PEGASYSTEMS INC [PEGA] Filings

10-Q 1 pega-20240630.htm 10-Q pega-20240630

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, 2024


☐			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 85,409,645 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 17, 2024.

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, 2024 and December 31, 2023			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023			4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2024 and 2023			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2024 and 2023			6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 5. Other Information			30
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, 2024		December 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	258,257	$	229,902
Marketable securities	406,819		193,436
Total cash, cash equivalents, and marketable securities	665,076		423,338
Accounts receivable, net	165,723		300,173
Unbilled receivables, net	164,533		237,379
Other current assets	76,323		68,137
Total current assets	1,071,655		1,029,027
Long-term unbilled receivables, net	81,218		85,402
Goodwill	81,410		81,611
Other long-term assets	302,249		314,696
Total assets	$	1,536,532	$	1,510,736
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,682	$	11,290
Accrued expenses	44,875		39,941
Accrued compensation and related expenses	81,110		126,640
Deferred revenue	352,618		377,845
Convertible senior notes, net	500,604		—
Other current liabilities	20,677		21,343
Total current liabilities	1,016,566		577,059
Long-term convertible senior notes, net	—		499,368
Long-term operating lease liabilities	70,202		66,901
Other long-term liabilities	14,362		13,570
Total liabilities	1,101,130		1,156,898
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 85,369 and 83,840 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively	854		838
Additional paid-in capital	473,030		379,584
(Accumulated deficit)	(14,216)		(8,705)
Accumulated other comprehensive (loss)	(24,266)		(17,879)
Total stockholders’ equity	435,402		353,838
Total liabilities and stockholders’ equity	$	1,536,532	$	1,510,736

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,
	2024		2023		2024		2023
Revenue
Subscription services	$	214,430	$	197,105	$	426,333	$	384,614
Subscription license	84,647		41,197		147,985		125,724
Consulting	52,040		58,387		106,087		111,420
Perpetual license	36		1,579		895		1,982
Total revenue	351,153		298,268		681,300		623,740
Cost of revenue
Subscription services	36,238		36,783		72,062		73,647
Subscription license	477		623		1,120		1,342
Consulting	60,231		58,710		118,413		119,058
Perpetual license	—		24		9		27
Total cost of revenue	96,946		96,140		191,604		194,074
Gross profit	254,207		202,128		489,696		429,666
Operating expenses
Selling and marketing	139,761		143,858		267,456		293,655
Research and development	75,425		73,931		147,538		149,307
General and administrative	25,420		23,462		48,947		46,572
Litigation settlement, net of recoveries	—		—		32,403		—
Restructuring	635		2,167		798		3,628
Total operating expenses	241,241		243,418		497,142		493,162
Income (loss) from operations	12,966		(41,290)		(7,446)		(63,496)
Foreign currency transaction gain (loss)	437		(3,290)		(2,825)		(5,965)
Interest income	6,785		1,814		12,066		3,299
Interest expense	(1,656)		(1,778)		(3,408)		(3,696)
(Loss) income on capped call transactions	(3,277)		(1,361)		22		1,845
Other income, net	—		5,702		1,684		12,285
Income (loss) before provision for income taxes	15,255		(40,203)		93		(55,728)
Provision for income taxes	8,642		6,601		5,604		11,850
Net income (loss)	$	6,613	$	(46,804)	$	(5,511)	$	(67,578)
Earnings (loss) per share
Basic	$	0.08	$	(0.56)	$	(0.07)	$	(0.82)
Diluted	$	0.07	$	(0.56)	$	(0.07)	$	(0.82)
Weighted-average number of common shares outstanding
Basic	85,157		83,039		84,712		82,823
Diluted	88,500		83,039		84,712		82,823

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net income (loss)	$	6,613	$	(46,804)	$	(5,511)	$	(67,578)
Other comprehensive (loss) income, net of tax
Unrealized (loss) on available-for-sale securities	(72)		(195)		(818)		(241)
Foreign currency translation adjustments	(2,142)		361		(5,569)		1,950
Total other comprehensive (loss) income, net of tax	(2,214)		166		(6,387)		1,709
Comprehensive income (loss)	$	4,399	$	(46,638)	$	(11,898)	$	(65,869)

