Company Quick10K Filing
Quick10K
Pegasystems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$68.98 79 $5,440
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-18 Officers, Exhibits
8-K 2019-03-15 Regulation FD, Exhibits
8-K 2019-03-06 Officers, Exhibits
8-K 2019-02-20 Earnings, Exhibits
8-K 2019-02-06 Officers, Exhibits
8-K 2018-12-19 Officers
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-06-28 Shareholder Vote
8-K 2018-06-15 Regulation FD, Exhibits
8-K 2018-06-04 Earnings, Regulation FD, Exhibits
8-K 2018-04-23 Officers
8-K 2018-03-05 Officers, Exhibits
SAN Banco Santander 75,500
OGE Oklahoma Gas & Electric 8,140
PSEC Prospect Capital 2,470
MYGN Myriad Genetics 2,030
HLX Helix Energy Solutions Group 1,110
TG Tredegar 574
INSW International Seaways 568
ALLT Allot Communications 249
GMDA Gamida Cell 196
SNWV Sanuwave Health 0
PEGA 2019-03-31
Part I - Financial Information
Item 1. 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
EX-31.1 q12019_ex-311.htm
EX-31.2 q12019_ex-312.htm
EX-32 q12019_ex-32.htm

Pegasystems Earnings 2019-03-31

PEGA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q12019_10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________
 FORM 10-Q
____________________
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2019
OR
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-11859 
____________________
PEGASYSTEMS INC.
(Exact name of registrant as specified in its charter) 
____________________
Massachusetts
04-2787865
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
One Rogers Street, Cambridge, MA
02142-1209
(Address of principal executive offices)
(Zip Code)
(617) 374-9600
(Registrant’s telephone number, including area code)
____________________
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 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 x
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
There were 78,908,093 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on May 1, 2019.  





PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 
Page
PART I - FINANCIAL INFORMATION
 
 
Item 1. Unaudited Condensed Consolidated Financial Statements
 
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2019 and 2018
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
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


PART I - FINANCIAL INFORMATION
ITEM 1.     UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,367


$
114,422

Marketable securities
91,804


93,001

Total cash, cash equivalents, and marketable securities
202,171

 
207,423

Accounts receivable
135,352


180,872

Unbilled receivables
161,480


172,656

Other current assets
63,731


49,684

Total current assets
562,734

 
610,635

Long-term unbilled receivables
130,494


151,237

Goodwill
72,898


72,858

Other long-term assets
190,433


147,823

Total assets
$
956,559

 
$
982,553

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,559


$
16,487

Accrued expenses
40,947


45,506

Accrued compensation and related expenses
56,349


84,671

Deferred revenue
180,845


185,145

Other current liabilities
12,447

 

Total current liabilities
302,147

 
331,809

Operating lease liabilities
45,325

 

Deferred income tax liabilities
8,319


6,939

Other long-term liabilities
12,339


22,274

Total liabilities
368,130

 
361,022

Stockholders’ equity:
 
 
 
Preferred stock, 1,000 shares authorized; none issued

 

Common stock, 200,000 shares authorized; 78,896 and 78,526 shares issued and outstanding at
March 31, 2019 and December 31, 2018, respectively
789


785

Additional paid-in capital
119,182


123,205

Retained earnings
479,779


510,863

Accumulated other comprehensive loss
(11,321
)
 
(13,322
)
Total stockholders’ equity
588,429

 
621,531

Total liabilities and stockholders’ equity
$
956,559

 
$
982,553


See notes to unaudited condensed consolidated financial statements. 

3


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 
Three Months Ended  
March 31,
 
2019
 
2018
Revenue
 
 
 
Software license
$
63,264

 
$
87,773

Maintenance
67,706

 
64,525

Services
81,576

 
82,884

Total revenue
212,546

 
235,182

Cost of revenue
 
 
 
Software license
1,378

 
1,255

Maintenance
6,335

 
6,082

Services
66,724

 
68,277

Total cost of revenue
74,437

 
75,614

Gross profit
138,109

 
159,568

Operating expenses
 
 
 
Selling and marketing
108,865

 
88,383

Research and development
50,596

 
46,785

General and administrative
12,676

 
16,464

Total operating expenses
172,137

 
151,632

(Loss) income from operations
(34,028
)
 
7,936

Foreign currency transaction loss
(3,712
)
 
(1,085
)
Interest income, net
723

 
764

Other income, net

 
363

(Loss) income before benefit from income taxes
(37,017
)
 
7,978

Benefit from income taxes
(8,300
)
 
(4,222
)
Net (loss) income
$
(28,717
)
 
$
12,200

(Loss) earnings per share
 
 
 
Basic
$
(0.37
)
 
$
0.16

Diluted
$
(0.37
)
 
$
0.15

Weighted-average number of common shares outstanding
 
 
 
Basic
78,584

 
78,236

Diluted
78,584

 
83,102




See notes to unaudited condensed consolidated financial statements.

