What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-28 compared with 2020-10-28 · 117 added, 155 removed, 90 unchanged (75% of the section changed)

1 unchanged sentence

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

These forward-looking statements deal with future events, and are subject to various risks and uncertainties that are difficult to predict, including, but not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, the timing of revenue recognition, management of our transition to a more subscription-based business model, variation in demand for our products and services, including among clients in the public sector, the impact of actual or threatened public health emergencies, such as the Coronavirus (COVID-19), reliance on third-party service providers, compliance with our debt obligations and debt covenants, the potential impact of our convertible senior notes and related Capped Call Transactions, reliance on key personnel, the continued uncertainties in the global economy, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks, security breaches and security flaws, our ability to protect our intellectual property rights and costs associated with defending such rights, maintenance of our client retention rate, and management of our growth.

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

• our future financial performance and business plans;

• the adequacy of our liquidity and capital resources;

• the continued payment of our quarterly dividends;

• the timing of revenue recognition;

• management of our transition to a more subscription-based business model;

• variation in demand for our products and services, including among clients in the public sector;

• the impact of actual or threatened public health emergencies, such as the Coronavirus (“COVID-19”);

• reliance on third-party service providers;

• compliance with our debt obligations and covenants;

• the potential impact of our convertible senior notes and Capped Call Transactions;

• reliance on key personnel;

• the relocation of our corporate headquarters;

• the continued uncertainties in the global economy;

• foreign currency exchange rates;

• the potential legal and financial liabilities and reputation damage due to cyber-attacks;

• security breaches and security flaws;

• our ability to protect our intellectual property rights and costs associated with defending such rights;

• our client retention rate;

• management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, and other filings we make with the U.S.

Securities and Exchange Commission (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether as the result of new information, future events, or otherwise.

The forward-looking statements contained in this Quarterly Report represent our views as of April 28, 2021.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software applications that help organizations transform how they engage with their customers and process work across their enterprise.

We also license our low-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications.

Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified low-code Pega Platform, empowering businesses to quickly design, extend, and scale their enterprise applications to meet strategic business needs.

We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity.

Our intelligent technology and scalable architecture enables the world’s leading brands and government agencies to solve problems quickly and transform for tomorrow.

Our clients are able to make better decisions and get work done using real-time artificial intelligence (“AI”) and intelligent automation on applications built on the low-code, cloud-native Pega Platform™, enabling our clients to streamline service, increase customer lifetime value, and boost efficiency.

Our consulting and client success teams, along with our world-class partners, leverage our Pega Express™ methodology and low code to allow clients to design and deploy critical applications quickly and collaboratively.

Our target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve.

2 unchanged sentences

Cloud Transition

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud (“Cloud Transition”).

Until we substantially complete our Cloud Transition, which we expect to occur in early 2023, we expect to continue to experience lower revenue growth and lower operating cash flow growth or negative cash flow.

The actual mix of perpetual license, term license, and Pega Cloud in a given period can fluctuate based on client preferences.

Additional information on the transition’s impact can be found below and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

As of September 30, 2020, COVID-19 has not had a material impact on our results of operations or financial condition.

The ultimate impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, and impact on our partners, vendors, or employees, all of which are uncertain and unpredictable.

Our shift towards subscription-based revenue streams, the industry mix of our clients, our product mix, the fact that many of our clients are well-known and of large size, and the critical nature of our products to our clients may reduce or delay the impact of COVID-19 on our business.

However, it is not possible to estimate the ultimate impact that COVID-19 will have on our business.

See “Coronavirus (“COVID-19”)” under Item 1A.

Risk Factors for additional information.

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud.

Until we substantially complete our Cloud Transition, which we anticipate will occur in late 2022 or early 2023, we may experience lower revenue growth and lower operating cash flow growth or negative cash flow.

Operating performance and the actual mix of revenue and new arrangements in a given period can fluctuate based on client preferences for our perpetual and subscription offerings.

See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Coronavirus (“COVID-19”)

As of March 31, 2021, COVID-19 has not had a material impact on our results of operations or financial condition.

