What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-17 compared with 2020-02-12 · 482 added, 285 removed, 563 unchanged (58% of the section changed)

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Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.

Revenue Recognition – Software License Arrangements - Refer to Note 2 to the financial statements

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Certain new complex arrangements require a detailed analysis of the contractual terms and application of more complex accounting guidance, specifically for contracts with higher contract values.

Factors with potentially significant judgements include:

Identification of the complete customer arrangement

Factors with potentially significant judgments include:

• Identification of the complete client arrangement

• Accounting treatment of contract modifications

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• We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment of contract modifications, identification of material rights, and allocation of arrangement consideration.

We selected a sample of customer contracts and performed the following:

• We selected a sample of client contracts and performed the following:

◦ Evaluated whether the Company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.

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◦ Tested the accuracy of management’s calculation of revenue for each performance obligation by developing an expectation for the revenue to be recorded in the current period and comparing it to the Company’s recorded balances.

Evaluated management’s assessment of any ongoing negotiations with customers and bundling with statements of work.

◦ Evaluated management’s assessment of any ongoing negotiations with clients and bundling with statements of work.

◦ Analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products and services in the original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.

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◦ For contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each project will require and independently recalculated the stand-alone selling price for each bundled fixed price service.

Obtained evidence of delivery of the elements of the arrangement to the customer.

◦ Obtained evidence of delivery of the elements of the arrangement to the client.

Convertible senior notes and capped calls— Refer to Note 10 to the financial statements

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature.

The fair value was determined utilizing a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In February 2020, the Company also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes.

The Capped Call Transactions are accounted for as derivative instruments which are recorded at fair value at the end of each reporting period.

The fair value was determined utilizing a lattice model that includes inputs and assumptions such as stock price, expected term, volatility, risk-free rate and implied yield.

There is complexity in applying the accounting framework for the Notes and the related Capped Call Transactions.

In addition, the determination of the fair value of the liability component of the convertible notes and the Capped Call Transactions requires the Company to make significant estimates and assumptions relating to the implied credit spread, expected volatility, and the risk-free rate for the liability component of the Convertible Notes, and the expected term, volatility, risk-free rate and implied yield for the derivative value of the Capped Call Transactions.

Performing audit procedures to evaluate the appropriateness of the accounting framework and the reasonableness of the estimates and assumptions used in the fair value of the liability component of the Notes and the Capped Call Transactions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the accounting for the Notes and Capped Call Transactions, including the Company’s judgments and calculations related to the fair value of the liability component of the Notes and the derivative value of the Capped Call Transactions, included the following procedures, among others:

• We tested the effectiveness of controls over the Company’s accounting for the Notes and Capped Call Transactions, and over the determination of the fair value of the liability component of the Notes and fair value of the Capped Call Transaction derivative.

• With the assistance of professionals in our firm having expertise in debt issuance and derivative transaction accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the Notes and Capped Call Transactions.

• With the assistance of fair value specialists, we evaluated the reasonableness of the valuation methodologies and the significant assumptions used to determine the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative, by:

◦ Testing the source information underlying the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative and the mathematical accuracy of the calculations.

◦ Developing estimates of the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative using independent expectations of the significant assumptions, and comparing our estimates of fair value to the Company’s estimates.

/s/ DELOITTE & TOUCHE LLP

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(in thousands, except per share amounts)

December 31, 2020 December 31, 2019

Current assets:

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Unbilled receivables 113,278 121,736

Goodwill 79,231 79,039

Other long-term assets 434,843 278,427

Total assets $ 1,604,262 $ 984,812

Liabilities and Stockholders’ Equity

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Total current liabilities 460,135 377,955

Convertible senior notes, net 518,203 —

Operating lease liabilities 59,053 52,610

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(in thousands, except per share amounts)

2020 2019 2018

Software license $ 294,910 $ 279,448 $ 288,119

Maintenance 296,709 280,580 263,875

Pega Cloud 208,268 133,746 82,627

Consulting 217,630 217,609 256,960

Total revenue 1,017,517 911,383 891,581

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Software license 2,928 3,656 5,169

Maintenance 22,311 25,656 24,565

Pega Cloud 76,575 65,828 37,409

Consulting 209,099 214,882 234,622

Total cost of revenue 310,913 310,022 301,765

Gross profit 706,604 601,361 589,816

Operating expenses

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Total operating expenses 850,131 736,239 606,848

(Loss) income from operations

Foreign currency transaction (loss) gain

Interest income, net

(Loss) from operations ( 143,527 ) ( 134,878 ) ( 17,032 )

Foreign currency transaction gain (loss) 3,704 ( 2,335 ) 2,421

Interest income 1,223 2,020 2,715

Interest expense ( 19,356 ) ( 212 ) ( 10 )

Gain on capped call transactions 31,697 — —

Other income (loss), net 1,370 559 363

(Loss) income before (benefit from) income taxes

(Loss) before (benefit from) income taxes ( 124,889 ) ( 134,846 ) ( 11,543 )

(Benefit from) income taxes ( 63,516 ) ( 44,413 ) ( 22,160 )

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(Loss) earnings per share

Basic $ ( 0.76 ) $ ( 1.14 ) $ 0.14

Diluted $ ( 0.76 ) $ ( 1.14 ) $ 0.13

Weighted-average number of common shares outstanding

Basic 80,336 79,055 78,564

Diluted 80,336 79,055 83,064

See notes to consolidated financial statements.

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(in thousands)

2020 2019 2018

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

Other comprehensive income (loss), net of tax

Unrealized gain (loss) on available-for-sale marketable securities

Unrealized gain (loss) on available-for-sale securities 46 249 ( 17 )

Foreign currency translation adjustments 10,234 ( 155 ) ( 6,600 )

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(in thousands, except per share amounts)

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive (Loss) Income

Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total

Stockholders’ Equity

of Shares Amount

Balance at January 1, 2018 78,081 $ 781 $ 152,097 $ 509,697 $ ( 6,705 ) $ 655,870

Repurchase of common stock ( 1,001 ) ( 10 ) ( 55,265 ) — — ( 55,275 )

Issuance of common stock for share-based compensation plans

Issuance of common stock under Employee Stock Purchase Plan

Issuance of common stock for stock compensation plans 1,413 14 ( 39,375 ) — — ( 39,361 )

Issuance of common stock under the employee stock purchase plan 33 — 1,767 — — 1,767

Stock-based compensation — — 63,981 — — 63,981

Cash dividends declared ($ 0.12 per share)

Other comprehensive income

— — — ( 9,451 ) — ( 9,451 )

Other comprehensive (loss) — — — — ( 6,617 ) ( 6,617 )

