What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-07-27 · 60 added, 54 removed, 179 unchanged (39% of the section changed)

24 unchanged sentences

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 due to new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of July 27, 2022.

The forward-looking statements in this Quarterly Report represent our views as of October 26, 2022.

BUSINESS OVERVIEW

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

We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change.

Our powerful low-code platform for workflow automation and AI-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows.

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Coronavirus (“COVID-19”)

As of June 30, 2022, 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, 2021 for additional information.

As of September 30, 2022, COVID-19 has not had a material impact on our results of operations or financial condition.

See “ Actual or threatened public health emergencies could harm our business ” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.

Our direct financial exposure to Ukraine, Russia, and Belarus is not material.

1 unchanged sentence

For the year ended December 31, 2021, total revenue from clients located in Ukraine, Russia, and Belarus was less than $4.0 million.

However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict, the impact on our people, partners, clients, and vendors in neighboring countries, and globally, all of which are uncertain and unpredictable.

However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries and globally, all of which are uncertain and unpredictable.

Performance metrics

7 unchanged sentences

Reconciliation of GAAP Backlog and Constant Currency Backlog

(in millions) Q2 2022 1 Year Growth Rate

Backlog - GAAP $ 1,126 9 %

(in millions, except percentages) Q3 2022 1 Year Growth Rate

Backlog $ 1,148 11 %

Impact of changes in foreign exchange rates 74 7 %

Backlog - Constant Currency $ 1,222 18 %

Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to all periods.

Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods.

The above constant currency measures reflect foreign exchange rates applicable as of Q3 2021.

15 unchanged sentences

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted revenue growth as revenue is recognized differently for subscription services, which includes Pega Cloud and maintenance, than license sales.

Revenue from subscription service arrangements is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

This transition has impacted the optics of revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2022 2021 2022 2021

7 unchanged sentences

$ 270,731 100 % $ 256,268 100 % $ 14,463 6 % $ 921,375 100 % $ 895,469 100 % $ 25,906 3 %

The revenue changes in the three and six months ended June 30, 2022 generally reflect the impact of our subscription transition.

The revenue changes in the three and nine months ended September 30, 2022 generally reflect the impact of our subscription transition.

Other factors impacting our revenue include:

• The decreases in subscription license revenue in the three and six months ended June 30, 2022 were primarily due to several large software license contracts recognized in revenue in the three and six months ended June 30, 2021.

• The increases in consulting revenue in the three and six months ended June 30, 2022 were primarily due to increases in consultant billable hours in North America.

• The United States Dollar has strengthened against foreign currencies in the markets we operate, which reduced total revenue growth in the three and nine months ended September 30, 2022 by approximately 5 percent.

• The decreases in subscription license revenue in the three and nine months ended September 30, 2022 were primarily due to several large software license contracts recognized in revenue in the three and nine months ended September 30, 2021.

• The decreases in maintenance revenue in the three and nine months ended September 30, 2022 were primarily due to changes in foreign currency exchange rates and the continuing shift to Pega Cloud.

• The increase in consulting revenue in the nine months ended September 30, 2022 was primarily due to an increase in consultant billable hours in North America.

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2022 2021 2022 2021

8 unchanged sentences

* not meaningful

The decreases in gross profit and gross profit percent in the three and six months ended June 30, 2022 were primarily due to decreases in subscription license revenue.

• The increase in Pega Cloud gross profit percent in the six months ended June 30, 2022 was primarily due to cost-efficiency gains as Pega Cloud grows and scales.

• The decrease in consulting gross profit percent in the three months ended June 30, 2022 was due to a decrease in consultant utilization rates.

The increase in consulting gross profit percent in the six months ended June 30, 2022 was due to an increase in consultant realization rates in North America.

The gross profit percent changes in the three and nine months ended September 30, 2022 were primarily due to a shift in the revenue mix.

• The increases in Pega Cloud gross profit percent in the three and nine months ended September 30, 2022 were primarily due to cost-efficiency gains as Pega Cloud grows and scales.

• The decrease in Maintenance gross profit percent in the three months ended September 30, 2022 was primarily due to a decrease in maintenance revenue.

• The decreases in consulting gross profit percent in the three and nine months ended September 30, 2022 were due to increases in consultant availability.

Operating expenses

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2022 2021 2022 2021

3 unchanged sentences

General and administrative $ 26,043 10 % $ 20,176 8 % $ 5,867 29 % $ 94,530 10 % $ 57,607 6 % $ 36,923 64 %

• The increase in selling and marketing in the six months ended June 30, 2022 was primarily due to an increase in employee travel and entertainment of $5.6 million and an increase in compensation and benefits of $3.8 million.

• The increases in research and development in the three and six months ended June 30, 2022 were primarily due to increases in compensation and benefits of $6.4 million and $12.1 million, attributable to increases in headcount and incentive compensation.

• The increase in selling and marketing in the nine months ended September 30, 2022 was primarily due to an increase in employee travel and entertainment and marketing events of $10.7 million.

• The increases in research and development in the three and nine months ended September 30, 2022 were primarily due to increases in compensation and benefits of $7.5 million and $19.6 million, attributable to increases in headcount and incentive compensation.

The increases in headcount reflects additional investments in developing our solutions.

• The increases in general and administrative in the three and six months ended June 30, 2022 were primarily due to increases of $8.2 million and $23.6 million in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business.