4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)

 
Three Months Ended  
March 31,
 
2019
 
2018
Net (loss) income
$
(28,717
)
 
$
12,200

Other comprehensive income, net of tax
 
 
 
Unrealized gain (loss) on available-for-sale marketable securities, net of tax
374

 
(188
)
Foreign currency translation adjustments
1,627

 
4,450

Total other comprehensive income, net of tax
2,001

 
4,262

Comprehensive (loss) income
$
(26,716
)
 
$
16,462



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) Income 
 
Total
Stockholders’ Equity
 
Number
of Shares
 
Amount
 
 
 
 
December 31, 2017
78,081

 
$
781

 
$
152,097

 
$
509,697

 
$
(6,705
)
 
$
655,870

Repurchase of common stock
(101
)
 
(1
)
 
(5,688
)
 

 

 
(5,689
)
Issuance of common stock for share-based compensation plans
566

 
5

 
(15,556
)
 

 

 
(15,551
)
Stock-based compensation

 

 
15,109

 

 

 
15,109

Cash dividends declared ($0.12 per share)

 

 

 
(2,355
)
 

 
(2,355
)
Other comprehensive income

 

 

 

 
4,262

 
4,262

Net income

 

 

 
12,200

 

 
12,200

March 31, 2018
78,546

 
$
785

 
$
145,962

 
$
519,542

 
$
(2,443
)
 
$
663,846

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
78,526

 
785

 
123,205

 
510,863

 
(13,322
)
 
621,531

Repurchase of common stock
(144
)
 
(1
)
 
(7,586
)
 

 

 
(7,587
)
Issuance of common stock for share-based compensation plans
514

 
5

 
(14,843
)
 

 

 
(14,838
)
Stock-based compensation

 

 
18,406

 

 

 
18,406

Cash dividends declared ($0.12 per share)

 

 

 
(2,367
)
 

 
(2,367
)
Other comprehensive income

 

 

 

 
2,001

 
2,001

Net loss

 

 

 
(28,717
)
 


 
(28,717
)
March 31, 2019
78,896

 
$
789

 
$
119,182

 
$
479,779

 
$
(11,321
)
 
$
588,429


See notes to unaudited condensed consolidated financial statements.


6


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
Three Months Ended
March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net (loss) income
$
(28,717
)
 
$
12,200

Adjustments to reconcile net (loss) income to cash provided by operating activities:
 
 
 
Stock-based compensation
18,350

 
15,109

Amortization and depreciation
18,774

 
10,322

Foreign currency transaction loss
3,712

 
1,085

Other non-cash
1,471

 
1,137

Change in operating assets and liabilities, net
9,113

 
15,802

Cash provided by operating activities
22,703

 
55,655

Investing activities:


 
 
Purchases of investments
(7,224
)
 
(35,204
)
Proceeds from maturities and called investments
8,548

 
5,995

Other
(2,790
)
 
(2,069
)
Cash used in investing activities
(1,466
)
 
(31,278
)
Financing activities:
 
 
 
Dividend payments to shareholders
(2,363
)
 
(2,344
)
Common stock repurchases
(23,224
)
 
(20,708
)
Cash used in financing activities
(25,587
)
 
(23,052
)
Effect of exchange rate changes on cash and cash equivalents
295

 
2,186

Net (decrease) increase in cash and cash equivalents
(4,055
)
 
3,511

Cash and cash equivalents, beginning of period
114,422

 
162,279

Cash and cash equivalents, end of period
$
110,367

 
$
165,790



See notes to unaudited condensed consolidated financial statements.