Net income — $ — $ — $ 10,617 $ — $ 10,617

December 31, 2018 78,526 $ 785 $ 123,205 $ 510,863 $ ( 13,322 ) $ 621,531

Repurchase of common stock ( 333 ) ( 3 ) ( 21,133 ) — — ( 21,136 )

Issuance of common stock for share-based compensation plans

Issuance of common stock for stock compensation plans 1,375 14 ( 44,853 ) — — ( 44,839 )

Issuance of common stock under the employee stock purchase plan 31 — 2,202 — — 2,202

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Cash dividends declared ($ 0.12 per share)

Other comprehensive (loss)

— — — ( 9,511 ) — ( 9,511 )

Other comprehensive income — — — — 94 94

Net (loss) — — — ( 90,433 ) — ( 90,433 )

December 31, 2019 79,599 $ 796 $ 140,523 $ 410,919 $ ( 13,228 ) $ 539,010

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Repurchase of common stock ( 278 ) ( 3 ) ( 28,271 ) — — ( 28,274 )

Issuance of common stock for share-based compensation plans

Issuance of common stock for stock compensation plans 1,536 16 ( 75,578 ) — — ( 75,562 )

Issuance of common stock under the employee stock purchase plan 33 — 3,039 — — 3,039

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Cash dividends declared ($ 0.12 per share)

— — — ( 9,667 ) — ( 9,667 )

Other comprehensive income — — — — 10,280 10,280

Net (loss) — — — ( 61,373 ) — ( 61,373 )

December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ ( 2,948 ) $ 542,172

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(in thousands)

2020 2019 2018

Operating activities

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Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities

Stock-based compensation expense

Stock-based compensation 103,068 80,909 63,862

(Gain) loss on capped call transactions ( 31,697 ) — —

Deferred income taxes ( 59,777 ) ( 49,317 ) ( 30,898 )

Amortization of deferred contract costs

Amortization of deferred commissions 33,302 29,152 17,271

Lease expense 16,248 14,497 —

Amortization of debt discount and issuance costs 14,813 — —

Amortization of intangible assets and depreciation 21,348 21,396 25,295

Amortization of investments 1,073 800 1,596

Foreign currency transaction loss (gain)

Foreign currency transaction (gain) loss ( 3,704 ) 2,335 ( 2,421 )

Other non-cash ( 879 ) ( 521 ) ( 1,678 )

Change in operating assets and liabilities:

Accounts receivable, unbilled revenue, and contract assets

Income taxes receivable and other current assets

Accounts receivable, unbilled receivables, and contract assets ( 32,321 ) 1,088 25,779

Other current assets ( 12,959 ) ( 6,344 ) ( 6,068 )

Accounts payable, accrued compensation, and accrued expenses 37,945 25,670 20,798

Deferred revenue 43,661 1,937 28,951

Deferred contract costs

Deferred commissions ( 55,175 ) ( 49,746 ) ( 44,036 )

Other long-term assets and liabilities ( 14,136 ) ( 23,588 ) ( 4,712 )

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Investment in property and equipment ( 25,369 ) ( 10,608 ) ( 11,893 )

Cash provided by (used in) investing activities

Cash (used in) provided by investing activities ( 321,683 ) 70,074 ( 48,196 )

Financing activities

Dividend payments to shareholders

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 ) — —

Dividend payments to stockholders ( 9,628 ) ( 9,486 ) ( 9,432 )

Proceeds from revolving credit facility — 45,000 —

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Common stock repurchases under stock repurchase program ( 27,974 ) ( 22,135 ) ( 54,434 )

Cash (used in) financing activities

Cash provided by (used in) financing activities 423,448 ( 74,258 ) ( 101,460 )

Effect of exchange rate changes on cash and cash equivalents 2,334 290 ( 2,557 )

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents 103,536 ( 46,059 ) ( 47,857 )

Cash and cash equivalents, beginning of period 68,363 114,422 162,279

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Supplemental disclosures

Income taxes paid (refunded)

Interest paid on convertible notes $ 2,338 $ — $ —

Income taxes paid $ 3,377 $ 4,745 $ 6,630

Non-cash investing and financing activity:

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Actual results could differ from those estimates.

Accounts with reported amounts based on significant estimates and judgments include, but are not limited to, revenue, unbilled receivables, deferred revenue, deferred income taxes, deferred contract costs, income taxes payable, intangible assets, and goodwill.

Accounts with reported amounts based on significant estimates and judgments include, but are not limited to, revenue, unbilled receivables, deferred revenue, deferred income taxes, deferred commissions, income taxes payable, convertible senior notes, capped call transactions, intangible assets, and goodwill.

Principles of consolidation

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and subsidiaries in which the Company holds a controlling financial interest.

All intercompany accounts and transactions have been eliminated in consolidation.

All intercompany accounts and transactions were eliminated in consolidation.

SIGNIFICANT ACCOUNTING POLICIES

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• maintenance revenue from client support including software upgrades (on a when and if available basis), telephone support, and bug fixes or patches.

services revenue from cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications, and consulting revenue, which is primarily related to new software license implementations, training, and reimbursable costs.

• Pega Cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications.

• consulting revenue, which is primarily related to new software license implementations, training, and reimbursable costs.

Performance Obligations

The Company’s software license and cloud arrangements often contain multiple performance obligations.

For contracts with multiple performance obligations, the Company accounts for each performance obligation separately if it is distinct.

Transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis.

If the transaction price contains discounts or the Company expects to provide a future price concession, these elements are considered when determining the transaction price prior to allocation.

The Company’s policy is to exclude from the determination of transaction price sales and similar taxes collected from clients.

The Company’s software license and Pega Cloud arrangements often contain multiple performance obligations.

If a contract contains multiple performance obligations, the Company accounts for each distinct performance obligation separately.

The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis.

Any discounts or expected potential future price concessions are considered when determining the total transaction price.

The Company’s policy is to exclude sales and similar taxes collected from clients from the determination of transaction price.

