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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, 2022 |
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 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 | 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 ☒
There were 81,952,276 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 19, 2022.
PEGASYSTEMS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| | | | | |
| Page |
PART I - FINANCIAL INFORMATION |
| |
Item 1. Financial Statements | |
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 | |
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 | |
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021 | |
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2022 and 2021 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 | |
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 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 5. Other Information | |
Item 6. Exhibits | |
| |
Signature | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| | | | | | | | | | | |
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 109,275 | | | $ | 159,965 | |
Marketable securities | 187,613 | | | 202,814 | |
Total cash, cash equivalents, and marketable securities | 296,888 | | | 362,779 | |
Accounts receivable | 171,556 | | | 182,717 | |
Unbilled receivables | 201,130 | | | 226,714 | |
Other current assets | 70,633 | | | 68,008 | |
Total current assets | 740,207 | | | 840,218 | |
Unbilled receivables | 115,901 | | | 129,789 | |
Goodwill | 81,717 | | | 81,923 | |
Other long-term assets | 320,557 | | | 541,601 | |
Total assets | $ | 1,258,382 | | | $ | 1,593,531 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 21,465 | | | $ | 15,281 | |
Accrued expenses | 63,120 | | | 63,890 | |
Accrued compensation and related expenses | 73,945 | | | 120,946 | |
Deferred revenue | 269,121 | | | 275,844 | |
Other current liabilities | 7,800 | | | 9,443 | |
Total current liabilities | 435,451 | | | 485,404 | |
Convertible senior notes, net | 592,161 | | | 590,722 | |
Operating lease liabilities | 84,170 | | | 87,818 | |
Other long-term liabilities | 12,821 | | | 13,499 | |
Total liabilities | 1,124,603 | | | 1,177,443 | |
Commitments and contingencies (Note 14) | | | |
Stockholders’ equity: | | | |
Preferred stock, 1,000 shares authorized; none issued | — | | | — | |
Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 819 | | | 817 | |
Additional paid-in capital | 170,251 | | | 145,810 | |
(Accumulated deficit) retained earnings | (15,140) | | | 276,449 | |
Accumulated other comprehensive (loss) | (22,151) | | | (6,988) | |
Total stockholders’ equity | 133,779 | | | 416,088 | |
Total liabilities and stockholders’ equity | $ | 1,258,382 | | | $ | 1,593,531 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Subscription services | $ | 171,832 | | | $ | 152,075 | | | $ | 341,865 | | | $ | 295,494 | |
Subscription license | 41,600 | | | 104,296 | | | 179,133 | | | 215,805 | |
Perpetual license | 2,266 | | | 12,596 | | | 9,706 | | | 18,048 | |
Consulting | 58,639 | | | 56,735 | | | 119,940 | | | 109,854 | |
Total revenue | 274,337 | | | 325,702 | | | 650,644 | | | 639,201 | |
Cost of revenue | | | | | | | |
Subscription services | 36,533 | | | 29,046 | | | 68,563 | | | 57,389 | |
Subscription license | 673 | | | 585 | | | 1,295 | | | 1,205 | |
Perpetual license | 36 | | | 71 | | | 70 | | | 101 | |
Consulting | 57,873 | | | 54,829 | | | 113,384 | | | 108,283 | |
Total cost of revenue | 95,115 | | | 84,531 | | | 183,312 | | | 166,978 | |
Gross profit | 179,222 | | | 241,171 | | | 467,332 | | | 472,223 | |
Operating expenses | | | | | | | |
Selling and marketing | 157,198 | | | 156,423 | | | 319,434 | | | 305,162 | |
Research and development | 74,341 | | | 64,395 | | | 145,831 | | | 126,837 | |
General and administrative | 32,723 | | | 19,161 | | | 68,487 | | | 37,431 | |