7

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 and footnotes 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, 2018.
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.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2019.
2. NEW ACCOUNTING PRONOUNCEMENTS
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codifications 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840 “Leases”.
The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities of $54.2 million. The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.
See Note 9. “Leases” for additional information.
3. MARKETABLE SECURITIES
 
March 31, 2019
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
42,693

 
$
86

 
$
(20
)
 
$
42,759

Corporate bonds
48,966

 
142

 
(63
)
 
49,045

 
$
91,659

 
$
228

 
$
(83
)
 
$
91,804

 
December 31, 2018
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
44,802

 
$
13

 
$
(110
)
 
$
44,705

Corporate bonds
48,499

 
23

 
(226
)
 
48,296

 
$
93,301

 
$
36

 
$
(336
)
 
$
93,001

As of March 31, 2019, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.
As of March 31, 2019, maturities of marketable securities ranged from April 2019 to August 2022, with a weighted-average remaining maturity of approximately 1.4 years.

8

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



4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
March 31, 2019
 
December 31, 2018
Accounts receivable
$
135,352

 
$
180,872

Unbilled receivables
161,480

 
172,656

Long-term unbilled receivables
130,494

 
151,237


$
427,326

 
$
504,765

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
As of March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was not material.
Unbilled receivables are expected to be billed in the future as follows:
(Dollars in thousands)
March 31, 2019
1 year or less
$
161,480

55
%
1-2 years
86,496

30
%
2-5 years
43,998

15
%
 
$
291,974

100
%
Contract assets and deferred revenue
(in thousands)
March 31, 2019
 
December 31, 2018
Contract assets (1)
$
3,380

 
$
3,711

Long-term contract assets (2)
1,818

 
2,543

 
$
5,198

 
$
6,254

Deferred revenue
$
180,845

 
$
185,145

Long-term deferred revenue (3)
5,866

 
5,344

 
$
186,711

 
$
190,489

(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.
Contract assets are amounts under client contracts where revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.
The change in deferred revenue in the three months ended March 31, 2019 was primarily due to $89.4 million of revenue recognized, excluding the impact of netting contract assets and deferred revenue at the contract level, during the period that was included in deferred revenue at December 31, 2018, partially offset by new billings in advance of revenue recognition.
5. DEFERRED CONTRACT COSTS
The Company recognizes an asset for the incremental costs of obtaining a client contract, which primarily relate to sales commissions, if the Company expects to benefit from those costs for more than one year. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average 5 years.
(in thousands)
March 31, 2019
 
December 31, 2018
Deferred contract costs (1)
$
64,869

 
$
64,367

(1) Included in other long-term assets.
 
Three Months Ended  
March 31,
(in thousands)
2019
 
2018
Amortization of deferred contract costs (1)
$
8,301

 
$
3,789

(1) Included in selling and marketing expenses.

9

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



6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill was:
(in thousands)
Three Months Ended
March 31,
2019
Balance as of January 1,
$
72,858

Currency translation adjustments
40

Balance as of March 31,
$
72,898

Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
 
 
 
March 31, 2019
(in thousands)
Useful Lives
 
Cost
 
Accumulated
Amortization
 
Net Book Value (1)
Client-related intangibles
4-10 years
 
$
63,136

 
$
(52,839
)
 
$
10,297

Technology
2-10 years
 
59,742

 
(51,730
)
 
8,012

Other
1 - 5 years
 
5,361

 
(5,361
)
 

 
 
 
$
128,239

 
$
(109,930
)
 
$
18,309

(1) Included in other long-term assets.
 
 
 
December 31, 2018
(in thousands)
Useful Lives
 
Cost
 
Accumulated Amortization
 
Net Book Value (1)
Client-related intangibles
4-10 years
 
$
63,115

 
$
(51,224
)
 
$
11,891

Technology
2-10 years
 
59,742

 
(50,398
)
 
9,344

Other
1 - 5 years
 
5,361

 
(5,361
)
 

 
 
 
$
128,218

 
$
(106,983
)
 
$
21,235

(1) Included in other long-term assets.
Amortization of intangible assets was:
(in thousands)
Three Months Ended  
March 31,
2019
 
2018
Cost of revenue
$
1,332

 
$
1,232

Selling and marketing
1,603

 
1,605

 
$
2,935

 
$
2,837

7. ACCRUED EXPENSES
(in thousands)
March 31, 2019
 
December 31, 2018
Outside professional services expenses
$
8,815

 
$
10,367

Income and other taxes
7,954

 
10,387

Marketing and sales program expenses
8,318

 
5,860

Dividends payable
2,367

 
2,363

Employee-related expenses
5,432

 
3,536

Other
8,061

 
12,993

 
$
40,947

 
$
45,506

8. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, and investments in privately-held companies 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.