The Company’s typical performance obligations are:

Performance Obligation

How Standalone Selling Price is Typically Determined

When Performance Obligation is Typically Satisfied

When Payment is Typically Due

Perpetual license

Residual approach

Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time)

Effective date of the license

Residual approach

Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time)

Annually, or more frequently, over the term of the license

Consistent pricing relationship as a percentage of the related license and observable in stand-alone renewal transactions (1)

Ratably over the term of the maintenance (over time)

Annually, or more frequently, over the term of the maintenance

- time and materials

Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes

Based on hours incurred to date

- fixed price

Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes multiplied by estimated hours for the project

Based on hours incurred as a percentage of total estimated hours

As contract milestones are achieved

Residual approach

Ratably over the term of the service (over time)

Annually, or more frequently, over the term of the service

Performance Obligation How Standalone Selling Price is Typically Determined When Performance Obligation is Typically Satisfied When Payment is Typically Due

Perpetual license Residual approach Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) Effective date of the license

Term license Residual approach Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) Annually, or more frequently, over the term of the license

Maintenance Consistent pricing relationship as a percentage of the related license and observable in stand-alone renewal transactions (1)

Ratably over the term of the maintenance (over time) Annually, or more frequently, over the term of the maintenance

Pega Cloud Residual approach Ratably over the term of the service (over time) Annually, or more frequently, over the term of the service

- time and materials Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes Based on hours incurred to date Monthly

- fixed price Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes multiplied by estimated hours for the project Based on hours incurred as a percentage of total estimated hours As contract milestones are achieved

(1) Technical support and software updates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.

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Periodically, the Company reevaluates whether the residual approach remains appropriate.

As required, the Company evaluates its residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its standalone selling price.

As required, the Company evaluates its residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its stand-alone selling price.

If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to the client that the client would not receive without entering into that contract.

Discounts on options to purchase additional products and services that are in excess of discounts available to similar clients are accounted for as an additional performance obligation.

Discounts on options to purchase additional products and services greater than discounts available to similar clients are accounted for as an additional performance obligation.

During most of each client contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfer control of the performance obligation related to the software license at the inception of the contract term.

A significant portion of the total contract consideration is typically allocated to the license performance obligation.

Therefore, our contracts often result in the recording of unbilled receivables and contract assets throughout most of the contract term.

The Company records an unbilled receivable or contract asset when revenue recognized on a contract exceeds the billings.

The Company recognizes an impairment on receivables and contract assets if, after contract inception, it becomes probable that payment is not collectible.

The Company reviews receivables and contract assets on an individual basis for impairment.

Variable consideration

The Company’s arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license.

In addition, the Company may provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts.

The Company may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts.

For variable fees arising from the client’s acquisition of additional usage of a previously delivered software license, the Company applies the sales and usage-based royalties guidance related to a license of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs.

For pricing concessions, and other forms of variable consideration that may arise, the Company includes in the determination of total transaction price an estimate of variable fees if it is probable that a significant reversal of cumulative revenue recognized will not occur.

The Company includes variable fees in the determination of total transaction price if it is not probable that a future significant reversal of revenue will occur.

The Company uses the expected value or most likely value amount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical price concessions offered to clients.

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Although there may be instances with an intervening period between the delivery of the license and the payment, typically in term license arrangements, the purpose of that timing difference is to align the client’s payment with the timing of the use of the software license or service.

In certain circumstances, however, there are instances where the timing of revenue recognition differs from the timing of payment due to extended payment terms or fees that are non-proportional to the associated usage of software licenses.

In certain circumstances, however, there are instances where revenue recognition timing differs from the timing of payment due to extended payment terms or fees that are non-proportional to the associated usage of software licenses.

In these instances, the Company evaluates whether a significant financing component exists.

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• a cumulative catch-up basis.

Deferred contract costs

Deferred commissions

The Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions.

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As a result, there are no commensurate commissions paid on contract renewals.

Deferred contract costs are allocated to each performance obligation within the contract and amortized in accordance with the transfer of underlying goods and services within those contracts and expected renewals.

The expected benefit period is determined based on the length of the client contracts, client attrition rates, the underlying technology life-cycle, and the influence of the competitive marketplace in which the products and services are sold.

Deferred costs allocated to maintenance and deferred costs for cloud arrangements are amortized over an average expected benefit period of five years .

Deferred commissions are allocated to each performance obligation within the contract and amortized according to the transfer of underlying goods and services within those contracts and expected renewals.

The expected benefit period is determined based on the length of the client contracts, client attrition rates, the underlying technology life-cycle, and the competitive marketplace’s influence in which the products and services are sold.

Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefit period of five years .

Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the five years expected benefit period, are amortized at the point in time control of the software license is transferred.

Deferred costs allocated to consulting are amortized over a period that is consistent with the pattern of transfer of control for the related services.

Deferred costs allocated to consulting are amortized over a period consistent with the pattern of transfer of control for the related services.

Financial instruments

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, and accounts payable.

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, capped call transactions, and accounts payable.

The Company considers debt securities that are readily convertible to known amounts of cash with maturities of three months or less from the purchase date to be cash equivalents.

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All of the Company’s investments are classified as available-for-sale and are carried at fair value.

Unrealized gains and losses considered to be temporary in nature are recorded as a component of accumulated other comprehensive loss, net of related income taxes.

Unrealized gains and losses considered temporary in nature are recorded as a component of accumulated other comprehensive loss, net of related income taxes.

The Company reviews all investments for reductions in fair value that are other-than-temporary.

When such reductions occur, the cost of the investment is adjusted to fair value by recording a loss on investments in the consolidated statements of operations.

When such reductions occur, the investment cost is adjusted to fair value by recording a loss on investments in the consolidated statements of operations.

Gains and losses on investments are calculated based upon the specific investment.

Receivables, Contract Assets, And Deferred Revenue" and "Note 12.

Receivables, Contract Assets, And Deferred Revenue", "Note 10.

Debt", and "Note 12.

Fair Value Measurements" for additional information.

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Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for computer equipment and five years for furniture and fixtures.

Leasehold improvements are amortized over the lesser of the term of the lease or the useful life of the asset.

Leasehold improvements are amortized over the lesser of the lease’s term or the useful life of the asset.

Repairs and maintenance costs are expensed as incurred.

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All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life.

The Company evaluates its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

The Company evaluates its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that such assets’ carrying amount may not be recoverable.

Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the long-lived tangible or intangible assets to their carrying value.

If impairment exists, the Company calculates the impairment by comparing the carrying value to its fair value as determined by discounted expected cash flows.

Cash equivalents

Cash equivalents include money market funds, time deposits and other investments with original maturities of three months or less.

Business combinations

The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The Company uses its best estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The Company’s estimates are inherently uncertain and subject to refinement.

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Capitalization of computer software developed for resale begins upon the establishment of technological feasibility, generally demonstrated by a working model or an operative version of the computer software product.

Such costs have not been material to date, as technological feasibility is established within a short time frame from the software’s general availability and, as a result, no costs were capitalized in 2019 , 2018 , or 2017 .

Such costs have not been material to date, as technological feasibility is established within a short time frame from the software’s general availability.

As a result, no costs were capitalized in 2020, 2019, or 2018.

Stock-based compensation

The Company recognizes stock-based compensation expense associated with equity awards based on the fair value of these awards at the grant date.

