PEGASYSTEMS INC [PEGA] Filings

10-Q 1 pega-20220630.htm 10-Q pega-20220630

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 June 30, 2022


☐			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, 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 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. 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

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 81,952,276 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 19, 2022.

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 June 30, 2022 and December 31, 2021			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2022 and 2021			6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 5. Other Information			29
Item 6. Exhibits			30

Signature			31

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
	June 30, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	109,275	$	159,965
Marketable securities	187,613		202,814
Total cash, cash equivalents, and marketable securities	296,888		362,779
Accounts receivable	171,556		182,717
Unbilled receivables	201,130		226,714
Other current assets	70,633		68,008
Total current assets	740,207		840,218
Unbilled receivables	115,901		129,789
Goodwill	81,717		81,923
Other long-term assets	320,557		541,601
Total assets	$	1,258,382	$	1,593,531
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	21,465	$	15,281
Accrued expenses	63,120		63,890
Accrued compensation and related expenses	73,945		120,946
Deferred revenue	269,121		275,844
Other current liabilities	7,800		9,443
Total current liabilities	435,451		485,404
Convertible senior notes, net	592,161		590,722
Operating lease liabilities	84,170		87,818
Other long-term liabilities	12,821		13,499
Total liabilities	1,124,603		1,177,443
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively	819		817
Additional paid-in capital	170,251		145,810
(Accumulated deficit) retained earnings	(15,140)		276,449
Accumulated other comprehensive (loss)	(22,151)		(6,988)
Total stockholders’ equity	133,779		416,088
Total liabilities and stockholders’ equity	$	1,258,382	$	1,593,531

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue
Subscription services	$	171,832	$	152,075	$	341,865	$	295,494
Subscription license	41,600		104,296		179,133		215,805
Perpetual license	2,266		12,596		9,706		18,048
Consulting	58,639		56,735		119,940		109,854
Total revenue	274,337		325,702		650,644		639,201
Cost of revenue
Subscription services	36,533		29,046		68,563		57,389
Subscription license	673		585		1,295		1,205
Perpetual license	36		71		70		101
Consulting	57,873		54,829		113,384		108,283
Total cost of revenue	95,115		84,531		183,312		166,978
Gross profit	179,222		241,171		467,332		472,223
Operating expenses
Selling and marketing	157,198		156,423		319,434		305,162
Research and development	74,341		64,395		145,831		126,837
General and administrative	32,723		19,161		68,487		37,431
Total operating expenses	264,262		239,979		533,752		469,430
(Loss) income from operations	(85,040)		1,192		(66,420)		2,793
Foreign currency transaction gain (loss)	1,713		(403)		4,589		(5,501)
Interest income	309		236		516		389
Interest expense	(1,944)		(1,959)		(3,890)		(3,839)
(Loss) income on capped call transactions	(18,945)		26,309		(49,505)		7,192
Other income, net	3,785		—		6,526		106
(Loss) income before provision for (benefit from) income taxes	(100,122)		25,375		(108,184)		1,140
Provision for (benefit from) income taxes	186,174		(11,916)		178,491		(29,534)
Net (loss) income	$	(286,296)	$	37,291	$	(286,675)	$	30,674
(Loss) earnings per share
Basic	$	(3.50)	$	0.46	$	(3.51)	$	0.38
Diluted	$	(3.50)	$	0.43	$	(3.51)	$	0.36
Weighted-average number of common shares outstanding
Basic	81,847		81,316		81,764		81,161
Diluted	81,847		90,320		81,764		86,006

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net (loss) income	$	(286,296)	$	37,291	$	(286,675)	$	30,674
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities	(1,149)		121		(927)		1,131
Foreign currency translation adjustments	(11,466)		1,461		(14,236)		731
Total other comprehensive (loss) income, net of tax	$	(12,615)	$	1,582	$	(15,163)	$	1,862
Comprehensive (loss) income	$	(298,911)	$	38,873	$	(301,838)	$	32,536

See notes to unaudited condensed consolidated financial statements.


