PEGA filing — read by section

Item 8. Financial Statements and Supplementary Data

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
 
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
 
 Page 
 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 
 36 
 
 Consolidated Balance Sheets as of December 31, 2022 and 2021 
 38 
 
 Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 2020 
 39 
 
 Consolidated Statements of Comprehensive (Loss) for the years ended December 31, 2022, 2021, and 2020 
 40 
 
 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020 
 41 
 
 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020 
 42 
 
 Notes to Consolidated Financial Statements 43 
 

 
 
 35 

 
 
 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
 To the stockholders and the Board of Directors of Pegasystems Inc. 
 Cambridge, Massachusetts 
 Opinions on the Financial Statements and Internal Control over Financial Reporting 
 We have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) i ssued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 
 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. 
 Basis for Opinions 
 The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on and changes in internal control over financial reporting. 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 U.S. 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. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 
 Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 
 Definition and Limitations of Internal Control over Financial Reporting 
 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. 
 Revenue Recognition - Software License Arrangements — Refer to Note 2 to the financial statements 
 Critical Audit Matter Description 
 The Company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the Company’s Pega Platform and other software applications, maintenance revenue from client support, and services revenue primarily derived from cloud sales of the Company’s hosted Pega Platform and other software applications and consulting services. 
 The Company’s license and cloud contracts with clients (“arrangements”) often contain multiple performance obligations. These performance obligations may be included in the same contract or negotiated separately. Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications. Certain complex arrangements require that management performs a detailed analysis of the contractual terms and the application of more complex accounting guidance. Factors with potentially significant judgements include: 
 • Identification of the complete client arrangement 
 • Accounting treatment of contract modifications 
 • Valuation and allocation of identified material rights 
 • Allocation of arrangement consideration to bundled fixed price work orders 
 Given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved a high degree of auditor judgment when performing audit procedures and evaluating the license and cloud revenue arrangements. 
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 How the Critical Audit Matter Was Addressed in the Audit 
 Our audit procedures related to license and cloud revenue arrangements included the following, among others: 
 • 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, valuation and allocation of identified material rights, and allocation of arrangement consideration. 
 • We selected a sample of client arrangements, 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. 
 ◦ Evaluated whether the Company appropriately identified all performance obligations in the arrangement and whether the methodology to allocate the transaction price to the individual performance obligations was appropriately applied. 
 ◦ 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 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. 
 ◦ Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represent material rights included in the contract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised. 
 ◦ 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 client. 
 /s/ Deloitte & Touche LLP 
 Boston, Massachusetts 
 February 15, 2023 
 We have served as the Company's auditor since 2000. 
 37 

 
 
 

 PEGASYSTEMS INC. 
 CONSOLIDATED BALANCE SHEETS 
 (in thousands, except per share amounts) 
 
 December 31, 2022 December 31, 2021 
 Assets 
 Current assets: 
 Cash and cash equivalents $ 145,054 $ 159,965 
 Marketable securities 152,167 202,814 
 Total cash, cash equivalents, and marketable securities 297,221 362,779 
 Accounts receivable 255,150 182,717 
 Unbilled receivables 213,719 226,714 
 Other current assets 80,388 68,008 
 Total current assets 846,478 840,218 
 Unbilled receivables 95,806 129,789 
 Goodwill 81,399 81,923 
 Other long-term assets 333,989 541,601 
 Total assets $ 1,357,672 $ 1,593,531 
 Liabilities and stockholders’ equity 
 Current liabilities: 
 Accounts payable $ 18,195 $ 15,281 
 Accrued expenses 50,355 63,890 
 Accrued compensation and related expenses 127,728 120,946 
 Deferred revenue 325,212 275,844 
 Other current liabilities 17,450 9,443 
 Total current liabilities 538,940 485,404 
 Convertible senior notes, net 593,609 590,722 
 Operating lease liabilities 79,152 87,818 
 Other long-term liabilities 15,128 13,499 
 Total liabilities 1,226,829 1,177,443 
 Commitments and contingencies (Note 20) 
 Stockholders’ equity: 
 Preferred stock, $ 0.01 par value, 1,000 shares authorized; none issued 
 — — 
 Common stock, $ 0.01 par value, 200,000 shares authorized; 82,436 and 81,712 shares issued and outstanding as of December 31, 2022 and 2021, respectively 
 824 817 
 Additional paid-in capital 229,602 145,810 
 (Accumulated deficit) retained earnings ( 76,513 ) 276,449 
 Accumulated other comprehensive (loss) 
 Net unrealized gain on available-for-sale securities, net of tax 517 686 
 Foreign currency translation adjustments ( 23,587 ) ( 7,674 ) 
 Total stockholders’ equity 130,843 416,088 
 Total liabilities and stockholders’ equity $ 1,357,672 $ 1,593,531 

 
 
 See notes to consolidated financial statements. 
 
 
 38 

 
 
 

 PEGASYSTEMS INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS 
 (in thousands, except per share amounts) 
 
 Year Ended December 31, 
 2022 2021 2020 
 Revenue 
 Subscription services $ 701,835 $ 621,223 $ 504,977 
 Subscription license 366,063 336,248 266,352 
 Perpetual license 19,293 32,172 28,558 
 Consulting 230,654 222,010 217,630 
 Total revenue 1,317,845 1,211,653 1,017,517 
 Cost of revenue 
 Subscription services 138,736 120,446 98,886 
 Subscription license 2,642 2,389 2,644 
 Perpetual license 175 229 284 
 Consulting 227,082 213,299 209,099 
 Total cost of revenue 368,635 336,363 310,913 
 Gross profit 949,210 875,290 706,604 
 Operating expenses 
 Selling and marketing 624,789 625,886 545,693 
 Research and development 294,349 260,630 236,986 
 General and administrative 117,734 83,506 67,452 
 Restructuring 21,743 — — 
 Total operating expenses 1,058,615 970,022 850,131 
 (Loss) from operations ( 109,405 ) ( 94,732 ) ( 143,527 ) 
 Foreign currency transaction gain (loss) 4,560 ( 6,459 ) 3,704 
 Interest income 1,643 704 1,223 
 Interest expense ( 7,792 ) ( 7,956 ) ( 19,356 ) 
 (Loss) gain on capped call transactions ( 57,382 ) ( 23,633 ) 31,697 
 Other income, net 6,579 89 1,370 
 (Loss) before provision for (benefit from) income taxes ( 161,797 ) ( 131,987 ) ( 124,889 ) 
 Provision for (benefit from) income taxes 183,785 ( 68,947 ) ( 63,516 ) 
 Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 ) 
 (Loss) per share 
 Basic $ ( 4.22 ) $ ( 0.77 ) $ ( 0.76 ) 
 Diluted $ ( 4.22 ) $ ( 0.77 ) $ ( 0.76 ) 
 Weighted-average number of common shares outstanding 
 Basic 81,947 81,387 80,336 
 Diluted 81,947 81,387 80,336 

 
 
 See notes to consolidated financial statements. 
 