The Company recognizes stock-based compensation expense associated with equity awards based on the award’s fair value at the grant date.

Stock-based compensation is recognized over the requisite service period, which is generally the vesting period of the equity award and is adjusted each period for anticipated forfeitures.

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The Company regularly assesses the need for a valuation allowance against its deferred tax assets.

Future realization of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods.

Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income.

Future realization of the Company’s deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.

Taxable income sources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income.

The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized.

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New Accounting Standards

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 historical accounting under ASC 840 “Leases.”

The Company elected the permitted practical expedients not to 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.

Leases" for additional information.

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 Company adopted this standard effective January 1, 2020.

The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

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 equity an embedded conversion feature for such debt.

Additionally, 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.

Additionally, the standard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”).

The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020.

It can be adopted on either a full retrospective or modified retrospective basis.

The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

The Company expects to elect to early adopt the new standard in the first quarter of 2021.

MARKETABLE SECURITIES

As of December 31, 2019 , the Company did not hold any marketable securities.

(in thousands)

December 31, 2020

Municipal bonds

Corporate bonds

(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Government debt $ 39,996 $ — $ ( 8 ) $ 39,988

Corporate debt 253,345 88 ( 152 ) 253,281

$ 293,341 $ 88 $ ( 160 ) $ 293,269

As of December 31, 2020, marketable securities maturities ranged from January 2021 to December 2023, with a weighted-average remaining maturity of 1.5 years.

As of December 31, 2019, the Company did not hold any marketable securities.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Accounts receivable $ 215,827 $ 199,720

1 unchanged sentence

Long-term unbilled receivables 113,278 121,736

$ 536,260 $ 501,675

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

3 unchanged sentences

1 year or less $ 207,155 65 %

1-2 years 83,992 26 %

2-5 years 29,286 9 %

$ 320,433 100 %

Unbilled receivables based upon contract effective date:

(Dollars in thousands)

December 31, 2020

2020 $ 149,867 47 %

2019 87,941 27 %

2018 31,097 10 %

2017 31,668 10 %

2016 and prior 19,860 6 %

$ 320,433 100 %

Major clients

No client represented 10% or more of the Company’s total accounts receivable and unbilled receivables as of December 31, 2020 or December 31, 2019.

Contract assets and deferred revenue

(in thousands)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Contract assets (1)

$ 15,296 $ 5,558

Long-term contract assets (2)

$ 23,073 $ 10,978

Deferred revenue $ 232,865 $ 190,080

Long-term deferred revenue (3)

$ 241,856 $ 195,487

(1) Included in other current assets.

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(3) Included in other long-term liabilities.

Contract assets are client committed amounts for which 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.

Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client where the right to payment is subject to conditions other than the passage of time, such as completing 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 year ended December 31, 2019 was primarily due to new billings in advance of revenue recognition, partially offset by revenue recognized during the period that was included in deferred revenue at December 31, 2018 .

Major clients

No client represented 10 % or more of the Company’s total accounts receivable and unbilled receivables as of December 31, 2019 or December 31, 2018 .

DEFERRED CONTRACT COSTS

The change in deferred revenue in the year ended December 31, 2020 was primarily due to new billings in advance of revenue recognition and $ 187.6 million of revenue recognized during the period that was included in deferred revenue on December 31, 2019.

DEFERRED COMMISSIONS

(in thousands)

Deferred contract costs (1)

Deferred commissions (1)

$ 108,624 $ 85,314

(1) Included in other long-term assets.

Amortization of deferred contract costs was as follows:

(in thousands) 2020 2019 2018

Amortization of deferred contract costs (1)

Amortization of deferred commissions (1)

$ 33,302 $ 29,152 $ 17,271

(1) Included in selling and marketing expenses.

PROPERTY AND EQUIPMENT (1)

(in thousands)

(in thousands) December 31,

Leasehold improvements

$ 52,335 $ 42,162

Computer equipment

30,211 25,147

Furniture and fixtures

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Computer software developed for internal use

18,542 17,606

Fixed assets in progress

122,152 105,258

accumulated depreciation

Depreciation expense was:

( 81,754 ) ( 70,975 )

$ 40,398 $ 34,283

(1) Included in other long-term assets.

(in thousands) 2020 2019 2018

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GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill:

(in thousands)

January 1, $ 79,039 $ 72,858

Acquisition — 6,179

Currency translation adjustments 192 2

(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 intangible assets of $ 6.2 million and $ 5.1 million .

As discussed in "Note 8.

Segment Information" the Company operates in one operating segment and has one reporting unit.

December 31, $ 79,231 $ 79,039

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

December 31, 2020

(in thousands)

Net Book Value (1)

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

Client-related

$ 63,168 $ ( 55,877 ) $ 7,291

64,843 ( 56,386 ) 8,457

5,361 ( 5,361 ) —

$ 133,372 $ ( 117,624 ) $ 15,748

(1) Included in other long-term assets.

December 31, 2019

(in thousands)

Accumulated Amortization

Net Book Value (1)

Client-related

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

Client-related 4 - 10 years

$ 63,140 $ ( 54,368 ) $ 8,772

Technology 2 - 10 years

64,843 ( 53,898 ) 10,945

Other 1 - 5 years

5,361 ( 5,361 ) —

$ 133,344 $ ( 113,627 ) $ 19,717

(1) Included in other long-term assets.

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(in thousands)

2020 2019 2018

Cost of revenue $ 2,487 $ 3,500 $ 5,027

Selling and marketing 1,483 3,125 6,416

$ 3,970 $ 6,625 $ 11,443

Future estimated amortization expense related to intangible assets:

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December 31, 2020

2024 and thereafter

2025 and after 2,725

SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software

that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market.

To assess performance, the Company’s CODM, who is the Chief Executive Officer, reviews financial information on a consolidated basis.

The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides case management, business process management, and real time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market.

To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on a consolidated basis.

Therefore, the Company determined it has one operating segment and one reporting unit.

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and international operations were:

(Dollars in thousands)

International, other

(Dollars in thousands) December 31,

$ 31,339 78 % $ 26,644 78 %

International 9,059 22 % 7,639 22 %

$ 40,398 100 % $ 34,283 100 %

(in thousands) 2020 2019

2 unchanged sentences

Variable lease costs 4,470 5,554

Total rent expense under operating leases was approximately $ 14.9 million and $ 14.7 million for 2018 and 2017 , respectively.

$ 26,374 $ 25,095

Total rent expense under operating leases was $ 14.9 million for 2018.

