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PEGASYSTEMS INC - Quarter Report: 2021 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
_____________________________________
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2021
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) 
____________________________
Massachusetts04-2787865
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
One Main Street, Cambridge, MA 02142
(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ 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. Yes x 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). Yes x 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 filerSmaller reporting companyEmerging 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 81,675,315 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 19, 2021.


Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature

2

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$116,411 $171,899 
Marketable securities235,437 293,269 
Total cash, cash equivalents, and marketable securities351,848 465,168 
Accounts receivable143,445 215,827 
Unbilled receivables239,774 207,155 
Other current assets93,819 88,760 
Total current assets828,886 976,910 
Unbilled receivables
132,147 113,278 
Goodwill81,954 79,231 
Other long-term assets512,410 434,843 
Total assets$1,555,397 $1,604,262 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$25,604 $24,028 
Accrued expenses46,583 59,261 
Accrued compensation and related expenses86,018 123,012 
Deferred revenue229,103 232,865 
Other current liabilities13,118 20,969 
Total current liabilities400,426 460,135 
Convertible senior notes, net589,769 518,203 
Operating lease liabilities87,088 59,053 
Other long-term liabilities18,482 24,699 
Total liabilities1,095,765 1,062,090 
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued
— — 
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 capital148,098 204,432 
Retained earnings316,150 339,879 
Accumulated other comprehensive (loss)(5,433)(2,948)
Total stockholders’ equity459,632 542,172 
Total liabilities and stockholders’ equity$1,555,397 $1,604,262 

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
September 30,
Nine Months Ended
September 30,
2021202020212020
Revenue
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Maintenance83,188 74,670 237,531 220,587 
Software license38,295 39,784 272,148 187,023 
Consulting56,416 56,721 166,270 164,227 
Total revenue256,268 225,951 895,469 718,917 
Cost of revenue
Pega Cloud25,524 19,717 72,132 56,238 
Maintenance5,293 5,478 16,074 16,645 
Software license656 691 1,962 2,354 
Consulting52,749 51,913 161,032 158,781 
Total cost of revenue84,222 77,799 251,200 234,018 
Gross profit172,046 148,152 644,269 484,899 
Operating expenses
Selling and marketing152,479 132,053 457,641 395,684 
Research and development64,728 60,024 191,565 177,620 
General and administrative20,176 17,907 57,607 49,192 
Total operating expenses237,383 209,984 706,813 622,496 
(Loss) from operations(65,337)(61,832)(62,544)(137,597)
Foreign currency transaction gain (loss)518 4,236 (4,983)2,545 
Interest income166 243 555 1,092 
Interest expense(1,908)(5,956)(5,747)(13,791)
(Loss) income on capped call transactions(14,735)18,989 (7,543)19,816 
Other income, net— 108 1,374 
(Loss) before (benefit from) income taxes(81,294)(44,320)(80,154)(126,561)
(Benefit from) income taxes(24,826)(25,053)(54,360)(61,182)
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
(Loss) per share
Basic$(0.69)$(0.24)$(0.32)$(0.82)
Diluted$(0.69)$(0.24)$(0.32)$(0.82)
Weighted-average number of common shares outstanding
Basic81,526 80,537 81,284 80,191 
Diluted81,526 80,537 81,284 80,191 

See notes to unaudited condensed consolidated financial statements.
4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
Other comprehensive (loss) income, net of tax
Unrealized gain (loss) on available-for-sale securities53 (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)

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 Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
Amount
December 31, 201979,599 $796 $140,523 $410,919 $(13,228)$539,010 
Equity component of convertible senior notes, net— — 61,604 — — 61,604 
Repurchase of common stock(87)(1)(5,999)— — (6,000)
Issuance of common stock for stock compensation plans564 (23,017)— — (23,011)
Stock-based compensation— — 23,199 — — 23,199 
Cash dividends declared ($0.03 per share)
— — — (2,405)— (2,405)
Other comprehensive (loss)— — — — (414)(414)
Net (loss)— — — (25,372)— (25,372)
March 31, 202080,076 $801 $196,310 $383,142 $(13,642)$566,611 
Repurchase of common stock(23)— (2,199)— — (2,199)
Issuance of common stock for stock compensation plans349 (14,085)— — (14,082)
Issuance of common stock under the employee stock purchase plan18 — 1,403 — — 1,403 
Stock-based compensation— — 25,674 — — 25,674 
Cash dividends declared ($0.03 per share)
— — — (2,413)— (2,413)
Other comprehensive income— — — — 2,028 2,028 
Net (loss)— — — (20,740)— (20,740)
June 30, 202080,420 $804 $207,103 $359,989 $(11,614)$556,282 
Repurchase of common stock(94)(1)(10,628)— — (10,629)
Issuance of common stock for stock compensation plans371 (22,524)— — (22,520)
Stock-based compensation— — 27,931 — — 27,931 
Cash dividends declared ($0.03 per share)
— — — (2,422)— (2,422)
Other comprehensive (loss)— — — — (53)(53)
Net (loss)— — — (19,267)— (19,267)
September 30, 202080,697 $807 $201,882 $338,300 $(11,667)$529,322 
6


