will issue a written opinion in the future. Although it is not possible to predict timing, the entirety of the appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.
18
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell
On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company moved to dismiss the consolidated amended complaint on December 19, 2022. The hearing on the Company’s motion to dismiss took place on May 17, 2023. After hearing argument from both sides, the Court denied the Company’s motion from the bench and stated that a written opinion would follow. On June 30, 2023, the Company filed its Answer to the complaint. On July 24, 2023, the Court issued its written opinion denying the motion to dismiss as to the Company and Defendant Trefler but granting the motion without prejudice as to Mr. Stillwell.
On March 4, 2024, the parties agreed in principle to a proposed settlement of the litigation for an aggregate sum of $35 million. On April 23, 2024, the parties executed a stipulation of settlement. On April 23, 2024, the plaintiffs filed a motion seeking preliminary approval of the settlement. The parties are awaiting a ruling by the court on that motion and thereafter final approval of the settlement, which will not be heard until after a notice period to the proposed class of shareholders during which they have the opportunity to object to the proposed settlement. Although the outcome of the litigation is not certain until final disposition, the Company has recorded a $35 million accrued loss as of March 31, 2024, for the proposed settlement, the substantial majority of which the Company anticipates will be paid for directly by the Company and not reimbursed by insurance. However, it is possible that actual future losses related to the litigation could exceed the accrual amount if and to the extent that the court does not approve the proposed settlement.
In re Pegasystems Inc., Derivative Litigation
On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc., asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court. The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit and there being no specified quantum of damages sought in the complaint.
SEC Inquiry
Beginning in March 2023, the U.S. Securities and Exchange Commission (“SEC”) has requested certain information relating to, among other things, the accounting treatment of the Company’s above-described litigation with Appian Corporation. The Company is fully cooperating with the SEC’s requests.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words and other similar expressions identify forward-looking statements. These statements represent our views only as of the date the statement was made and are based on current expectations and assumptions.
Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:
•our future financial performance and business plans;
•the adequacy of our liquidity and capital resources;
•the continued payment of our quarterly dividends;
•the timing of revenue recognition;
•variation in demand for our products and services, including among clients in the public sector;
•reliance on key personnel;
•reliance on third-party service providers, including hosting providers;
•compliance with our debt obligations and covenants;
•the potential impact of our convertible senior notes and Capped Call Transactions;
•foreign currency exchange rates;
•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;
•security breaches and security flaws;
•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;
•our ongoing litigation with Appian Corp.;
•our client retention rate; and
•management of our growth.
These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2023, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results included in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise.
The forward-looking statements in this Quarterly Report represent our views as of April 24, 2024.
NON-GAAP MEASURES
Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. They are not a substitute for financial measures prepared under U.S. GAAP. A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure.
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change. Our powerful, low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.
Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to our clients’ specific industry.
20
Performance metrics
We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:
Annual contract value (“ACV”)
ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV. ACV is a performance measure that we believe provides useful information to our management and investors.
Reconciliation of ACV and constant currency ACV
(in millions, except percentages)
March 31, 2023
March 31, 2024
1-Year Change
ACV
$
1,174
$
1,273
9
%
Impact of changes in foreign exchange rates
—
4
Constant currency ACV
$
1,174
$
1,277
9
%
Note: Constant currency ACV is calculated by applying the March 31, 2023 foreign exchange rates to all periods shown.
21
Cash flow (1)
(Dollars in thousands)
Three Months Ended March 31,
2024
2023
Cash provided by operating activities
$
180,146
$
68,107
Investment in property and equipment
(604)
(11,487)
Free cash flow (1)
$
179,542
$
56,620
Supplemental information (2)
Restructuring
$
3,347
$
14,458
Legal fees
2,739
1,515
Interest on convertible senior notes
1,884
2,250
Income taxes
8,163
2,825
$
16,133
$
21,048
(1) Our non-GAAP free cash flow is defined as cash provided by operating activities less investment in property and equipment. Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP.
(2) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance.