Right of use assets and lease liabilities

(in thousands)

December 31, 2019

(in thousands) December 31, 2020 December 31, 2019

Right of use assets (1)

$ 67,651 $ 58,273

Lease liabilities (2)

$ 18,541 $ 15,885

Long-term lease liabilities $ 59,053 $ 52,610

3 unchanged sentences

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

December 31, 2019

Weighted-average remaining lease term

December 31, 2020 December 31, 2019

Weighted-average remaining lease term 4.7 years 4.0 years

Weighted-average discount rate (1)

(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 term of the lease in a similar economic environment.

(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.

Maturities of lease liabilities are:

(in thousands)

December 31, 2019

2024 and thereafter

(in thousands) December 31, 2020

1 year or less $ 22,164

1-2 years 21,747

2-3 years 21,599

3-4 years 7,683

> 4 years 14,431

Total lease payments 87,624

1 unchanged sentence

Total short and long-term lease liabilities $ 77,594

(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 before the adoption of ASC 842 were:

(in thousands)

Operating Leases (1)

(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.

(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

2 unchanged sentences

Right of use assets recognized for new leases and amendments (non-cash) $ 24,276 $ 31,155

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $ 600 million, due March 1, 2025, in a private placement.

The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes.

There are no required principal payments until the maturity of the Notes.

The Notes accrue interest at an annual rate of 0.75 %, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

Proceeds from the Notes and Capped Call Transactions:

(in thousands) Amount

Principal $ 600,000

issuance costs ( 14,527 )

Capped Call Transactions ( 51,900 )

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 Company will settle conversions by paying or delivering, as applicable, 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.

The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

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 commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds one hundred and thirty percent ( 130 %) of the conversion price for each of at least twenty ( 20 ) trading days (whether or not consecutive) during the thirty ( 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 the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time 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 due on such redemption date in full, at any time until the Company pays such redemption price in full).

As of December 31, 2020, no Notes were eligible for conversion at the noteholders’ election.

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” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, 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 an integral 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 events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Impact of the Notes

In accounting for the transaction, the Notes have been separated into liability and equity components.

• The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature.

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the Notes’ contractual term.

• The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes.

The Company incurred issuance costs of $ 14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components.

• Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance.

They are amortized as interest expense using the effective interest method over the contractual term of the Notes.

• Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.

Net carrying amount of the liability component:

(in thousands) December 31, 2020

Principal $ 600,000

Unamortized debt discount ( 71,222 )

Unamortized issuance costs ( 10,575 )

Net carrying amount of the equity component, included in additional paid-in capital:

(in thousands) December 31, 2020

Conversion options (1)

(1) Net of issuance costs and taxes.

Interest expense related to the Notes:

(in thousands) 2020

Contractual interest expense ( 0.75 % coupon)

Amortization of debt discount (1)

Amortization of issuance costs (1)

(1) Amortized based upon an effective interest rate of 4.31 %.

Future payments of principal and contractual interest:

December 31, 2020

(in thousands) Principal Interest Total

2021 — 4,500 4,500

2022 — 4,500 4,500

2023 — 4,500 4,500

2024 — 4,500 4,500

2025 600,000 1,488 601,488

$ 600,000 $ 19,488 $ 619,488

Capped Call Transactions

In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock.

They are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.

The cap price of the Capped Call Transactions is $ 196.44 , subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events and tender offers.

The Capped Call Transactions are accounted for as derivative instruments.

The Capped Call Transactions do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement.

The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

Change in value of Capped Call Transactions:

(in thousands) Year Ended

December 31, 2020

Value at issuance $ 51,900

Fair value adjustment 31,697

Balance as of December 31, $ 83,597

Credit facility

On November 6, 2019 , the Company entered into a five year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”).

The Company may use borrowings to finance working capital needs and for general corporate purposes.

Under certain circumstances, the Credit Facility allows the Company to increase the aggregate commitment up to $ 200 million .

The Credit Facility contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 .

Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $ 200 million.

The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.

As of December 31, 2019 , the Company had no borrowings under the credit facility.

The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants, including:

• Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $ 200 million in cash and investments held by Pegasystems Inc.

• Beginning with the quarter ended on March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of December 31, 2020 and December 31, 2019, the Company had no outstanding borrowings under the Credit Facility.

STOCKHOLDERS’ EQUITY

Preferred stock

The Company has one million authorized shares of preferred stock, $ 0.01 par value per share, of which none were issued and outstanding at December 31, 2019 .

The Company has 1 million authorized shares of preferred stock, $ 0.01 par value per share, of which none were issued and outstanding at December 31, 2020.

The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictions thereof, without any further vote or action by the stockholders.

The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring, or defeating a change in control of the Company.

The Company had not issued any shares of preferred stock through December 31, 2019 .

The issuance of preferred stock could decrease the earnings and assets available for distribution to holders of common stock and may have the effect of delaying, deferring, or defeating a change in control of the Company.

The Company had no t issued any shares of preferred stock through December 31, 2020.

The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 80.9 million shares were issued and outstanding at December 31, 2020.

Dividends declared

2020 2019 2018

Dividends declared (per share) $ 0.12 $ 0.12 $ 0.12

Dividend payments to shareholders (in thousands)

The Company’s paid a quarterly cash dividend of $ 0.03 per share in 2019 , 2018 , and 2017 , however, the Board of Directors may terminate or modify this dividend program at any time without prior notice.

Dividend payments to stockholders (in thousands) $ 9,628 $ 9,486 $ 9,432

The Company’s paid a quarterly cash dividend of $ 0.03 per share in 2020, 2019, and 2018, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

Stock repurchases

(in thousands) 2020 2019 2018

Shares Amount Shares Amount Shares Amount

January 1, $ 45,484 $ 6,620 $ 34,892

Authorizations (1)

(1) On March 15, 2019, the Company announced that the Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock the Company is authorized to repurchase by $ 60 million .

$ 20,516 $ 60,000 $ 27,003

Repurchases (2)

( 278 ) $ ( 28,274 ) ( 333 ) $ ( 21,136 ) ( 1,001 ) $ ( 55,275 )

December 31, $ 37,726 $ 45,484 $ 6,620

(1) On June 15, 2020, the Company announced that the Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2021 and increased the remaining stock repurchase authority to $ 60 million.

(2) Purchases under this program have been made on the open market.

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.

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.

3 unchanged sentences

• 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 and are valued using model-based techniques, including option pricing models and discounted cash flow models.

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 2019 , 2018 , or 2017 .

The Company’s assets and liabilities measured at fair value on a recurring basis were:

December 31, 2019

(in thousands)

Investments in privately-held companies (1)

(1) Included in other long-term assets.

December 31, 2018

(in thousands)

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 models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable.

The Company applies judgment in its determination of expected volatility.

The Company considers both historical and implied volatility levels of the underlying equity security and, to a lesser extent, historical peer group volatility levels.

The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

The Company’s assets and liabilities measured at fair value on a recurring basis:

December 31, 2020 December 31, 2019

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Cash equivalents $ 42,339 $ 14,000 $ — $ 56,339 $ — $ — $ — $ —

Marketable securities $ — $ 293,269 $ — $ 293,269 $ — $ — $ — $ —

Municipal bonds

Corporate bonds

Total marketable securities

Investments in privately-held companies (1)

Capped Call Transactions (1) (2)

$ — $ 83,597 $ — $ 83,597 $ — $ — $ — $ —

Venture investments (1) (3)

$ — $ — $ 8,345 $ 8,345 $ — $ — $ 4,871 $ 4,871

(1) Included in other long-term assets.

For certain other financial instruments, including accounts receivable, unbilled receivables, and accounts payable, the carrying value approximates fair value due to the relatively short maturity of these items.

Assets measured at fair value on a nonrecurring basis

Assets recorded at fair value on a nonrecurring basis, including property and equipment and intangible assets, are recognized at fair value when they are impaired.

The Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis during

2019 , 2018 , or 2017 .

(2) See "Note 10.

Debt" for additional information.

(3) Investments in privately-held companies.

Change in venture investments:

(in thousands) 2020 2019

January 1, $ 4,871 $ 3,390

New investments 3,306 1,444

Sales of investments ( 1,424 ) —

Changes in foreign exchange rates 118 37

Fair value adjustment 1,474 —

December 31, $ 8,345 $ 4,871

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ relatively short maturity.

Fair value of the Notes

The fair value of the Company’s Notes was recorded at $ 515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature.

The fair value of the debt component was determined based on a discounted cash flow model.

The discount rate used reflected both the time value of money and credit risk inherent in the Notes.

The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $ 600 million.

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 706.5 million as of December 31, 2020.

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.

See "Note 10.

Debt" for additional information.

In addition to receivables, the Company is potentially subject to concentrations of credit risk from the Company’s cash, cash equivalents, and marketable securities.

The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwide to reduce the credit risk exposure.

The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwide to reduce the Company’s credit risk exposure.

Investment policies have been implemented that limit purchases of marketable debt securities to investment-grade securities.

1 unchanged sentence

(Dollars in thousands) 2020 2019 2018

$ 613,844 61 % $ 525,191 57 % $ 469,987 52 %

Other Americas 49,441 5 % 60,536 7 % 53,239 6 %

1 unchanged sentence

Europe (excluding U.K.), Middle East, and Africa 156,056 15 % 137,946 15 % 147,248 17 %

Asia-Pacific 106,659 10 % 100,328 11 % 125,479 14 %

$ 1,017,517 100 % $ 911,383 100 % $ 891,581 100 %

Revenue streams

1 unchanged sentence

Perpetual license $ 28,558 $ 80,015 $ 109,863

Term license 266,352 199,433 178,256

Revenue recognized at a point in time 294,910 279,448 288,119

Maintenance 296,709 280,580 263,875

Pega Cloud 208,268 133,746 82,627

Consulting 217,630 217,609 256,960

Revenue recognized over time 722,607 631,935 603,462

$ 1,017,517 $ 911,383 $ 891,581

(in thousands) 2020 2019 2018

Pega Cloud 208,268 133,746 82,627

Maintenance 296,709 280,580 263,875

Term license $ 266,352 $ 199,433 $ 178,256

Subscription (1)

771,329 613,759 524,758

Perpetual license 28,558 80,015 109,863

Consulting 217,630 217,609 256,960

Total revenue $ 1,017,517 $ 911,383 $ 891,581

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

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

Remaining performance obligations ("Backlog")

1 unchanged sentence

December 31, 2020

(Dollars in thousands)

Perpetual license

(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total

1 year or less $ 11,514 $ 105,920 $ 227,803 $ 248,223 $ 19,226 $ 612,686 57 %

1-2 years 395 7,962 54,509 193,064 346 256,276 24 %

2-3 years — 4,928 28,320 104,542 851 138,641 13 %

Greater than 3 years — 4 19,283 44,308 1,189 64,784 6 %

$ 11,909 $ 118,814 $ 329,915 $ 590,137 $ 21,612 $ 1,072,387 100 %

December 31, 2019

(Dollars in thousands)

Perpetual license

(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total

1 year or less $ 2,305 $ 97,826 $ 206,882 $ 165,571 $ 20,798 $ 493,382 58 %

1-2 years 2,179 12,014 30,291 128,109 1,439 174,032 21 %

2-3 years — 3,132 17,844 84,788 132 105,896 13 %

Greater than 3 years — 3,861 13,277 43,702 1,993 62,833 8 %

Major clients

Clients accounting for 10% or more of the Company’s total revenue were:

(Dollars in thousands)

Total revenue

*Client accounted for less than 10% of total revenue.

$ 4,484 $ 116,833 $ 268,294 $ 422,170 $ 24,362 $ 836,143 100 %

STOCK-BASED COMPENSATION

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(in thousands) 2020 2019 2018

Cost of revenues

Cost of revenue $ 20,796 $ 18,822 $ 16,862

Selling and marketing 46,283 32,665 23,237

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General and administrative 13,104 10,484 8,489

$ 103,068 $ 80,909 $ 63,862

Income tax benefit $ ( 20,464 ) $ ( 16,392 ) $ ( 13,383 )

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The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant.

The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest.

The stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest.

Employees may elect to receive 50 % of their target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.

If elected by an employee, the equity amount is equal in value on the date of grant to 50 % of his or her target incentive opportunity, based on the employee’s base salary.

The number of RSUs granted is determined by dividing 50 % of the employee’s target incentive opportunity by 85 % of the closing price of its common stock on the grant date, less the present value of expected dividends during the vesting period.

If elected, the award vests 100 % on the CICP payout date of the following year for all participants.

Employees may elect to receive 50 % of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.

If elected by an employee, the equity amount is equal in value on the date of grant to 50 % of the employee’s target incentive opportunity, based on the employee’s base salary.

The number of RSUs granted is determined by dividing 50 % of the employee’s target incentive opportunity by 85 % of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during the vesting period.

If elected, the award vests 100 % on the following year’s CICP payout date.

Vesting is conditioned upon the performance conditions of the CICP and on continued employment;

if threshold funding does not occur, the RSUs will not vest.

The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on

the vesting date.

The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”).

With net settled awards, the employee does not surrender any cash or shares upon exercise.

Rather, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement.

Instead, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement.

The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by the Company.

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Subsequent amendments to the plan increased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annual compensation to any non-employee Director to $ 0.5 million.