See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Performance metrics

We utilize several performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased 21% since September 30, 2019

• ACV represents the annualized value of our active contracts as of the measurement date.

We utilize performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased 20% since March 31, 2020

• ACV, as reported, represents the annualized value of our active contracts as of the measurement date.

The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts.

Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.

Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts.

We believe the presentation of ACV on a constant currency basis enhances the understanding of our results, as it provides visibility into the impact of changes in foreign currency exchange rates, which are outside of our control.

All periods shown reflect foreign currency exchange rates as of September 30, 2020.

Remaining performance obligations (“Backlog”) | Increased 38% since September 30, 2019

• Backlog represents contracted revenue that has not yet been recognized and includes deferred revenue and non-cancellable amounts expected to be invoiced and recognized as revenue in future periods.

Year to date Pega Cloud revenue | Increased 55% since September 30, 2019

• Pega Cloud revenue is revenue as reported under U.S.

Client Cloud ACV is composed of maintenance ACV and term license ACV.

ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our Cloud Transition.

Reported amounts have not been adjusted for changes in foreign exchange rates.

Foreign currency exchange rate changes contributed 3% to total ACV growth in 2021.

Remaining performance obligations (“Backlog”) | Increased 30% since March 31, 2020

• Backlog represents expected future revenue on existing non-cancellable contracts.

Year to date Pega Cloud revenue | Increased 56% since the three months ended March 31, 2020

• Pega Cloud revenue is revenue under U.S.

GAAP for cloud contracts.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) and the rules and regulations of the SEC for interim financial reporting.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States and the rules and regulations of the SEC for interim financial reporting.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities.

2 unchanged sentences

• “Critical Accounting Estimates and Significant Judgments” in Item 7;

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

“Significant Accounting Policies” in Item 8.

“Financial Statements and Supplementary Data.”

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 other than those listed below.

Capped Call Transactions

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

The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes.

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.

Management applies judgment in its determination of expected volatility.

We consider both historical and implied volatility levels of the underlying equity security and, to a lesser extent, historical peer group volatility levels.

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.

Debt" and “7.

Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.

There have been no significant changes other than those disclosed in “Note 2.

New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

RESULTS OF OPERATIONS

Our Pega Cloud revenue is derived from our hosted Pega Platform and software applications.

Our license revenue is derived from sales of our applications and the Pega Platform.

Cloud Transition

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud.

As revenue from Pega Cloud arrangements is generally recognized over the contract term while revenue from perpetual and term licenses is generally recognized when the license rights become effective, the shift has and is expected to continue to result in slower revenue growth during the transition.

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud.

Revenue growth has been slower because of this transition.

Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract term.

In contrast, revenue from license sales is recognized when the license rights become effective, typically upfront.

(Dollars in thousands) Three Months Ended

September 30, Change

Nine Months Ended

September 30, Change

2020 2019 2020 2019

March 31, Change

Pega Cloud $ 67,858 22 % $ 43,466 16 % $ 24,392 56 %

7 unchanged sentences

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

The changes in total revenue in the three and nine months ended September 30, 2020 generally reflect our Cloud Transition.

Other factors impacting our revenue included:

• Term license revenue was higher in the three months ended September 30, 2019 primarily due to a greater number of large deals than in the three months ended September 30, 2020.

• An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance.

Under such arrangements, a greater portion of the total contract value is recorded as maintenance revenue, which is recognized over the contract term, rather than as term revenue, as the license rights become effective which is usually shortly after contract execution.

In the three and nine months ended September 30, 2020 multi-year committed maintenance contributed $2.9 million and $7.7 million to maintenance revenue growth.

In the nine months ended September 30, 2020 multi-year committed maintenance reduced term revenue growth by $10.2 million.

• Maintenance renewal rates remained over 90% in the nine months ended September 30, 2020.

• The decrease in consulting revenue in the nine months ended September 30, 2020 was primarily due to lower billable travel expenses as a result of COVID-19.

The increase in consulting revenue in the three months ended September 30, 2020 was primarily due to increased billable hours which more than offset the impact of reduced billable travel expenses due to COVID-19.

