Company Quick10K Filing
Quick10K
Pegasystems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$68.98 79 $5,440
10-Q 2019-06-30 Quarter: 2019-06-30
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 2019-08-07 Earnings, Exhibits
8-K 2019-08-05 Enter Agreement
8-K 2019-06-25 Shareholder Vote
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
BABA Alibaba 464,100
BMO Bank of Montreal 49,600
CPT Camden Property Trust 9,650
SNA Snap-On 9,290
SPSC SPS Commerce 1,850
ATRS Antares Pharma 481
CSTR Capstar Financial Holdings 264
AKTS Akoustis Technologies 240
GCC Wisdomtree Continuous Commodity Index Master Fund 0
SFAS Steadfast Apartment REIT III 0
PEGA 2019-06-30
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 q22019ex-311.htm
EX-31.2 q22019ex-312.htm
EX-32 q22019ex-32.htm

Pegasystems Earnings 2019-06-30

PEGA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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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, 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) 
____________________________

Massachusetts04-2787865
(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)
____________________________
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 79,131,665 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 30, 2019 



Table of Contents


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 June 30, 2019 and December 31, 2018
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and six months ended June 30, 2019 and 2018
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2019 and 2018
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

Table of Contents

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

 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
95,500


$
114,422

Marketable securities
59,549


93,001

Total cash, cash equivalents, and marketable securities
155,049

 
207,423

Accounts receivable
134,965


180,872

Unbilled receivables
169,554


172,656

Other current assets
77,290


49,684

Total current assets
536,858

 
610,635

Long-term unbilled receivables
117,889


151,237

Goodwill
79,037


72,858

Other long-term assets
206,833


147,823

Total assets
$
940,617

 
$
982,553

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,586


$
16,487

Accrued expenses
50,372


45,506

Accrued compensation and related expenses
62,880


84,671

Deferred revenue
169,009


185,145

Other current liabilities
14,576

 

Total current liabilities
311,423

 
331,809

Operating lease liabilities
54,292

 

Deferred income tax liabilities
6,918


6,939

Other long-term liabilities
10,697


22,274

Total liabilities
383,330

 
361,022

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

 

Common stock, 200,000 shares authorized; 79,144 and 78,526 shares issued and outstanding at
June 30, 2019 and December 31, 2018, respectively
791


785

Additional paid-in capital
122,880


123,205

Retained earnings
445,108


510,863

Accumulated other comprehensive (loss)
(11,492
)
 
(13,322
)
Total stockholders’ equity
557,287

 
621,531

Total liabilities and stockholders’ equity
$
940,617

 
$
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  
June 30,
 
Six Months Ended  
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Software license
$
44,274

 
$
44,784

 
$
107,538

 
$
132,557

Maintenance
69,329

 
65,906

 
137,035

 
130,431

Services
91,989

 
86,089

 
173,565

 
168,973

Total revenue
205,592

 
196,779

 
418,138

 
431,961

Cost of revenue
 
 
 
 
 
 
 
Software license
928

 
1,262

 
2,306

 
2,517

Maintenance
6,292

 
5,874

 
12,627

 
11,956

Services
69,860

 
66,681

 
136,584

 
134,958

Total cost of revenue
77,080

 
73,817

 
151,517

 
149,431

Gross profit
128,512

 
122,962

 
266,621

 
282,530

Operating expenses
 
 
 
 
 
 
 
Selling and marketing
116,962

 
93,972

 
225,827

 
182,355

Research and development
49,714

 
41,972

 
100,310

 
88,757

General and administrative
14,174

 
10,181

 
26,850

 
26,645

Total operating expenses
180,850

 
146,125

 
352,987

 
297,757

(Loss) from operations
(52,338
)
 
(23,163
)
 
(86,366
)
 
(15,227
)
Foreign currency transaction gain (loss)
2,105

 
1,244

 
(1,607
)
 
159

Interest income, net
544

 
629

 
1,267

 
1,393

Other income, net
55

 

 
55

 
363

(Loss) before (benefit from) income taxes
(49,634
)
 
(21,290
)
 
(86,651
)
 
(13,312
)
(Benefit from) income taxes
(17,338
)
 
(10,881
)
 
(25,638
)
 
(15,103
)
Net (loss) income
$
(32,296
)
 
$
(10,409
)
 
$
(61,013
)
 
$
1,791

(Loss) earnings per share
 
 
 
 
 
 
 
Basic
$
(0.41
)
 
$
(0.13
)
 
$
(0.77
)
 
$
0.02

Diluted
$
(0.41
)
 
$
(0.13
)
 
$
(0.77
)
 
$
0.02

Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
Basic
78,987

 
78,635

 
78,787

 
78,436

Diluted
78,987

 
78,635

 
78,787

 
83,247


See notes to unaudited condensed consolidated financial statements.