As of December 31, 2019 , approximately 10 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.

As of December 31, 2020, 9.9 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.

2006 Employee Stock Purchase Plan

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) pursuant to which the Company’s employees are entitled to purchase up to an aggregate of one million shares of common stock, at a price equal to at least 85 % of the fair market value of the Company’s common stock on either the commencement date or completion date for offerings under the plan, whichever is less, or such higher price as the Company’s Board of Directors may establish from time to time.

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which the Company’s employees are entitled to purchase up to an aggregate of one million shares of common stock, at a price equal to at least 85 % of the fair market value of the Company’s common stock on the lesser of the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time.

Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95 % of the fair market value on the completion date of the offering period.

As a result, the 2006 ESPP is non-compensatory and is tax-qualified.

Therefore, as of December 31, 2019 , no compensation expense related to shares issued under the plan had been recognized.

In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining to be issued under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.

As of December 31, 2019 , approximately 0.4 million shares had been issued thereunder.

Shares available for issuance

As of December 31, 2019 , there were approximately 6.5 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of approximately 5.9 million shares under the 2004 Plan and approximately 0.6 million shares under the 2006 ESPP.

Therefore, as of December 31, 2020, no compensation expense related to the plan had been recognized.

In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.

As of December 31, 2020, 0.5 million shares had been issued thereunder.

Shares issued and available for issuance

During 2020, the Company issued 1.6 million shares to its employees and directors under the Company’s share-based compensation plans.

As of December 31, 2020, there were 11.1 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 10.6 million shares under the 2004 Plan and 0.5 million shares under the 2006 ESPP.

Grant activity

During 2019 , the Company issued approximately 1.4 million shares to its employees and directors under the Company’s share-based compensation plans.

Stock options

The Company estimates the fair value of stock options using a Black-Scholes option valuation model.

The Company estimates the fair value of stock options using a Black-Scholes option-pricing model.

Key inputs used to estimate the fair value of stock options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.

The exercise price for stock options is greater than or equal to the fair market value of the shares at the grant date.

The exercise price for stock options is greater than or equal to the shares’ fair market value at the grant date.

The following table summarizes the Company’s fair value assumptions for stock options:

2020 2019 2018

Weighted-average grant-date fair value $ 24.16 $ 19.10 $ 18.03

Assumptions used in the Black-Scholes option valuation model

Assumptions used in the Black-Scholes option-pricing model:

Expected annual volatility (1)

31 % 32 % 34 %

Expected term in years (2)

Risk-free interest rate (3)

0.7 % 2.4 % 2.6 %

Expected annual dividend yield (4)

(1) The expected annual volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period which approximates the expected option term.

0.2 % 0.3 % 0.4 %

(1) The expected annual volatility for each grant is determined based on the average of historic daily price changes of the Company’s common stock over a period, which approximates the expected option term.

(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

(3) The risk-free interest rate is based on the yield of U.S.

Treasury securities with a maturity that is commensurate with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period.

Treasury securities with a commensurate maturity with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average dividend yield assumptions used for options granted during the applicable period.

The following table summarizes the combined stock option activity under the Company’s stock option plans for 2020:

(in thousands)

Weighted-average Exercise Price

Weighted-average Remaining Contractual Term (in years)

Aggregate Intrinsic Value

(in thousands) Weighted-average Exercise Price Weighted-average Remaining Contractual Term (in years) Aggregate Intrinsic Value

(in thousands)

Options outstanding as of January 1, 2020 7,436 $ 44.76

Granted 2,018 92.81

Exercised ( 1,777 ) 33.52

Forfeited ( 286 ) 62.86

Options outstanding as of December 31, 2020 7,391 $ 59.88

Vested and expected to vest as December 31, 2019

Vested and expected to vest as of December 31, 2020 6,225 $ 57.85 7.1 $ 469,374

Exercisable as of December 31, 2020 2,935 $ 38.73 5.6 $ 277,450

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The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2020 is based on the difference between the closing price of the Company’s stock of $ 133.26 and the exercise price of the applicable stock options.

As of December 31, 2019 , the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of approximately $ 29.6 million that is expected to be recognized as expense over a weighted-average period of approximately 2.3 years.

As of December 31, 2020, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $ 35.9 million that is expected to be recognized as expense over a weighted-average period of 2.3 years.

RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting.

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The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2020:

(in thousands)

Weighted- Average

Aggregate Intrinsic Value

(in thousands) Weighted- Average Grant-Date

Fair Value Aggregate Intrinsic Value

(in thousands)

Nonvested as of January 1, 2020 2,565 $ 55.61

Granted 1,168 93.68

Vested ( 1,059 ) 51.11

Forfeited ( 212 ) 65.17

Nonvested as of December 31, 2020 2,462 $ 74.78 $ 328,023

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The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2020 is based on the closing price of the Company’s stock of $ 133.26 on December 31, 2020.

As of December 31, 2019 , the Company had approximately $ 54.1 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of approximately 2.1 years .

As of December 31, 2020, the Company had $ 68.6 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of 2.1 years.

In 2020, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $ 117.47 per share.

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(in thousands) 2020 2019 2018

401(k) Plan $ 8,109 $ 6,676 $ 5,506

International plans 16,132 13,021 11,101

The components of (loss) income before (benefit from) income taxes are:

$ 24,241 $ 19,697 $ 16,607

The components of (loss) before (benefit from) income taxes are:

(in thousands) 2020 2019 2018

(Loss) income before (benefit from) income taxes

The components of the (benefit from) income taxes are:

Domestic $ ( 59,281 ) $ ( 51,396 ) $ ( 27,494 )

Foreign ( 65,608 ) ( 83,450 ) 15,951

$ ( 124,889 ) $ ( 134,846 ) $ ( 11,543 )

The components of (benefit from) income taxes are:

(in thousands) 2020 2019 2018

Total current provision for (benefit from)

Federal $ ( 11,251 ) $ 1,050 $ ( 1,862 )

State 399 405 287

Foreign 7,113 3,449 10,313

Total current (benefit from) provision for ( 3,739 ) 4,904 8,738

Federal ( 34,573 ) ( 25,356 ) ( 18,939 )

State ( 8,119 ) ( 5,143 ) ( 3,702 )

Foreign ( 17,085 ) ( 18,818 ) ( 8,257 )

Total deferred (benefit) ( 59,777 ) ( 49,317 ) ( 30,898 )

(Benefit from) income taxes

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory Federal income tax rate to (loss) income before (benefit from) income taxes is as follows:

$ ( 63,516 ) $ ( 44,413 ) $ ( 22,160 )

A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate, is as follows:

(in thousands) 2020 2019 2018

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Excess tax benefits related to share-based compensation ( 25,797 ) ( 14,291 ) ( 13,541 )

Cares Act ( 10,576 ) — —

Impact of change in tax law 7,489 1,908 1,636

(Benefit from) income taxes

Tax Reform Act

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”).

