What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-04-22 compared with 2024-10-23 · 71 added, 97 removed, 193 unchanged (47% of the section changed)

7 unchanged sentences

• the adequacy of our liquidity and capital resources;

• the successful execution of investments in artificial intelligence;

• the continued payment of our quarterly dividends;

4 unchanged sentences

• compliance with our debt obligations and covenants;

• the potential impact of our convertible senior notes and Capped Call Transactions;

• foreign currency exchange rates;

9 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 October 23, 2024.

The forward-looking statements in this Quarterly Report represent our views as of April 22, 2025.

NON-GAAP MEASURES

5 unchanged sentences

BUSINESS OVERVIEW

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

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

With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation.

In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

We develop, market, license, host, and support enterprise software that helps organizations optimize decisions and processes in real-time so they can deliver outcomes that transform their business.

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

With Pega, our clients can leverage our AI technology and scalable architecture to accelerate their digital transformation.

In addition, our sales and client success teams, world-class partners, and clients are able to leverage Pega GenAI Blueprint TM (“Blueprint”) to rapidly prototype and accelerate the development and deployment of applications quickly and collaboratively.

Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve.

Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk.

Along with our partners, we deliver solutions tailored to our clients’ specific industry.

Along with our partners, we deliver solutions tailored by industry.

Performance metrics

4 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

(Dollars in thousands)

March 31, 2024 March 31, 2025 Change Constant Currency Change

Pega Cloud $ 570,356 $ 701,311 $ 130,955 23 % 23 %

6 unchanged sentences

Reconciliation of ACV and constant currency ACV

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

(in millions, except percentages) March 31, 2024 March 31, 2025 1-Year Change

ACV $ 1,273 $ 1,445 13 %

2 unchanged sentences

$ 1,273 $ 1,445 13 %

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

Constant currency ACV is calculated by applying the March 31, 2024 foreign exchange rates to current period shown.

Cash Flow (1)

(Dollars in thousands)

Nine Months Ended

September 30, Change

Three Months Ended

March 31, Change

Cash provided by operating activities $ 180,146 $ 204,228 13 %

3 unchanged sentences

Supplemental information (2)

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

$ 2,739 $ 2,413

Restructuring 3,347 1,184

6 unchanged sentences

(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.

◦ 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 September 30, 2024 for additional information.

◦ Legal fees:

3 unchanged sentences

◦ Interest on convertible senior notes :

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

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

In February 2020, we issued convertible senior notes (the “Notes”), due March 1, 2025, in a private placement.

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

The outstanding Notes were repaid in their entirety at maturity.

◦ Income taxes :

2 unchanged sentences

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

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

(in millions, except percentages) March 31, 2024 March 31, 2025 1-Year Growth Rate

Backlog - GAAP $ 1,425 $ 1,728 21 %

1 unchanged sentence

Constant currency backlog $ 1,425 $ 1,723 21 %

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

Constant currency Backlog is calculated by applying the March 31, 2024 foreign exchange rates to current period shown.

CRITICAL ACCOUNTING POLICIES

8 unchanged sentences

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

March 31, Change

Pega Cloud $ 151,123 32 % $ 130,902 40 % $ 20,221 15 %

6 unchanged sentences

$ 475,633 100 % $ 330,147 100 % $ 145,486 44 %

• 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.

• The increase in Pega Cloud revenue in the three months ended March 31, 2025 was primarily due to expanded adoption of Pega Cloud by our existing clients.

• The decrease in maintenance revenue in the three months ended March 31, 2025 was primarily due to our clients’ shift to Pega Cloud-based offerings, which do not generally result in maintenance revenue.

• The increase in subscription license revenue in the three months ended March 31, 2025 was primarily due to several large multi-year contracts recognized in revenue in the three months ended March 31, 2025.

• The increase in consulting revenue in the three months ended March 31, 2025 was primarily due to increases in consultant billable hours.

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

March 31, Change

Pega Cloud $ 118,654 79 % $ 101,305 77 % $ 17,349 17 %

6 unchanged sentences

$ 373,183 78 % $ 235,489 71 % $ 137,694 58 %

• 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.

• The increase in Pega Cloud gross profit percent in the three months ended March 31, 2025 was primarily due to increased cost efficiency, primarily 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, 2025 was primarily due to increases in consultant utilization rates.

Operating expenses

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

March 31, Change

Selling and marketing $ 138,069 $ 127,695 $ 10,374 8 %

9 unchanged sentences

* Not meaningful

• 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.

• The increase in selling and marketing in the three months ended March 31, 2025 was primarily due to an increase in compensation and benefits of $6.7 million attributable to increases in commissions and equity compensation.

• The increase in research and development in the three months ended March 31, 2025 was primarily due to an increase in computer hardware and software costs of $1 million and an increase in compensation and benefits of $0.5 million.

• The increase in general and administrative in the three months ended March 31, 2025 was primarily due to an increase in compensation and benefits of $4.2 million attributable to an increase in equity compensation and an increase of $4.6 million in legal fees and related expenses arising from legal proceedings outside the ordinary course of business.

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

For additional information, see "Note 17.

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

• 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.

Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report.