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common Stock
Additional
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares
Amount
December 31, 202080,890 $809 $204,432 $339,879 $(2,948)$542,172 
Cumulative-effect adjustment from adoption of ASU 2020-06, net
— — (61,604)9,399 — (52,205)
Repurchase of common stock(70)(1)(9,145)— — (9,146)
Issuance of common stock for stock compensation plans402 (25,513)— — (25,509)
Issuance of common stock under the employee stock purchase plan24 — 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— — — — 280 280 
Net (loss)— — — (6,617)— (6,617)
March 31, 202181,246 $812 $140,558 $340,223 $(2,668)$478,925 
Repurchase of common stock(81)(1)(10,245)— — (10,246)
Issuance of common stock for stock compensation plans267 (16,199)— — (16,196)
Issuance of common stock under the employee stock purchase plan24 2,858 — — 2,859 
Stock-based compensation— — 30,698 — — 30,698 
Cash dividends declared ($0.03 per share)
— — — (2,445)— (2,445)
Other comprehensive income— — — — 1,582 1,582 
Net income— — — 37,291 — 37,291 
June 30, 202181,456 $815 $147,670 $375,069 $(1,086)$522,468 
Repurchase of common stock(96)(1)(12,795)— — (12,796)
Issuance of common stock for stock compensation plans286 (18,117)— — (18,114)
Issuance of common stock under the employee stock purchase plan24 — 2,639 — — 2,639 
Stock-based compensation— — 28,701 — — 28,701 
Cash dividends declared ($0.03 per share)
— — — (2,451)— (2,451)
Other comprehensive (loss)— — — — (4,347)(4,347)
Net (loss)— — — (56,468)— (56,468)
September 30, 202181,670 $817 $148,098 $316,150 $(5,433)$459,632 

See notes to unaudited condensed consolidated financial statements.
7


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
20212020
Operating activities
Net (loss)$(25,794)$(65,379)
Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation89,483 76,755 
Loss (gain) on capped call transactions7,543 (19,816)
Deferred income taxes(53,638)(43,476)
Amortization of deferred commissions31,388 24,922 
Amortization of debt discount and issuance costs2,025 10,405 
Amortization of intangible assets and depreciation24,030 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 investments96,859 — 
Sales of investments25,123 1,424 
Payments for acquisitions, net of cash acquired(4,993)— 
Investment in property and equipment(7,089)(21,806)
Cash provided by (used in) investing activities42,730 (210,701)
Financing activities
Proceeds from issuance of convertible senior notes— 600,000 
Purchase of capped calls related to convertible senior notes— (51,900)
Payment of debt issuance costs— (14,527)
Proceeds from employee stock purchase plan7,786 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 period171,899 68,363 
Cash and cash equivalents, end of period$116,411 $281,218 

See notes to unaudited condensed consolidated financial statements.
8

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. 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.
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.
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.
9

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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.
10

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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.
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.
11

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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 

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.
12

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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 
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.
13

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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 
14

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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.

15

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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.
16

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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 %
17

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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 %
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 

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.
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.
18