 
 
 
 39 

 
 
 

 PEGASYSTEMS INC. 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) 
 (in thousands) 
 
 Year Ended December 31, 
 2022 2021 2020 
 Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 ) 
 Other comprehensive (loss) income, net of tax 
 Unrealized (loss) gain on available-for-sale securities ( 169 ) 640 46 
 Foreign currency translation adjustments ( 15,913 ) ( 4,680 ) 10,234 
 Total other comprehensive (loss) income, net of tax ( 16,082 ) ( 4,040 ) 10,280 
 Comprehensive (loss) $ ( 361,664 ) $ ( 67,080 ) $ ( 51,093 ) 

 
 
 See notes to consolidated financial statements. 
 
 
 40 

 
 
 

 
 
 PEGASYSTEMS INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 
 (in thousands, except per share amounts) 
 
 Common Stock Additional paid-in capital 
 Retained earnings (accumulated deficit) 
 Accumulated other comprehensive (loss) Total 
 stockholders’ equity 
 
 Number 
 of shares 
 Amount 
 January 1, 2020 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 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 
 Stock-based compensation — — 103,115 — — 103,115 
 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 
 Cumulative-effect adjustment from adoption of ASU 2020-06, net — — ( 61,604 ) 9,399 — ( 52,205 ) 
 Repurchase of common stock ( 432 ) ( 5 ) ( 53,605 ) — — ( 53,610 ) 
 Issuance of common stock for stock compensation plans 1,153 12 ( 69,937 ) — — ( 69,925 ) 
 Issuance of common stock under the employee stock purchase plan 101 1 10,553 — — 10,554 
 Stock-based compensation — — 115,971 — — 115,971 
 Cash dividends declared ($ 0.12 per share) 
 — — — ( 9,789 ) — ( 9,789 ) 
 Other comprehensive (loss) — — — — ( 4,040 ) ( 4,040 ) 
 Net (loss) — — — ( 63,040 ) — ( 63,040 ) 
 December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ ( 6,988 ) $ 416,088 
 Repurchase of common stock ( 280 ) ( 2 ) ( 24,506 ) — — ( 24,508 ) 
 Issuance of common stock for stock compensation plans 754 7 ( 20,627 ) — — ( 20,620 ) 
 Issuance of common stock under the employee stock purchase plan 250 2 9,170 — — 9,172 
 Stock-based compensation — — 122,229 — — 122,229 
 Cash dividends declared ($ 0.12 per share) 
 — — ( 2,474 ) ( 7,380 ) — ( 9,854 ) 
 Other comprehensive (loss) — — — — ( 16,082 ) ( 16,082 ) 
 Net (loss) — — — ( 345,582 ) — ( 345,582 ) 
 December 31, 2022 82,436 $ 824 $ 229,602 $ ( 76,513 ) $ ( 23,070 ) $ 130,843 

 
 
 See notes to consolidated financial statements. 
 41 

 
 
 

 PEGASYSTEMS INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 (in thousands) 
 
 Year Ended December 31, 
 2022 2021 2020 
 Operating activities 
 Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 ) 
 Adjustments to reconcile net (loss) to cash provided by (used in) operating activities 
 Stock-based compensation 122,210 115,947 103,068 
 Deferred income taxes 168,890 ( 75,336 ) ( 59,777 ) 
 Loss (gain) on capped call transactions 57,382 23,633 ( 31,697 ) 
 Amortization of deferred commissions 53,471 41,387 33,302 
 Lease expense 15,940 13,277 16,248 
 Amortization of intangible assets and depreciation 18,780 28,593 21,348 
 Foreign currency transaction (gain) loss ( 4,560 ) 6,459 ( 3,704 ) 
 Other 157 7,730 15,007 
 Change in operating assets and liabilities: 
 Accounts receivable, unbilled receivables, and contract assets ( 51,157 ) ( 11,957 ) ( 32,321 ) 
 Other current assets ( 9,133 ) 17,209 ( 12,959 ) 
 Other current liabilities 529 ( 18,726 ) 37,945 
 Deferred revenue 62,578 41,279 43,661 
 Deferred commissions ( 53,857 ) ( 71,451 ) ( 55,175 ) 
 Other long-term assets and liabilities ( 13,312 ) ( 15,886 ) ( 14,136 ) 
 Cash provided by (used in) operating activities 22,336 39,118 ( 563 ) 
 Investing activities 
 Purchases of investments ( 41,015 ) ( 79,121 ) ( 326,549 ) 
 Proceeds from maturities and called investments 66,583 105,977 28,811 
 Sales of investments 23,808 61,096 1,424 
 Payments for acquisitions, net of cash acquired ( 922 ) ( 4,993 ) — 
 Investment in property and equipment ( 35,379 ) ( 10,456 ) ( 25,369 ) 
 Cash provided by (used in) investing activities 13,075 72,503 ( 321,683 ) 
 Financing activities 
 Proceeds from issuance of convertible senior notes — — 600,000 
 Purchase of capped calls related to convertible senior notes — — ( 51,900 ) 
 Payment of debt issuance costs — — ( 14,527 ) 
 Proceeds from employee stock purchase plan 9,172 10,554 3,039 
 Dividend payments to stockholders ( 9,834 ) ( 9,761 ) ( 9,628 ) 
 
 
 Common stock repurchases for tax withholdings for net settlement of equity awards ( 20,620 ) ( 69,925 ) ( 75,562 ) 
 Common stock repurchases under stock repurchase program ( 25,707 ) ( 52,711 ) ( 27,974 ) 
 Cash (used in) provided by financing activities ( 46,989 ) ( 121,843 ) 423,448 
 Effect of exchange rate changes on cash and cash equivalents ( 3,333 ) ( 1,712 ) 2,334 
 Net (decrease) increase in cash and cash equivalents ( 14,911 ) ( 11,934 ) 103,536 
 Cash and cash equivalents, beginning of period 159,965 171,899 68,363 
 Cash and cash equivalents, end of period $ 145,054 $ 159,965 $ 171,899 
 
 Supplemental disclosures 
 Interest paid on convertible notes $ 4,500 $ 4,500 $ 2,338 
 Income taxes paid (refunded) $ 7,645 $ ( 4,552 ) $ 3,377 
 Non-cash investing and financing activity: 
 Investment in property and equipment included in accounts payable and accrued liabilities $ 9,914 $ 2,143 $ 825 
 Dividends payable $ 2,474 $ 2,454 $ 2,428 

 
 
 See notes to consolidated financial statements. 
 42 

 
 PEGASYSTEMS INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 
 
 
 1. BASIS OF PRESENTATION 
 Business 
 The Company develops, markets, licenses, hosts, and supports enterprise software that helps organizations build agility into their business. The Company’s low-code platform for workflow automation and artificial intelligence-powered decisioning enables clients to personalize customer experiences, streamline customer service, and automate business processes and workflows. The Company provides consulting, training, support, and hosting services to facilitate the use of its software. 
 Management estimates and reporting 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. 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 commissions, income taxes payable, convertible senior notes, capped call transactions, intangible assets, and goodwill. 
 Principles of consolidation 
 The Company’s consolidated financial statements reflect Pegasystems Inc. and subsidiaries in which the Company holds a controlling financial interest. All intercompany accounts and transactions were eliminated in consolidation. 
 Reclassifications 
 Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, (loss) from operations, or net (loss). 
 
