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Risks Related to Our Business and Industry
−Removed: If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted.
−Removed: We are transitioning to a more subscription-based business model, which impacts our revenue and cash flow.
−Removed: The subscription model prices and delivers our software differently than a perpetual license model.
−Removed: These changes reflect a significant shift from perpetual license sales in favor of providing our clients the right to access our software in a hosted environment or use downloaded software for a specified subscription period.
+Added: If we fail to operate our subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted.
+Added: We have substantially completed our transition to a more subscription-based business model, in which clients have the right to access our software in a hosted environment or use downloaded software for a specified subscription period.
The shift of our clients’ preference to subscription-based offerings requires a scalable organization and a considerable investment of technical, financial, legal, managerial, and sales resources.
−Removed: Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted.
−Removed: Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.
−Removed: Market acceptance of our subscription-based offerings will depend on our ability to continue to:
+Added: Continued growth of our subscription-based offerings will depend on our ability to continue to:
• innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements;
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If we are unable to meet these challenges effectively, our operating results and financial condition could be materially adversely affected.
−Removed: The transition to a subscription-based business model gives rise to several risks, including:
−Removed: • our revenues and cash flows may fluctuate more than anticipated in the near term;
−Removed: • if the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flow because of our continued significant investments in our Pega Cloud offering;
−Removed: • if new or current clients desire only perpetual licenses, our subscription sales may trail our expectations;
−Removed: • we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption, and projected renewal rates, or we may select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;
−Removed: • a failure to achieve the anticipated level of subscriptions may cause our revenue to decline and our business to be materially adversely affected on an ongoing basis due to lower-than-expected recurring revenue;
−Removed: • we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated.
−Removed: The metrics our investors and we use to monitor our business model transition may evolve during the transition as significant trends emerge.
−Removed: Therefore, it may be difficult to accurately determine the impact of this transition on our business on a contemporaneous basis or to communicate the appropriate metrics to our investors clearly.
We may not achieve the key elements of our strategy and grow our business as anticipated.
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We do not carry, nor do we currently intend to obtain, significant key-person life insurance on officers or other employees.
−Removed: Our success will depend on attracting and retaining qualified personnel and, as needed, rapidly replacing and developing new management.
+Added: Our success will depend on attracting and retaining qualified personnel and rapidly replacing and developing new management, as needed.
The number of potential employees who have the extensive knowledge needed to develop, sell, and maintain our offerings is limited, and competition for their services is intense.
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In addition, we believe our corporate culture has been a key contributor to our success.
−Removed: Shifting workforce priorities, including an increase in remote workers, may make it more difficult to maintain important aspects of our corporate culture, negatively affecting our ability to retain and recruit personnel essential to our success.
+Added: If we fail to maintain and enhance our corporate culture within an environment of hybrid work, our ability to retain and recruit personnel essential to our success may be negatively affected.
The timing of our license and Pega Cloud revenue is difficult to predict, which may cause our operating results to vary considerably.
−Removed: A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloud arrangements, can cause our revenues and cash flows to fluctuate materially between periods.
+Added: A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, subscription licenses, and Pega Cloud arrangements, can cause our revenues and cash flows to fluctuate materially between periods.
Revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.
−Removed: Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.
+Added: Subscription licenses and services are typically billed and collected over the contract term, while perpetual licenses are generally billed and collected upfront when the license rights become effective.
Factors that may influence the predictability of our license and Pega Cloud revenue include:
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We may not be able to maintain our retention rate for our subscription clients.
−Removed: An increasing percentage of our revenue has been derived from our subscription offerings.
+Added: The majority of our revenue is derived from our subscription offerings.
Our clients have no obligation to renew their subscriptions, although historically, most have elected to do so.
If our retention rate for those clients decreases, our business, operating results, and financial condition could be materially affected.
−Removed: We are investing heavily in our business in anticipation of continued growth in license and Pega Cloud arrangements, and we may experience decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balance our growth in expenses.
+Added: Investments we are making to continue to grow license and Pega Cloud arrangements may result in decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balance our growth in expenses.
We expect to provide our clients with more cloud and maintenance support as our business grows and have been investing significantly in research and development to expand and improve the Pega Platform and applications.
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We have established offices in the Americas, Europe, Asia, and Australia.