The Tax Reform Act makes significant changes in the U.S.

tax code including the following:

reduction of the corporate federal income tax rate from 35% to 21%;

repeal of the domestic manufacturing deduction;

repeal of the corporate alternative minimum tax;

a one-time transition tax on accumulated foreign earnings (if any);

a move to a territorial tax system;

acceleration of business asset expensing.

The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017.

The Company has concluded that it is not subject to the one-time transition tax due to our foreign subsidiaries being in a net accumulated deficit position.

Companies must make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as the global intangible low taxed income (“GILTI”) in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.

The Company has elected to account for GILTI in the year the tax is incurred as a period cost.

In 2018, the Company recognized an immaterial U.S.

tax benefit resulting from the foreign derived intangible income (“FDII”) deduction.

Beginning in 2019, there is no impact on the Company’s effective tax rate deriving from either the FDII,GILTI, or the base erosion and anti - abuse tax (“BEAT”) provisions.

Other 86 59 52

$ ( 63,516 ) $ ( 44,413 ) $ ( 22,160 )

(1) Global Intangible Low Taxed Income (“GILTI”), Foreign-Derived Intangible Income (“FDII”), and Base Erosion and Anti-abuse Tax (“BEAT”)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”) was enacted to address the economic impact of the COVID-19 pandemic in the United States.

Among other things, the Cares Act allows a five-year carryback period for tax losses generated in 2019 through 2021.

The Company carried back net operating losses generated in 2019, resulting in an income tax benefit of $ 5.7 million.

The $ 5.7 million income tax benefit represents the Federal rate differential between 35% and 21%.

In addition, the Company applied the carryback provisions of the Cares Act to its net operating losses generated in 2020, which resulted in the reclassification of $ 4.8 million net operating losses from a deferred income tax asset to refundable income taxes.

The Company does not expect the other income tax provisions of the Cares Act to have a material impact on its financial statements.

Deferred income taxes

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Accruals and reserves 26,309 24,902

Interest expense carryforward 3,464 —

Depreciation 4,795 2,493

Tax credit carryforwards 31,556 15,307

Other 370 199

Total deferred tax assets 154,623 113,861

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Deferred tax liabilities:

Capped call transactions ( 20,858 ) —

Convertible senior notes ( 6,473 ) —

Software revenue ( 11,477 ) ( 23,859 )

Intangibles ( 4,338 ) ( 6,103 )

Total deferred tax liabilities ( 43,146 ) ( 29,962 )

Deferred income taxes

$ 88,068 $ 55,892

The Company regularly assesses the need for a valuation allowance against its deferred tax assets.

In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized.

This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information.

There were no material changes in the valuation allowance in 2019 or 2018 .

At December 31, 2019 , the Company’s net operating losses and credit carryforwards are:

In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realizing the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized.

This determination requires significant judgment, including assumptions about future taxable income based on historical and projected information.

In 2020, the change in valuation allowances was primarily due to the expiration of $ 5.9 million in acquisition-related net operating losses.

There were no material changes in valuation allowances in 2019.

As of December 31, 2020, the Company’s net operating losses and credit carryforwards are:

(in thousands)

Federal State

Net operating losses (1)

$ 124,115 $ 9,149

Net operating losses due to acquisitions (1)

$ 76,826 $ 1,466

Credit carryforwards (2)

$ 24,372 $ 1,895

Credit carryforwards due to acquisitions $ 640 $ 60

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(in thousands)

2020 2019 2018

Balance as of January 1,

Additions based on tax positions related to the current year

$ 23,271 $ 18,157 $ 19,150

Additions for tax positions related to the current year 653 510 978

Additions for tax positions of prior years 962 4,917 174

Additions for acquired uncertain tax benefits

Reductions for change in U.S.

federal tax rate

Reductions for tax positions of prior years ( 1,085 ) ( 313 ) ( 2,145 )

Reductions for a lapse of the applicable statute of limitations

Balance as of December 31,

As of December 31, 2019 , the Company had approximately $ 23.3 million of total unrecognized tax benefits, which would decrease the

Company’s effective tax rate if recognized.

The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $ 0.1 million due to an anticipated settlement with tax authorities.

Income Tax Receivable

$ 23,801 $ 23,271 $ 18,157

As of December 31, 2020, the Company had $ 23.8 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized.

As of December 31, 2020 and December 31, 2019, the Company’s income tax receivable was $ 44.1 million and $ 25.9 million, respectively.

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The Company files federal and state income tax returns in the U.S.

as well as in various foreign jurisdictions.

and in various foreign jurisdictions.

In the ordinary course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S.

4 unchanged sentences

With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2014 to the present.

EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period.

Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method.

(LOSS) EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted-average number of common shares outstanding during the applicable period.

Diluted earnings per share is calculated using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method.

In periods of loss, all stock options and RSUs are excluded from the weighted-average number of common shares, as their inclusion would be anti-dilutive.

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Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

Weighted-average effect of dilutive securities:

Stock options — — 2,891

RSUs — — 1,609

Effect of dilutive securities — — 4,500

2 unchanged sentences

Outstanding anti-dilutive stock options and RSUs (1)

6,278 5,911 188

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

These awards may be dilutive in the future.

SELECTED QUARTERLY INFORMATION (UNAUDITED) (1)

(in thousands, except per share amounts)

(Loss) from operations

Net (loss) income

(Loss) earnings per share

(in thousands, except per share amounts)

Income (loss) from operations

Net income (loss)

Earnings (loss) per share

(1) Quarterly amounts shown may not sum to the full year amount due to rounding.

COMMITMENTS AND CONTINGENCIES

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The Company does not believe that the resolution of these matters will have a material adverse effect on its financial position or results of operations.

SUBSEQUENT EVENTS

Relocation of Corporate Headquarters

On February 12, 2021, the Company executed the Lease Termination Agreement with Charles Park Owner LLC to accelerate the lease termination date for the Company’s corporate headquarters in Cambridge, Massachusetts to October 1, 2021.

Under the terms of the Lease Termination Agreement, the Company will receive a payment of $ 18 million.

The Company is obligated to make rent payments outlined in the existing lease agreements until October 1, 2021, the new lease termination date.

Qurious.io acquisition

In January 2021, the Company acquired Qurious.io, Inc., a cloud-based real time speech analytics solution for customer service teams.

The acquisition was immaterial.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data