The total revenue change in the three months ended March 31, 2021 generally reflects our Cloud Transition.

Other factors impacting our revenue include:

• An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance periods.

Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than as term license revenue upon the effectiveness of the license rights.

In the three months ended March 31, 2021, multi-year committed maintenance contributed $3.4 million to maintenance revenue growth and reduced term revenue growth by $5.5 million.

• Maintenance renewal rates of higher than 90%.

• The decrease in consulting revenue in the three months ended March 31, 2021 was primarily due to a decrease in billable travel expenses as a result of COVID-19.

As part of our long-term strategy, we intend to continue growing and leveraging our ecosystem of partners on implementation projects, potentially reducing our future consulting revenue growth.

Three Months Ended

September 30, Change

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2021 2020

4 unchanged sentences

$ 231,052 74 % $ 186,063 70 % $ 44,989 24 %

* not meaningful

• The changes in gross profit in the three and nine months ended September 30, 2020 were primarily due to our Cloud Transition, revenue growth, and cost efficiency gains as Pega Cloud grows and scales.

• The increase in consulting gross profit in the three months ended September 30, 2020 was primarily due to an increase in consultant utilization.

Consultant utilization is impacted by several factors, including the scope and timing of new implementation projects and our level of involvement in implementation projects compared to our consulting partners and enabled clients.

To support our long-term strategy, we intend to grow and increasingly leverage our partners and enabled clients for future implementation projects, which may reduce the future growth rate.

• The changes in gross profit in the three months ended March 31, 2021 were primarily due to our Cloud Transition, revenue growth, and cost-efficiency gains as Pega Cloud grows and scales.

• The increase in consulting gross profit in the three months ended March 31, 2021 was primarily due to an increase in consultant utilization.

Consultant utilization is impacted by several factors, including the timing and scope of new implementation projects and the extent of our involvement compared to our consulting partners and enabled clients.

Operating expenses

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2020 2019 2020 2019

% of Revenue % of Revenue % of Revenue % of Revenue

March 31, Change

% of Revenue % of Revenue

Selling and marketing $ 148,739 47 % $ 136,024 51 % $ 12,715 9 %

1 unchanged sentence

General and administrative $ 18,270 6 % $ 15,630 6 % $ 2,640 17 %

• The increases in selling and marketing in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $24.4 million and $76.0 million, attributable to increases in headcount and equity compensation.

The increases in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.

These increases were partially offset by decreases in travel and entertainment of $8.5 million and $17.4 million as a result of COVID-19.

• The increases in research and development in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $7.8 million and $23.6 million, attributable to increases in headcount and equity compensation.

• The increases in general and administrative in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $0.8 million and $3.0 million, attributed to increases in headcount and equity compensation, and increases in professional services fees of $1.5 million and $4.2 million.

• The increase in selling and marketing in the three months ended March 31, 2021 was primarily due to an increase in compensation and benefits of $25.4 million, attributable to increases in headcount and equity compensation, partially offset by decreases in travel and entertainment of $6.0 million and sales and marketing events of $7.9 million due to COVID-19.

The increase in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.

• The increase in research and development in the three months ended March 31, 2021 was primarily due to an increase in compensation and benefits of $4.6 million, attributable to increases in headcount and equity compensation.

• The increase in general and administrative in the three months ended March 31, 2021 was primarily due to an increase in compensation and benefits of $1.1 million, attributable to increases in headcount and equity compensation, and an increase in professional services fees of $1.6 million.

• In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million.

This agreement was the primary contributor to a decrease in facilities expense of $2.1 million in selling and marketing, $1.7 million in research and development, and $0.3 million in general and administrative in the three months ended March 31, 2021.