−Removed: We anticipate hiring additional personnel to accommodate increased international demand, and we may also enter into agreements with local distributors, representatives, or resellers.
+Added: We anticipate hiring personnel to accommodate increased international demand, and we may also enter into agreements with local distributors, representatives, or resellers.
If we are unable to do one or more of these things in a timely and effective manner, the growth, if any, of our international operations may be restricted, and our business, operating results, and financial condition could be materially adversely affected.
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There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, operating results, and financial condition.
−Removed: We are exposed to fluctuations in foreign currency exchange rates that could negatively impact our financial results and cash flows.
−Removed: Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates.
−Removed: Our international sales are usually denominated in foreign currencies.
−Removed: The operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales.
−Removed: Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the U.S.
−Removed: dollar, the Euro, and the Australian dollar relative to the British Pound.
−Removed: These exposures may change over time as business practices evolve.
−Removed: We have historically used but do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates.
−Removed: We may enter into hedging contracts again in the future if we believe it is appropriate.
−Removed: Our realized gain or loss for foreign currency fluctuations will depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered forward contracts to offset these exposures, and other factors.
−Removed: All these factors could materially impact our operating results, financial condition, and cash flows.
Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.
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Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets in which we operate.
−Removed: The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable.
+Added: The introduction of third-party solutions embodying new technologies, including generative AI and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable.
As a result, our success will depend upon our ability to enhance current products, address any product defects or errors, acquire or develop and introduce new products that meet client needs, keep pace with technology and regulatory changes, respond to competitive products, and achieve market acceptance.
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Inability to introduce or implement new or enhanced products in a timely manner could result in loss of market share if competitors are able to provide solutions to meet client needs before we do, give rise to unanticipated expenses related to further development or modification of acquired technologies, and materially adversely affect our financial performance.
−Removed: We may also fail to anticipate adequately and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such as blockchain and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
+Added: We may also fail to anticipate adequately and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such as generative AI and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.
The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.
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• clients’ in-house information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.
−Removed: Many of our competitors, such as Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”), have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or changes in client requirements or preferences.
+Added: Many of our competitors, such as International Business Machines Corporation (“IBM”), Microsoft Corporation, Oracle Corporation, Salesforce.com, SAP SE, and ServiceNow, have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies, programming languages or standards, or changes in client requirements or preferences.
Competitors may also be able to devote greater managerial and financial resources to develop, promote, and distribute products and to provide related consulting and training services.
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There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not materially adversely affect our business, operating results, and financial condition.
−Removed: See "Competition" in Item 1 of this Annual Report for additional information.
+Added: For additional information, see "Item 1.
+Added: Business" of this Annual Report.
Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could materially adversely affect our other stockholders.
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As a result, he has the ability to exert significant influence over all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation, or sale of our assets.
−Removed: This concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders.
+Added: Under Massachusetts law and our governing documents, approval of a merger, share exchange or sale of all or substantially all of our assets requires approval of two-thirds of all shares entitled to vote.
+Added: As a result, this concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed by other stockholders.
If we are unsuccessful in the appeal of the trial court judgment in our litigation with Appian Corp., our operating results and financial condition would be adversely impacted.
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On September 15, 2022, the circuit court of Fairfax County entered judgment for Appian in the amount of $2,060,479,287 and awarding post-judgment interest.
−Removed: The Company filed a notice of appeal from the judgment the same day.
−Removed: On September 29, 2022, the court approved the $25,000,000 letter of credit obtained by the Company to secure the judgment and suspended the judgment during the pendency of the Company’s appeal.
−Removed: Appellate briefing is currently in process.
+Added: The Company filed a notice of appeal from the judgment the same day with the Court of Appeals of Virginia.
+Added: On September 29, 2022, the circuit court approved the $25,000,000 letter of credit obtained by the Company to secure the judgment and suspended the judgment during the pendency of the Company’s appeal.
+Added: On November 15, 2023, the Court of Appeals of Virginia heard oral arguments in the appeal.
+Added: After the Court issues an opinion, the non-prevailing party or, depending on the ruling of the court, parties may file a petition for rehearing with the Court of Appeals of Virginia and/or file a petition for appeal with the Supreme Court of Virginia.
Although it is not possible to predict timing, this appeals process could potentially take years to complete.
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Threats to IT security can take a variety of forms.
−Removed: Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten our clients and us.
+Added: Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten our clients, suppliers, third-party technology providers, and us.
Although we are not aware of having experienced any prior material data breaches, regulatory non-compliance incidents or cyber security incidents, we may in the future be impacted by such an event, exposing our clients and us to a risk of someone obtaining access to our information, to information of our clients or their customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information.
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These services involve storing and transmitting client data and other confidential information.
−Removed: Our security measures and those of our clients may be breached because of third-party actions or that of employees, consultants, or others, including intentional misconduct by computer hackers, system errors, human errors, technical flaws in our products, or otherwise.
+Added: Our security measures, those of our suppliers, third-party technology providers, and our clients may be breached because of third-party actions or those of employees, consultants, clients, or others, including intentional misconduct by computer hackers, system errors, human errors, technical flaws in our products, or otherwise.
Because we do not control the configuration of Pega applications by our clients, the transmissions between our clients and our third-party technology providers, the processing of data on the servers at third-party technology providers, or the internal controls maintained by our clients and third-party technology providers that could prevent unauthorized access or provide appropriate data encryption, we cannot fully ensure the complete integrity or security of such transmissions processing or controls.
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The techniques used to obtain unauthorized access or sabotage systems change frequently and are generally only recognized once launched against a target.
−Removed: While we have invested in protecting our data and systems and clients' data to reduce these risks, there can be no assurance that our efforts will prevent breaches.
+Added: While we have invested in protecting our data and systems and clients' data to reduce these risks and actively monitor for risks of data breaches, regulatory non-compliance incidents and cyber security incidents, there can be no assurance that our efforts will prevent breaches.
+Added: Moreover, like most software companies, we incorporate open-source code into our software products and services, which also creates a potential risk.
We deal with security issues regularly and have experienced security incidents from time to time.
−Removed: Accordingly, there is a risk that a security breach will be successful, and such an event will be material.
+Added: We have a standing Compliance and Risk Governing Committee composed of senior representatives across the Company that reports to and assists the Audit Committee and the Board as a whole in the oversight of compliance and risk management programs, including cybersecurity measures.
+Added: In addition, we have a standing Security Steering Group, whose members include our Chief Information Security Officer, Chief Product Officer and Chief Technical Systems Officer, and which is charged with providing strategic direction for the implementation and ongoing operation of our cyber security program.
+Added: Even with the efforts the Company has undertaken, there is a risk that a security breach will be successful, and such an event will be material.
We carry data breach insurance coverage to mitigate the financial impact of a security breach, though this may prove insufficient in the event of a breach.
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The cost of these steps could negatively impact our operating results.
+Added: While we actively work to improve vulnerability scanning, patching, threat intelligence, security event detection, security event alerting and forensics, it is possible that security breaches, whether due to unpatched vulnerabilities or otherwise, occur and may be undetected when they occur.
+Added: Any such security breach could result in a loss of confidence in the security of our services, damage our reputation, disrupt our business, require us to incur significant costs of investigation, remediation and/or payment of a ransom, lead to legal liability, negatively impact our future sales, and result in a substantial financial loss.
We rely on third-party hosting providers to deliver our offerings, and any disruption or interference with our use of these services could adversely affect our business.
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Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or new versions of our software.
−Removed: Additionally, detecting and correcting any security flaws can be time-consuming and costly.
+Added: Additionally, detecting and correcting any security flaws, including those introduced by our use of open-source, can be time-consuming and costly.
Errors or security flaws in our software could result in the inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties.
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Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary.
−Removed: Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained.
+Added: Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, vendors, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained.
In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S.
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Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses.
−Removed: As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost.
+Added: As a result, we may be required to develop alternative non-infringing technology, which could require substantial time, effort, and cost.
If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.
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The California Consumer Privacy Act (“CCPA”), effective January 2020, requires, among other things, covered companies to provide new disclosure to consumers about such companies’ data collection, use and sharing practices, provide such consumers new ways to opt-out of certain sales or transfers of personal information, and provide consumers with additional causes of action.
−Removed: The CCPA was modified as of January 1, 2023 by the California Privacy Rights Act (“CPRA”) which expands California consumers’ rights with respect to sensitive personal information and which created a new state agency that is vested with authority to implement and enforce the CCPA and CPRA.