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		(Accumulated deficit)		Accumulated other comprehensive (loss)		Total stockholders’ equity
	Number of shares	Amount
December 31, 2022	82,436	$	824	$	229,602	$	(76,513)	$	(23,070)	$	130,843

Issuance of common stock for stock compensation plans	452	4		668		—		—		672
Issuance of common stock under the employee stock purchase plan	52	1		2,142		—		—		2,143
Stock-based compensation	—	—		42,557		—		—		42,557
Cash dividends declared ($0.03 per share)	—	—		(2,488)		—		—		(2,488)
Other comprehensive income	—	—		—		—		1,543		1,543
Net (loss)	—	—		—		(20,774)		—		(20,774)
March 31, 2023	82,940	$	829	$	272,481	$	(97,287)	$	(21,527)	$	154,496

Issuance of common stock for stock compensation plans	225	2		1,824		—		—		1,826
Issuance of common stock under the employee stock purchase plan	47	1		1,980		—		—		1,981
Stock-based compensation	—	—		36,227		—		—		36,227
Cash dividends declared ($0.03 per share)	—	—		(2,496)		—		—		(2,496)
Other comprehensive income	—	—		—		—		166		166
Net (loss)	—	—		—		(46,804)		—		(46,804)
June 30, 2023	83,212	$	832	$	310,016	$	(144,091)	$	(21,361)	$	145,396









December 31, 2023	83,840	$	838	$	379,584	$	(8,705)	$	(17,879)	$	353,838

Issuance of common stock for stock compensation plans	1,139	12		18,644		—		—		18,656
Issuance of common stock under the employee stock purchase plan	32	—		1,758		—		—		1,758
Stock-based compensation	—	—		34,781		—		—		34,781
Cash dividends declared ($0.03 per share)	—	—		(2,550)		—		—		(2,550)
Other comprehensive (loss)	—	—		—		—		(4,173)		(4,173)
Net (loss)	—	—		—		(12,124)		—		(12,124)
March 31, 2024	85,011	$	850	$	432,217	$	(20,829)	$	(22,052)	$	390,186

Issuance of common stock for stock compensation plans	326	4		5,481		—		—		5,485
Issuance of common stock under the employee stock purchase plan	32	—		1,669		—		—		1,669
Stock-based compensation	—	—		36,224		—		—		36,224
Cash dividends declared ($0.03 per share)	—	—		(2,561)		—		—		(2,561)
Other comprehensive (loss)	—	—		—		—		(2,214)		(2,214)
Net income	—	—		—		6,613		—		6,613
June 30, 2024	85,369	$	854	$	473,030	$	(14,216)	$	(24,266)	$	435,402

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Six Months Ended June 30,
	2024		2023
Operating activities
Net (loss)	$	(5,511)	$	(67,578)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation	71,005		78,784
Amortization of deferred commissions	32,276		29,027
Amortization of intangible assets and depreciation	8,812		9,553
Lease expense	7,844		8,186
Foreign currency transaction loss	2,825		5,965
(Gain) on capped call transactions	(22)		(1,845)
Deferred income taxes	232		(136)
(Gain) on investments	(1,628)		(4,430)
(Gain) on repurchases of convertible senior notes	—		(7,855)
Other non-cash	(5,056)		2,122
Change in operating assets and liabilities, net	109,466		61,959
Cash provided by operating activities	220,243		113,752
Investing activities
Purchases of investments	(291,810)		(69,662)
Proceeds from maturities and called investments	83,967		88,849
Sales of investments	—		10,725

Investment in property and equipment	(1,857)		(13,933)
Cash (used in) provided by investing activities	(209,700)		15,979
Financing activities
Repurchases of convertible senior notes	—		(88,989)
Dividend payments to stockholders	(5,065)		(4,962)


Proceeds from employee stock plans	29,928		8,044
Common stock repurchases for tax withholdings for net settlement of equity awards	(2,360)		(1,422)


Other	—		341
Cash provided by (used in) financing activities	22,503		(86,988)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(2,842)		1,010
Net increase in cash, cash equivalents, and restricted cash	30,204		43,753
Cash, cash equivalents, and restricted cash, beginning of period	232,827		145,054
Cash, cash equivalents, and restricted cash, end of period	$	263,031	$	188,807

Cash and cash equivalents	$	258,257	$	186,874
Restricted cash included in other current assets	768		—
Restricted cash included in other long-term assets	4,006		1,933
Total cash, cash equivalents, and restricted cash	$	263,031	$	188,807

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, 2023.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for 2024.