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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.
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, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which 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;
management of our transition to a more subscription-based business model;
variation in demand for our products and services, including among clients in the public sector;
the impact of actual or threatened public health emergencies, such as the Coronavirus (“COVID-19”);
reliance on third-party service providers;
compliance with our debt obligations and covenants;
the potential impact of our convertible senior notes and Capped Call Transactions;
reliance on key personnel;
the relocation of our corporate headquarters;
the continued uncertainties in the global economy;
foreign currency exchange rates;
the potential legal and financial liabilities and reputation damage due to cyber-attacks;
security breaches and security flaws;
our ability to protect our intellectual property rights and costs associated with defending such rights;
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, 2020, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”). Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether from new information, future events, or otherwise.
The forward-looking statements contained in this Quarterly Report represent our views as of October 27, 2021.
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity. Our intelligent technology and scalable architecture enable the world’s leading brands and government agencies to solve problems quickly and transform for tomorrow. Our clients are able to make better decisions and get work done using real-time artificial intelligence (“AI”) and intelligent automation on applications built on the low-code, cloud-native Pega Platform™, enabling our clients to streamline service, increase customer lifetime value, and boost efficiency. Our consulting and client success teams, along with our world-class partners, leverage our Pega Express™ methodology and low code to allow clients to design and deploy critical applications quickly and collaboratively.
Our target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve. Our applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.
20


Cloud Transition
We are transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Until we substantially complete our Cloud Transition, which we expect will occur in 2023, we may experience lower revenue growth and lower operating cash flow growth or negative cash flow. Operating performance and the actual mix of revenue and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.
Coronavirus (“COVID-19”)
As of September 30, 2021, COVID-19 has not had a material impact on our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.
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”) | Increased 22% since September 30, 2020
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 for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and term license ACV. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition.
pega-20210930_g1.gif
Note: Foreign currency exchange rate changes contributed 1-2% to total ACV growth in 2021.
21


Remaining performance obligations (“Backlog”) | Increased 23% since September 30, 2020
Backlog represents expected future revenue from existing non-cancellable contracts.
pega-20210930_g2.gif
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 and the rules and regulations of the SEC for interim financial reporting. The preparation of 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, 2020:
“Critical Accounting Estimates and Significant Judgments” in Item 7; and
“Note 2. Significant Accounting Policies” in Item 8.
There have been no significant changes other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
22


RESULTS OF OPERATIONS
Revenue
Cloud Transition
We are transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Revenue growth has been slower because of this transition. Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract term while revenue from license sales is recognized when the license rights become effective, typically upfront.
(Dollars in thousands)Three Months Ended
September 30,
Change
Nine Months Ended
September 30,
Change
2021202020212020
Pega Cloud$78,369 31 %$54,776 24 %$23,593 43 %$219,520 25 %$147,080 20 %$72,440 49 %
Client Cloud$118,609 46 %$110,602 49 %$8,007 %$488,757 54 %$391,042 55 %$97,715 25 %
Maintenance83,18832%74,67033%8,51811%237,53126%220,58731%16,9448%
Term license35,42114%35,93216%(511)(1)%251,22628%170,45524%80,77147%
Cloud subscription (1)
$196,978 77 %$165,378 73 %$31,600 19 %$708,277 79 %$538,122 75 %$170,155 32 %
Perpetual license2,874 %3,852 %(978)(25)%20,922 %16,568 %4,354 26 %
Consulting56,416 22 %56,721 25 %(305)(1)%166,270 19 %164,227 23 %2,043 %
$256,268 100 %$225,951 100 %$30,317 13 %$895,469 100 %$718,917 100 %$176,552 25 %
(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).
The revenue changes in the three and nine months ended September 30, 2021 generally reflect our Cloud Transition. Other factors impacting our revenue include:
The increases in perpetual and term license revenue were primarily due to several large software license contracts recognized in revenue in the nine months ended September 30, 2021.
An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance. Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than upon the effectiveness of the license rights as term license revenue. In the three months ended September 30, 2021, multi-year committed maintenance contributed $4.8 million to maintenance revenue growth and reduced term revenue growth by $1.0 million. In the nine months ended September 30, 2021, multi-year committed maintenance contributed $12.6 million to maintenance revenue growth and reduced term revenue growth by $22.0 million.
Maintenance renewal rates of higher than 90%.
The changes in consulting revenue in the three and nine months ended September 30, 2021 were primarily due to changes in billable hours. As part of our long-term strategy, we intend to continue growing and leveraging our ecosystem of partners on implementation projects, potentially reducing our future consulting revenue growth.
Gross profit
Three Months Ended
September 30,
Change
Nine Months Ended
September 30,
Change
(Dollars in thousands)2021202020212020
Pega Cloud$52,845 67 %$35,059 64 %$17,786 51 %$147,388 67 %$90,842 62 %$56,546 62 %
Maintenance77,895 94 %69,192 93 %8,703 13 %221,457 93 %203,942 92 %17,515 %
Software license37,639 98 %39,093 98 %(1,454)(4)%270,186 99 %184,669 99 %85,517 46 %
Consulting3,667 %4,808 %(1,141)(24)%5,238 %5,446 %(208)(4)%
$172,046 67 %$148,152 66 %$23,894 16 %$644,269 72 %$484,899 67 %$159,370 33 %
The changes in gross profit and gross profit percent in the three and nine months ended September 30, 2021 were primarily due to our Cloud Transition, revenue growth, and cost-efficiency gains as Pega Cloud grows and scales.
The decrease in consulting gross profit percent in the three months ended September 30, 2021 was due to a decrease in consultant utilization in North America.
23