▪Restructuring: Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.
▪Legal fees: Legal and related fees arising from proceedings outside the ordinary course of business.
▪Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1.
▪Income taxes: Direct income taxes paid net of refunds received.
22
Remaining performance obligations (“Backlog”)
Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP)
(in millions, except percentages)
March 31, 2023
March 31, 2024
1-Year Growth Rate
Backlog - GAAP
$
1,308
$
1,425
9
%
Impact of changes in foreign exchange rates
—
4
Constant currency backlog
$
1,308
$
1,429
9
%
Note: Constant currency Backlog is calculated by applying the Q1 2023 foreign exchange rates to all periods shown.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States of America (“U.S.”) and the rules and regulations of the SEC for interim financial reporting. Preparing these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future, given the available information.
For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2023:
•“Critical Accounting Estimates and Significant Judgments” in Item 7; and
•“Note 2. Significant Accounting Policies” in Item 8.
There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
23
RESULTS OF OPERATIONS
Revenue
(Dollars in thousands)
Three Months Ended March 31,
Change
2024
2023
Pega Cloud
$
130,902
40
%
$
107,879
33
%
$
23,023
21
%
Maintenance
81,001
24
%
79,630
25
%
1,371
2
%
Subscription services
211,903
64
%
187,509
58
%
24,394
13
%
Subscription license
63,338
19
%
84,527
26
%
(21,189)
(25)
%
Subscription
275,241
83
%
272,036
84
%
3,205
1
%
Consulting
54,047
17
%
53,033
16
%
1,014
2
%
Perpetual license
859
—
%
403
—
%
456
113
%
$
330,147
100
%
$
325,472
100
%
$
4,675
1
%
•The increase in Pega Cloud revenue for the three months ended March 31, 2024 was primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud.
•The increase in maintenance revenue in the three months ended March 31, 2024 was primarily due to continued demand for our subscription license offerings, which are generally bundled with maintenance.
•The decrease in subscription license revenue in the three months ended March 31, 2024 was primarily due to a large multi-year contract recognized in revenue in the three months ended March 31, 2023.
•The increase in consulting revenue in the three months ended March 31, 2024 was primarily due to an increase in consultant realization rates in the Americas.
Gross profit
(Dollars in thousands)
Three Months Ended March 31,
Change
2024
2023
Pega Cloud
$
101,305
77
%
$
77,629
72
%
$
23,676
30
%
Maintenance
74,774
92
%
73,016
92
%
1,758
2
%
Subscription services
176,079
83
%
150,645
80
%
25,434
17
%
Subscription license
62,695
99
%
83,808
99
%
(21,113)
(25)
%
Subscription
238,774
87
%
234,453
86
%
4,321
2
%
Consulting
(4,135)
(8)
%
(7,315)
(14)
%
3,180
43
%
Perpetual license
850
99
%
400
99
%
450
113
%
$
235,489
71
%
$
227,538
70
%
$
7,951
3
%
* not meaningful
•The increase in Pega Cloud gross profit percent in the three months ended March 31, 2024 was primarily due to increased cost efficiency, particularly for hosting services and employee compensation and benefits, as Pega Cloud continues to grow and scale.
•The increase in consulting gross profit percent in the three months ended March 31, 2024 was primarily due to an increase in consultant realization rates in the Americas.
24
Operating expenses
(Dollars in thousands)
Three Months Ended March 31,
Change
2024
2023
Selling and marketing
$
127,695
$
149,797
$
(22,102)
(15)
%
% of Revenue
39
%
46
%
Research and development
$
72,113
$
75,376
$
(3,263)
(4)
%
% of Revenue
22
%
23
%
General and administrative
$
23,527
$
23,110
$
417
2
%
% of Revenue
7
%
7
%
Litigation settlement, net of recoveries
$
32,403
$
—
$
32,403
100
%
% of Revenue
10
%
—
%
Restructuring
$
163
$
1,461
$
(1,298)
(89)
%
% of Revenue
—
%
—
%
•The decrease in selling and marketing during the three months ended March 31, 2024 was primarily due to a decrease in compensation and benefits of $17.5 million from reduced headcount as we optimized our go-to-market strategy. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.