10

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



As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:
Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - significant other inputs that are observable either directly or indirectly; and
Level 3 - significant unobservable inputs 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 to minimize the use of unobservable inputs when determining fair value.
The Company’s cash equivalents are composed of money market funds and time deposits, which are classified within Level 1 and Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s investments in privately-held companies are classified within Level 3 of the fair value hierarchy.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between levels during the three months ended March 31, 2019.
The Company’s assets and liabilities measured at fair value on a recurring basis were:
 
March 31, 2019
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
12,401

 
$
10,062

 
$

 
$
22,463

Marketable securities:
 
 
 
 
 
 
 
Municipal bonds
$

 
$
42,759

 
$

 
$
42,759

Corporate bonds

 
49,045

 

 
49,045

Total marketable securities
$

 
$
91,804

 
$

 
$
91,804

Investments in privately-held companies (1)
$

 
$

 
$
3,390

 
$
3,390

(1) Included in other long-term assets.
 
December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
10,155

 
$
10,000

 
$

 
$
20,155

Marketable securities:
 
 
 
 
 
 
 
Municipal bonds
$

 
$
44,705

 
$

 
$
44,705

Corporate bonds

 
48,296

 

 
48,296

Total marketable securities
$

 
$
93,001

 
$

 
$
93,001

Investments in privately-held companies (1)
$

 
$

 
$
3,390

 
$
3,390

(1) Included in other long-term assets.
For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates fair value due to the relatively short maturity of these items.
9. LEASES
The Company’s leases are primarily for office space used in the ordinary course of business.
Accounting policy
All the Company’s leases are operating leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term, if the Company is reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

11

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



Expense
 
Three Months Ended
March 31,
(in thousands)
2019
Operating lease costs
$
4,300

Variable lease costs (1)
1,321

 
$
5,621

(1) Lease costs that are not fixed at lease commencement.
Right of use assets and lease liabilities
(in thousands)
March 31, 2019
Right of use assets (1)
$
46,464

Lease liabilities (2)
$
12,447

Long-term lease liabilities
$
45,325

(1) An asset that 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.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
 
March 31, 2019
Weighted-average remaining lease term
4.3 years

Weighted-average discount rate (1)
5.7
%
(1) The rate implicit in the lease is not readily determinable in most of the Company’s leases, and 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 at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Maturities of lease liabilities were:
(in thousands)
March 31, 2019
Remainder of 2019
$
11,324

2020
15,784

2021
13,764

2022
12,761

2023
11,604

Total lease payments
65,237

Less: imputed interest (1)
(7,465
)
 
$
57,772

(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 as a result of a lease reassessment event.
As of December 31, 2018, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as determined prior to the adoption of ASC 842 were:
(in thousands)
Operating Leases (1)
2019
$
15,993

2020
14,807

2021
13,262

2022
12,279

2023
11,084

 
$
67,425

(1) Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the Company has vacated pursuant to its restructuring activities.

12

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



Cash flow information
 
Three Months Ended
March 31,
(in thousands)
2019
Cash paid for leases
5,197

Right of use assets recognized for new leases (non-cash)
8,034

10. REVENUE
Geographic revenue
 
Three Months Ended  
March 31,
(Dollars in thousands)
2019
 
2018
U.S.
$
103,991

48
%
 
$
113,985

48
%
Other Americas
28,829

14
%
 
17,715

8
%
United Kingdom (“U.K.”)
24,549

12
%
 
26,094

11
%
Europe (excluding U.K.), Middle East, and Africa
34,186

16
%
 
31,826

14
%
Asia-Pacific
20,991

10
%
 
45,562

19
%
 
$
212,546

100
%
 
$
235,182

100
%
Revenue streams
 
Three Months Ended  
March 31,
(in thousands)
2019
 
2018
Perpetual license
$
14,950

 
$
23,078

Term license
48,314

 
64,695

Revenue recognized at a point in time
63,264

 
87,773

Maintenance
67,706

 
64,525

Cloud
27,758

 
15,582

Consulting
53,818

 
67,302

Revenue recognized over time
149,282

 
147,409

 
$
212,546

 
$
235,182

(in thousands)
Three Months Ended  
March 31,
2019
 
2018
Term license
$
48,314

 
$
64,695

Cloud
27,758

 
15,582

Maintenance
67,706

 
64,525

Subscription (1)
143,778

 
144,802

Perpetual license
14,950

 
23,078

Consulting
53,818

 
67,302

 
$
212,546

 
$
235,182

(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

13

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



Remaining performance obligations
Revenue recognition timing on existing contracts:
 