Operating expenses
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2021202020212020
% of Revenue% of Revenue% of Revenue% of Revenue
Selling and marketing$152,479 59 %$132,053 58 %$20,426 15 %$457,641 51 %$395,684 55 %$61,957 16 %
Research and development$64,728 25 %$60,024 27 %$4,704 %$191,565 21 %$177,620 25 %$13,945 %
General and administrative$20,176 %$17,907 %$2,269 13 %$57,607 %$49,192 %$8,415 17 %
The increases in selling and marketing in the three and nine months ended September 30, 2021 were primarily due to increases in compensation and benefits of $15.8 million and $63.8 million, attributable to increases in headcount, sales commissions, and equity compensation. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.
The increases in research and development in the three and nine months ended September 30, 2021 were primarily due to increases in compensation and benefits of $5.1 million and $16.9 million, attributable to increases in headcount.
The increases in general and administrative in the three and nine months ended September 30, 2021 were primarily due to increases in compensation and benefits of $0.4 million and $3.8 million, attributable to increases in headcount and equity compensation, and increases in legal and other professional services fees of $2.7 million and $6.1 million.
In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to decreases in facilities expenses of $2.1 million and $5.5 million in selling and marketing, $2.0 million and $5.6 million in research and development, and $1.0 million and $2.8 million in general and administrative, in the three and nine months ended September 30, 2021.
Other income (expense), net
(Dollars in thousands)Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
2021202020212020
Foreign currency transaction gain (loss)$518 $4,236 $(3,718)(88)%$(4,983)$2,545 $(7,528)*
Interest income166 243 (77)(32)%555 1,092 (537)(49)%
Interest expense(1,908)(5,956)4,048 68 %(5,747)(13,791)8,044 58 %
(Loss) income on capped call transactions(14,735)18,989 (33,724)*(7,543)19,816 (27,359)*
Other income, net— *108 1,374 (1,266)(92)%