•The decrease in research and development for the three months ended March 31, 2024 was primarily due to a decrease in compensation and benefits of $1.5 million due to reduced headcount and a decrease in cloud hosting expenses of $1.2 million.
•The increase in litigation settlement, net of recoveries in the three months ended March 31, 2024 was primarily due to the estimated cost to settle ongoing litigation arising from proceedings outside the ordinary course of business. See "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part I, Item 1A of our Annual Report for the year ended December 31, 2023 for additional information.
•The decrease in restructuring expenses during the three months ended March 31, 2024 was primarily due to efforts to optimize our go-to-market organization in the three months ended March 31, 2023. For additional information, see "Note 9. Restructuring" in Part I, Item 1 of this Quarterly Report.
Other income and expenses
(Dollars in thousands)
Three Months Ended March 31,
Change
2024
2023
Foreign currency transaction (loss)
$
(3,262)
$
(2,675)
$
(587)
(22)
%
Interest income
5,281
1,485
3,796
256
%
Interest expense
(1,752)
(1,918)
166
9
%
Gain on capped call transactions
3,299
3,206
93
3
%
Other income, net
1,684
6,583
(4,899)
(74)
%
$
5,250
$
6,681
$
(1,431)
(21)
%
•The change in foreign currency transaction (loss) in the three months ended March 31, 2024 was primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.
•The increase in interest income in the three months ended March 31, 2024 was primarily due to higher investment balances and market interest rates.
•The decrease in other income, net in the three months ended March 31, 2024 was due to a gain of $3.8 million on our venture investments and a gain of $2.8 million from repurchases of our convertible senior notes in the three months ended March 31, 2023. For additional information, see “Note 8. Debt” and "Note 10. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report.
(Benefit from) provision for income taxes
Three Months Ended March 31,
(Dollars in thousands)
2024
2023
(Benefit from) provision for income taxes
$
(3,038)
$
5,249
Effective income tax rate
20
%
(34)
%
The effective income tax rate in the three months ended March 31, 2024 was primarily driven by the valuation allowance on our deferred tax assets in the U.S. and U.K., and forecasted taxable income, offset by an income tax benefit for discrete items in the three months ended March 31, 2024.
25
The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax regulations, known as Pillar Two, that began to come into effect on January 1, 2024. We are monitoring this development and evaluating its potential impact on our tax rate and eligibility to qualify for the safe harbor provisions. For 2024, we currently anticipate meeting the transitional safe harbors in most jurisdictions, with any remaining top-up tax being immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31,
(in thousands)
2024
2023
Cash provided by (used in):
Operating activities
$
180,146
$
68,107
Investing activities
(132,399)
(14,413)
Financing activities
17,899
(29,372)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(2,803)
782
Net increase in cash, cash equivalents, and restricted cash
$
62,843
$
25,104
(in thousands)
March 31, 2024
December 31, 2023
Held in U.S. entities
$
491,808
$
263,453
Held in foreign entities
127,141
159,885
Total cash, cash equivalents, and marketable securities
618,949
423,338
Restricted cash included in other current assets
775
—
Restricted cash included in other long-term assets
2,990
2,925
Total cash, cash equivalents, marketable securities, and restricted cash
$
622,714
$
426,263
We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. We may utilize available funds or seek external financing if we require additional capital resources.
If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations.
Operating activities
The change in cash provided by operating activities in the three months ended March 31, 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives. For additional information, see “Note 9. Restructuring” and "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report.
Investing activities
The change in cash (used in) investing activities in the three months ended March 31, 2024 was primarily due to our investments in financial instruments and reduced investment in property and equipment as we optimize our office space.
Financing activities
Debt financing
In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. As of March 31, 2024, we had $502.3 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.