 2. SIGNIFICANT ACCOUNTING POLICIES 
 Revenue 
 The Company’s revenue is primarily derived from: 
 • Subscription services, composed of revenue from Pega Cloud and maintenance. Pega Cloud is the Company’s hosted Pega Platform and software applications. Maintenance revenue is earned from providing client support, software upgrades, and bug fixes or patches. 
 • Subscription license, composed of revenue from term license arrangements for the Company’s Pega Platform and software applications. Term licenses represent functional intellectual property and are delivered separately from maintenance and services. 
 • Perpetual license, composed of revenue from perpetual license arrangements for the Company’s Pega Platform and software applications. Perpetual licenses represent functional intellectual property and are delivered separately from maintenance and services. 
 • Consulting, primarily related to new software license implementations, training, and reimbursable costs. 
 Performance obligations 
 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. 
 43 

 
 

 The Company’s typical performance obligations are: 
 Performance obligation 
 How stand-alone selling price is typically determined 
 When performance obligation is typically satisfied 
 When payment is typically due 
 Income statement line item 
 
 Perpetual license Residual approach Upon transfer of control to the client, defined as when the client can use and benefit from the license (point in time) 
 Effective date of the license Perpetual license 
 
 Term license Residual approach Upon transfer of control to the client, defined as when the client can use and benefit from the license (point in time) 
 Annually, or more frequently, over the term of the license Subscription 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 Subscription services 
 
 Pega Cloud Residual approach Ratably over the term of the service (over time) Annually, or more frequently, over the term of the service Subscription services 
 
 Consulting
- time and materials Observable hourly rate for time and materials-based services in similar geographies 
 Based on hours incurred to date (over time) 
 Monthly Consulting 
 
 Consulting 
- fixed price Observable hourly rate for time and materials-based services in similar geographies multiplied by estimated hours for the project 
 Based on hours incurred as a percentage of total estimated hours (over time) 
 As contract milestones are achieved Consulting 
 

 (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. 
 The Company utilizes the residual approach for software license and Pega Cloud performance obligations since the selling price is highly variable and the stand-alone selling price is not discernible from past transactions or other observable evidence. 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 before concluding the estimate represents 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 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, the Company’s 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. The Company may also provide pricing concessions to clients, a business practice that gives rise to variable fees. 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. The Company includes variable fees in the determination of total transaction price if it is not probable that a significant future 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. The variable consideration related to pricing concessions and other forms of variable consideration, including usage-based fees, have not been material to the Company’s consolidated financial statements. 
 Significant financing components 
 The Company generally does not intend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms of contracts between the Company and its clients. Although there may be 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 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. This evaluation includes determining the difference between the consideration the client would have paid when the performance obligation was satisfied and the amount of consideration paid. Contracts that include a significant financing component are adjusted for the time value of money at the rate inherent in the contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing. 
 During 2022, 2021, and 2020, significant financing components were not material. 
 44 

 
 

 Contract modifications 
 The Company assesses contract modifications to determine: 
 • if the additional products and services are distinct from the products and services in the original arrangement; and 
 • if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services. 
 A contract modification meeting both criteria is accounted for as a separate contract. If a contract modification does not meet both criteria, it is accounted for as either: 
 • a prospective basis as a termination of the existing contract and the creation of a new contract; or 
 • a cumulative catch-up basis. 
 Deferred commissions 
 The Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company primarily pays sales commissions on the initial contract. As a result, there are no commensurate commissions paid on contract renewals. 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 lifecycle, and the competitive marketplace’s influence on the products and services sold. Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefit period of 4.5 years. Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the 4.5 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 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, capped call transactions, and accounts payable. The Company considers debt securities readily convertible to known amounts of cash with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. The Company’s investments are classified as available-for-sale and are carried at fair value. Unrealized gains and losses considered temporary 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 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 on the specific investment. 
 See "Note 4. Receivables, Contract Assets, And Deferred Revenue", "Note 12. Debt", and "Note 14. Fair Value Measurements" for additional information. 
 Property and equipment 
 Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of each asset, which are three years for computer equipment and five years for furniture and fixtures. 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. 
 Leases 
 All of the Company’s leases are operating leases, primarily composed of office space leases. The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized on a straight-line basis over the lease term. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components when determining lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain it will exercise those options. The Company’s leases do not contain material residual value guarantees or restrictive covenants. 
 Loss contingencies and legal costs 
 The Company accrues loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. 
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 Significant judgments are required to determine the probability and the range of the outcomes, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from the Company’s estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on the Company’s results of operations and financial position. As additional information becomes available, the Company reassesses the potential liability from pending claims and litigation and may revise its estimates. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources and other factors. Legal costs are expensed as incurred. 
 Internal-use software 
 The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Company amortizes capitalized software costs generally over three to five years , commencing on the date the software is placed into service. 
 Goodwill 
 Goodwill represents the residual purchase price paid in a business combination after the fair value of all identified assets and liabilities have been recorded. Goodwill is not amortized. The Company has a single reporting unit. The Company performed a qualitative assessment as of November 30, 2022, 2021, and 2020, and concluded that there was no impairment since it was not more-likely-than-not that the fair value of its reporting unit was less than its carrying value. 
 Intangible and long-lived assets 
 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 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 and other investments with original maturities of three months or less. 
 Business combinations 
 The Company uses its 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. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company reevaluates these estimates and assumptions quarterly as new information arises and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. 
 Research and development and software development costs 
 Research and development costs are expensed as incurred. 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. As a result, no costs were capitalized in 2022, 2021, or 2020. 
 Stock-based compensation 
 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. See "Note 16. Stock-Based Compensation" for a discussion of the Company’s key assumptions when determining the fair value of its equity awards at the grant date. 
 46 

 
 

 Foreign currency translation and remeasurement 
 The translation of assets and liabilities for the Company’s subsidiaries with functional currencies other than the U.S. dollar are made at period-end exchange rates. Revenue and expense accounts are translated at the average exchange rates during the period transactions occur. The resulting translation adjustments are reflected in accumulated other comprehensive (loss). Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations. 
 Accounting for income taxes 
 The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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 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, the Company’s firm contractual backlog, tax planning strategies, and projected 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. Changes in the valuation allowance impact income tax expense in the period of adjustment. The Company recognizes excess tax benefits when realized, as a reduction of the provision for income taxes. 
 The Company assesses its income tax positions and records tax benefits based on management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense. 
 As a global company, significant judgment must be used to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise because of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex. 
 For additional information, see "Note 18. Income Taxes". 
 Advertising expense 
 Advertising costs are expensed as incurred. Advertising expenses were $ 6.6 million, $ 11.8 million, and $ 8.7 million during 2022, 2021, and 2020, respectively. 
 