March 31, 2019
(Dollars in thousands)
Perpetual license
 
Term License
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
10,263

 
$
44,404

 
$
187,324

 
$
115,548

 
$
13,251

 
$
370,790

58
%
1-2 years
998

 
4,274

 
9,350

 
91,539

 
1,363

 
107,524

17
%
2-3 years
2,180

 
756

 
4,438

 
71,509

 
473

 
79,356

13
%
Greater than 3 years

 
135

 
2,008

 
72,742

 
27

 
74,912

12
%
 
$
13,441

 
$
49,569

 
$
203,120

 
$
351,338

 
$
15,114

 
$
632,582

100
%
 
March 31, 2018
(Dollars in thousands)
Perpetual license
 
Term License
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
33,859

 
$
21,087

 
$
156,702

 
$
47,764

 
$
9,403

 
$
268,815

59
%
1-2 years
14,106

 
7,877

 
21,381

 
52,849

 
1,098

 
97,311

21
%
2-3 years
1,204

 
5,634

 
4,924

 
37,844

 

 
49,606

11
%
Greater than 3 years
382

 
853

 
1,825

 
40,478

 

 
43,538

9
%
 
$
49,551

 
$
35,451

 
$
184,832

 
$
178,935

 
$
10,501

 
$
459,270

100
%
The above amounts include contracts that have an original expected duration of one year or less.
11. STOCK-BASED COMPENSATION
Expense
 
Three Months Ended  
March 31,
(in thousands)
2019
 
2018
Cost of revenues
$
4,519


$
3,701

Selling and marketing
7,374


4,658

Research and development
4,560


3,637

General and administrative
1,897


3,113

 
$
18,350


$
15,109

Income tax benefit
$
(3,740
)

$
(3,141
)
The Company recognizes stock-based compensation using the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of March 31, 2019, the Company had $114.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested restricted stock units (“RSUs”) and stock options. These amounts are expected to be recognized over a weighted-average period of 2.3 years.
Grants
The Company granted the following stock-based compensation awards:
 
Three Months Ended
March 31,
 
2019
(in thousands)
Shares
 
Total Fair Value
RSUs
839

 
$
53,184

Non-qualified stock options
1,770

 
$
33,344

RSU vestings and stock option exercises
During the three months ended March 31, 2019, 0.5 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.

14

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



12. INCOME TAXES
Effective income tax rate
 
Three Months Ended
March 31,
(Dollars in thousands)
2019
 
2018
Benefit from income taxes
$
(8,300
)
 
$
(4,222
)
Effective income tax rate
22
%
 
(53
)%
During the three months ended March 31, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.
13. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.
The calculation of the basic and diluted earnings per share was:
 
Three Months Ended  
March 31,
(in thousands, except per share amounts)
2019
 
2018
Basic
 
 
 
Net (loss) income
$
(28,717
)
 
$
12,200

Weighted-average common shares outstanding
78,584


78,236

(Loss) earnings per share, basic
$
(0.37
)
 
$
0.16

 
 
 
 
Diluted
 
 
 
Net (loss) income
$
(28,717
)
 
$
12,200

Weighted-average effect of dilutive securities:
 
 
 
Stock options

 
3,119

RSUs

 
1,747

Effect of dilutive securities

 
4,866

Weighted-average common shares outstanding, assuming dilution
78,584

 
83,102

(Loss) earnings per share, diluted
$
(0.37
)
 
$
0.15

 
 
 
 
Outstanding anti-dilutive stock options and RSUs (1)
5,563

 
397

(1) Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.