+Added: The CCPA was modified as of January 1, 2023 by the California Privacy Rights Act (“CPRA”) which expands California consumers’ rights with respect to sensitive personal information and which created a new state agency that is vested with authority to implement and enforce the CCPA, CPRA and associated regulations.
+Added: Following the passage of the CCPA, several other U.S.
+Added: states passed similar data privacy laws with variations on the CCPA/CPRA and GDPR requirements, most of which laws either went into effect in 2023 or will go into effect in 2024.
+Added: Additional states are expected to pass their own versions of data privacy laws in 2024.
+Added: In 2023, Europe finalized the first-ever comprehensive legal framework for governance of the use of artificial intelligence, the European Union Artificial Intelligence Act, with an anticipated effective date in 2026, and is moving forward with finalizing applicable regulations.
Compliance with these varying regimes has caused and will cause us to incur additional costs, including as may result from any non-compliance or asserted non-compliance.
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In addition, our future income taxes could be materially adversely affected by a shift in our jurisdictional income mix, by changes in the valuation of our deferred tax assets and liabilities, because of changes in tax laws, regulations, or accounting principles, as well as by certain discrete items.
−Removed: In the United States, such tax law changes will include the impact of the currently enacted mandatory capitalization of research and experimentation expenses, effective for tax years beginning after December 31, 2021 unless the effective date is retroactively postponed by the United States Congress.
−Removed: Globally, the Organization for Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting is advancing fundamental changes to the international corporate tax system creating new rules for allocating rights to tax global income and a global minimum tax.
+Added: In the United States, this may include any changes to the currently enacted law regarding mandatory capitalization of research and experimentation expenses, effective for tax years beginning after December 31, 2021.
Considering fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative actions to increase tax revenue, including corporate income taxes.
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Similarly, in Europe and elsewhere globally, various tax reform efforts underway are designed to increase the taxes paid by corporate entities.
+Added: On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported by over 130 countries worldwide.
+Added: The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive.
+Added: A significant number of countries are also implementing similar local legislation.
+Added: The Company is continuing to evaluate the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.
If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations.
As of December 31, 2023, $159.9 million of our cash and cash equivalents were held in our foreign subsidiaries.
−Removed: If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation.
+Added: If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation.
We consider the earnings of our foreign subsidiaries to be permanently reinvested.
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Global economic uncertainty has produced, and continues to produce, substantial stress, volatility, illiquidity and disruption of global credit and other financial markets.
−Removed: Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflict between Russia and Ukraine, the continuing effects of the COVID-19 pandemic, an actual recession or fears of a recession, trade policies and tariffs, and geopolitical tensions.
+Added: Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflict between Russia and Ukraine and between Israel and Gaza, an actual recession or fears of a recession, trade policies and tariffs, and geopolitical tensions.
Economic uncertainty has and could continue to negatively affect the business and purchasing decisions of companies in industries in which our customers operate.
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The combination of these factors could negatively impact our business, operating results, and financial condition.
−Removed: Actual or threatened public health emergencies could harm our business.
−Removed: Our business and operations could be adversely affected by health epidemics, including the current COVID-19 pandemic, impacting the markets and communities in which we, our partners and clients operate.
−Removed: The COVID-19 pandemic has caused significant disruption to the business and financial markets, and there remains uncertainty about the duration of this disruption on both a nationwide and global level, as well as the ongoing effect on our business.
−Removed: The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain and unpredictable.
−Removed: We continue to monitor the COVID-19 situation and potential effects on our business and operations.
−Removed: While the spread and impact of COVID-19 has stabilized, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur.
+Added: We are exposed to fluctuations in foreign currency exchange rates that could negatively impact our financial results and cash flows.
+Added: Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates.
+Added: Our international sales are usually denominated in foreign currencies.
+Added: The operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset our foreign currency exposure on our international sales.
+Added: Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the U.S.
+Added: dollar, the Euro, and the Australian dollar relative to the British Pound.
+Added: These exposures may change over time as business practices evolve.
+Added: We do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates.
+Added: We may enter into hedging contracts again in the future if we believe it is appropriate.
+Added: Our realized gain or loss for foreign currency fluctuations will depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered forward contracts to offset these exposures, and other factors.
+Added: All these factors could materially impact our operating results, financial condition, and cash flows.
The market price of our common stock has been and is likely to continue to be volatile .
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If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
−Removed: UNRESOLVED STAFF COMMENTS
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.