 3. MARKETABLE SECURITIES 
 December 31, 2022 December 31, 2021 
 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value 
 Government debt $ 2,960 $ — $ ( 52 ) $ 2,908 $ 2,000 $ — $ ( 10 ) $ 1,990 
 Corporate debt 151,906 — ( 2,647 ) 149,259 201,659 2 ( 837 ) 200,824 
 $ 154,866 $ — $ ( 2,699 ) $ 152,167 $ 203,659 $ 2 $ ( 847 ) $ 202,814 

 
 As of December 31, 2022, marketable securities’ maturities ranged from January 2023 to November 2024, with a weighted-average remaining maturity of 0.5 years. 
 
 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE 
 Receivables 
 (in thousands) 
 December 31, 2022 December 31, 2021 
 Accounts receivable $ 255,150 $ 182,717 
 Unbilled receivables 213,719 226,714 
 Long-term unbilled receivables 95,806 129,789 
 $ 564,675 $ 539,220 

 
 47 

 
 

 Unbilled receivables 
 Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. 
 Unbilled receivables by expected billing date: 
 (Dollars in thousands) 
 December 31, 2022 
 1 year or less $ 213,719 69 % 
 1-2 years 81,280 26 % 
 2-5 years 14,526 5 % 
 $ 309,525 100 % 

 Unbilled receivables by contract effective date: 
 (Dollars in thousands) 
 December 31, 2022 
 2022 $ 150,597 49 % 
 2021 109,024 35 % 
 2020 30,763 10 % 
 2019 11,621 4 % 
 2018 and prior 7,520 2 % 
 $ 309,525 100 % 

 
 Major clients 
 Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables: 
 
 December 31, 2022 December 31, 2021 
 Client A 
 Accounts receivable * 1 % 
 Unbilled receivables * 15 % 
 Total receivables * 10 % 

 * Client accounted for less than 10% of receivables. 
 Contract assets 
 Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation. 
 (in thousands) 
 December 31, 2022 December 31, 2021 
 Contract assets (1) 
 $ 17,546 $ 12,530 
 Long-term contract assets (2) 
 16,470 10,643 
 $ 34,016 $ 23,173 

 (1) Included in other current assets. 
 (2) Included in other long-term assets. 
 Deferred revenue 
 Deferred revenue consists of billings and payments received in advance of revenue recognition. 
 (in thousands) 
 December 31, 2022 December 31, 2021 
 Deferred revenue $ 325,212 $ 275,844 
 Long-term deferred revenue (1) 
 3,552 5,655 
 $ 328,764 $ 281,499 

 (1) Included in other long-term liabilities. 
 The change in deferred revenue in 2022 was primarily due to new billings in advance of revenue recognition and $ 276.7 million of revenue recognized during the period included in deferred revenue as of December 31, 2021. 
 
 5. DEFERRED COMMISSIONS 
 December 31, 
 (in thousands) 
 2022 2021 
 Deferred commissions (1) 
 $ 130,195 $ 135,911 

 
 (1) Included in other long-term assets. 
 48 

 
 

 
 (in thousands) 2022 2021 2020 
 Amortization of deferred commissions (1) 
 $ 53,471 $ 41,387 $ 33,302 

 (1) Included in selling and marketing expenses. 
 
 6. PROPERTY AND EQUIPMENT (1) 
 (in thousands) December 31, 
 2022 2021 
 Leasehold improvements 
 $ 35,049 $ 31,203 
 Computer equipment 
 27,292 26,115 
 Furniture and fixtures 
 5,993 5,565 
 Computer software purchased 
 9,724 8,566 
 Computer software developed for internal use 
 19,869 19,463 
 Fixed assets in progress 
 37,342 4,262 
 135,269 95,174 
 Less: accumulated depreciation 
 ( 80,213 ) ( 68,337 ) 
 $ 55,056 $ 26,837 

 
 (1) Included in other long-term assets. 
 
 (in thousands) 2022 2021 2020 
 Depreciation expense $ 14,687 $ 24,606 $ 17,378 

 
 
 7. GOODWILL AND OTHER INTANGIBLE ASSETS 
 Goodwill 
 (in thousands) 
 2022 2021 
 January 1, $ 81,923 $ 79,231 
 Acquisition — 2,701 
 Currency translation adjustments ( 524 ) ( 9 ) 
 December 31, $ 81,399 $ 81,923 

 
 Intangibles 
 Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives: 
 December 31, 2022 
 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1) 
 
 Client-related 
 4 - 10 years 
 $ 63,076 $ ( 58,623 ) $ 4,453 
 Technology 
 2 - 10 years 
 68,056 ( 61,621 ) 6,435 
 Other 
 1 - 5 years 
 5,361 ( 5,361 ) — 
 $ 136,493 $ ( 125,605 ) $ 10,888 

 (1) Included in other long-term assets. 
 
 December 31, 2021 
 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1) 
 
 Client-related 4 - 10 years 
 $ 63,165 $ ( 57,342 ) $ 5,823 
 Technology 2 - 10 years 
 67,142 ( 58,902 ) 8,240 
 Other 1 - 5 years 
 5,361 ( 5,361 ) — 
 $ 135,668 $ ( 121,605 ) $ 14,063 

 (1) Included in other long-term assets. 
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 Amortization of intangible assets was: 
 (in thousands) 
 2022 2021 2020 
 Cost of revenue $ 2,723 $ 2,516 $ 2,487 
 Selling and marketing 1,370 1,471 1,483 
 
 
 $ 4,093 $ 3,987 $ 3,970 

 
 Future estimated intangible assets amortization: 
 (in thousands) 
 December 31, 2022 
 2023 $ 3,924 
 2024 3,153 
 2025 2,610 
 2026 874 
 2027 327 
 $ 10,888 

 
 
 8. 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 assess 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, the Chief Executive Officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one operating segment and one reporting unit. 
 Long-lived assets related to the Company’s U.S. and international operations were: 
 (Dollars in thousands) December 31, 2022 December 31, 2021 
 U.S. $ 50,445 92 % $ 20,548 77 % 
 International 4,611 8 % 6,289 23 % 
 $ 55,056 100 % $ 26,837 100 % 