15


ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, the timing of revenue recognition, and are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services, reliance on third party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches, and management of our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.
BUSINESS OVERVIEW
We develop, market, license, and support enterprise software applications that help organizations transform the way they engage with their customers and process and complete work across their enterprise. We license our no-code Pega Platform™ for rapid application development to clients that wish to build and extend their own business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified no-code Pega Platform, empowering businesses to quickly design, extend, and scale their enterprise applications to meet strategic business needs.
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.
Performance metrics
We utilize a number of different performance measures in analyzing and assessing our overall performance, making operating decisions, and forecasting and planning for future periods.
(Dollars in thousands,
except per share amounts)
Three Months Ended  
March 31,
 
Change
2019
 
2018
 
Total revenue
$
212,546

 
$
235,182

 
$
(22,636
)
(10
)%
Subscription revenue (1)
$
143,778

 
$
144,802

 
$
(1,024
)
(1
)%
Net (loss) income
$
(28,717
)
 
$
12,200

 
$
(40,917
)
*

(Loss) earnings per share, diluted
$
(0.37
)
 
$
0.15

 
$
(0.52
)
*

* not meaningful  
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.


16


Annual Contract Value (“ACV”) (1) 
The change in ACV measures the growth and predictability of future cash flows from Pega cloud and client cloud committed arrangements as of the end of the particular reporting period.
acvtimes5619a02.jpg
 
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Pega Cloud ACV
$
128,636

 
$
72,966

 
$
55,670

76
%
Client Cloud ACV
462,130

 
421,159

 
40,971

10
%
Total ACV
$
590,766

 
$
494,125

 
$
96,641

20
%
(1) ACV, as of a given date, is the sum of the following two components:
Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting for Client Cloud arrangements
Pega Cloud: the total of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.
Remaining performance obligations
Revenue recognition timing on existing contracts:
 
March 31, 2019
(Dollars in thousands)
Perpetual license
 
Term license
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
10,263

 
$
44,404

 
$
187,324

 
$
115,548

 
$
13,251

 
$
370,790

58
%
1-2 years
998

 
4,274

 
9,350

 
91,539

 
1,363

 
107,524

17
%
2-3 years
2,180

 
756

 
4,438

 
71,509

 
473

 
79,356

13
%
Greater than 3 years

 
135

 
2,008

 
72,742

 
27

 
74,912

12
%
 
$
13,441

 
$
49,569

 
$
203,120

 
$
351,338

 
$
15,114

 
$
632,582

100
%
 
March 31, 2018
(Dollars in thousands)
Perpetual license
 
Term license
 
Maintenance
 
Cloud
 
Consulting
 
Total
1 year or less
$
33,859

 
$
21,087

 
$
156,702

 
$
47,764

 
$
9,403

 
$
268,815

59
%
1-2 years
14,106

 
7,877

 
21,381

 
52,849

 
1,098

 
97,311

21
%
2-3 years
1,204

 
5,634

 
4,924

 
37,844

 

 
49,606

11
%
Greater than 3 years
382

 
853

 
1,825

 
40,478

 

 
43,538

9
%
 
$
49,551

 
$
35,451

 
$
184,832

 
$
178,935

 
$
10,501

 
$
459,270

100
%
The above amounts include contracts that have an original expected duration of one year or less.
CRITICAL ACCOUNTING POLICES
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 in accordance with accounting principles generally accepted in the United States

17


(“U.S.”) 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, and 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 available information.
For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2018:
“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data”.
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
RESULTS OF OPERATIONS
Revenue
(Dollars in thousands)
Three Months Ended  
March 31,
 
Change
2019
 
2018
 
Term license
$
48,314

23
%
 
$
64,695

28
%
 
$
(16,381
)
(25
)%
Cloud
27,758

13
%
 
15,582

7
%
 
12,176

78
 %
Maintenance
67,706

32
%
 
64,525

27
%
 
3,181

5
 %
Subscription revenue (1)
143,778

68
%
 
144,802

62
%
 
(1,024
)
(1
)%
Perpetual license
14,950

7
%
 
23,078

10
%
 
(8,128
)
(35
)%
Consulting
53,818

25
%
 
67,302

28
%
 
(13,484
)
(20
)%
 
$
212,546

100
%
 
$
235,182

100
%
 
$
(22,636
)
(10
)%
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
Our license revenue is derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software applications.
We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud arrangements, which could result in slower total revenue growth in the near term. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
Subscription revenue
The decrease in term license revenue in the three months ended March 31, 2019 was primarily due to lower average revenue per arrangement. The increase in cloud revenue in the three months ended March 31, 2019 reflects the shift in client preferences to cloud arrangements from other types of arrangements.
The increase in maintenance revenue was primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90%.
Perpetual license
The decrease in perpetual license revenue in the three months ended March 31, 2019 reflects the shift in client preferences in favor of our cloud offerings and away from perpetual license arrangements.
Consulting
Our consulting revenue fluctuates depending upon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners. The decrease in consulting revenue in the three months ended March 31, 2019 was primarily due to a decrease in billable hours.