Other income (expense), net

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2020 2019 2020 2019

Foreign currency transaction gain (loss) $ 4,236 $ (1,970) $ 6,206 * $ 2,545 $ (3,577) $ 6,122 *

March 31, Change

Foreign currency transaction (loss) $ (5,098) $ (5,947) $ 849 14 %

Interest income 153 607 (454) (75) %

Interest expense (1,880) (2,306) 426 18 %

Gain on capped call transactions 18,989 — 18,989 * 19,816 — 19,816 *

(Loss) on capped call transactions (19,117) (18,592) (525) (3) %

Other income, net 106 1,374 (1,268) (92) %

$ (25,836) $ (24,864) $ (972) (4) %

* not meaningful

• The changes in foreign currency transaction gain (loss) in the three and nine months ended September 30, 2020 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, accounts receivable, and intercompany receivables and payables held by our United Kingdom (“U.K.”) subsidiary.

• The decreases in interest income in the three and nine months ended September 30, 2020 were due to the decreases in market interest rates.

• The increases in interest expense in the three and nine months ended September 30, 2020 were due to our issuance of $600 million in aggregate principal amount of the Notes on February 24, 2020.

Debt" in Item 1 of this Quarterly Report for additional information.

• The change in foreign currency transaction (loss) in the three months ended March 31, 2021 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.

• The decrease in interest income in the three months ended March 31, 2021 was primarily due to a decrease in market interest rates.

• The decrease in interest expense in the three months ended March 31, 2021 was primarily due to our adoption of ASU 2020-06 on January 1, 2021.

New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.

Interest expense related to the Notes:

Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

March 31, Change

(in thousands) 2021 2020

4 unchanged sentences

$ 1,798 $ 2,169 $ (371)

• The increases in the gain on capped call transactions in the three and nine months ended September 30, 2020 were due to fair value adjustments on the Capped Call Transactions entered into in connection with our issuance of the Notes.

Debt" in Item 1 of this Quarterly Report for additional information.

• The increase in other income, net in the nine months ended September 30, 2020 was due to a gain from our venture investments portfolio.

• The increase in the (loss) on capped call transactions in the three months ended March 31, 2021 was due to fair value adjustments.

• The decrease in other income, net in the three months ended March 31, 2021 was due to an increase in the value of our venture investments portfolio in the three months ended March 31, 2020.

(Benefit from) income taxes

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2021 2020

(Benefit from) income taxes $ (17,618) $ (23,810)

Effective income tax rate

The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods.

This fluctuation may continue in future periods, depending on our future stock price in relation to the fair value of awards, the timing of the vestings of RSU awards, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.

During the nine months ended September 30, 2020, our effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Effective income tax benefit rate 73 % 48 %

During the three months ended March 31, 2021, the increase in our effective income tax benefit rate was primarily due to excess tax benefits from stock-based compensation and fair value adjustments for the capped call transactions, which were proportionally larger on a lower loss before income taxes.

Stock-based compensation increases the variability of our effective tax rates.

The impact of stock-based compensation on a given period depends on our profitability, the attributes of our stock compensation awards we grant, and award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2021 2020

4 unchanged sentences

Effect of exchange rates on cash and cash equivalents (1,536) (1,510)

Net increase (decrease) in cash and cash equivalents $ 212,855 $ (22,318)

Net increase in cash and cash equivalents $ 809 $ 469,779

(in thousands)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

$ 342,016 $ 399,138

3 unchanged sentences

$ 442,358 $ 465,168

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations and quarterly cash dividends for at least the next 12 months.

Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our growth, operating results, and the investments required to respond to the possible increased demand for our services.

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months.

Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments required to support our operations.

If we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.

1 unchanged sentence

and foreign taxes upon repatriation.

Due to the complexity of income tax laws and regulations, and the Tax Reform Act’s effects, it is impracticable to estimate the amount of taxes we would have to pay.

Cash (used in) operating activities

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud.

As cash from Pega Cloud and term arrangements is generally collected over the contract term while cash from perpetual licenses is generally collected when the license rights become effective, the shift has and is expected to continue to impact our cash collections.

As client preferences continue to shift in favor of Pega Cloud arrangements, we could continue to experience slower operating cash flow growth, or negative cash flow, in the near term.

In the nine months ended September 30, 2020, COVID-19 did not have a material impact on our cash flows from operations.

See “Coronavirus (“COVID-19”)” under Item 1A.

