What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-23 compared with 2024-07-24 · 74 added, 55 removed, 216 unchanged (37% of the section changed)

25 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 July 24, 2024.

The forward-looking statements in this Quarterly Report represent our views as of October 23, 2024.

NON-GAAP MEASURES

18 unchanged sentences

ACV is a performance measure that we believe provides useful information to our management and investors.

September 30, 2024 September 30, 2023 Change Constant Currency Change

Pega Cloud $ 640,574 $ 494,571 $ 146,003 30 % 26 %

306,753 319,250 (12,497) (4) % (6) %

Subscription services

947,327 813,821 133,506 16 % 14 %

Subscription license

412,678 355,055 57,623 16 % 15 %

$ 1,360,005 $ 1,168,876 $ 191,129 16 % 14 %

Reconciliation of ACV and constant currency ACV

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

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

ACV $ 1,169 $ 1,360 16 %

2 unchanged sentences

$ 1,169 $ 1,332 14 %

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

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

Cash flow (1)

(Dollars in thousands)

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

Cash provided by operating activities $ 250,697 $ 137,920 82 %

14 unchanged sentences

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.

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

◦ Legal fees:

9 unchanged sentences

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

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

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

Backlog - GAAP $ 1,265 $ 1,475 17 %

1 unchanged sentence

Constant currency backlog $ 1,265 $ 1,432 13 %

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

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

CRITICAL ACCOUNTING POLICIES

5 unchanged sentences

Significant Accounting Policies” in Item 8.

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.

No significant changes have been made to our critical accounting policies as 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

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

7 unchanged sentences

$ 325,050 100 % $ 334,643 100 % $ (9,593) (3) % $ 1,006,350 100 % $ 958,383 100 % $ 47,967 5 %

• 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.

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

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

• The decreases in subscription license revenue in the three and nine months ended September 30, 2024 were primarily due to several large multi-year contracts recognized in revenue in the three and nine months ended September 30, 2023.

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

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

7 unchanged sentences

$ 228,344 70 % $ 240,880 72 % $ (12,536) (5) % $ 718,040 71 % $ 670,546 70 % $ 47,494 7 %

• 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.

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

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

Operating expenses

(Dollars in thousands) Three Months Ended

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

10 unchanged sentences

* 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.

• The decreases in selling and marketing during the three and nine months ended September 30, 2024 were primarily due to decreases in compensation and benefits of $2.4 million and $27.5 million, respectively, from reduced headcount as a result of our effort to optimize our go-to-market strategy.

For additional information, see "Note 9.

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

• 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.

• The decrease in research and development for the three months ended September 30, 2024 was primarily due to a decrease in compensation and benefits of $1.1 million.

The decrease in research and development for the nine months ended September 30, 2024 was primarily due to a decrease in cloud hosting expenses of $1.8 million and a decrease in compensation and benefits of $1.5 million.

• The increases in general and administrative during the three and nine months ended September 30, 2024 were primarily due to increases in compensation and benefits of $3.1 million and $7.2 million, respectively, due to increases in incentive-based compensation.

• The increase in litigation settlement, net of recoveries in the nine months ended September 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 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.

• The decreases in restructuring expenses during the three and nine months ended September 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

June 30, Change Six Months Ended

June 30, Change

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

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

Foreign currency transaction (loss) gain $ (4,405) $ 1,994 $ (6,399) * $ (7,230) $ (3,971) $ (3,259) (82) %

Interest income 6,769 2,532 4,237 167 % 18,835 5,831 13,004 223 %

Interest expense (1,639) (1,533) (106) (7) % (5,047) (5,229) 182 3 %

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

(Loss) on capped call transactions (689) (2,294) 1,605 70 % (667) (449) (218) (49) %

Other income, net — 6,383 (6,383) (100) % 1,684 18,668 (16,984) (91) %

1 unchanged sentence

* 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.

• The changes in foreign currency transaction (loss) gain in the three and nine months ended September 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 nine months ended September 30, 2024 were primarily due to higher investment balances and higher interest rate yields.

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

• The decrease in other income, net in the three months ended September 30, 2024 was due to a gain of $6.4 million on our venture investments in the three months ended September 30, 2023.

The decrease in other income, net in the nine months ended September 30, 2024 was due to a gain of $7.9 million from repurchases of our convertible senior notes and a decrease of $9.3 million in the gain from our venture investments in the nine months ended September 30, 2024.

For additional information, see “Note 8.

2 unchanged sentences

Provision for income taxes

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands) 2024 2023

1 unchanged sentence

Effective income tax rate (73) % (26) %

* 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).

Our effective income tax rate for the nine months ended September 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.

and a near break-even year-to-date pretax loss resulting in a not meaningful 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

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2024 2023

6 unchanged sentences

(in thousands)

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

entities $ 464,232 $ 263,453

11 unchanged sentences

Operating activities

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.

The change in cash provided by operating activities in the nine months ended September 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) 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.

The change in cash (used in) investing activities in the nine months ended September 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 June 30, 2024, we had $502.3 million in aggregate principal amount of convertible senior notes outstanding.

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

For additional information, see "Note 8.

2 unchanged sentences

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

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.

As of September 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) Six Months Ended

June 30, 2024

(in thousands) Nine Months Ended

September 30, 2024

December 31, 2023 $ 60,000

Authorizations (1)

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.

Repurchases (2)

September 30, 2024 $ 48,251

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

On October 22, 2024, our Board of Directors extended the expiration date of our share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchase by $250 million to $310 million as of that date.

(2) All purchases under this program have been made on the open market.

Common stock repurchases

Six Months Ended

Nine Months Ended

September 30,

(in thousands) Shares Amount Shares Amount

Repurchases paid

164 $ 11,249 — $ —

Repurchases unpaid at period end

Stock repurchase program

171 11,749 — —

Tax withholdings for net settlement of equity awards 48 2,987 39 1,654

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.

219 14,736 39 1,654

In the nine months ended September 30, 2024 and 2023, instead of receiving cash from the equity holders, we withheld shares with a value of $3.3 million and $1.0 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2024 2023

1 unchanged sentence

Contractual obligations

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

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

Payments due by period

17 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