Total operating expenses | 264,262 | | | 239,979 | | | 533,752 | | | 469,430 | |
(Loss) income from operations | (85,040) | | | 1,192 | | | (66,420) | | | 2,793 | |
Foreign currency transaction gain (loss) | 1,713 | | | (403) | | | 4,589 | | | (5,501) | |
Interest income | 309 | | | 236 | | | 516 | | | 389 | |
Interest expense | (1,944) | | | (1,959) | | | (3,890) | | | (3,839) | |
(Loss) income on capped call transactions | (18,945) | | | 26,309 | | | (49,505) | | | 7,192 | |
Other income, net | 3,785 | | | — | | | 6,526 | | | 106 | |
(Loss) income before provision for (benefit from) income taxes | (100,122) | | | 25,375 | | | (108,184) | | | 1,140 | |
Provision for (benefit from) income taxes | 186,174 | | | (11,916) | | | 178,491 | | | (29,534) | |
Net (loss) income | $ | (286,296) | | | $ | 37,291 | | | $ | (286,675) | | | $ | 30,674 | |
(Loss) earnings per share | | | | | | | |
Basic | $ | (3.50) | | | $ | 0.46 | | | $ | (3.51) | | | $ | 0.38 | |
Diluted | $ | (3.50) | | | $ | 0.43 | | | $ | (3.51) | | | $ | 0.36 | |
Weighted-average number of common shares outstanding | | | | | | | |
Basic | 81,847 | | | 81,316 | | | 81,764 | | | 81,161 | |
Diluted | 81,847 | | | 90,320 | | | 81,764 | | | 86,006 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | $ | (286,296) | | | $ | 37,291 | | | $ | (286,675) | | | $ | 30,674 | |
Other comprehensive (loss) income, net of tax | | | | | | | |
Unrealized (loss) gain on available-for-sale securities | (1,149) | | | 121 | | | (927) | | | 1,131 | |
Foreign currency translation adjustments | (11,466) | | | 1,461 | | | (14,236) | | | 731 | |
Total other comprehensive (loss) income, net of tax | $ | (12,615) | | | $ | 1,582 | | | $ | (15,163) | | | $ | 1,862 | |
Comprehensive (loss) income | $ | (298,911) | | | $ | 38,873 | | | $ | (301,838) | | | $ | 32,536 | |
See notes to unaudited condensed consolidated financial statements.
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PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive (Loss) | | Total Stockholders’ Equity |
| Number of Shares | | Amount | | | | |
December 31, 2020 | 80,890 | | | $ | 809 | | | $ | 204,432 | | | $ | 339,879 | | | $ | (2,948) | | | $ | 542,172 | |
Cumulative-effect adjustment from adoption of ASU 2020-06, net | — | | | — | | | (61,604) | | | 9,399 | | | — | | | (52,205) | |
Repurchase of common stock | (70) | | | (1) | | | (9,145) | | | — | | | — | | | (9,146) | |
Issuance of common stock for stock compensation plans | 402 | | | 4 | | | (25,513) | | | — | | | — | | | (25,509) | |
Issuance of common stock under the employee stock purchase plan | 24 | | | — | | | 2,288 | | | — | | | — | | | 2,288 | |
Stock-based compensation | — | | | — | | | 30,100 | | | — | | | — | | | 30,100 | |
Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,438) | | | — | | | (2,438) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 280 | | | 280 | |
Net (loss) | — | | | — | | | — | | | (6,617) | | | — | | | (6,617) | |
March 31, 2021 | 81,246 | | | $ | 812 | | | $ | 140,558 | | | $ | 340,223 | | | $ | (2,668) | | | $ | 478,925 | |
Repurchase of common stock | (81) | | | (1) | | | (10,245) | | | — | | | — | | | (10,246) | |
Issuance of common stock for stock compensation plans | 267 | | | 3 | | | (16,199) | | | — | | | — | | | (16,196) | |
Issuance of common stock under the employee stock purchase plan | 24 | | | 1 | | | 2,858 | | | — | | | — | | | 2,859 | |
Stock-based compensation | — | | | — | | | 30,698 | | | — | | | — | | | 30,698 | |
Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,445) | | | — | | | (2,445) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1,582 | | | 1,582 | |
Net income | — | | | — | | | — | | | 37,291 | | | — | | | 37,291 | |
June 30, 2021 | 81,456 | | | $ | 815 | | | $ | 147,670 | | | $ | 375,069 | | | $ | (1,086) | | | $ | 522,468 | |