 
 
 9. OTHER ASSETS AND LIABILITIES 
 Other current assets 
 
 (in thousands) December 31, 2022 December 31, 2021 
 Income tax receivables $ 25,354 $ 25,691 
 Contract assets 17,546 12,530 
 Other 37,488 29,787 
 $ 80,388 $ 68,008 

 Other long-term assets 
 
 (in thousands) December 31, 2022 December 31, 2021 
 Deferred income taxes $ 4,795 $ 180,656 
 Deferred commissions 130,195 135,911 
 Right of use assets 76,114 87,521 
 Capped call transactions 2,582 59,964 
 Property and equipment 55,056 26,837 
 Intangible assets 10,888 14,063 
 Contract assets 16,470 10,643 
 Other 37,889 26,006 
 $ 333,989 $ 541,601 

 Other current liabilities 
 
 (in thousands) December 31, 2022 December 31, 2021 
 Operating lease liabilities $ 14,976 $ 6,989 
 Dividends payable 2,474 2,454 
 $ 17,450 $ 9,443 

 50 

 
 

 Other long-term liabilities 
 
 (in thousands) December 31, 2022 December 31, 2021 
 Deferred revenue $ 3,552 $ 5,655 
 Other 11,576 7,844 
 $ 15,128 $ 13,499 

 
 10. RESTRUCTURING 
 During the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s target organization go-to-market strategy and commitment to be a Rule of 40 managed company. The plan resulted in a restructuring expense of $ 21.7 million in 2022, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of the Company’s Salem, New Hampshire office. 
 As of December 31, 2022, the Company’s employee severance and related benefits restructuring accrual was $ 18.6 million and is included in accrued compensation and related expenses. 
 
 11. LEASES 
 Corporate headquarters 
 In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $ 18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $ 21.1 million and right of use assets by $ 20.3 million. On March 31, 2021, the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $ 2 million per year. 
 Waltham office 
 On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first became payable on August 1, 2022. Base rent for the first year is approximately $ 6 million and will increase by 3 % annually. In addition, the Company received an improvement allowance from the landlord of $ 11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $ 42.1 million on August 1, 2021. 
 Expense 
 (in thousands) 2022 2021 2020 
 Fixed lease costs (1) 
 $ 20,186 $ ( 1,694 ) $ 20,235 
 Short-term lease costs 3,356 2,244 1,669 
 Variable lease costs 3,894 4,480 4,470 
 $ 27,436 $ 5,030 $ 26,374 

 (1) The lower fixed lease costs in 2021 was due to the modification of the corporate headquarters lease. 
 Right of use assets and lease liabilities 
 (in thousands) December 31, 2022 December 31, 2021 
 Right of use assets (1) 
 $ 76,114 $ 87,521 
 Operating lease liabilities (2) 
 $ 14,976 $ 6,989 
 Long-term operating lease liabilities $ 79,152 $ 87,818 

 (1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. 
 (2) Included in other current liabilities. 
 The weighted-average remaining lease term and discount rate for the Company’s leases were: 
 December 31, 2022 December 31, 2021 
 Weighted-average remaining lease term 7.5 years 7.7 years 
 Weighted-average discount rate (1) 
 4.1 % 4.4 % 

 (1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment. 
 51 

 
 

 Maturities of lease liabilities: 
 (in thousands) December 31, 2022 
 2023 $ 18,476 
 2024 17,101 
 2025 14,444 
 2026 10,860 
 2027 9,814 
 Thereafter 39,265 
 Total lease payments 109,960 
 Less: imputed interest (1) 
 ( 15,832 ) 
 $ 94,128 

 (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 (1) (2) 
 (in thousands) 2022 2021 
 Cash paid for operating leases, net of tenant improvement allowances $ 7,690 $ 18,428 
 Right of use assets recognized for new leases and amendments (non-cash) $ 4,733 $ 55,068 

 (1) In 2022 and 2021, the Company received tenant improvement allowances of $ 8.8 million and $ 3.0 million, respectively, as part of the lease of the Company’s new corporate headquarters in Waltham, Massachusetts. 
 (2) In 2021, the Company received $ 18 million as a one-time payment for the Company’s accelerated exit from its then corporate headquarters in Cambridge, Massachusetts. This payment has been excluded from the above table. 
 
 12. DEBT 
 Convertible senior notes and capped calls 
 Convertible senior notes 
 In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $ 600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. 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. 
 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 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 certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. 
 Before September 1, 2024, noteholders may convert their Notes in the following circumstances: 
 • During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 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 certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert 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 in full on the redemption date, until the Company pays the redemption price). 
 Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. 
 As of December 31, 2022, the Notes were not eligible for conversion. 
 Repurchase rights 
 On or after March 1, 2023 and on or before the 40 th 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. 
 52 

 
 

 If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right 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 a 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 mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock. 
 
 
 Carrying value of the Notes: 
 (in thousands) December 31, 2022 December 31, 2021 
 Principal $ 600,000 $ 600,000 
 Unamortized issuance costs ( 6,391 ) ( 9,278 ) 
 Convertible senior notes, net $ 593,609 $ 590,722 

 
 
 Interest expense related to the Notes: 
 (in thousands) 2022 2021 
 Contractual interest expense ( 0.75 % coupon) 
 $ 4,500 $ 4,500 
 Amortization of issuance costs 
 2,888 2,977 
 $ 7,388 $ 7,477 

 The effective interest rate for the Notes: 
 2022 2021 
 Weighted-average effective interest rate 1.2 % 1.3 % 

 Future payments of principal and contractual interest: 
 December 31, 2022 
 (in thousands) Principal Interest Total 
 2023 $ — $ 4,500 $ 4,500 
 2024 — 4,500 4,500 
 2025 600,000 2,250 602,250 
 $ 600,000 $ 11,250 $ 611,250 

 Capped call transactions 
 In February 2020, the Company entered into privately negotiated capped call transactions (the “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. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $ 196.44 . The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers. 
 The Capped Call Transactions are accounted for as derivative instruments and 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 following 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 capped call transactions: 
 (in thousands) 2022 2021 
 January 1, $ 59,964 $ 83,597 
 Fair value adjustment ( 57,382 ) ( 23,633 ) 
 December 31, $ 2,582 $ 59,964 

 
 Credit facility 
 In November 2019, and as since amended, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. 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. 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 required to comply with financial covenants, including: 
 • Beginning with the fiscal quarter that ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc. must maintain at least $ 200 million in cash, investments, and availability under the Revolving Credit Loan. 
 53 

 
 

 • Beginning with the fiscal quarter ending March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0. 
 As of December 31, 2022 and December 31, 2021, the Company had no outstanding cash borrowings under the Credit Facility. 
 As of December 31, 2022, the Company had $ 27.3 million in outstanding letters of credit which reduce the available borrowing capacity under the Credit Facility. 
 
