What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-24 compared with 2024-04-24 · 75 added, 54 removed, 196 unchanged (40% of the section changed)

15 unchanged sentences

• foreign currency exchange rates;

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

• potential legal and financial liabilities, as well as damage to our reputation, due to cyber-attacks;

• security breaches and security flaws;

7 unchanged sentences

Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise these forward-looking statements, whether as the result of new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of April 24, 2024.

The forward-looking statements in this Quarterly Report represent our views as of July 24, 2024.

NON-GAAP MEASURES

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We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations.

Management uses these measures to assess the performance of the company's operations and establish operational goals and incentives.

They are not a substitute for financial measures prepared under U.S.

15 unchanged sentences

Reconciliation of ACV and constant currency ACV

(in millions, except percentages) March 31, 2023 March 31, 2024 1-Year Change

(in millions, except percentages) June 30, 2023 June 30, 2024 1-Year Change

ACV $ 1,164 $ 1,305 12 %

2 unchanged sentences

$ 1,164 $ 1,310 13 %

Constant currency ACV is calculated by applying the March 31, 2023 foreign exchange rates to all periods shown.

Constant currency ACV is calculated by applying the June 30, 2023 foreign exchange rates to all periods shown.

Cash flow (1)

(Dollars in thousands)

Three Months Ended

Six Months Ended

June 30, Change

Cash provided by operating activities $ 220,243 $ 113,752 94 %

3 unchanged sentences

Supplemental information (2)

Litigation settlement, net of recoveries $ 32,403 $ —

Restructuring 3,852 17,521

Legal fees 2,739 1,515

Interest on convertible senior notes 1,884 2,250

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(2) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance.

▪ Restructuring :

Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.

◦ Litigation settlement, net of recoveries :

Cost to settle litigation, net of insurance recoveries, arising from proceedings outside the ordinary course of business.

Commitments and Contingencies in our Quarterly Report for the three months ended June 30, 2024 for additional information.

◦ Legal fees:

Legal and related fees arising from proceedings outside the ordinary course of business.

◦ Restructuring:

Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.

◦ Interest on convertible senior notes :

In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement.

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

The convertible senior notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1.

◦ Income taxes :

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Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP)

(in millions, except percentages) March 31, 2023 March 31, 2024 1-Year Growth Rate

(in millions, except percentages) June 30, 2023 June 30, 2024 1-Year Growth Rate

Backlog - GAAP $ 1,266 $ 1,406 11 %

1 unchanged sentence

Constant currency backlog $ 1,266 $ 1,413 12 %

Constant currency Backlog is calculated by applying the Q1 2023 foreign exchange rates to all periods shown.

Constant currency Backlog is calculated by applying the June 30, 2023 foreign exchange rates to all periods shown.

CRITICAL ACCOUNTING POLICIES

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

We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future, given the available information.

We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future based on the available information.

For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2023:

1 unchanged sentence

Significant Accounting Policies” in Item 8.

There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

No significant changes have been made to our critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

RESULTS OF OPERATIONS

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2024 2023 2024 2023

Pega Cloud $ 134,086 38 % $ 115,063 39 % $ 19,023 17 % $ 264,988 39 % $ 222,942 36 % $ 42,046 19 %

6 unchanged sentences

$ 351,153 100 % $ 298,268 100 % $ 52,885 18 % $ 681,300 100 % $ 623,740 100 % $ 57,560 9 %

• The increase in Pega Cloud revenue for the three months ended March 31, 2024 was primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud.

• The increase in maintenance revenue in the three months ended March 31, 2024 was primarily due to continued demand for our subscription license offerings, which are generally bundled with maintenance.

• The decrease in subscription license revenue in the three months ended March 31, 2024 was primarily due to a large multi-year contract recognized in revenue in the three months ended March 31, 2023.

• The increase in consulting revenue in the three months ended March 31, 2024 was primarily due to an increase in consultant realization rates in the Americas.

• The increases in Pega Cloud revenue for the three and six months ended June 30, 2024 were primarily due to additional investments made by our existing clients as they continued to deepen and expand their use of Pega Cloud.

• The decreases in maintenance revenue in the three and six months ended June 30, 2024 were primarily due to the shift to Pega Cloud-based offerings, which do not generally result in maintenance revenue.

• The increases in subscription license revenue in the three and six months ended June 30, 2024 were primarily due to several large multi-year contracts recognized in revenue in the three and six months ended June 30, 2024.

• The decreases in consulting revenue in the three and six months ended June 30, 2024 were primarily due to decreases in consultant billable hours.