• The decrease in litigation settlement, net of recoveries in the three months ended March 31, 2025 was primarily due to the cost to settle litigation arising from proceedings outside the ordinary course of business in the three months ended March 31, 2024.

See “Note 20.

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 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.

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

Commitments and Contingencies” in Item 8 of our Annual Report filed on Form-10K for the year ended December 31, 2024 and prior filings for further information.

Other income and expenses

(Dollars in thousands) Three Months Ended

September 30, Change Nine Months Ended

September 30, Change

2024 2023 2024 2023

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

March 31, Change

Foreign currency transaction (loss) $ (5,325) $ (3,262) $ (2,063) (63) %

Interest income 5,335 5,281 54 1 %

Interest expense (1,027) (1,752) 725 41 %

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

(Loss) income on capped call transactions (223) 3,299 (3,522) *

Other income, net 561 1,684 (1,123) (67) %

1 unchanged sentence

* Not meaningful

• 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.

• The increase in foreign currency transaction (loss) in the three months ended March 31, 2025 was primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.

• The decrease in interest expense in the three months ended March 31, 2025 was primarily due to the repayment of the Notes at maturity on March 3, 2025.

• The change in (loss) income on capped call transactions was due to the termination of the capped call transactions in the three months ended March 31, 2025.

• The decrease in other income, net was primarily due to lower recorded valuation gains from our venture investments portfolio.

For additional information, see "Note 12.

Debt” and "Note 10.

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

Provision for income taxes

Nine Months Ended

September 30,

Provision for (benefit from) income taxes

Three Months Ended

(Dollars in thousands) 2025 2024

Provision for income taxes $ 8,369 $ 15,395

Provision for (benefit from) income taxes $ 40,888 $ (3,038)

Effective income tax rate 32 % 20 %

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 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.

We are monitoring this development and evaluating its potential impact on our tax rate and eligibility to qualify for the safe harbor provisions.

For 2024, we currently anticipate meeting the transitional safe harbors in most jurisdictions, with any remaining top-up tax being immaterial.

Our effective income tax rate for the three months ended March 31, 2025, is impacted by the valuation allowance on our deferred tax assets in the U.S.

as well as the jurisdictional mix and timing of the actual compared to projected earnings.

The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax regulations, known as Pillar Two, that was supported by over 130 countries worldwide.

Parts of the minimum tax rules were applicable in 2024, with the remaining provisions becoming fully effective for 2025.

We do not expect this legislation to have a material impact on our consolidated financial statements.

We will continue to monitor and evaluate new legislation and guidance, which could change our current assessment.

LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2025 2024

4 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents, and restricted cash 3,570 (2,803)

Net increase in cash, cash equivalents, and restricted cash $ 66,238 $ 27,092

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (106,293) $ 62,843

(in thousands)

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

entities $ 118,576 $ 474,509

5 unchanged sentences

$ 375,843 $ 744,399

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.

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, 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 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.

Restructuring” and "Note 15.

Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report.

The change in cash provided by operating activities in the three months ended March 31, 2025 was primarily due to increase in client collections.

Investing activities

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.

The change in cash provided by (used in) investing activities in the three months ended March 31, 2025 was primarily due to scheduled maturities of our investments in financial instruments in anticipation of the repayment of the maturing Notes.

Financing activities

Debt financing

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

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

In February 2020, we issued $600 million in aggregate principal amount of Notes, which matured on March 1, 2025.

As of December 31, 2024, we had $468 million in aggregate principal amount of Notes outstanding, which were repaid in their entirety at maturity.

For additional information, see "Note 10.

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

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 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.

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.

Effective as of February 4, 2025, the Credit Facility was amended to extend the expiration date to February 4, 2027.

As of March 31, 2025 and December 31, 2024, we had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but we had no outstanding cash borrowings.

For additional information, see "Note 10.

2 unchanged sentences

Changes in the remaining stock repurchase authority:

(in thousands) Nine Months Ended

September 30, 2024

(in thousands) Three Months Ended

March 31, 2025

December 31, 2024 $ 240,443

Authorizations (1)

Repurchases (1)

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.

March 31, 2025 (2)

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

(2) On April 22, 2025, the Company’s Board of Directors further extended the expiration date of the share repurchase program from December 31, 2025 to June 30, 2026 and increased the authorized repurchase by $500 million.

Common stock repurchases

Nine Months Ended

September 30,

Three Months Ended

(in thousands) Shares Amount Shares Amount

6 unchanged sentences

1,489 $ 121,008 32 $ 2,005

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.

During the three months ended March 31, 2025 and 2024, instead of receiving cash from the equity holders, we withheld shares with a value of $1.5 million and $2.8 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.

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2025 2024

1 unchanged sentence

Contractual obligations

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

As of March 31, 2025, our contractual obligations were:

Payments due by period

(in thousands) Remainder of 2025 2026 2027 2028 2029 2030 and after Other Total

Convertible senior notes (1)

$ — $ 504,154 $ — $ — $ — $ — $ — $ 504,154

Purchase obligations (1)

7 unchanged sentences

$ 110,831 $ 170,364 $ 185,236 $ 47,721 $ 11,306 $ 24,176 $ 20,785 $ 570,419

(1) Includes principal and interest.

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

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

(2) 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