What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-07-22 compared with 2025-04-22 · 84 added, 56 removed, 208 unchanged (40% of the section changed)

19 unchanged sentences

• our ongoing litigation with Appian Corp.

and associated legal proceedings;

• our client retention rate;

• management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2024, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S.

Securities and Exchange Commission (“SEC”).

Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the results included in such statements will be achieved.

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 22, 2025.

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

NON-GAAP MEASURES

19 unchanged sentences

(Dollars in thousands)

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

June 30, 2024 June 30, 2025 Change Constant Currency Change

Pega Cloud $ 593,752 $ 761,051 $ 167,299 28 % 25 %

6 unchanged sentences

Reconciliation of ACV and constant currency ACV

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

(in millions, except percentages) June 30, 2024 June 30, 2025 1-Year Change

ACV $ 1,305 $ 1,514 16 %

2 unchanged sentences

$ 1,305 $ 1,482 14 %

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

Constant currency ACV is calculated by applying the June 30, 2024 foreign exchange rates to current period shown.

Cash Flow (1)

(Dollars in thousands)

Three Months Ended

March 31, Change

Six Months Ended

June 30, Change

Cash provided by operating activities $ 220,243 $ 290,496 32 %

3 unchanged sentences

Supplemental information (2)

$ 2,739 $ 2,413

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

Restructuring 3,852 1,354

Interest on convertible senior notes 1,884 1,754

Interest paid on convertible senior notes 1,884 1,754

Income taxes, net of refunds 25,560 (702)

$ 66,400 $ 12,426

(1) Our non-GAAP free cash flow is defined as cash provided by operating activities less investment in property and equipment.

Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities.

Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities and equipment.

We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings.

1 unchanged sentence

(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.

See "Note 20.

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

• Legal fees:

2 unchanged sentences

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

◦ Interest on convertible senior notes :

• Interest paid on convertible senior notes :

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

1 unchanged sentence

The outstanding Notes were repaid in their entirety at maturity.

◦ Income taxes :

• Income taxes, net of refunds :

Direct income taxes paid net of refunds received.

1 unchanged sentence

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

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

(in millions, except percentages) June 30, 2024 June 30, 2025 1-Year Growth Rate

Backlog - GAAP $ 1,406 $ 1,835 31 %

1 unchanged sentence

Constant currency backlog $ 1,406 $ 1,780 27 %

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

Constant currency Backlog is calculated by applying the June 30, 2024 foreign exchange rates to current period shown.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States of America (“U.S.”) and the rules and regulations of the SEC for interim financial reporting.

and the rules and regulations of the SEC for interim financial reporting.

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.

6 unchanged sentences

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2025 2024 2025 2024

Pega Cloud $ 166,743 43 % $ 134,086 38 % $ 32,657 24 % $ 317,866 37 % $ 264,988 39 % $ 52,878 20 %

6 unchanged sentences

$ 384,512 100 % $ 351,153 100 % $ 33,359 9 % $ 860,145 100 % $ 681,300 100 % $ 178,845 26 %

• 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.

• The increases in Pega Cloud revenue in the three and six months ended June 30, 2025 were primarily due to expanded adoption of Pega Cloud by our clients.

• The decreases in maintenance revenue in the three and six months ended June 30, 2025 were primarily due to our clients’ shift to Pega Cloud-based offerings, which do not result in maintenance revenue.

• The decrease in subscription license revenue in the three months ended June 30, 2025 was primarily due to several large multi-year contracts recognized in revenue in the three months ended June 30, 2024.

The increase in subscription revenue in the six months ended June 30, 2025 was primarily due to several large multi-year contracts recognized in revenue in the six months ended June 30, 2025.

• The increases in consulting revenue in the three and six months ended June 30, 2025 were primarily due to increases in consultant billable hours.

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2025 2024 2025 2024

Pega Cloud $ 130,985 79 % $ 104,331 78 % $ 26,654 26 % $ 249,639 79 % $ 205,636 78 % $ 44,003 21 %

6 unchanged sentences

$ 274,938 72 % $ 254,207 72 % $ 20,731 8 % $ 648,121 75 % $ 489,696 72 % $ 158,425 32 %

• 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.

• The increases in Pega Cloud gross profit percent in the three and six months ended June 30, 2025 were primarily due to increased hosting cost efficiencies as Pega Cloud continues to grow and scale and a reallocation of certain headcount from Pega Cloud to Maintenance to align with the change in the nature of their responsibilities.

• The decrease in consulting gross profit percent in the three months ended June 30, 2025 was primarily due to an increase in compensation and benefits of $4.6 million, attributable to incentive compensation, and contracted services of $2.3 million.

The increase in consulting gross profit percent in six months ended June 30, 2025 was primarily due to an increase in consultant utilization rates.

Operating expenses

(Dollars in thousands) Three Months Ended

March 31, Change

June 30, Change Six Months Ended

June 30, Change

2025 2024 2025 2024

Selling and marketing $ 147,131 $ 139,761 $ 7,370 5 % $ 285,200 $ 267,456 $ 17,744 7 %

9 unchanged sentences

* Not meaningful

• 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.

• The increases in selling and marketing in the three and six months ended June 30, 2025 were primarily due to increases in compensation and benefits of $4.9 million and $11.6 million, respectively, attributable to increases in headcount and incentive compensation.

• The increases in research and development in the three and six months ended June 30, 2025 were primarily due to increases in compensation and benefits of $3.5 million and $3.9 million, respectively, attributable to incentive compensation.