NOTE 2. MARKETABLE SECURITIES


	June 30, 2024								December 31, 2023
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	12,942	$	—	$	(17)	$	12,925	$	11,471	$	33	$	(1)	$	11,503
Corporate debt	394,521		1		(628)		393,894		181,960		200		(227)		181,933
	$	407,463	$	1	$	(645)	$	406,819	$	193,431	$	233	$	(228)	$	193,436

As of June 30, 2024, marketable securities’ maturities ranged from July 2024 to January 2026, with a weighted-average remaining maturity of 0.4 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	June 30, 2024		December 31, 2023
Accounts receivable, net	$	165,723	$	300,173
Unbilled receivables, net	164,533		237,379
Long-term unbilled receivables, net	81,218		85,402
	$	411,474	$	622,954

Unbilled receivables

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing. Billing is solely subject to the passage of time.

Unbilled receivables by expected collection date:


(Dollars in thousands)	June 30, 2024
1 year or less	$	164,533	67	%
1-2 years	58,353		24	%
2-5 years	22,865		9	%
	$	245,751	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	June 30, 2024
2024	$	58,562	24	%
2023	130,140		53	%
2022	29,241		12	%
2021	22,830		9	%
2020 and prior	4,978		2	%
	$	245,751	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2024		December 31, 2023
Contract assets	$	15,374	$	16,238
Long-term contract assets	19,997		20,635
	$	35,371	$	36,873

Deferred revenue

Deferred revenue consists of billings made and payments received in advance of revenue recognition.


(in thousands)	June 30, 2024		December 31, 2023
Deferred revenue	$	352,618	$	377,845
Long-term deferred revenue	2,443		2,478
	$	355,061	$	380,323

The decrease in deferred revenue in the six months ended June 30, 2024, was primarily due to $272.7 million of revenue recognized that was in deferred revenue as of December 31, 2023.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	June 30, 2024		December 31, 2023
Deferred commissions	$	100,490	$	114,119


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Amortization of deferred commissions (1)	$	14,994	$	14,750	$	32,276	$	29,027

(1) Included in selling and marketing.

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill


	Six Months Ended June 30,
(in thousands)	2024		2023
January 1,	$	81,611	$	81,399

Currency translation adjustments	(201)		194
June 30,	$	81,410	$	81,593

Intangibles

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


		June 30, 2024
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value
Client-related	4-10 years	$	63,112	$	(60,714)	$	2,398
Technology	2-10 years	68,005		(65,198)		2,807
Other	1-5 years	5,361		(5,361)		—
		$	136,478	$	(131,273)	$	5,205


		December 31, 2023
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value
Client-related	4-10 years	$	63,117	$	(60,035)	$	3,082
Technology	2-10 years	68,138		(64,218)		3,920
Other	1-5 years	5,361		(5,361)		—
		$	136,616	$	(129,614)	$	7,002

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future estimated amortization of intangible assets:


(in thousands)	June 30, 2024
Remainder of 2024	$	1,399
2025	2,605
2026	874
2027	327


	$	5,205

Amortization of intangible assets:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Cost of revenue	$	447	$	621	$	1,068	$	1,327
Selling and marketing	342		342		685		685

	$	789	$	963	$	1,753	$	2,012

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	June 30, 2024		December 31, 2023
Income tax receivables	$	16,060	$	4,804
Contract assets	15,374		16,238
Insurance receivable	—		1,954
Indirect tax receivable	2,702		1,924
Capped call transactions	915		—
Restricted cash	768		—
Other	40,504		43,217
	$	76,323	$	68,137

Other long-term assets


(in thousands)	June 30, 2024		December 31, 2023
Deferred commissions	$	100,490	$	114,119
Right of use assets	68,293		64,198
Property and equipment	42,190		47,279
Venture investments	21,047		19,450
Contract assets	19,997		20,635
Intangible assets	5,205		7,002
Capped call transactions	—		893
Deferred income taxes	3,666		3,678
Restricted cash	4,006		2,925
Other	37,355		34,517
	$	302,249	$	314,696

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued expenses


(in thousands)	June 30, 2024		December 31, 2023

Cloud hosting	$	15,152	$	1,358
Outside professional services	9,539		10,419
Marketing and sales program	7,081		2,557
Income and other taxes	3,422		15,428
Employee related	4,966		4,486
Other	4,715		5,693
	$	44,875	$	39,941

Other current liabilities


(in thousands)	June 30, 2024		December 31, 2023
Operating lease liabilities	$	15,254	$	15,000
Dividends payable	2,561		2,515
Other	2,862		3,828
	$	20,677	$	21,343

Other long-term liabilities


(in thousands)	June 30, 2024		December 31, 2023
Deferred revenue	$	2,443	$	2,478
Income taxes payable	858		859
Other	11,061		10,233
	$	14,362	$	13,570

NOTE 7. LEASES

Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Fixed lease costs	$	5,271	$	4,495	$	9,533	$	10,261
Short-term lease costs	410		696		953		1,477
Variable lease costs	1,763		2,186		3,372		4,160
	$	7,444	$	7,377	$	13,858	$	15,898

Right of use assets and lease liabilities


(in thousands)	June 30, 2024		December 31, 2023
Right of use assets	$	68,293	$	64,198
Operating lease liabilities	$	15,254	$	15,000
Long-term operating lease liabilities	$	70,202	$	66,901

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


	June 30, 2024		December 31, 2023
Weighted-average remaining lease term	6.4 years		6.8 years
Weighted-average discount rate (1)	4.6	%	4.0	%

(1) The rates implicit in 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maturities of lease liabilities:


(in thousands)	June 30, 2024
Remainder of 2024	$	7,954
2025	18,784
2026	14,384
2027	13,387
2028	12,813
2029	10,099
Thereafter	21,650
Total lease payments	99,071
Less: imputed interest (1)	(13,615)
	$	85,456

(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


	Six Months Ended June 30,
(in thousands)	2024		2023
Cash paid for operating leases, net of tenant improvement allowances	$	9,493	$	10,540
Right of use assets recognized for new leases and amendments (non-cash)	$	12,290	$	1,465

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning September 1, 2020. In the three and six months ended June 30, 2023, the Company recognized gains of $5.1 million and $7.9 million, respectively, in other income, net from repurchases of Notes representing $64.7 million and $97.7 million, respectively, in aggregate principal amount.

Conversion rights

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

•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 June 30, 2024, the Notes were not eligible for conversion.

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.

Carrying value of the Notes:


(in thousands)	June 30, 2024		December 31, 2023
Principal	$	502,270	$	502,270
Unamortized issuance costs	(1,666)		(2,902)
Convertible senior notes, net	$	500,604	$	499,368

Interest expense related to the Notes:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Contractual interest expense (0.75% coupon)	$	942	$	997	$	1,884	$	2,122
Amortization of issuance costs	619		647		1,236		1,375
	$	1,561	$	1,644	$	3,120	$	3,497

The average interest rate on the Notes in the six months ended June 30, 2024 and 2023 was 1.2%.

Future payments:


	June 30, 2024
(in thousands)	Principal		Interest		Total
Remainder of 2024	$	—	$	1,883	$	1,883
2025	502,270		1,884		504,154

	$	502,270	$	3,767	$	506,037

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions initially covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock. In the three and six months ended June 30, 2023, Capped Call Transactions covering approximately 0.5 million and 0.7 million shares, respectively, were settled for proceeds of $0.1 million and $0.3 million, respectively. As of June 30, 2024, Capped Call Transactions covering approximately 3.7 million shares were outstanding.

The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value calculated following the governing documents may not represent a fair value measurement. The Capped Call Transactions are remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in capped call transactions:


	Six Months Ended June 30,
(in thousands)	2024		2023
January 1,	$	893	$	2,582
Settlements	—		(341)
Fair value adjustment	22		1,845
June 30,	$	915	$	4,086

Credit facility

In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.