In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025. As of March 31, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings. For additional information, see "Note 8. Debt" in Part I, Item 1 of this Quarterly Report.
26
Stock repurchase program
Changes in the remaining stock repurchase authority:
(in thousands)
Three Months Ended March 31, 2024
December 31, 2023
$
60,000
Authorizations (1)
—
March 31, 2024
$
60,000
(1) On April 23, 2024, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2024 to June 30, 2025.
Common stock repurchases
Three Months Ended March 31,
2024
2023
(in thousands)
Shares
Amount
Shares
Amount
Tax withholdings for net settlement of equity awards
32
$
2,005
27
$
1,107
In the three months ended March 31, 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $2.8 million and $0.6 million, respectively, for the exercise price of options. These amounts are not included in the table above.
Dividends
We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.
Three Months Ended March 31,
(in thousands)
2024
2023
Dividend payments to stockholders
$
2,515
$
2,474
Contractual obligations
As of March 31, 2024, our contractual obligations were:
Payments due by period
(in thousands)
Remainder of 2024
2025
2026
2027
2028
2029 and after
Other
Total
Convertible senior notes (1)
$
1,883
$
504,154
$
—
$
—
$
—
$
—
$
—
$
506,037
Purchase obligations (2)
128,610
137,788
126,585
135,247
990
—
—
529,220
Operating lease obligations
12,700
16,024
11,246
10,066
9,334
30,147
—
89,517
Venture investment commitments (3)
500
500
—
—
—
—
—
1,000
Liability for uncertain tax positions (4)
—
—
—
—
—
—
2,175
2,175
$
143,693
$
658,466
$
137,831
$
145,313
$
10,324
$
30,147
$
2,175
$
1,127,949
(1) Includes principal and interest.
(2) Represents the fixed amount owed for purchase obligations for software licenses, hosting services, and sales and marketing programs.
(3) Represents the maximum funding under existing venture investment agreements. Our venture investment agreements generally allow us to withhold unpaid funds at our discretion.
(4) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, partially offsetting our foreign currency exposure.
27
A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in the following:
Three Months Ended March 31,
2024
2023
(Decrease) in revenue
(4)
%
(4)
%
(Decrease) increase in net income
(4)
%
1
%
Remeasurement risk
We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:
Three Months Ended March 31,
(in thousands)
2024
2023
Foreign currency (loss)
$
(14,618)
$
(9,251)
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of March 31, 2024. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2024.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in “Note 15. Commitments and Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results and may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of equity securities (1)
Common stock repurchased in the three months ended March 31, 2024:
(in thousands, except per share amounts)
Total Number
of Shares
Purchased (2)
Average Price
Paid per
Share (2)
Total Number
of Shares Purchased as Part of
Publicly Announced Share
Repurchase Program
Approximate Dollar
Value of Shares That
May Yet Be Purchased at Period
End Under Publicly Announced
Share Repurchased Programs
January 1, 2024 - January 31, 2024
14
$
49.31
—
$
60,000
February 1, 2024 - February 29, 2024
45
63.50
—
$
60,000
March 1, 2024 - March 31, 2024
19
63.69
—
$
60,000
78
$
61.06
—
(1) For additional information, see "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report.
(2) Includes shares withheld to cover the option exercise price and tax withholding obligations for stock compensation awards subject to net settlement provisions.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 and non-rule 10b5-1 trading arrangements
During the three months ended March 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Credit Facility
On April 23, 2024, we entered into an amendment to our $100 million senior secured revolving credit agreement with PNC Bank, National Association which extends the expiration date of the Credit Facility to February 4, 2025. The description contained herein is qualified in its entirety by reference to the Amendment, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
Share Repurchase Program
On April 23, 2024, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2024 to June 30, 2025. Any actual repurchases under the current repurchase program will be disclosed in the Company’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for the annual and applicable quarterly periods ending between June 30, 2024 and December 31, 2025.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
X
+ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pegasystems Inc.
Dated:
April 24, 2024
By:
/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