18


Gross profit
 
Three Months Ended  
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Software license
$
61,886

98
%
 
$
86,518

99
%
 
$
(24,632
)
(28
)%
Maintenance
61,371

91
%
 
58,443

91
%
 
2,928

5
 %
Cloud
14,460

52
%
 
7,861

50
%
 
6,599

84
 %
Consulting
392

1
%
 
6,746

10
%
 
(6,354
)
(94
)%
 
$
138,109

65
%
 
$
159,568

68
%
 
$
(21,459
)
(13
)%
The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
The decrease in total gross profit in the three months ended March 31, 2019 was primarily due to the decrease in term and perpetual license revenue reflecting the shift in client preferences toward our cloud offerings.
The decrease in total gross profit percent in the three months ended March 31, 2019 was driven by a shift in favor of cloud arrangements, which are lower margin than our term and perpetual license revenue streams. The increase in cloud gross profit percent was driven by cost efficiency gains as our cloud business continues to grow and scale. The decrease in consulting gross profit percent was driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project which began in the second half of 2016 and an increase in consulting resource availability in Europe as we continue growing and leveraging our partner network.
Operating expenses
Selling and marketing
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Selling and marketing (1)
$
108,865

 
$
88,383

 
$
20,482

23
%
As a percent of total revenue
51
%
 
38
%
 
 
 
Selling and marketing headcount,
end of period
1,282

 
1,082

 
200

18
%
(1) Includes compensation, benefits, and other headcount-related expenses as well as advertising, promotions, trade shows, seminars, and the amortization of client-related intangibles.
The increase in the three months ended March 31, 2019 was primarily due to an increase in compensation and benefits of $17.7 million, attributable to increased headcount, and an increase of $4.5 million in deferred contract commission amortization. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.
Research and development
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Research and development (1)
$
50,596

 
$
46,785

 
$
3,811

8
%
As a percent of total revenue
24
%
 
20
%
 
 
 
Research and development headcount,
end of period
1,638

 
1,602

 
36

2
%
(1) Includes compensation, benefits, contracted services, and other headcount-related expenses associated with the development of our products, as well as enhancements and design changes to existing products and the integration of acquired technologies.
The increase in the three months ended March 31, 2019 was primarily due to an increase in compensation and benefits of $2.1 million, attributable to an increase in headcount, and an increase of $1.6 million in cloud hosting expenses as we expand our cloud-focused research and development activities.

19


General and administrative
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
General and administrative (1)
$
12,676

 
$
16,464

 
$
(3,788
)
(23
)%
As a percent of total revenue
6
%
 
7
%
 
 
 
General and administrative headcount,
end of period (2)
373

 
299

 
74

25
 %
(1) Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. Also includes accounting, legal, and other professional consulting and administrative fees. (2) The headcount includes employees in information technology and corporate services departments, whose costs are partially allocated to other operating expense areas.
The decrease in the three months ended March 31, 2019 was primarily due to a decrease in compensation and benefits of $1.2 million, due to a decrease in equity compensation, and a decrease of $1.9 million in legal and other professional services fees. Despite the headcount increase, associated compensation and benefits did not increase because these costs are primarily allocated to other operating expense areas.
Stock-based compensation
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Cost of revenues
$
4,519

 
$
3,701

 
$
818

22
 %
Selling and marketing
7,374

 
4,658

 
2,716

58
 %
Research and development
4,560

 
3,637

 
923

25
 %
General and administrative
1,897

 
3,113

 
(1,216
)
(39
)%
 
$
18,350

 
$
15,109

 
$
3,241

21
 %
Income tax benefit
$
(3,740
)
 
$
(3,141
)
 