As of June 30, 2024 and December 31, 2023, the Company had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings.

NOTE 9. RESTRUCTURING

The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:


(in thousands)	Three months ended	Expense
Office space reduction	March 31, 2023	$	1,241
Employee severance and related benefits	June 30, 2023	$	1,581
Employee severance and related benefits and office space reduction	September 30, 2023	$	17,236
Office space reduction	December 31, 2023	$	1,497
Office space reduction	June 30, 2024	$	1,257

Accrued employee severance and related benefits:

Change for all restructuring actions:


	Six Months Ended June 30,
(in thousands)	2024		2023
January 1,	$	8,095	$	18,573
Costs incurred	(238)		2,387
Cash disbursements	(3,852)		(17,521)
Currency translation adjustments	(169)		185
June 30,	$	3,836	$	3,624

Note: Accrued employee severance and related benefits is included in accrued compensation and related expenses.

NOTE 10. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

•Level 3 - significant unobservable inputs with little or no market data, which require the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value.

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied volatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

Assets and liabilities measured at fair value on a recurring basis:


	June 30, 2024								December 31, 2023
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	18,345	$	—	$	—	$	18,345	$	54,357	$	—	$	—	$	54,357
Marketable securities	$	—	$	406,819	$	—	$	406,819	$	—	$	193,436	$	—	$	193,436
Capped Call Transactions	$	—	$	915	$	—	$	915	$	—	$	893	$	—	$	893
Venture investments (1)	$	—	$	—	$	21,047	$	21,047	$	—	$	—	$	19,450	$	19,450

(1) Investments in privately-held companies

Changes in venture investments:


	Six Months Ended June 30,
(in thousands)	2024		2023
January 1,	$	19,450	$	13,069
New investments	350		400
Sales of investments	—		(2,773)
Changes in foreign exchange rates	(19)		119
Changes in fair value:
included in other income, net	1,628		4,475
included in other comprehensive income (loss)	(362)		(1,908)
June 30,	$	21,047	$	13,382

The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities.

Fair value of the Convertible Senior Notes

The fair value of the Notes outstanding (including the embedded conversion feature) was $485.3 million as of June 30, 2024, and $466.5 million as of December 31, 2023.

The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

NOTE 11. REVENUE

Geographic revenue


	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2024				2023				2024				2023
U.S.	$	189,214	54	%	$	150,385	50	%	$	370,197	55	%	$	334,904	54	%
Other Americas	21,314		6	%	19,505		7	%	43,100		6	%	34,516		6	%
United Kingdom (“U.K.”)	38,628		11	%	28,892		10	%	70,745		10	%	71,129		11	%
Europe (excluding U.K.), Middle East, and Africa	53,360		15	%	54,353		18	%	115,207		17	%	105,671		17	%
Asia-Pacific	48,637		14	%	45,133		15	%	82,051		12	%	77,520		12	%
	$	351,153	100	%	$	298,268	100	%	$	681,300	100	%	$	623,740	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue streams


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Subscription license	$	84,647	$	41,197	$	147,985	$	125,724
Perpetual license	36		1,579		895		1,982
Revenue recognized at a point in time	84,683		42,776		148,880		127,706
Maintenance	80,344		82,042		161,345		161,672
Pega Cloud	134,086		115,063		264,988		222,942
Consulting	52,040		58,387		106,087		111,420
Revenue recognized over time	266,470		255,492		532,420		496,034
Total revenue	$	351,153	$	298,268	$	681,300	$	623,740


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Pega Cloud	$	134,086	$	115,063	$	264,988	$	222,942
Maintenance	80,344		82,042		161,345		161,672
Subscription services	214,430		197,105		426,333		384,614
Subscription license	84,647		41,197		147,985		125,724
Subscription	299,077		238,302		574,318		510,338
Consulting	52,040		58,387		106,087		111,420
Perpetual license	36		1,579		895		1,982
	$	351,153	$	298,268	$	681,300	$	623,740

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of June 30, 2024:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting	Total
	Pega Cloud		Maintenance
1 year or less	$	470,379	$	209,655	$	23,931	$	2,696