$(15,957)$17,512 $(33,469)*$(17,610)$11,036 $(28,646)*
* not meaningful
The changes in foreign currency transaction gain (loss) in the three and nine months ended September 30, 2021 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.
The decreases in interest income in the three and nine months ended September 30, 2021 were primarily due to declines in market interest rates.
The decreases in interest expense in the three and nine months ended September 30, 2021 were primarily due to our adoption of ASU 2020-06 on January 1, 2021. See "Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.
Interest expense related to the Notes:
Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
(in thousands)2021202020212020
Contractual interest expense (0.75% coupon)
$1,125 $1,125 $— $3,375 $2,700 $675 
Amortization of debt discount— 3,807 (3,807)— 9,060 (9,060)
Amortization of issuance costs677 565 112 2,025 1,345 680 
$1,802 $5,497 $(3,695)$5,400 $13,105 $(7,705)
The decreases in the (loss) income on capped call transactions in the three and nine months ended September 30, 2021, were due to fair value adjustments driven by changes in our stock price.
The decrease in other income, net in the nine months ended September 30, 2021, was due to larger fair value adjustments on equity securities held in our venture investments portfolio in the nine months ended September 30, 2020.
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(Benefit from) income taxes
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2021202020212020
(Benefit from) income taxes$(24,826)$(25,053)$(54,360)$(61,182)
Effective income tax benefit rate68 %48 %
During the nine months ended September 30, 2021, the change in our effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, 2020. The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.
Stock-based compensation increases the variability of our effective tax rates. The impact on our effective tax rate in each period depends on our profitability and the tax deductions from our stock compensation activity, which depend upon our stock price and the award holders' exercise behavior.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended
September 30,
 (in thousands)20212020
Cash provided by (used in):
Operating activities$(5,321)$(26,257)
Investing activities42,730 (210,701)
Financing activities(91,431)449,630 
Effect of exchange rates on cash and cash equivalents(1,466)183 
Net (decrease) increase in cash and cash equivalents$(55,488)$212,855 
(in thousands)
September 30, 2021December 31, 2020
Held by U.S. entities
$267,378 $399,138 
Held by foreign entities
84,470 66,030 
Total cash, cash equivalents, and marketable securities
$351,848 $465,168 
We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months. 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. If we require additional capital resources to grow our business, we may utilize available funds or additional external financing.
If it becomes necessary to repatriate foreign funds, we may have to pay U.S. and foreign taxes upon repatriation. Due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.
Operating activities
We are transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has impacted and is expected to continue to impact the timing of our billings and cash collections. Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective. As client preferences shift in favor of Pega Cloud arrangements, we could experience slower operating cash flow growth, or negative cash flow, in the near term.
The change in cash (used in) operating activities in the nine months ended September 30, 2021 was primarily due to a significant increase in client collections.
Corporate headquarters
In February 2021, we agreed to accelerate our exit from our previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was paid in October 2021. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million. On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.
New Waltham Office
On July 6, 2021, we 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% annually. In addition, we will receive an improvement allowance from the landlord of up to $11.8 million as part of the lease. This lease increased our lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
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Investing activities
The change in cash provided by (used in) investing activities in the nine months ended September 30, 2021 was primarily driven by investments in financial instruments, an acquisition, and a decrease in office space related capital expenditures.
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. In November 2019, and as amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of September 30, 2021, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Item 1 of this Quarterly Report for additional information.
Stock repurchase program
Changes in the remaining stock repurchase authority:
(in thousands)Nine Months Ended
September 30, 2021
December 31, 2020$37,726 
Authorizations (1)
38,467 
Repurchases (2)
(32,188)
September 30, 2021$44,005 
(1) On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining common stock repurchase authority to $60 million.
(2) All purchases under this program have been made on the open market.
Common stock repurchases
Nine Months Ended
September 30,
20212020
(in thousands)SharesAmountSharesAmount
Tax withholdings for net settlement of equity awards462 $59,819 599 $59,613 
Stock repurchase program248 32,188 204 18,828 
710 $92,007 803 $78,441 
During the nine months ended September 30, 2021 and 2020, instead of receiving cash from the equity holders, we withheld shares with a value of $47.1 million and $49.5 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 at any time without prior notice.
Nine Months Ended
September 30,
(in thousands)20212020
Dividend payments to stockholders$7,310 $7,206 
Contractual obligations
As of September 30, 2021, our contractual obligations were:
Payments due by period
(in thousands)Remainder of 202120222023202420252026 and thereafterOtherTotal
Convertible senior notes (1)
$— $4,500 $4,500 $4,500 $601,488 $— $— $614,988 
Purchase obligations (2)
7,386 64,810 18,361 5,271 429 — — 96,257 
Operating lease obligations 961 9,948 19,607 16,482 13,607 58,381 — 118,986 
Liability for uncertain tax positions (3)
— — — — — — 1,677 1,677 
$8,347 $79,258 $42,468 $26,253 $615,524 $58,381 $1,677 $831,908 
(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(3) We are unable to reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
26


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, which partially offsets our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:
Nine Months Ended
September 30,
20212020
(Decrease) increase in revenue(4)%(4)%
(Decrease) increase in net (loss)(9)%(13)%
Remeasurement risk
We experience 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:
Nine Months Ended
September 30,
(in thousands)20212020
Foreign currency gain (loss)$(4,480)$(6,326)
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 September 30, 2021. 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 September 30, 2021.
(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 September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
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, 2020, 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
Common stock repurchased in the three months ended September 30, 2021:
(in thousands, except per share amounts)
Total Number of Shares Purchased (1) (2)
Average 
Price Paid
per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2021 - July 31, 202146$135.62 31$52,603 
August 1, 2021 - August 31, 2021167130.67 34$48,204 
September 1, 2021 - September 30, 2021160138.24 31$44,005 
373$134.52 96
(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2) On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report for additional information.
ITEM 6.     EXHIBITS
Exhibit No.DescriptionIncorporation by ReferenceFiled Herewith
FormExhibitFiling Date
3.110-Q3.1November 4, 2014
3.28-K3.2June 15, 2020
10.110-Q10.1July 28, 2021
10.2**8-K10.1July 9, 2021
31.1X
31.2X
32++X
101.INS
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.
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
X
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document.
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
X
101.LAB
Inline XBRL Taxonomy Label Linkbase Document.
X
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document.
X
104
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.
** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations.
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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:October 27, 2021By:/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)