 13. STOCKHOLDERS’ EQUITY 
 Preferred stock 
 The Company has 1 million authorized shares of preferred stock, $ 0.01 par value per share, of which none were issued and outstanding as of December 31, 2022. 
 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 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, 2022. 
 Common stock 
 The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 82.4 million were issued and outstanding as of December 31, 2022. 
 Dividends declared 
 2022 2021 2020 
 Dividends declared (per share) $ 0.12 $ 0.12 $ 0.12 
 Dividend payments to stockholders (in thousands) $ 9,834 $ 9,761 $ 9,628 

 
 The Company paid a quarterly cash dividend of $ 0.03 per share in 2022, 2021, and 2020. In the future, the Board of Directors may terminate or modify the dividend program without prior notice. 
 
 Stock repurchases 
 (in thousands) 2022 2021 2020 
 Shares Amount Shares Amount Shares Amount 
 January 1, $ 22,583 $ 37,726 $ 45,484 
 Authorizations (1) 
 60,000 38,467 20,516 
 Repurchases (2) 
 ( 280 ) ( 24,508 ) ( 432 ) ( 53,610 ) ( 278 ) ( 28,274 ) 
 December 31, $ 58,075 $ 22,583 $ 37,726 

 (1) On June 2, 2022, the Company announced that the Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023 and increased the remaining stock repurchase authority to $ 60 million. 
 (2) Purchases under this program have been made on the open market. 
 
 14. FAIR VALUE MEASUREMENTS 
 Assets and liabilities measured 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. 
 As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: 
 • Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; 
 • Level 2 - significant other inputs that are observable either directly or indirectly; and 
 • 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 minimize unobservable inputs when determining fair value. 
 54 

 
 

 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 model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied volatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and 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, 2022 December 31, 2021 
 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 
 Cash equivalents $ 2,526 $ — $ — $ 2,526 $ 3,216 $ — $ — $ 3,216 
 Marketable securities $ — $ 152,167 $ — $ 152,167 $ — $ 202,814 $ — $ 202,814 
 Capped Call Transactions (1) (2) 
 $ — $ 2,582 $ — $ 2,582 $ — $ 59,964 $ — $ 59,964 
 Venture investments (1) (3) 
 $ — $ — $ 13,069 $ 13,069 $ — $ — $ 7,648 $ 7,648 

 (1) Included in other long-term assets . 
 (2) For additional information, see "Note 12. Debt". 
 (3) Investments in privately held companies. 
 Change in venture investments: 
 
 (in thousands) 2022 2021 
 January 1, $ 7,648 $ 8,345 
 New investments 1,400 500 
 Sales of investments ( 4,020 ) ( 2,449 ) 
 Changes in foreign exchange rates ( 450 ) ( 68 ) 
 Changes in fair value: 
 included in other income 5,989 100 
 included in other comprehensive income 2,502 1,220 
 December 31, $ 13,069 $ 7,648 

 
 
 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 Notes’ fair value (including the conversion feature embedded in the Notes) was $ 521.1 million as of December 31, 2022 and $ 642.0 million as of December 31, 2021. 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. For additional information, see "Note 12. Debt". 
 Credit risk 
 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 Company’s credit risk exposure. Investment policies have been implemented that limit purchases of marketable debt securities to investment-grade securities. 
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 15. REVENUE 
 Geographic revenue 
 (Dollars in thousands) 2022 2021 2020 
 U.S. $ 763,558 57 % $ 690,133 57 % $ 613,844 61 % 
 Other Americas 102,980 8 % 61,339 5 % 49,441 5 % 
 United Kingdom (“U.K.”) 115,793 9 % 117,580 10 % 91,517 9 % 
 Europe (excluding U.K.), Middle East, and Africa 194,563 15 % 198,080 16 % 156,056 15 % 
 Asia-Pacific 140,951 11 % 144,521 12 % 106,659 10 % 
 $ 1,317,845 100 % $ 1,211,653 100 % $ 1,017,517 100 % 

 
 Revenue streams 
 (in thousands) 2022 2021 2020 
 Perpetual license $ 19,293 $ 32,172 $ 28,558 
 Subscription license 366,063 336,248 266,352 
 Revenue recognized at a point in time 385,356 368,420 294,910 
 Maintenance 317,564 320,257 296,709 
 Pega Cloud 384,271 300,966 208,268 
 Consulting 230,654 222,010 217,630 
 Revenue recognized over time 932,489 843,233 722,607 
 $ 1,317,845 $ 1,211,653 $ 1,017,517 

 
 (in thousands) 2022 2021 2020 
 Pega Cloud $ 384,271 $ 300,966 $ 208,268 
 Maintenance 317,564 320,257 296,709 
 Subscription services 701,835 621,223 504,977 
 Subscription license 366,063 336,248 266,352 
 Subscription 1,067,898 957,471 771,329 
 Perpetual license 19,293 32,172 28,558 
 Consulting 230,654 222,010 217,630 
 $ 1,317,845 $ 1,211,653 $ 1,017,517 

 Remaining performance obligations ("Backlog") 
 Expected future revenue from existing non-cancellable contracts: 
 As of December 31, 2022: 
 (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total 
 Maintenance Pega Cloud 
 1 year or less 
 $ 242,073 $ 379,648 $ 60,668 $ 5,310 $ 32,374 $ 720,073 53 % 
 1 -2 years 
 66,207 246,195 3,803 2,253 6,371 324,829 24 % 
 2-3 years 
 26,746 143,901 1,707 — 1,647 174,001 13 % 
 Greater than 3 years 
 15,602 115,944 5,283 — — 136,829 10 % 
 $ 350,628 $ 885,688 $ 71,461 $ 7,563 $ 40,392 $ 1,355,732 100 % 

 As of December 31, 2021: 
 
 (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total 
 Maintenance Pega Cloud 
 1 year or less 
 $ 234,917 $ 330,426 $ 153,467 $ 10,952 $ 41,411 $ 771,173 58 % 
 1 -2 years 
 65,502 220,231 14,968 4,505 8,917 314,123 23 % 
 2-3 years 
 38,432 124,969 1,955 2,252 5,512 173,120 13 % 
 Greater than 3 years 
 28,157 55,937 1,765 — 619 86,478 6 % 
 $ 367,008 $ 731,563 $ 172,155 $ 17,709 $ 56,459 $ 1,344,894 100 % 

 
 
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 16. STOCK-BASED COMPENSATION 
 