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, 2020	80,890	$	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 plans	402	4		(25,513)		—		—		(25,509)
Issuance of common stock under the employee stock purchase plan	24	—		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, 2021	81,246	$	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 plans	267	3		(16,199)		—		—		(16,196)
Issuance of common stock under the employee stock purchase plan	24	1		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, 2021	81,456	$	815	$	147,670	$	375,069	$	(1,086)	$	522,468








December 31, 2021	81,712	$	817	$	145,810	$	276,449	$	(6,988)	$	416,088
Repurchase of common stock	(242)	(2)		(22,581)		—		—		(22,583)
Issuance of common stock for stock compensation plans	297	3		(12,131)		—		—		(12,128)
Issuance of common stock under the employee stock purchase plan	35	—		2,446		—		—		2,446
Stock-based compensation	—	—		28,227		—		—		28,227
Cash dividends declared ($0.03 per share)	—	—		—		(2,455)		—		(2,455)
Other comprehensive (loss)	—	—		—		—		(2,548)		(2,548)
Net (loss)	—	—		—		(379)		—		(379)
March 31, 2022	81,802	$	818	$	141,771	$	273,615	$	(9,536)	$	406,668
Repurchase of common stock	(38)	—		(1,925)		—		—		(1,925)
Issuance of common stock for stock compensation plans	117	1		(3,252)		—		—		(3,251)
Issuance of common stock under the employee stock purchase plan	59	—		2,357		—		—		2,357
Stock-based compensation	—	—		31,300		—		—		31,300
Cash dividends declared ($0.03 per share)	—	—		—		(2,459)		—		(2,459)
Other comprehensive (loss)	—	—		—		—		(12,615)		(12,615)
Net (loss)	—	—		—		(286,296)		—		(286,296)
June 30, 2022	81,940	$	819	$	170,251	$	(15,140)	$	(22,151)	$	133,779

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Six Months Ended June 30,
	2022		2021
Operating activities
Net (loss) income	$	(286,675)	$	30,674
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Stock-based compensation	59,527		60,788
Deferred income taxes	169,105		(28,232)
Loss (gain) on capped call transactions	49,505		(7,192)
Amortization of deferred commissions	28,155		21,202
Lease expense	7,832		5,792
Amortization of intangible assets and depreciation	8,175		15,504
Foreign currency transaction (gain) loss	(4,589)		5,501
Other non-cash	(3,479)		3,543
Change in operating assets and liabilities, net	(32,625)		(88,170)
Cash (used in) provided by operating activities	(5,069)		19,410
Investing activities
Purchases of investments	(38,489)		(51,601)
Proceeds from maturities and called investments	34,912		68,798
Sales of investments	14,839		2,450
Payments for acquisitions, net of cash acquired	(922)		(4,993)
Investment in property and equipment	(11,863)		(4,161)
Cash (used in) provided by investing activities	(1,523)		10,493
Financing activities



Proceeds from employee stock purchase plan	4,803		5,146
Dividend payments to stockholders	(4,908)		(4,865)




Common stock repurchases	(41,086)		(60,998)
Cash (used in) financing activities	(41,191)		(60,717)
Effect of exchange rate changes on cash and cash equivalents	(2,907)		(1,207)
Net (decrease) in cash and cash equivalents	(50,690)		(32,021)
Cash and cash equivalents, beginning of period	159,965		171,899
Cash and cash equivalents, end of period	$	109,275	$	139,878

See notes to unaudited condensed consolidated financial statements.

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, 2021.

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 the full year 2022.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.

NOTE 2. MARKETABLE SECURITIES


	June 30, 2022								December 31, 2021
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	2,989	$	—	$	(60)	$	2,929	$	2,000	$	—	$	(10)	$	1,990
Corporate debt	188,350		—		(3,666)		184,684		201,659		2		(837)		200,824
	$	191,339	$	—	$	(3,726)	$	187,613	$	203,659	$	2	$	(847)	$	202,814

As of June 30, 2022, marketable securities’ maturities ranged from July 2022 to November 2024, with a weighted-average remaining maturity of 0.9 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	June 30, 2022		December 31, 2021
Accounts receivable	$	171,556	$	182,717
Unbilled receivables	201,130		226,714
Long-term unbilled receivables	115,901		129,789
	$	488,587	$	539,220

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)	June 30, 2022
1 year or less	$	201,130	63	%
1-2 years	78,813		25	%
2-5 years	37,088		12	%
	$	317,031	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	June 30, 2022
2022	$	81,887	26	%
2021	142,578		45	%
2020	56,283		18	%
2019	19,928		6	%
2018 and prior	16,355		5	%
	$	317,031	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients accounting for 10% or more of the Company’s total receivables:


	June 30, 2022	December 31, 2021
Client A
Accounts receivable	*	1	%
Unbilled receivables	*	15	%
Total receivables	*	10	%

* 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)	June 30, 2022		December 31, 2021
Contract assets (1)	$	12,149	$	12,530
Long-term contract assets (2)	12,983		10,643
	$	25,132	$	23,173

(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)	June 30, 2022		December 31, 2021
Deferred revenue	$	269,121	$	275,844
Long-term deferred revenue (1)	5,417		5,655
	$	274,538	$	281,499

(1) Included in other long-term liabilities.