4


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

 
Three Months Ended  
June 30,
 
Six Months Ended  
June 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(32,296
)
 
$
(10,409
)
 
$
(61,013
)
 
$
1,791

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale marketable securities
238

 
73

 
612

 
(115
)
Foreign currency translation adjustments
(409
)
 
(7,414
)
 
1,218

 
(2,964
)
Total other comprehensive (loss) income, net of tax
(171
)
 
(7,341
)
 
1,830

 
(3,079
)
Comprehensive (loss)
$
(32,467
)
 
$
(17,750
)
 
$
(59,183
)
 
$
(1,288
)

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

Repurchase of common stock
(171
)
 
(2
)
 
(10,179
)
 

 

 
(10,181
)
Issuance of common stock for share-based compensation plans
358

 
4

 
(11,395
)
 

 

 
(11,391
)
Issuance of common stock under Employee Stock Purchase Plan
15

 

 
849

 

 

 
849

Stock-based compensation

 

 
16,163

 

 

 
16,163

Cash dividends declared ($0.12 per share)

 

 

 
(2,364
)
 

 
(2,364
)
Other comprehensive loss

 

 

 

 
(7,341
)
 
(7,341
)
Net loss

 

 

 
(10,409
)
 

 
(10,409
)
June 30, 2018
78,748

 
$
787

 
$
141,400

 
$
506,769

 
$
(9,784
)
 
$
639,172

 
 
 
 
 
 
 
 
 
 
 
 
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

Repurchase of common stock
(88
)
 
(1
)
 
(6,301
)
 

 

 
(6,302
)
Issuance of common stock for share-based compensation plans
320

 
3

 
(11,217
)
 

 

 
(11,214
)
Issuance of common stock under Employee Stock Purchase Plan
16

 

 
1,103

 

 

 
1,103

Stock-based compensation

 

 
20,113

 

 

 
20,113

Cash dividends declared ($0.12 per share)

 

 

 
(2,375
)
 

 
(2,375
)
Other comprehensive (loss)

 

 

 

 
(171
)
 
(171
)
Net (loss)

 

 

 
(32,296
)
 

 
(32,296
)
June 30, 2019
79,144

 
$
791

 
$
122,880

 
$
445,108

 
$
(11,492
)
 
$
557,287


See notes to unaudited condensed consolidated financial statements.

6


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

 
Six Months Ended  
June 30,
 
2019
 
2018
Operating activities
 
 
 
Net (loss) income
$
(61,013
)
 
$
1,791

Adjustments to reconcile net (loss) income to cash provided by operating activities
 
 
 
Stock-based compensation
38,397

 
31,165

Amortization and depreciation
33,788

 
20,921

Foreign currency transaction loss (gain)
1,607

 
(159
)
Other non-cash
(230
)
 
(846
)
Change in operating assets and liabilities, net
(4,829
)
 
22,560

Cash provided by operating activities
7,720

 
75,432

Investing activities


 
 
Purchases of investments
(10,497
)
 
(51,395
)
Proceeds from maturities and called investments
13,545

 
11,546

Sales of investments
29,965

 

Payments for acquisitions, net of cash acquired
(10,921
)
 

Investment in property and equipment
(4,882
)
 
(6,520
)
Cash provided by (used in) investing activities
17,210

 
(46,369
)
Financing activities
 
 
 
Dividend payments to shareholders
(4,730
)
 
(4,702
)
Common stock repurchases
(39,637
)
 
(41,123
)
Cash (used in) financing activities
(44,367
)
 
(45,825
)
Effect of exchange rate changes on cash and cash equivalents
515

 
(1,226
)
Net (decrease) in cash and cash equivalents
(18,922
)
 
(17,988
)
Cash and cash equivalents, beginning of period
114,422

 
162,279

Cash and cash equivalents, end of period
$
95,500

 
$
144,291


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 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 does not expect the adoption of this standard will have a material effect on its financial position or results of operations.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification 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
 
June 30, 2019
(in thousands)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Municipal bonds
$
29,495

 
$
156

 
$
(5
)
 
$
29,646

Corporate bonds
29,620

 
291

 
(8
)
 
29,903

 
$
59,115

 
$
447

 
$
(13
)
 
$
59,549

 
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 June 30, 2019, maturities of marketable securities ranged from January 2020 to August 2022, with a weighted-average remaining maturity of approximately 1.5 years.

8

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



4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
June 30, 2019
 
December 31, 2018
Accounts receivable
$
134,965

 
$
180,872

Unbilled receivables
169,554

 
172,656

Long-term unbilled receivables
117,889

 
151,237


$
422,408

 
$
504,765


Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables are expected to be billed in the future as follows:
(Dollars in thousands)
June 30, 2019
1 year or less
$
169,554

59
%
1-2 years
79,128

28
%
2-5 years
38,761

13
%
 
$
287,443

100
%

Contract assets and deferred revenue
(in thousands)
June 30, 2019
 
December 31, 2018
Contract assets (1)
$
3,770

 
$
3,711

Long-term contract assets (2)
2,190

 
2,543

 
$
5,960

 
$
6,254

(1) Included in other current assets. (2) Included in other long-term assets.
(in thousands)
June 30, 2019
 
December 31, 2018
Deferred revenue
$
169,009

 
$
185,145

Long-term deferred revenue (1)
4,342

 
5,344

 
$
173,351

 
$
190,489

(1) 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 six months ended June 30, 2019 was primarily due to $135.8 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. The Company expects to benefit from those costs for more than one year, as the Company generally only pays sales commissions on the initial contract, and not any subsequent contract renewals. As a result, there are no commensurate commissions paid on contract renewals. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average 5 years.
(in thousands)
June 30, 2019
 
December 31, 2018
Deferred contract costs (1)
$
64,809

 
$
64,367

(1) Included in other long-term assets.
 