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December 31, 2021 | 81,712 | | | $ | 817 | | | $ | 145,810 | | | $ | 276,449 | | | $ | (6,988) | | | $ | 416,088 | |
Repurchase of common stock | (242) | | | (2) | | | (22,581) | | | — | | | — | | | (22,583) | |
Issuance of common stock for stock compensation plans | 297 | | | 3 | | | (12,131) | | | — | | | — | | | (12,128) | |
Issuance of common stock under the employee stock purchase plan | 35 | | | — | | | 2,446 | | | — | | | — | | | 2,446 | |
Stock-based compensation | — | | | — | | | 28,227 | | | — | | | — | | | 28,227 | |
Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,455) | | | — | | | (2,455) | |
Other comprehensive (loss) | — | | | — | | | — | | | — | | | (2,548) | | | (2,548) | |
Net (loss) | — | | | — | | | — | | | (379) | | | — | | | (379) | |
March 31, 2022 | 81,802 | | | $ | 818 | | | $ | 141,771 | | | $ | 273,615 | | | $ | (9,536) | | | $ | 406,668 | |
Repurchase of common stock | (38) | | | — | | | (1,925) | | | — | | | — | | | (1,925) | |
Issuance of common stock for stock compensation plans | 117 | | | 1 | | | (3,252) | | | — | | | — | | | (3,251) | |
Issuance of common stock under the employee stock purchase plan | 59 | | | — | | | 2,357 | | | — | | | — | | | 2,357 | |
Stock-based compensation | — | | | — | | | 31,300 | | | — | | | — | | | 31,300 | |
Cash dividends declared ($0.03 per share) | — | | | — | | | — | | | (2,459) | | | — | | | (2,459) | |
Other comprehensive (loss) | — | | | — | | | — | | | — | | | (12,615) | | | (12,615) | |
Net (loss) | — | | | — | | | — | | | (286,296) | | | — | | | (286,296) | |
June 30, 2022 | 81,940 | | | $ | 819 | | | $ | 170,251 | | | $ | (15,140) | | | $ | (22,151) | | | $ | 133,779 | |
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See notes to unaudited condensed consolidated financial statements.
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PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Operating activities | | | |
Net (loss) income | $ | (286,675) | | | $ | 30,674 | |
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities | | | |
Stock-based compensation | 59,527 | | | 60,788 | |
Deferred income taxes | 169,105 | | | (28,232) | |
Loss (gain) on capped call transactions | 49,505 | | | (7,192) | |
Amortization of deferred commissions | 28,155 | | | 21,202 | |
Lease expense | 7,832 | | | 5,792 | |
Amortization of intangible assets and depreciation | 8,175 | | | 15,504 | |
Foreign currency transaction (gain) loss | (4,589) | | | 5,501 | |
Other non-cash | (3,479) | | | 3,543 | |
Change in operating assets and liabilities, net | (32,625) | | | (88,170) | |
Cash (used in) provided by operating activities | (5,069) | | | 19,410 | |
Investing activities | | | |
Purchases of investments | (38,489) | | | (51,601) | |
Proceeds from maturities and called investments | 34,912 | | | 68,798 | |
Sales of investments | 14,839 | | | 2,450 | |
Payments for acquisitions, net of cash acquired | (922) | | | (4,993) | |
Investment in property and equipment | (11,863) | | | (4,161) | |
Cash (used in) provided by investing activities | (1,523) | | | 10,493 | |
Financing activities | | | |
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Proceeds from employee stock purchase plan | 4,803 | | | 5,146 | |
Dividend payments to stockholders | (4,908) | | | (4,865) | |
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Common stock repurchases | (41,086) | | | (60,998) | |
Cash (used in) financing activities | (41,191) | | | (60,717) | |
Effect of exchange rate changes on cash and cash equivalents | (2,907) | | | (1,207) | |
Net (decrease) in cash and cash equivalents | (50,690) | | | (32,021) | |
Cash and cash equivalents, beginning of period | 159,965 | | | 171,899 | |
Cash and cash equivalents, end of period | $ | 109,275 | | | $ | 139,878 | |
See notes to unaudited condensed consolidated financial statements.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2022.
Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.
NOTE 2. MARKETABLE SECURITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
(in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Government debt | $ | 2,989 | | | $ | — | | | $ | (60) | | | $ | 2,929 | | | $ | 2,000 | | | $ | — | | | $ | (10) | | | $ | 1,990 | |
Corporate debt | 188,350 | | | — | | | (3,666) | | | 184,684 | | | 201,659 | | | 2 | | | (837) | | | 200,824 | |
| $ | 191,339 | | | $ | — | | | $ | (3,726) | | | $ | 187,613 | | | $ | 203,659 | | | $ | 2 | | | $ | (847) | | | $ | 202,814 | |
As of June 30, 2022, marketable securities’ maturities ranged from July 2022 to November 2024, with a weighted-average remaining maturity of 0.9 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables | | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Accounts receivable | $ | 171,556 | | | $ | 182,717 | |
Unbilled receivables | 201,130 | | | 226,714 | |
Long-term unbilled receivables | 115,901 | | | 129,789 | |
| $ | 488,587 | | | $ | 539,220 | |
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
Unbilled receivables by expected billing date: | | | | | | | | |
(Dollars in thousands) | June 30, 2022 |
1 year or less | $ | 201,130 | | 63 | % |
1-2 years | 78,813 | | 25 | % |
2-5 years | 37,088 | | 12 | % |
| $ | 317,031 | | 100 | % |
Unbilled receivables by contract effective date: | | | | | | | | |
(Dollars in thousands) | June 30, 2022 |
2022 | $ | 81,887 | | 26 | % |
2021 | 142,578 | | 45 | % |
2020 | 56,283 | | 18 | % |
2019 | 19,928 | | 6 | % |
2018 and prior | 16,355 | | 5 | % |
| $ | 317,031 | | 100 | % |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major clients
Clients accounting for 10% or more of the Company’s total receivables: | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Client A | | | |
Accounts receivable | * | | 1 | % |
Unbilled receivables | * | | 15 | % |
Total receivables | * | | 10 | % |
* Client accounted for less than 10% of receivables
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation. | | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Contract assets (1) | $ | 12,149 | | | $ | 12,530 | |
Long-term contract assets (2) | 12,983 | | | 10,643 | |
| $ | 25,132 | | | $ | 23,173 | |
(1) Included in other current assets. (2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition. | | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Deferred revenue | $ | 269,121 | | | $ | 275,844 | |
Long-term deferred revenue (1) | 5,417 | | | 5,655 | |
| $ | 274,538 | | | $ | 281,499 | |
(1) Included in other long-term liabilities.
The change in deferred revenue in the six months ended June 30, 2022 was primarily due to new billings in advance of revenue recognition offset by $205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.
NOTE 4. DEFERRED COMMISSIONS | | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Deferred commissions (1) | $ | 123,067 | | | $ | 135,911 | |
(1) Included in other long-term assets.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Amortization of deferred commissions (1) | $ | 10,934 | | | $ | 9,706 | | | $ | 28,155 | | | $ | 21,202 | |
(1) Included in selling and marketing expense.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill: | | | | | | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 |
January 1, | $ | 81,923 | | | $ | 79,231 | |
Acquisition | — | | | 2,701 | |
Currency translation adjustments | (206) | | | 241 | |
June 30, | $ | 81,717 | | | $ | 82,173 | |
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives. | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4-10 years | | $ | 63,082 | | | $ | (57,944) | | | $ | 5,138 | |
Technology | 2-10 years | | 68,064 | | | (60,211) | | | 7,853 | |
Other | 1-5 years | | 5,361 | | | (5,361) | | | — | |
| | | $ | 136,507 | | | $ | (123,516) | | | $ | 12,991 | |
(1) Included in other long-term assets.