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2024 2023 2024 2023

Pega Cloud $ 104,331 78 % $ 84,761 74 % $ 19,570 23 % $ 205,636 78 % $ 162,390 73 % $ 43,246 27 %

6 unchanged sentences

$ 254,207 72 % $ 202,128 68 % $ 52,079 26 % $ 489,696 72 % $ 429,666 69 % $ 60,030 14 %

* not meaningful

• The increase in Pega Cloud gross profit percent in the three months ended March 31, 2024 was primarily due to increased cost efficiency, particularly for hosting services and employee compensation and benefits, as Pega Cloud continues to grow and scale.

• The increase in consulting gross profit percent in the three months ended March 31, 2024 was primarily due to an increase in consultant realization rates in the Americas.

• The increases in Pega Cloud gross profit percent in the three and six months ended June 30, 2024 were primarily due to increased cost efficiency, particularly for hosting services and employee compensation and benefits, as Pega Cloud continues to grow and scale.

• The increase in subscription license gross profit percent in the three months ended June 30, 2024 was primarily due to increased cost efficiency as subscription license revenue grew.

• The decreases in consulting gross profit percent in the three and six months ended June 30, 2024 were primarily due to decreases in consultant utilization rates.

Operating expenses

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2024 2023 2024 2023

Selling and marketing $ 139,761 $ 143,858 $ (4,097) (3) % $ 267,456 $ 293,655 $ (26,199) (9) %

8 unchanged sentences

% of Revenue — % 1 % — % 1 %

• The decrease in selling and marketing during the three months ended March 31, 2024 was primarily due to a decrease in compensation and benefits of $17.5 million from reduced headcount as we optimized our go-to-market strategy.

* not meaningful

• The decreases in selling and marketing during the three and six months ended June 30, 2024 were primarily due to decreases in compensation and benefits of $7.6 million and $25.1 million from reduced headcount as we optimized our go-to-market strategy.

For additional information, see "Note 9.

Restructuring" in Part I, Item 1 of this Quarterly Report.

• The decrease in research and development for the three months ended March 31, 2024 was primarily due to a decrease in compensation and benefits of $1.5 million due to reduced headcount and a decrease in cloud hosting expenses of $1.2 million.

• The increase in litigation settlement, net of recoveries in the three months ended March 31, 2024 was primarily due to the estimated cost to settle ongoing litigation arising from proceedings outside the ordinary course of business.

• The increase in research and development for the three months ended June 30, 2024 was primarily due to an increase in compensation and benefits of $1.1 million due to an increase in incentive-based compensation.

The decrease in research and development for the six months ended June 30, 2024 was primarily due to a decrease in cloud hosting expenses of $1.4 million.

• The increases in general and administrative during the three and six months ended June 30, 2024 were primarily due to increases in compensation and benefits of $3.3 million and $4.1 million due to increases in incentive-based compensation.

• The increase in litigation settlement, net of recoveries in the six months ended June 30, 2024 was primarily due to the cost to settle litigation arising from proceedings outside the ordinary course of business.

See "Note 15.

Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part I, Item 1A of our Annual Report for the year ended December 31, 2023 for additional information.

• The decrease in restructuring expenses during the three months ended March 31, 2024 was primarily due to efforts to optimize our go-to-market organization in the three months ended March 31, 2023.

• The decreases in restructuring expenses during the three and six months ended June 30, 2024 were primarily due to efforts to optimize our go-to-market organization and office space.

For additional information, see "Note 9.

2 unchanged sentences

(Dollars in thousands) Three Months Ended

March 31, Change

Foreign currency transaction (loss) $ (3,262) $ (2,675) $ (587) (22) %

June 30, Change Six Months Ended

June 30, Change

2024 2023 2024 2023

Foreign currency transaction gain (loss) $ 437 $ (3,290) $ 3,727 * $ (2,825) $ (5,965) $ 3,140 53 %

Interest income 6,785 1,814 4,971 274 % 12,066 3,299 8,767 266 %

Interest expense (1,656) (1,778) 122 7 % (3,408) (3,696) 288 8 %

Gain on capped call transactions 3,299 3,206 93 3 %

(Loss) income on capped call transactions (3,277) (1,361) (1,916) (141) % 22 1,845 (1,823) (99) %

Other income, net — 5,702 (5,702) (100) % 1,684 12,285 (10,601) (86) %

$ 2,289 $ 1,087 $ 1,202 111 % $ 7,539 $ 7,768 $ (229) (3) %

• The change in foreign currency transaction (loss) in the three months ended March 31, 2024 was primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increase in interest income in the three months ended March 31, 2024 was primarily due to higher investment balances and market interest rates.