Three Months Ended  
June 30,
 
Six Months Ended  
June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Amortization of deferred contract costs (1)
$
5,878

 
$
3,809

 
$
14,179

 
$
7,598

(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)
Six Months Ended  
June 30, 2019
Balance as of January 1,
$
72,858

Acquisition (1)
6,179

Currency translation adjustments

Balance as of June 30,
$
79,037


(1) In May 2019, the Company acquired In the Chat Communications Inc., a privately-held software provider of digital customer service software for $10.9 million, net of cash acquired. The Company also expects to issue up to approximately 15 thousand shares in retention-based bonus payments to a key employee upon the achievement of specified retention milestones. The principal assets and liabilities acquired as part of the business combination were additional goodwill and technology intangibles assets of $6.2 million and $5.1 million. The allocation of the purchase price is preliminary for income taxes as the Company is still gathering information.
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
 
 
 
June 30, 2019
(in thousands)
Useful Lives
 
Cost
 
Accumulated
Amortization
 
Net Book Value (1)
Client-related intangibles
4-10 years
 
$
63,115

 
$
(53,608
)
 
$
9,507

Technology
2-10 years
 
64,843

 
(52,605
)
 
12,238

Other
1 - 5 years
 
5,361

 
(5,361
)
 

 
 
 
$
133,319

 
$
(111,574
)
 
$
21,745

(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  
June 30,
 
Six Months Ended  
June 30,
2019
 
2018
 
2019
 
2018
Cost of revenue
$
875

 
$
1,231

 
$
2,207

 
$
2,463

Selling and marketing
781

 
1,605

 
2,385

 
3,210

 
$
1,656

 
$
2,836

 
$
4,592

 
$
5,673


7. ACCRUED EXPENSES
(in thousands)
June 30, 2019
 
December 31, 2018
Outside professional services expenses
$
8,513

 
$
10,367

Income and other taxes
6,401

 
10,387

Marketing and sales program expenses
12,115

 
5,860

Dividends payable
2,375

 
2,363

Employee-related expenses
5,378

 
3,536

Cloud hosting expenses
11,978

 
4,604

Other
3,612

 
8,389

 
$
50,372

 
$
45,506



10

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



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.
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 six months ended June 30, 2019.
The Company’s assets and liabilities measured at fair value on a recurring basis were:
 
June 30, 2019
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
5,653

 
$

 
$

 
$
5,653

Marketable securities:
 
 
 
 
 
 
 
Municipal bonds
$

 
$
29,646

 
$

 
$
29,646

Corporate bonds

 
29,903

 

 
29,903

Total marketable securities
$

 
$
59,549

 
$

 
$
59,549

Investments in privately-held companies (1)
$

 
$

 
$
3,890

 
$
3,890

(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

11

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



reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
Expense
(in thousands)
Three Months Ended  
June 30, 2019
 
Six Months Ended  
June 30, 2019
Operating lease costs (1)
$
4,281

 
$
8,581

Variable lease costs
1,362

 
2,683

 
$
5,643

 
$
11,264

(1) Lease costs that are fixed.
Right of use assets and lease liabilities
(in thousands)
June 30, 2019
Right of use assets (1)
$
57,772

Lease liabilities (2)
$
14,576

Long-term lease liabilities
$
54,292

(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:
 
June 30, 2019
Weighted-average remaining lease term
4.3 years

Weighted-average discount rate (1)
5.7
%
(1) The rates implicit in most of the Company’s leases are not readily determinable, 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 to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Maturities of lease liabilities are:
(in thousands)
June 30, 2019
Remainder of 2019
$
8,290

2020
18,976

2021
17,099

2022
16,166

2023 and thereafter
17,393

Total lease payments
77,924

Less: imputed interest (1)
(9,056
)
 
$
68,868

(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
(in thousands)
Six Months Ended  
June 30, 2019
Cash paid for leases
9,638

Right of use assets recognized for new leases and amendments (non-cash)
22,667


10. REVENUE
Geographic revenue
 
Three Months Ended  
June 30,
 
Six Months Ended  
June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
U.S.
$
119,682

59
%
 
$
110,349

55
%
 
$
223,673

54
%
 
$
224,334

52
%
Other Americas
8,873

4
%
 
9,627

5
%
 
37,702

9
%
 
27,342

6
%
United Kingdom (“U.K.”)
16,686

8
%
 
23,079

12
%
 
41,235

10
%
 
49,173

11
%
Europe (excluding U.K.), Middle East, and Africa
33,395

16
%
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