• The increases in general and administrative in the three and nine months ended September 30, 2022 were primarily due to increases in compensation and benefits of $2.9 million and $5.7 million, facilities expenses of $1.1 million and $2.8 million, and legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $0.4 million and $24.0 million.

We have incurred and expect to continue to incur additional expenses for these proceedings in 2022.

3 unchanged sentences

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2022 2021 2022 2021

2 unchanged sentences

Interest expense (1,992) (1,908) (84) (4) % (5,882) (5,747) (135) (2) %

(Loss) income on capped call transactions (18,945) 26,309 (45,254) * (49,505) 7,192 (56,697) *

Other income, net 3,785 — 3,785 * 6,526 106 6,420 6,057 %

(Loss) on capped call transactions (6,876) (14,735) 7,859 53 % (56,381) (7,543) (48,838) (647) %

Other (loss) income, net (29) 2 (31) * 6,497 108 6,389 5,916 %

$ (4,551) $ (15,957) $ 11,406 71 % $ (46,315) $ (17,610) $ (28,705) (163) %

* not meaningful

• The increases in foreign currency transaction gain (loss) in the three and six months ended June 30, 2022 were 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 increases in interest income in the three and six months ended June 30, 2022 were primarily due to increases in market interest rates.

• The decreases in (loss) income on capped call transactions in the three and six months ended June 30, 2022, were due to fair value adjustments for our capped call transactions.

• The increases in foreign currency transaction gain (loss) in the three and nine months ended September 30, 2022 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increases in interest income in the three and nine months ended September 30, 2022 were primarily due to increases in market interest rates.

• The changes in (loss) on capped call transactions in the three and nine months ended September 30, 2022 were due to fair value adjustments for our capped call transactions.

Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.

• The increases in other income, net in the three and six months ended June 30, 2022 were due to gains on our venture investments portfolio.

• The increase in other (loss) income, net in the nine months ended September 30, 2022 was due to gains on our venture investments portfolio.

Provision for (benefit from) income taxes

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2022 2021 2022 2021

1 unchanged sentence

Effective income tax rate (benefit rate) 100 % (68) %

During the six months ended June 30, 2022, the change in our effective income tax rate (benefit rate) was primarily due to the recognition of a $191.9 million valuation allowance on our deferred tax assets.

See "Note 12.

Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information.

During the nine months ended September 30, 2022, the change in our effective income tax rate (benefit rate) was primarily due to the recognition of a $191.9 million valuation allowance recognized at June 30, 2022, on our U.S.

and U.K deferred tax assets.

As a result of recording the valuation allowance, we are no longer recording any income tax benefit on our U.S and U.K losses.

The $11.7 million provision for (benefit from) income taxes for the three months ended September 30, 2022 primarily represents non-U.K.

foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2022 2021

6 unchanged sentences

(in thousands)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

$ 226,640 $ 274,813

11 unchanged sentences

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted and is expected to continue impacting our billings and cash collections, as the timing of billings and cash collections generally differs between our subscription and perpetual license arrangements.

Subscription licenses and services are generally billed and collected over the contract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.

The change in cash (used in) provided by operating activities in the six months ended June 30, 2022 was primarily due to our subscription transition and increased costs as we made investments in research and development and selling and marketing activities to support future growth.

In addition, in the six months ended June 30, 2022 we incurred $28.0 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

This transition has impacted and is expected to continue impacting our billings and cash collections, as subscription licenses and services 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.

The change in cash (used in) operating activities in the nine months ended September 30, 2022 was primarily due to our subscription transition and increased costs as we made investments in research and development to support development of our offerings partially offset by strong client collections.

In addition, in the nine months ended September 30, 2022 and 2021, we incurred $32.4 million and $8.4 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

We expect to continue to incur additional expenses for these proceedings.

2 unchanged sentences

Investing activities

The change in cash (used in) provided by investing activities in the six months ended June 30, 2022 was primarily driven by our investments in financial instruments, an increase in office space related capital expenditures, and an acquisition in 2021.

The change in cash provided by investing activities in the nine months ended September 30, 2022 was primarily driven by our investments in financial instruments and an increase in office space related capital expenditures.

Financing activities

1 unchanged sentence

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

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

As of June 30, 2022, we had no outstanding borrowings under the Credit Facility.

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

As of September 30, 2022, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which reduce the available borrowing capacity.

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

1 unchanged sentence

Changes in the remaining stock repurchase authority:

(in thousands) Six Months Ended

June 30, 2022

(in thousands) Nine Months Ended

September 30, 2022

December 31, 2021 $ 22,583

1 unchanged sentence

Repurchases (2)

June 30, 2022 $ 58,075

September 30, 2022 $ 58,075

(1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.

1 unchanged sentence

Common stock repurchases

Six Months Ended

Nine Months Ended

September 30,

(in thousands) Shares Amount Shares Amount

4 unchanged sentences

532 $ 42,083 710 $ 92,007

During the six months ended June 30, 2022 and 2021, instead of receiving cash from the equity holders, we withheld shares with a value of $8.3 million and $27.8 million, respectively, for the exercise price of options.

During the nine months ended September 30, 2022 and 2021, instead of receiving cash from the equity holders, we withheld shares with a value of $11.5 million and $47.1 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2022 2021

1 unchanged sentence

Contractual obligations

As of June 30, 2022, our contractual obligations were:

As of September 30, 2022, our contractual obligations were:

Payments due by period

12 unchanged sentences

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