 (in thousands) 2022 2021 2020 
 Cost of revenue $ 26,400 $ 21,822 $ 20,796 
 Selling and marketing 46,769 54,182 46,283 
 Research and development 29,266 25,413 22,885 
 General and administrative 19,775 14,530 13,104 
 $ 122,210 $ 115,947 $ 103,068 
 Income tax benefit $ ( 1,881 ) $ ( 23,410 ) $ ( 20,464 ) 

 
 The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stock options. 
 Most of the Company’s stock-based compensation arrangements vest over five years , with 20 % vesting after one year and 80 % vesting in equal quarterly installments over the remaining four years . The Company’s stock options have a term of ten years . The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as an individual grant. The stock-based compensation expense recognized during a period is based on the value of the awards that are 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 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 grant date 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 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. 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 being issued by the Company. 
 Stock-based compensation plans 
 2004 Long-Term Incentive Plan (as amended and restated) 
 In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employee Directors, and consultants with opportunities to purchase stock through incentive and non-qualified stock options. 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, 2022, 17.3 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”) under which employees may 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. In October 2012, the Company’s Board of Directors amended the 2006 ESPP to continue until no shares remain. Before January 1, 2021, the 2006 ESPP was non-compensatory as the Company’s Board of Directors set the purchase price at 95 % of the fair market value on the completion date of the offering period. Commencing on January 1, 2021, the Company’s Board of Directors set the purchase price at 85 % of the fair market value on the completion date of the offering period. 
 
 (in thousands) 2022 
 Compensation expense from 2006 ESPP $ 1,614 

 
 As of December 31, 2022, 0.8 million shares had been issued under the plan. 
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 Shares issued and available for issuance 
 In 2022, the Company issued 1.0 million shares to its employees and directors under the Company’s stock-based compensation plans. 
 As of December 31, 2022, there were 1.4 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 1.2 million shares under the 2004 Plan and 0.2 million shares under the 2006 ESPP. 
 Grant activity 
 Stock options 
 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 shares’ fair market value at the grant date. 
 The following table summarizes the Company’s fair value assumptions for stock options: 
 2022 2021 2020 
 Weighted-average grant-date fair value $ 17.49 $ 37.74 $ 24.16 
 Assumptions used in the Black-Scholes option-pricing model: 
 Expected annual volatility (1) 
 42 % 35 % 31 % 
 Expected term in years (2) 
 3.9 4.4 4.5 
 Risk-free interest rate (3) 
 3.4 % 0.6 % 0.7 % 
 Expected annual dividend yield (4) 
 0.1 % 0.2 % 0.2 % 

 (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 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 2022: 
 Shares 
(in thousands) Weighted-average Exercise Price Weighted-average Remaining Contractual Term (in years) Aggregate Intrinsic Value 
(in thousands) 
 Options outstanding as of January 1, 2022 7,189 $ 74.94 
 Granted 9,725 50.35 
 Exercised ( 572 ) 25.17 
 Forfeited ( 1,153 ) 87.71 
 Expired ( 278 ) $ 82.83 
 Options outstanding as of December 31, 2022 14,911 $ 59.67 
 Vested and expected to vest as of December 31, 2022 12,449 $ 59.06 8.1 $ 9,476 
 Exercisable as of December 31, 2022 3,901 $ 64.76 5.3 $ 8,056 

 
 The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2022, 2021, and 2020 was $ 15.6 million, $ 94.3 million, and $ 126.8 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2022 is based on the difference between the closing price of the Company’s stock of $ 34.24 and the exercise price of the applicable stock options. 
 As of December 31, 2022, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $ 101.6 million that is expected to be recognized as expense over a weighted-average period of 2.0 years. 
 RSUs 
 RSUs provide the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expected dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period. 
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 The weighted-average grant-date fair value for RSUs granted in 2022, 2021, and 2020 was $ 74.50 , $ 129.03 , and $ 93.68 , respectively. 
 The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2022: 
 Shares 
(in thousands) Weighted- Average Grant-Date 
Fair Value Aggregate Intrinsic Value 
(in thousands) 
 Nonvested as of January 1, 2022 2,054 $ 99.36 
 Granted 1,571 74.50 
 Vested ( 795 ) 93.72 
 Forfeited ( 479 ) 95.13 
 Nonvested as of December 31, 2022 2,351 $ 85.52 $ 80,497 
 Expected to vest as of December 31, 2022 1,716 $ 85.17 $ 58,772 

 
 The fair value of RSUs vested in 2022, 2021, and 2020 was $ 50.3 million, $ 122.5 million, and $ 108.4 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2022 is based on the closing price of the Company’s stock of $ 34.24 as of December 31, 2022. 
 As of December 31, 2022, the Company had $ 65.5 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 2.0 years. 
 Common stock 
 In 2022, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $ 42.41 per share. 
 
 17. EMPLOYEE BENEFIT PLANS 
 The Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makes discretionary matching contributions. 
 Employee benefit plan expenses: 
 (in thousands) 2022 2021 2020 
 U.S. 401(k) Plan $ 8,994 $ 8,879 $ 8,109 
 International plans 21,141 20,780 16,132 
 $ 30,135 $ 29,659 $ 24,241 

 
 
 
 
 18. INCOME TAXES 
 The components of (loss) before provision for (benefit from) income taxes are: 
 (in thousands) 2022 2021 2020 
 Domestic $ ( 185,820 ) $ ( 125,947 ) $ ( 59,281 ) 
 Foreign 24,023 ( 6,040 ) ( 65,608 ) 
 $ ( 161,797 ) $ ( 131,987 ) $ ( 124,889 ) 

 
 The components of provision for (benefit from) income taxes are: 
 (in thousands) 2022 2021 2020 
 Current: 
 Federal $ 3,920 $ 1,921 $ ( 11,251 ) 
 State 775 363 399 
 Foreign 10,200 4,105 7,113 
 Total current provision for (benefit from) 14,895 6,389 ( 3,739 ) 
 Deferred: 
 Federal 149,028 ( 42,214 ) ( 34,573 ) 
 State 20,704 ( 9,413 ) ( 8,119 ) 
 Foreign ( 842 ) ( 23,709 ) ( 17,085 ) 
 Total deferred provision (benefit) 168,890 ( 75,336 ) ( 59,777 ) 
 $ 183,785 $ ( 68,947 ) $ ( 63,516 ) 

 
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 A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate: 
 (in thousands) 2022 2021 2020 
 U.S. federal income taxes at statutory rates $ ( 33,977 ) $ ( 27,717 ) $ ( 26,227 ) 
 Valuation allowance 188,258 ( 469 ) ( 5,881 ) 
 State income taxes, net of federal benefit and tax credits ( 2,433 ) ( 7,217 ) ( 6,994 ) 
 Permanent differences 11,561 541 1,773 
 Federal research and experimentation credits ( 5,012 ) ( 6,380 ) ( 5,716 ) 
 Tax effects of foreign activities 3,770 3,599 3,050 
 GILTI, FDII, and BEAT 16,390 — — 
 Provision to return adjustments ( 6,317 ) ( 2,016 ) 3,416 
 Non-deductible compensation 4,769 5,464 1,806 
 Expiration of statutes and changes in estimates 5,673 ( 2,250 ) 55 
 Excess tax benefits related to stock-based compensation 1,563 ( 20,697 ) ( 25,797 ) 
 CARES Act — — ( 10,576 ) 
 Impact of change in tax law ( 793 ) ( 11,811 ) 7,489 
 Other 333 6 86 
 $ 183,785 $ ( 68,947 ) $ ( 63,516 ) 

 
 Deferred income taxes 
 Significant components of net deferred tax assets and liabilities are: 
 December 31, 
 (in thousands) 2022 2021 
 Deferred tax assets: 
 Net operating loss carryforwards $ 109,286 $ 133,164 
 Accruals and reserves 32,467 38,526 
 Interest expense carryforward 208 7,759 
 Software revenue 1,828 336 
 Convertible senior notes 5,794 8,362 
 Depreciation 3,698 3,764 
 Tax credit carryforwards 39,122 40,590 
 Research and development capitalization 38,425 — 
 Other 622 1,015 
 Total deferred tax assets 231,450 233,516 
 Valuation allowances ( 212,808 ) ( 25,855 ) 
 Total net deferred tax assets 18,642 207,661 
 Deferred tax liabilities: 
 Capped call transactions ( 644 ) ( 14,961 ) 
 Convertible senior notes — — 
 Software revenue — — 
 Intangibles ( 14,280 ) ( 12,044 ) 
 Total deferred tax liabilities ( 14,924 ) ( 27,005 ) 
 $ 3,718 $ 180,656 

 
 The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projected information. On a quarterly basis, the Company reassesses the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. 
 As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover the Company’s net deferred tax assets. The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook. 
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 As of June 30, 2022, the combination of the above factors caused the Company to conclude there is not sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s U.S. and U.K. net deferred tax assets. 
 The Company intends to maintain a full valuation allowance on its U.S and U.K deferred tax assets until there is sufficient evidence to support the realization of these deferred tax assets. Accordingly, the Company recorded a valuation allowance of $ 188.3 million in income tax expense in 2022. 
 As of December 31, 2022, the Company’s net operating losses and credit carryforwards are: 
 (in thousands) 
 Federal State 
 Net operating losses (1) 
 $ 147,294 $ 10,807 
 Net operating losses due to acquisitions (1) 
 $ 27,442 $ 2,849 
 Credit carryforwards (2) 
 $ 29,080 $ 1,686 
 Credit carryforwards due to acquisitions $ 640 $ 60 

 (1) Excludes federal and state net operating losses of $ 19.8 million and $ 0.8 million, respectively, from prior acquisitions that the Company expects will expire unutilized. 
 (2) Excludes federal and state tax credits of $ 0.1 million and $ 9.2 million, respectively, that the Company expects will expire unutilized. 
 Carryforward losses and credits expire between 2023 and 2040, except for the 2020 and 2021 federal net operating loss of $ 119.9 million and $ 1.2 million of state credits, which both have unlimited carryforward periods. 
 The Company’s India subsidiary is primarily located in Special Economic Zones (“SEZs”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in India. The tax holiday in the Hyderabad SEZ is expected to expire in 2023. The tax holiday in the Bengaluru SEZ is expected to expire in 2027. 
 Uncertain tax benefits 
 A rollforward of the Company’s gross unrecognized tax benefits is: 
 (in thousands) 
 2022 2021 2020 
 Balance as of January 1, 
 $ 17,584 $ 23,801 $ 23,271 
 Additions for tax positions related to the current year 1,706 653 653 
 Additions for tax positions of prior years 728 — 962 
 Reductions for tax positions of prior years ( 272 ) ( 6,870 ) ( 1,085 ) 
 
 
 
 Balance as of December 31, 
 $ 19,746 $ 17,584 $ 23,801 

 
 As of December 31, 2022, the Company had $ 19.7 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized. 
 Tax examinations 
 The Company files federal and state income tax returns in the U.S. and 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. As of December 31, 2022, the Company’s U.S. federal tax returns for the years 2015 through 2018 were under examination by the Internal Revenue Service. In addition, certain foreign jurisdictions are auditing the Company’s income tax returns for periods ranging from 2013 through 2020. The Company does not expect the results of these audits to have a material effect on the Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for all tax years since 2016 to the present. 
 
 19. (LOSS) PER SHARE 
 Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes. 
 Calculation of (loss) per share: 
 (in thousands, except per share amounts) 2022 2021 2020 
 Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 ) 
 Weighted-average common shares outstanding 81,947 81,387 80,336 
 (Loss) per share, basic $ ( 4.22 ) $ ( 0.77 ) $ ( 0.76 ) 
 
 Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 ) 
 
 
 
 Weighted-average common shares outstanding, assuming dilution (1) (2) (3) 
 81,947 81,387 80,336 
 (Loss) per share, diluted $ ( 4.22 ) $ ( 0.77 ) $ ( 0.76 ) 
 
 Outstanding anti-dilutive stock options and RSUs (4) 
 3,367 5,862 6,278 

 
 (1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive. 
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 (2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares. 
 (3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $ 196.44 . The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive. 
 (4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may be dilutive in the future. 
 
 20. COMMITMENTS AND CONTINGENCIES 
 Commitments 
 For additional information, see "Note 11. Leases". 
 
 Legal Proceedings 
 In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors. 
 In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material. 
 The Company had no accrued losses for litigation as of December 31, 2022 and December 31, 2021. 
 Pegasystems Inc. v. Appian Corp. & Business Process Management Inc. 
 On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). As previously indicated in the Company’s Current Report on Form 8-K filed on November 10, 2022 with the SEC, on November 9, 2022, the Company entered into a confidential settlement agreement with Appian resolving the litigation, and the parties filed a Stipulation of Dismissal with Prejudice dismissing all claims and counterclaims in this litigation. The Company will not contain disclosure regarding this litigation in future filings it makes with the SEC. 
 Appian Corp. v. Pegasystems Inc. & Youyong Zou 
 As previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $ 2,060,479,287 , consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0 % per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $ 25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. Appellate briefing is currently in process. Although it is not possible to predict timing, this appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings. 
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 City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell 
 On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company believes the claims brought against the defendants are without merit and intends to defend against these claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint. 
 Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant 
 On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. The Company believes the claims brought against the defendants are without merit and intends to defend against these claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint. 
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 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
 None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
PEGASYSTEMS INC 10-K

Item 8. Financial Statements and Supplementary Data