The change in deferred revenue in the six months ended June 30, 2022 was primarily due to new billings in advance of revenue recognition offset by $205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	June 30, 2022		December 31, 2021
Deferred commissions (1)	$	123,067	$	135,911

(1) Included in other long-term assets.


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Amortization of deferred commissions (1)	$	10,934	$	9,706	$	28,155	$	21,202

(1) Included in selling and marketing expense.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


	Six Months Ended June 30,
(in thousands)	2022		2021
January 1,	$	81,923	$	79,231
Acquisition	—		2,701
Currency translation adjustments	(206)		241
June 30,	$	81,717	$	82,173

Intangibles

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.


		June 30, 2022
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,082	$	(57,944)	$	5,138
Technology	2-10 years	68,064		(60,211)		7,853
Other	1-5 years	5,361		(5,361)		—
		$	136,507	$	(123,516)	$	12,991

(1) Included in other long-term assets.


		December 31, 2021
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,165	$	(57,342)	$	5,823
Technology	2-10 years	67,142		(58,902)		8,240
Other	1-5 years	5,361		(5,361)		—
		$	135,668	$	(121,605)	$	14,063

(1) Included in other long-term assets.

Amortization of intangible assets:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021			2022		2021
Cost of revenue	$	683	$	629		$	1,312	$	1,258
Selling and marketing	342		373			685		746

	$	1,025	$	1,002		$	1,997	$	2,004

Future estimated intangibles assets amortization:


(in thousands)	June 30, 2022
Remainder of 2022	$	2,098
2023	3,925
2024	3,156
2025	2,611
2026	874
2027	327
	$	12,991

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	June 30, 2022		December 31, 2021
Income tax receivables	$	22,982	$	25,691
Contract assets	12,149		12,530
Other	35,502		29,787
	$	70,633	$	68,008

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets


(in thousands)	June 30, 2022		December 31, 2021
Deferred income taxes	$	6,092	$	180,656
Deferred commissions	123,067		135,911
Right of use assets	80,646		87,521
Capped call transactions	10,459		59,964
Property and equipment	34,886		26,837
Venture investments	16,073		7,648
Intangible assets	12,991		14,063
Contract assets	12,983		10,643
Other	23,360		18,358
	$	320,557	$	541,601

Other current liabilities


(in thousands)	June 30, 2022		December 31, 2021
Operating lease liabilities	$	5,341	$	6,989
Dividends payable	2,459		2,454
	$	7,800	$	9,443

Other long-term liabilities


(in thousands)	June 30, 2022		December 31, 2021
Deferred revenue	$	5,417	$	5,655
Other	7,404		7,844
	$	12,821	$	13,499

NOTE 7. LEASES

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. 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% 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 June 30,				Six Months Ended June 30,
(in thousands)	2022		2021			2022		2021
Fixed lease costs (1)	$	4,965	$	(3,972)		$	10,059	$	(3,672)
Short-term lease costs	787		515			1,594		974
Variable lease costs	727		1,340			1,491		2,727
	$	6,479	$	(2,117)		$	13,144	$	29

(1) The lower fixed lease costs in the six months ended June 30, 2021 was due to the modification of the corporate headquarters lease.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities


(in thousands)	June 30, 2022		December 31, 2021
Right of use assets (1)	$	80,646	$	87,521
Operating lease liabilities (2)	$	5,341	$	6,989
Long-term operating lease liabilities	$	84,170	$	87,818

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.

(2) Included in other current liabilities.

Weighted-average remaining lease term and discount rate for the Company’s leases were:


	June 30, 2022		December 31, 2021
Weighted-average remaining lease term	7.5 years		7.7 years
Weighted-average discount rate (1)	4.2	%	4.4	%

(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)	June 30, 2022
Remainder of 2022	$	(401)
2023	18,837
2024	16,290
2025	14,118
2026	10,507