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| | | December 31, 2021 |
(in thousands) | Useful Lives | | Cost | | Accumulated Amortization | | Net Book Value (1) |
Client-related | 4-10 years | | $ | 63,165 | | | $ | (57,342) | | | $ | 5,823 | |
Technology | 2-10 years | | 67,142 | | | (58,902) | | | 8,240 | |
Other | 1-5 years | | 5,361 | | | (5,361) | | | — | |
| | | $ | 135,668 | | | $ | (121,605) | | | $ | 14,063 | |
(1) Included in other long-term assets.
Amortization of intangible assets:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Cost of revenue | $ | 683 | | | $ | 629 | | | $ | 1,312 | | | $ | 1,258 | |
Selling and marketing | 342 | | | 373 | | | 685 | | | 746 | |
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| $ | 1,025 | | | $ | 1,002 | | | $ | 1,997 | | | $ | 2,004 | |
Future estimated intangibles assets amortization: | | | | | |
(in thousands) | June 30, 2022 |
Remainder of 2022 | $ | 2,098 | |
2023 | 3,925 | |
2024 | 3,156 | |
2025 | 2,611 | |
2026 | 874 | |
2027 | 327 | |
| $ | 12,991 | |
NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets
| | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Income tax receivables | $ | 22,982 | | | $ | 25,691 | |
Contract assets | 12,149 | | | 12,530 | |
Other | 35,502 | | | 29,787 | |
| $ | 70,633 | | | $ | 68,008 | |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other long-term assets
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Deferred income taxes | $ | 6,092 | | | $ | 180,656 | |
Deferred commissions | 123,067 | | | 135,911 | |
Right of use assets | 80,646 | | | 87,521 | |
Capped call transactions | 10,459 | | | 59,964 | |
Property and equipment | 34,886 | | | 26,837 | |
Venture investments | 16,073 | | | 7,648 | |
Intangible assets | 12,991 | | | 14,063 | |
Contract assets | 12,983 | | | 10,643 | |
Other | 23,360 | | | 18,358 | |
| $ | 320,557 | | | $ | 541,601 | |
Other current liabilities
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Operating lease liabilities | $ | 5,341 | | | $ | 6,989 | |
Dividends payable | 2,459 | | | 2,454 | |
| $ | 7,800 | | | $ | 9,443 | |
Other long-term liabilities
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Deferred revenue | $ | 5,417 | | | $ | 5,655 | |
Other | 7,404 | | | 7,844 | |
| $ | 12,821 | | | $ | 13,499 | |
NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.
New Waltham Office
On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
Expense
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Fixed lease costs (1) | $ | 4,965 | | | $ | (3,972) | | | $ | 10,059 | | | $ | (3,672) | |
Short-term lease costs | 787 | | | 515 | | | 1,594 | | | 974 | |
Variable lease costs | 727 | | | 1,340 | | | 1,491 | | | 2,727 | |
| $ | 6,479 | | | $ | (2,117) | | | $ | 13,144 | | | $ | 29 | |
(1) The lower fixed lease costs in the six months ended June 30, 2021 was due to the modification of the corporate headquarters lease.
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Right of use assets and lease liabilities | | | | | | | | | | | |
(in thousands) | June 30, 2022 | | December 31, 2021 |
Right of use assets (1) | $ | 80,646 | | | $ | 87,521 | |
Operating lease liabilities (2) | $ | 5,341 | | | $ | 6,989 | |
Long-term operating lease liabilities | $ | 84,170 | | | $ | 87,818 | |
(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.
(2) Included in other current liabilities.
Weighted-average remaining lease term and discount rate for the Company’s leases were: | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Weighted-average remaining lease term | 7.5 years | | 7.7 years |
Weighted-average discount rate (1) | 4.2 | % | | 4.4 | % |
(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.
Maturities of lease liabilities: | | | | | |
(in thousands) | June 30, 2022 |
Remainder of 2022 | $ | (401) | |
2023 | 18,837 | |
2024 | 16,290 | |
2025 | 14,118 | |
2026 | 10,507 | |