• The increases in general and administrative in the three and six months ended June 30, 2025 were primarily due to increases in compensation and benefits of $1.5 million and $5.8 million, respectively, attributable to a reallocation of certain headcount from research and development to general and administrative to align with the change in the nature of their responsibilities, and increases of $4.0 million and $8.6 million, respectively, 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.

1 unchanged sentence

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.

• The decrease in litigation settlement, net of recoveries in the six months ended June 30, 2025 was primarily due to the cost to settle litigation arising from proceedings outside the ordinary course of business in the six months ended June 30, 2024.

See “Note 20.

2 unchanged sentences

(Dollars in thousands) Three Months Ended

March 31, Change

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

June 30, Change Six Months Ended

June 30, Change

2025 2024 2025 2024

Foreign currency transaction (loss) gain $ (14,008) $ 437 $ (14,445) * $ (19,333) $ (2,825) $ (16,508) (584) %

Interest income 3,248 6,785 (3,537) (52) % 8,583 12,066 (3,483) (29) %

Interest expense (1) (1,656) 1,655 100 % (1,028) (3,408) 2,380 70 %

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

Gain (loss) on capped call transactions — (3,277) 3,277 100 % (223) 22 (245) *

Other income, net 18,729 — 18,729 * 19,290 1,684 17,606 1045 %

1 unchanged sentence

* Not meaningful

• 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.

• The changes in foreign currency transaction (loss) gain in the three and six months ended June 30, 2025 were primarily due to fluctuations in foreign currency exchange rates associated with foreign currency-denominated receivables and intercompany balances held by our subsidiary in the United Kingdom.

• The decreases in interest income in the three and six months ended June 30, 2025 were primarily due to lower investment balances as a result of the repayment of the Notes at maturity on March 3, 2025.

• The decreases in interest expense in the three and six months ended June 30, 2025 were primarily due to the repayment of the Notes at maturity on March 3, 2025.

• The changes in gain (loss) on capped call transactions was due to the expiration of the capped call in the three months ended March 31, 2025.

• The increases in other income, net in the three and six months ended June 30, 2025 were primarily due to the gain from the partial sale of a venture investment.

For additional information, see "Note 12.

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

Provision for (benefit from) income taxes

Three Months Ended

(Benefit from) provision for income taxes

Six Months Ended

(Dollars in thousands) 2025 2024

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

(Benefit from) provision for income taxes $ 36,058 $ 5,604

Effective income tax rate 24 % *

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.

* Not meaningful

Our effective income tax rate for the six months ended June 30, 2025, is mainly attributable to the jurisdictional mix of earnings and is also impacted by excess tax benefits from stock-based compensation and the valuation allowance on its deferred tax assets in the U.S.

On July 4, 2025, the OBBBA was enacted into law.

The OBBBA provides for significant U.S.

tax law changes.

ASC 740, Accounting for Income Taxes , provides that changes in tax rates and laws are recognized in the period of enactment.

As a result, the Company is assessing the impact of this new legislation and will record any impacts in the period of enactment.

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.

Certain aspects of Pillar Two are effective for tax years beginning on or after January 1, 2024.

Although the U.S.

has not enacted legislation to adopt Pillar Two, certain countries in which we operate have already adopted, or are in the process of adopting, legislation to implement Pillar Two.

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

1 unchanged sentence

LIQUIDITY AND CAPITAL RESOURCES

Three Months Ended

Six Months Ended

(in thousands) 2025 2024

6 unchanged sentences

(in thousands)

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

entities $ 182,084 $ 474,509

11 unchanged sentences

Operating activities

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

The change in cash provided by operating activities in the six months ended June 30, 2025 was primarily due to increase in client collections.

Investing activities

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.

The change in cash provided by (used in) investing activities in the six months ended June 30, 2025 was primarily due to scheduled maturities of our investments in financial instruments in anticipation of the repayment of the maturing Notes and the consideration received from the sale of a venture investment.

Financing activities

6 unchanged sentences

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.

As of June 30, 2025 and December 31, 2024, we had letters of credit of $26.7 million and $27.3 million, respectively, under the Credit Facility, however had no cash borrowings.

For additional information, see "Note 10.

2 unchanged sentences

Changes in the remaining stock repurchase authority:

(in thousands) Three Months Ended

March 31, 2025

(in thousands) Six Months Ended

June 30, 2025

December 31, 2024 $ 240,443

Authorizations (1)

Repurchases (2)

March 31, 2025 (2)

June 30, 2025 $ 489,254

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

(2) 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

Three Months Ended

Six Months Ended

(in thousands) Shares Amount Shares Amount

6 unchanged sentences

6,213 $ 257,789 76 $ 2,360

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.

On June 20, 2025, the Company effected the Stock Split of the Company’s Common Stock described above in “Note 1.

Basis of Presentation”.

All share and per share amounts in the Company’s unaudited condensed consolidated financial statements and in the accompanying notes for all prior periods presented have been recast to reflect the effect of the Stock Split.

During the six months ended June 30, 2025 and 2024, instead of receiving cash from the equity holders, we withheld shares with a value of $7.3 million and $2.8 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

We intend to pay a quarterly cash dividend of $0.03 per share.

Following the Stock Split and commencing with the third quarter of 2025, we intend to pay a quarterly cash dividend of $0.03 per share, or the equivalent of $0.06 per share prior to the Stock Split.

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

Three Months Ended

Six Months Ended

(in thousands) 2025 2024

1 unchanged sentence

Contractual obligations

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

As of June 30, 2025, our contractual obligations were:

Payments due by period

14 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