$
(599
)
19
 %
The increase in the three months ended March 31, 2019 was primarily due to the increased value of our annual periodic equity awards granted in March 2019 and 2018. These awards generally have a five-year vesting schedule.
Non-operating (expense) income, net
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Foreign currency transaction loss
$
(3,712
)
 
$
(1,085
)
 
$
(2,627
)
242
 %
Interest income, net
723

 
764

 
(41
)
(5
)%
Other income, net

 
363

 
(363
)
(100
)%

$
(2,989
)
 
$
42

 
$
(3,031
)
*

* not meaningful
The change in foreign currency transaction loss was primarily due to unrealized losses on foreign currency denominated cash and receivables of our U.K subsidiary due to fluctuations in foreign currency exchange rates as the British Pound strengthened against the Euro and U.S. dollar.
Benefit from income taxes
 
Three Months Ended
March 31,
 
Change
(Dollars in thousands)
2019
 
2018
 
Benefit from income taxes
$
(8,300
)
 
$
(4,222
)
 
$
(4,078
)
97
%
Effective income tax rate
22
%
 
(53
)%
 
 
 
The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, as the amount of excess tax benefits from stock-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU vestings, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.
During the three months ended March 31, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.

20



LIQUIDITY AND CAPITAL RESOURCES
 
Three Months Ended
March 31,
 (in thousands)
2019
 
2018
Cash provided by (used in):
 
 
 
Operating activities
$
22,703

 
$
55,655

Investing activities
(1,466
)
 
(31,278
)
Financing activities
(25,587
)
 
(23,052
)
Effect of exchange rates on cash and cash equivalents
295

 
2,186

Net (decrease) increase in cash and cash equivalents
$
(4,055
)
 
$
3,511

(in thousands)
March 31, 2019
 
December 31, 2018
Held by U.S. entities
$
141,051

 
$
143,533

Held by foreign entities
61,120

 
63,890

Total cash, cash equivalents, and marketable securities
$
202,171

 
$
207,423

We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, quarterly cash dividends, and stock repurchases for at least the next 12 months.
If it became necessary to repatriate foreign funds, we may be required to pay U.S. state and local taxes, as well as foreign taxes, upon repatriation. Due to the complexity of income tax laws and regulations, and the effects of the Tax Reform Act, it is impracticable to estimate the amount of taxes we would have to pay.
Cash provided by operating activities
As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth in the near term. Cash from cloud arrangements is generally collected throughout the service period of three to five years, while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective.
The primary driver during the three months ended March 31, 2019 was $78.1 million in cash generated from client receivables, largely due to cash collections and the timing of billings.
Cash used in investing activities
Cash used in investing activities is primarily driven by the timing of investment maturities and purchases of new investments.
Cash used in financing activities
We used cash primarily for repurchases of our common stock under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.
Stock repurchase program (1) 
The changes in the remaining stock repurchase authority was:
 
Three Months Ended
March 31,
(in thousands)
2019
January 1
$
6,620

Authorizations (2)
60,000

Repurchases
(7,586
)
March 31,
$
59,034

(1) Purchases under these programs have been made on the open market. (2) On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020.

21


Common stock repurchases
 
Three Months Ended
March 31,
 
2019
 
2018
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
Tax withholdings for net settlement of equity awards
232

 
$
14,838

 
270

 
$
15,575

Stock repurchase program (1)
 
 
 
 
 
 
 
Repurchases paid
141

 
7,387

 
89

 
4,998

Repurchases unsettled at period end
3

 
199

 
12

 
690

Activity in period (2)
376

 
$
22,424

 
371

 
$
21,263

(1) Represents activity under our publicly announced stock repurchase programs. (2) During the three months ended March 31, 2019 and 2018, instead of receiving cash from the equity holders, we withheld shares with a value of $12.2 million and $11.2 million, respectively, for the exercise price of options. These amounts have been excluded from the table above.
Dividends
 
Three Months Ended
March 31,
(in thousands)
2019
 
2018
Dividend payments to shareholders
$
2,363

 
$
2,344

It is our current intention 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.
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes during the three months ended March 31, 2019 to the market risk exposure disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of March 31, 2019. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2019.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22


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, 2018. These risk factors could materially affect our business, financial condition, and future results and could 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 from time to time.
There have been no material changes during the three months ended March 31, 2019 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding our repurchases of our common stock during the three months ended March 31, 2019.