Risk Factors for additional information.

The change in cash (used in) operating activities in the nine months ended September 30, 2020 was primarily due to our Cloud Transition and increased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.

Cash (used in) provided by investing activities

The change in cash (used in) provided by investing activities in the nine months ended September 30, 2020 was primarily driven by purchases of financial instruments and investments in property and equipment at several of our office locations.

Cash provided by (used in) financing activities

Convertible senior notes

In February 2020, we issued $600 million in aggregate principal amount of our convertible senior notes (“Notes”) due March 1, 2025, which provided proceeds as follows:

(in thousands) Amount

Principal $ 600,000

issuance costs (14,527)

Capped Call Transactions (51,900)

A portion of the proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes.

Debt" in Item 1 of this Quarterly Report for additional information.

Credit facility

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

As of September 30, 2020, we had no outstanding borrowings under the Credit Facility.

Due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

Operating activities

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud.

This transition has and is expected to continue to impact our billings and timing of cash collections.

Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.

As client preferences shift in favor of Pega Cloud arrangements, we could experience slower operating cash flow growth, or negative cash flow, in the near term.

The change in cash provided by (used in) operating activities in the three months ended March 31, 2021 was primarily due to a significant increase in client collections.

In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which is expected to be paid in the last quarter of 2021.

The accelerated exit from this lease reduced our future lease liabilities by $21.1 million.

Investing activities

The change in cash provided by (used in) investing activities in the three months ended March 31, 2021 was primarily driven by investments in financial instruments, an acquisition, and a decrease in office space related capital expenditures.

Financing activities

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes due March 1, 2025.

In November 2019, and as amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association.

As of March 31, 2021, we had no outstanding borrowings under the Credit Facility.

Debt" in Item 1 of this Quarterly Report for additional information.

1 unchanged sentence

Changes in the remaining stock repurchase authority:

(in thousands) Nine Months Ended

September 30, 2020

(in thousands) Three Months Ended

March 31, 2021

December 31, 2020 $ 37,726

Authorizations (2)

Repurchases (1)

September 30, 2020 $ 47,172

March 31, 2021 $ 28,580

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

(2) On June 15, 2020, we announced that our 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.

Common stock repurchases

Nine Months Ended

September 30,

Three Months Ended

(in thousands) Shares Amount Shares Amount

2 unchanged sentences

267 $ 34,655 344 $ 29,011

During the nine months ended September 30, 2020 and 2019, instead of receiving cash from the equity holders, we withheld shares with a value of $49.5 million and $31.6 million, respectively, for the exercise price of options.

During the three months ended March 31, 2021 and 2020, instead of receiving cash from the equity holders, we withheld shares with a value of $10.1 million and $15.3 million, respectively, for the exercise price of options.

These amounts have been excluded from the table above.

Nine Months Ended

September 30,

(in thousands) 2020 2019

Dividend payments to shareholders $ 7,206 $ 7,105

We currently intend to pay a quarterly cash dividend of $0.03 per share.

We intend to pay a quarterly cash dividend of $0.03 per share.

However, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

Contractual obligations

As of September 30, 2020, our contractual obligations were:

Payments due by period

(in thousands) 2020 2021 2022-2023 2024-2025 2026 and thereafter Other Total

Purchase obligations (1)

$ 21,627 $ 56,689 $ 61,117 $ 173 $ — $ — $ 139,606

Investment commitments (2)

300 500 — — — — 800

Liability for uncertain tax positions (3)

— — — — — 5,441 5,441

Operating lease obligations 5,490 22,887 43,888 13,187 9,959 — 95,411

$ 27,417 $ 80,076 $ 105,005 $ 13,360 $ 9,959 $ 5,441 $ 241,258

(1) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.

(2) Represents the maximum funding that would be expected under existing venture investment agreements.

Our investment agreements generally allow us to withhold unpaid committed funds at our discretion.

(3) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

Three Months Ended

(in thousands) 2021 2020

Dividend payments to stockholders $ 2,427 $ 2,388

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-Q

Item 2. Management’s Discussion and Analysis