• The decrease in other income, net in the three months ended March 31, 2024 was due to a gain of $3.8 million on our venture investments and a gain of $2.8 million from repurchases of our convertible senior notes in the three months ended March 31, 2023.

* not meaningful

• The changes in foreign currency transaction gain (loss) in the three and six months ended June 30, 2024 was primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increases in interest income in the three and six months ended June 30, 2024 were primarily due to higher investment balances and market interest rates.

• The changes in (loss) income on capped call transactions in the three and six months ended June 30, 2024 were due to fair value adjustments for our capped call transactions.

• The decrease in other income, net in the three months ended June 30, 2024 was due to a gain of $0.7 million on our venture investments and a gain of $5.1 million from repurchases of our convertible senior notes in the three months ended June 30, 2023.

The decrease in other income, net in the six months ended June 30, 2024 was due to a gain of $7.9 million from repurchases of our convertible senior notes in the six months ended June 30, 2023 and a decrease of $2.8 million in the gain from our venture investments in the six months ended June 30, 2024.

For additional information, see “Note 8.

1 unchanged sentence

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

(Benefit from) provision for income taxes

Three Months Ended

Provision for income taxes

Six Months Ended

(Dollars in thousands) 2024 2023

(Benefit from) provision for income taxes $ (3,038) $ 5,249

Provision for income taxes $ 5,604 $ 11,850

Effective income tax rate * (21) %

The effective income tax rate in the three months ended March 31, 2024 was primarily driven by the valuation allowance on our deferred tax assets in the U.S.

and U.K., and forecasted taxable income, offset by an income tax benefit for discrete items in the three months ended March 31, 2024.

* not meaningful

Our effective income tax rate for the six months ended June 30, 2024, is impacted by the jurisdictional mix and timing of the actual compared to projected earnings (losses).

It is also impacted by the valuation allowance on our deferred tax assets in the U.S.

and a near break-even pretax income resulting in a not meaningful high effective income tax rate.

The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax regulations, known as Pillar Two, that began to come into effect on January 1, 2024.

2 unchanged sentences

LIQUIDITY AND CAPITAL RESOURCES

Three Months Ended

Six Months Ended

(in thousands) 2024 2023

6 unchanged sentences

(in thousands)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

entities $ 468,286 $ 263,453

5 unchanged sentences

$ 669,850 $ 426,263

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, settlement of our convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

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

3 unchanged sentences

Operating activities

The change in cash provided by operating activities in the three months ended March 31, 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives.

The change in cash provided by operating activities in the six months ended June 30, 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives.

For additional information, see “Note 9.

2 unchanged sentences

Investing activities

The change in cash (used in) investing activities in the three months ended March 31, 2024 was primarily due to our investments in financial instruments and reduced investment in property and equipment as we optimize our office space.

The change in cash (used in) provided by investing activities in the six months ended June 30, 2024 was primarily due to our investments in financial instruments and reduced investment in property and equipment as we optimized our office space.

Financing activities

1 unchanged sentence

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

As of March 31, 2024, we had $502.3 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025.

As of June 30, 2024, we had $502.3 million in aggregate principal amount of convertible senior notes outstanding.

For additional information, see "Note 8.

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

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

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

On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025.

As of March 31, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings.

As of June 30, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings.

For additional information, see "Note 8.

2 unchanged sentences

Changes in the remaining stock repurchase authority:

(in thousands) Three Months Ended

March 31, 2024

(in thousands) Six Months Ended

June 30, 2024

December 31, 2023 $ 60,000

Authorizations (1)

March 31, 2024 $ 60,000

June 30, 2024 $ 60,000

(1) On April 23, 2024, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2024 to June 30, 2025.

Common stock repurchases

Three Months Ended

Six Months Ended

(in thousands) Shares Amount Shares Amount

Tax withholdings for net settlement of equity awards 38 $ 2,360 34 $ 1,422

In the three months ended March 31, 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $2.8 million and $0.6 million, respectively, for the exercise price of options.

In the six months ended June 30, 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $2.8 million and $0.9 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

1 unchanged sentence

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

Three Months Ended

Six Months Ended

(in thousands) 2024 2023

1 unchanged sentence

Contractual obligations

As of March 31, 2024, our contractual obligations were:

As of June 30, 2024, our contractual obligations were:

Payments due by period

12 unchanged sentences

(1) Includes principal and interest.

(2) Represents the fixed amount owed for purchase obligations for software licenses, hosting services, and sales and marketing programs.

(2) Represents the fixed amount owed for purchase obligations including for software licenses, hosting services, and sales and marketing programs.

(3) Represents the maximum funding under existing venture investment agreements.

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis