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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 September 30, 2021
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 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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ 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 filerSmaller reporting companyEmerging 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 81,675,315 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 19, 2021.



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 September 30, 2021 and December 31, 2020
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2021 and 2020
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature

2

PART I - FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$116,411 $171,899 
Marketable securities235,437 293,269 
Total cash, cash equivalents, and marketable securities351,848 465,168 
Accounts receivable143,445 215,827 
Unbilled receivables239,774 207,155 
Other current assets93,819 88,760 
Total current assets828,886 976,910 
Unbilled receivables
132,147 113,278 
Goodwill81,954 79,231 
Other long-term assets512,410 434,843 
Total assets$1,555,397 $1,604,262 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$25,604 $24,028 
Accrued expenses46,583 59,261 
Accrued compensation and related expenses86,018 123,012 
Deferred revenue229,103 232,865 
Other current liabilities13,118 20,969 
Total current liabilities400,426 460,135 
Convertible senior notes, net589,769 518,203 
Operating lease liabilities87,088 59,053 
Other long-term liabilities18,482 24,699 
Total liabilities1,095,765 1,062,090 
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued
  
Common stock, 200,000 shares authorized; 81,670 and 80,890 shares issued and outstanding at
September 30, 2021 and December 31, 2020, respectively
817 809 
Additional paid-in capital148,098 204,432 
Retained earnings316,150 339,879 
Accumulated other comprehensive (loss)(5,433)(2,948)
Total stockholders’ equity459,632 542,172 
Total liabilities and stockholders’ equity$1,555,397 $1,604,262 

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
September 30,
Nine Months Ended
September 30,
2021202020212020
Revenue
Pega Cloud$78,369 $54,776 $219,520 $147,080 
Maintenance83,188 74,670 237,531 220,587 
Software license38,295 39,784 272,148 187,023 
Consulting56,416 56,721 166,270 164,227 
Total revenue256,268 225,951 895,469 718,917 
Cost of revenue
Pega Cloud25,524 19,717 72,132 56,238 
Maintenance5,293 5,478 16,074 16,645 
Software license656 691 1,962 2,354 
Consulting52,749 51,913 161,032 158,781 
Total cost of revenue84,222 77,799 251,200 234,018 
Gross profit172,046 148,152 644,269 484,899 
Operating expenses
Selling and marketing152,479 132,053 457,641 395,684 
Research and development64,728 60,024 191,565 177,620 
General and administrative20,176 17,907 57,607 49,192 
Total operating expenses237,383 209,984 706,813 622,496 
(Loss) from operations(65,337)(61,832)(62,544)(137,597)
Foreign currency transaction gain (loss)518 4,236 (4,983)2,545 
Interest income166 243 555 1,092 
Interest expense(1,908)(5,956)(5,747)(13,791)
(Loss) income on capped call transactions(14,735)18,989 (7,543)19,816 
Other income, net2  108 1,374 
(Loss) before (benefit from) income taxes(81,294)(44,320)(80,154)(126,561)
(Benefit from) income taxes(24,826)(25,053)(54,360)(61,182)
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
(Loss) per share
Basic$(0.69)$(0.24)$(0.32)$(0.82)
Diluted$(0.69)$(0.24)$(0.32)$(0.82)
Weighted-average number of common shares outstanding
Basic81,526 80,537 81,284 80,191 
Diluted81,526 80,537 81,284 80,191 

See notes to unaudited condensed consolidated financial statements.
4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Net (loss)$(56,468)$(19,267)$(25,794)$(65,379)
Other comprehensive (loss) income, net of tax
Unrealized gain (loss) on available-for-sale securities53 (166)1,184 (66)
Foreign currency translation adjustments(4,400)113 (3,669)1,627 
Total other comprehensive (loss) income, net of tax$(4,347)$(53)$(2,485)$1,561 
Comprehensive (loss)$(60,815)$(19,320)$(28,279)$(63,818)

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)
Total
Stockholders’ Equity
Number
of Shares
Amount
December 31, 201979,599 $796 $140,523 $410,919 $(13,228)$539,010 
Equity component of convertible senior notes, net— — 61,604 — — 61,604 
Repurchase of common stock(87)(1)(5,999)— — (6,000)
Issuance of common stock for stock compensation plans564 6 (23,017)— — (23,011)
Stock-based compensation— — 23,199 — — 23,199 
Cash dividends declared ($0.03 per share)
— — — (2,405)— (2,405)
Other comprehensive (loss)— — — — (414)(414)
Net (loss)— — — (25,372)— (25,372)
March 31, 202080,076 $801 $196,310 $383,142 $(13,642)$566,611 
Repurchase of common stock(23)— (2,199)— — (2,199)
Issuance of common stock for stock compensation plans349 3 (14,085)— — (14,082)
Issuance of common stock under the employee stock purchase plan18 — 1,403 — — 1,403 
Stock-based compensation— — 25,674 — — 25,674 
Cash dividends declared ($0.03 per share)
— — — (2,413)— (2,413)
Other comprehensive income— — — — 2,028 2,028 
Net (loss)— — — (20,740)— (20,740)
June 30, 202080,420 $804 $207,103 $359,989 $(11,614)$556,282 
Repurchase of common stock(94)(1)(10,628)— — (10,629)
Issuance of common stock for stock compensation plans371 4 (22,524)— — (22,520)
Stock-based compensation— — 27,931 — — 27,931 
Cash dividends declared ($0.03 per share)
— — — (2,422)— (2,422)
Other comprehensive (loss)— — — — (53)(53)
Net (loss)— — — (19,267)— (19,267)
September 30, 202080,697 $807 $201,882 $338,300 $(11,667)$529,322 
6


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)
Total
Stockholders’ Equity
Number
of Shares
Amount
December 31, 202080,890 $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 plans402 4 (25,513)— — (25,509)
Issuance of common stock under the employee stock purchase plan24 — 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, 202181,246 $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 plans267 3 (16,199)— — (16,196)
Issuance of common stock under the employee stock purchase plan24 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, 202181,456 $815 $147,670 $375,069 $(1,086)$522,468 
Repurchase of common stock(96)(1)(12,795)— — (12,796)
Issuance of common stock for stock compensation plans286 3 (18,117)— — (18,114)
Issuance of common stock under the employee stock purchase plan24 — 2,639 — — 2,639 
Stock-based compensation— — 28,701 — — 28,701 
Cash dividends declared ($0.03 per share)
— — — (2,451)— (2,451)
Other comprehensive (loss)— — — — (4,347)(4,347)
Net (loss)— — — (56,468)— (56,468)
September 30, 202181,670 $817 $148,098 $316,150 $(5,433)$459,632 

See notes to unaudited condensed consolidated financial statements.
7


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
20212020
Operating activities
Net (loss)$(25,794)$(65,379)
Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation89,483 76,755 
Loss (gain) on capped call transactions7,543 (19,816)
Deferred income taxes(53,638)(43,476)
Amortization of deferred commissions31,388 24,922 
Amortization of debt discount and issuance costs2,025 10,405 
Amortization of intangible assets and depreciation24,030 15,677 
Amortization of investments 2,916 252 
Foreign currency transaction loss (gain)4,983 (2,545)
Other non-cash(8,421)10,623 
Change in operating assets and liabilities, net(79,836)(33,675)
Cash (used in) operating activities(5,321)(26,257)
Investing activities
Purchases of investments(67,170)(190,319)
Proceeds from maturities and called investments96,859  
Sales of investments25,123 1,424 
Payments for acquisitions, net of cash acquired(4,993) 
Investment in property and equipment(7,089)(21,806)
Cash provided by (used in) investing activities42,730 (210,701)
Financing activities
Proceeds from issuance of convertible senior notes 600,000 
Purchase of capped calls related to convertible senior notes (51,900)
Payment of debt issuance costs (14,527)
Proceeds from employee stock purchase plan7,786 1,403 
Dividend payments to stockholders(7,310)(7,206)
Common stock repurchases(91,907)(78,140)
Cash (used in) provided by financing activities(91,431)449,630 
Effect of exchange rate changes on cash and cash equivalents(1,466)183 
Net (decrease) increase in cash and cash equivalents(55,488)212,855 
Cash and cash equivalents, beginning of period171,899 68,363 
Cash and cash equivalents, end of period$116,411 $281,218 

See notes to unaudited condensed consolidated financial statements.
8

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. These financial statements 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, 2020.
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 are not necessarily indicative of the results expected for the full year 2021.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
Convertible debt
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, “Derivatives and Hedging”, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.
The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.
See "Note 8. Debt" for additional information.
NOTE 3. MARKETABLE SECURITIES
September 30, 2021December 31, 2020
(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debt$2,000 $ $ $2,000 $39,996 $ $(8)$39,988 
Corporate debt233,556 25 (144)233,437 253,345 88 (152)253,281 
$235,556 $25 $(144)$235,437 $293,341 $88 $(160)$293,269 
As of September 30, 2021, marketable securities’ maturities ranged from October 2021 to September 2024, with a weighted-average remaining maturity of 1.2 years.
9

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



NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
September 30, 2021December 31, 2020
Accounts receivable$143,445 $215,827 
Unbilled receivables239,774 207,155 
Long-term unbilled receivables132,147 113,278 
$515,366 $536,260 
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)
September 30, 2021
1 year or less$239,774 64 %
1-2 years80,980 22 %
2-5 years51,167 14 %
$371,921 100 %
Unbilled receivables by contract effective date:
(Dollars in thousands)
September 30, 2021
2021$168,237 45 %
2020109,904 29 %
201947,058 13 %
201822,169 6 %
2017 and prior24,553 7 %
$371,921 100 %
Major clients
Clients accounting for 10% or more of the Company’s total receivables:
September 30, 2021December 31, 2020
Client A12 %*
* Client accounted for less than 10% of total 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 completing a related performance obligation.
(in thousands)
September 30, 2021December 31, 2020
Contract assets (1)
$11,495 $15,296 
Long-term contract assets (2)
8,485 7,777 
$19,980 $23,073 
(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)
September 30, 2021December 31, 2020
Deferred revenue$229,103 $232,865 
Long-term deferred revenue (1)
5,682 8,991 
$234,785 $241,856 
(1) Included in other long-term liabilities.
The change in deferred revenue in the nine months ended September 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $212.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.
10

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



NOTE 5. DEFERRED COMMISSIONS
(in thousands)
September 30, 2021December 31, 2020
Deferred commissions (1)
$114,503 $108,624 
(1) Included in other long-term assets.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Amortization of deferred commissions (1)
$10,186 $8,861 $31,388 $24,922 
(1) Included in selling and marketing expense.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:
Nine Months Ended
September 30,
(in thousands)
2021
January 1,$79,231 
Acquisition2,701 
Currency translation adjustments22 
September 30,$81,954 
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
September 30, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,163 $(56,988)$6,175 
Technology
2-10 years
67,142 (58,273)8,869 
Other
1-5 years
5,361 (5,361) 
$135,666 $(120,622)$15,044 
(1) Included in other long-term assets.
December 31, 2020
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4-10 years
$63,168 $(55,877)$7,291 
Technology
2-10 years
64,843 (56,386)8,457 
Other
1-5 years
5,361 (5,361) 
$133,372 $(117,624)$15,748 
(1) Included in other long-term assets.
11

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



Amortization of intangible assets:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Cost of revenue
$629 $647 $1,887 $1,940 
Selling and marketing
373 371 1,119 1,111 
$1,002 $1,018 $3,006 $3,051 
Future estimated intangibles assets amortization:
(in thousands)
September 30, 2021
2021$981 
20223,886 
20233,618 
20242,849 
20252,509 
2026 and thereafter1,201 
$15,044 

NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was amortized over the remaining lease term. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million and accelerated corporate headquarters-related depreciation. 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 percent annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
Expense
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2021202020212020
Fixed lease costs (1)
$(3,108)$5,172 $(6,780)$14,933 
Short-term lease costs542 422 1,516 1,248 
Variable lease costs1,099 1,259 3,826 3,506 
$(1,467)$6,853 $(1,438)$19,687 
(1) The decrease in fixed lease costs in three and nine months ended September 30, 2021 was due to the modification of the corporate headquarters lease.
Right of use assets and lease liabilities
(in thousands)September 30, 2021December 31, 2020
Right of use assets (1)
$91,349 $67,651 
Operating lease liabilities (2)
$10,668 $18,541 
Long-term operating lease liabilities$