PEGASYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 30, 2025 December 31, 2024 Assets Current assets: Cash and cash equivalents $ 201,565 $ 337,103 Marketable securities 210,002 402,870 Total cash, cash equivalents, and marketable securities 411,567 739,973 Accounts receivable, net 156,470 305,468 Unbilled receivables, net 184,184 173,085 Other current assets 93,403 115,178 Total current assets 845,624 1,333,704 Long-term unbilled receivables, net 104,298 61,407 Goodwill 81,538 81,113 Other long-term assets 292,957 292,049 Total assets $ 1,324,417 $ 1,768,273 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 17,101 $ 6,226 Accrued expenses 51,430 31,544 Accrued compensation and related expenses 91,769 138,042 Deferred revenue 418,931 423,910 Convertible senior notes, net — 467,470 Other current liabilities 20,387 18,866 Total current liabilities 599,618 1,086,058 Long-term operating lease liabilities 65,191 67,647 Other long-term liabilities 35,066 29,088 Total liabilities 699,875 1,182,793 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, 1,000 shares authorized; none issued — — Common stock, 400,000 shares authorized; 171,102 and 172,224 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively 1,711 1,722 Additional paid-in capital 431,466 526,102 Retained earnings 195,677 87,901 Accumulated other comprehensive (loss) ( 4,312 ) ( 30,245 ) Total stockholders’ equity 624,542 585,480 Total liabilities and stockholders’ equity $ 1,324,417 $ 1,768,273 See notes to unaudited condensed consolidated financial statements. 3 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Revenue Subscription services $ 246,014 $ 214,430 $ 473,505 $ 426,333 Subscription license 79,963 84,647 266,518 147,985 Consulting 57,824 52,040 118,245 106,087 Perpetual license 711 36 1,877 895 Total revenue 384,512 351,153 860,145 681,300 Cost of revenue Subscription services 41,510 36,238 79,638 72,062 Subscription license 360 477 746 1,120 Consulting 67,700 60,231 131,634 118,413 Perpetual license 4 — 6 9 Total cost of revenue 109,574 96,946 212,024 191,604 Gross profit 274,938 254,207 648,121 489,696 Operating expenses Selling and marketing 147,131 139,761 285,200 267,456 Research and development 78,784 75,425 153,070 147,538 General and administrative 31,788 25,420 65,616 48,947 Litigation settlement, net of recoveries — — — 32,403 Restructuring ( 44 ) 635 ( 33 ) 798 Total operating expenses 257,659 241,241 503,853 497,142 Income (loss) from operations 17,279 12,966 144,268 ( 7,446 ) Foreign currency transaction (loss) gain ( 14,008 ) 437 ( 19,333 ) ( 2,825 ) Interest income 3,248 6,785 8,583 12,066 Interest expense ( 1 ) ( 1,656 ) ( 1,028 ) ( 3,408 ) Gain (loss) on capped call transactions — ( 3,277 ) ( 223 ) 22 Other income, net 18,729 — 19,290 1,684 Income before (benefit from) provision for income taxes 25,247 15,255 151,557 93 (Benefit from) provision for income taxes ( 4,830 ) 8,642 36,058 5,604 Net income (loss) $ 30,077 $ 6,613 $ 115,499 $ ( 5,511 ) Earnings (loss) per share Basic $ 0.18 $ 0.04 $ 0.67 $ ( 0.03 ) Diluted $ 0.17 $ 0.04 $ 0.63 $ ( 0.03 ) Weighted-average number of common shares outstanding Basic 170,776 170,314 171,287 169,424 Diluted 182,160 177,000 185,477 169,424 See notes to unaudited condensed consolidated financial statements. 4 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Net income (loss) $ 30,077 $ 6,613 $ 115,499 $ ( 5,511 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on available-for-sale securities 184 ( 72 ) ( 78 ) ( 818 ) Foreign currency translation adjustments 17,201 ( 2,142 ) 26,011 ( 5,569 ) Total other comprehensive income (loss), net of tax 17,385 ( 2,214 ) 25,933 ( 6,387 ) Comprehensive income (loss) $ 47,462 $ 4,399 $ 141,432 $ ( 11,898 ) See notes to unaudited condensed consolidated financial statements. 5 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) Common Stock Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) Total stockholders’ equity Number of shares Amount December 31, 2023 167,680 $ 1,676 $ 378,746 $ ( 8,705 ) $ ( 17,879 ) $ 353,838 Issuance of common stock for stock compensation plans 2,278 23 18,633 — — 18,656 Issuance of common stock under the employee stock purchase plan 64 1 1,757 — — 1,758 Stock-based compensation — — 34,781 — — 34,781 Cash dividends declared ($ 0.015 per share) — — ( 2,550 ) — — ( 2,550 ) Other comprehensive (loss) — — — — ( 4,173 ) ( 4,173 ) Net (loss) — — — ( 12,124 ) — ( 12,124 ) March 31, 2024 170,022 $ 1,700 $ 431,367 $ ( 20,829 ) $ ( 22,052 ) $ 390,186 Issuance of common stock for stock compensation plans 652 7 5,478 — — 5,485 Issuance of common stock under the employee stock purchase plan 64 1 1,668 — — 1,669 Stock-based compensation — — 36,224 — — 36,224 Cash dividends declared ($ 0.015 per share) — — ( 2,561 ) — — ( 2,561 ) Other comprehensive (loss) — — — — ( 2,214 ) ( 2,214 ) Net income — — — 6,613 — 6,613 June 30, 2024 170,738 $ 1,708 $ 472,176 $ ( 14,216 ) $ ( 24,266 ) $ 435,402 December 31, 2024 172,224 $ 1,722 $ 526,102 $ 87,901 $ ( 30,245 ) $ 585,480 Repurchase of common stock ( 2,920 ) ( 30 ) ( 118,674 ) — — ( 118,704 ) Issuance of common stock for stock compensation plans 1,756 18 9,736 — — 9,754 Issuance of common stock under the employee stock purchase plan 64 2 1,909 — — 1,911 Stock-based compensation — — 41,425 — — 41,425 Cash dividends declared ($ 0.015 per share) — — — ( 2,567 ) — ( 2,567 ) Other comprehensive income — — — — 8,548 8,548 Net income — — — 85,422 — 85,422 March 31, 2025 171,124 $ 1,712 $ 460,498 $ 170,756 $ ( 21,697 ) $ 611,269 Repurchase of common stock ( 3,147 ) ( 31 ) ( 132,454 ) — — ( 132,485 ) Issuance of common stock for stock compensation plans 3,086 30 64,876 — — 64,906 Issuance of common stock under the employee stock purchase plan 39 — 1,816 — — 1,816 Stock-based compensation — — 36,730 — — 36,730 Cash dividends declared ($ 0.03 per share) — — — ( 5,156 ) — ( 5,156 ) Other comprehensive income — — — — 17,385 17,385 Net income — — — 30,077 — 30,077 June 30, 2025 171,102 $ 1,711 $ 431,466 $ 195,677 $ ( 4,312 ) $ 624,542 See notes to unaudited condensed consolidated financial statements. 6 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended June 30, 2025 2024 Operating activities Net income (loss) $ 115,499 $ ( 5,511 ) Adjustments to reconcile net income (loss) to cash provided by operating activities Stock-based compensation 78,155 71,005 Amortization of deferred commissions 33,578 32,276 Amortization of intangible assets and depreciation 6,319 8,812 Amortization of right-of-use lease assets 5,803 7,844 Foreign currency transaction loss 19,333 2,825 Loss (gain) on capped call transactions 223 ( 22 ) Deferred income taxes 282 232 (Accretion) of investments ( 2,110 ) ( 6,535 ) (Gain) on investments ( 19,480 ) ( 1,628 ) Other non-cash 1,067 1,479 Change in operating assets and liabilities, net 51,827 109,466 Cash provided by operating activities 290,496 220,243 Investing activities Purchases of investments ( 158,703 ) ( 291,810 ) Proceeds from maturities and called investments 345,166 83,967 Sales of investments 30,547 — Investment in property and equipment ( 4,015 ) ( 1,857 ) Cash provided by (used in) investing activities 212,995 ( 209,700 ) Financing activities Repurchases of convertible senior notes ( 467,864 ) — Dividend payments to stockholders ( 5,150 ) ( 5,065 ) Proceeds from employee stock plans 84,987 29,928 Common stock repurchases for tax withholdings for net settlement of equity awards ( 6,600 ) ( 2,360 ) Common stock repurchases under stock repurchase program ( 251,689 ) — Cash (used in) provided by financing activities ( 646,316 ) 22,503 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 7,407 ( 2,842 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 135,418 ) 30,204 Cash, cash equivalents, and restricted cash, beginning of period 341,529 232,827 Cash, cash equivalents, and restricted cash, end of period $ 206,111 $ 263,031 Cash and cash equivalents $ 201,565 $ 258,257 Restricted cash included in other current assets — 768 Restricted cash included in other long-term assets 4,546 4,006 Total cash, cash equivalents, and restricted cash $ 206,111 $ 263,031 See notes to unaudited condensed consolidated financial statements. 7 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by the generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2024. In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for fiscal year 2025. Stock Split On February 12, 2025, the Company’s Board of Directors approved a two -for-one forward stock split (the “Stock Split”) of the Company’s common stock, par value $ 0.01 (“Common Stock”), to be effected as a stock dividend and a proportionate increase in the number of authorized shares of Common Stock from 200,000,000 to 400,000,000 (the “Authorized Share Increase”). The Authorized Share Increase was subject to shareholder approval of an amendment to the Company’s Restated Articles of Organization. The requisite shareholder approval was obtained on June 17, 2025. On June 20, 2025, each shareholder of record at the close of business on June 10, 2025 (the “Record Date”) received one additional share of Common Stock for each share of Common Stock held on the Record Date. All share, per share, and equity award information in the Company’s unaudited condensed consolidated financial statements and in the accompanying notes for all periods presented have been recast to reflect the effect of the Stock Split. The shares of Common Stock retained a par value of $ 0.01 per share. Accordingly, an amount equal to the par value of the increased shares resulting from the Stock Split was reclassified from additional paid-in capital to common stock. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 includes expanded income tax rate reconciliation disclosures, a disaggregation of income taxes paid, and other expanded disclosures. ASU 2023-09 will be effective for the Company for the year ending December 31, 2025. The Company expects the adoption to result in disclosure changes only. Disaggregation of Income Statement Expenses In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (ASU “2024-03”). Among other items, the requirements include expanded disclosures around employee compensation and selling expenses. ASU 2024-03 will be effective for the Company for the year ending December 31, 2027. The Company is still evaluating the impact of this new guidance on its consolidated financial statements but expects the adoption to result in disclosure changes only . NOTE 3. MARKETABLE SECURITIES June 30, 2025 December 31, 2024 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Government debt $ 17,500 $ 3 $ ( 16 ) $ 17,487 $ 11,851 $ 1 $ ( 19 ) $ 11,833 Corporate debt 192,149 404 ( 38 ) 192,515 391,097 63 ( 123 ) 391,037 $ 209,649 $ 407 $ ( 54 ) $ 210,002 $ 402,948 $ 64 $ ( 142 ) $ 402,870 As of June 30, 2025, marketable securities’ maturities ranged from July 2025 to June 2028, with a weighted-average remaining maturity of 1.4 years. NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Receivables (in thousands) June 30, 2025 December 31, 2024 Accounts receivable, net $ 156,470 $ 305,468 Unbilled receivables, net 184,184 173,085 Long-term unbilled receivables, net 104,298 61,407 $ 444,952 $ 539,960 8 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Unbilled receivables Unbilled receivables are client-committed amounts for which revenue recognition precedes billing. Billing is solely subject to the passage of time. Unbilled receivables by expected collection date: (Dollars in thousands) June 30, 2025 1 year or less $ 184,184 64 % 1-2 years 66,332 23 % 2-5 years 37,966 13 % $ 288,482 100 % Unbilled receivables by contract effective date: (Dollars in thousands) June 30, 2025 2025 $ 118,439 41 % 2024 98,467 34 % 2023 59,673 21 % 2022 6,399 2 % 2021 and prior 5,504 2 % $ 288,482 100 % Major clients Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables: June 30, 2025 December 31, 2024 Client A Accounts receivable * 20 % Unbilled receivables * — % Total receivables * 11 % Client B Accounts receivable — % * Unbilled receivables 18 % * Total receivables 11 % * *Client accounted for less than 10% of total accounts receivable and unbilled receivables. Contract assets Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation. (in thousands) June 30, 2025 December 31, 2024 Contract assets (1) $ 16,689 $ 13,498 Long-term contract assets (2) 23,345 18,321 $ 40,034 $ 31,819 (1) Included in other current assets. (2) Included in other long-term assets. Deferred revenue Deferred revenue consists of billings made and payments received in advance of revenue recognition. (in thousands) June 30, 2025 December 31, 2024 Deferred revenue $ 418,931 $ 423,910 Long-term deferred revenue (1) 3,256 2,121 $ 422,187 $ 426,031 (1) Included in other long-term liabilities. The change in deferred revenue during the six months ended June 30, 2025 was primarily due to new billings in advance of revenue recognition and $ 303.6 million of revenue recognized during the period included in deferred revenue as of December 31, 2024. 9 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5. DEFERRED COMMISSIONS (in thousands) June 30, 2025 December 31, 2024 Deferred commissions (1) $ 104,355 $ 105,405 (1) Included in other long-term assets. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Amortization of deferred commissions (1) $ 15,074 $ 14,994 $ 33,578 $ 32,276 (1) Included in selling and marketing expenses. NOTE 6. GOODWILL AND OTHER INTANGIBLES Goodwill Six Months Ended June 30, (in thousands) 2025 2024 January 1, $ 81,113 $ 81,611 Currency translation adjustments 425 ( 201 ) June 30, $ 81,538 $ 81,410 Intangibles Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives. June 30, 2025 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1) Client-related 4 - 10 years $ 63,178 $ ( 62,151 ) $ 1,027 Technology 2 - 10 years 68,115 ( 66,686 ) 1,429 Other 1 - 5 years 5,361 ( 5,361 ) — $ 136,654 $ ( 134,198 ) $ 2,456 (1) Included in other long-term assets. December 31, 2024 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1) Client-related 4 - 10 years $ 63,107 $ ( 61,395 ) $ 1,712 Technology 2 - 10 years 68,115 ( 65,995 ) 2,120 Other 1 - 5 years 5,361 ( 5,361 ) — $ 136,583 $ ( 132,751 ) $ 3,832 (1) Included in other long-term assets. Future estimated amortization of intangible assets: (in thousands) June 30, 2025 Remainder of 2025 $ 1,254 2026 874 2027 328 $ 2,456 Amortization of intangible assets: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Cost of revenue $ 333 $ 447 $ 691 $ 1,068 Selling and marketing 342 342 685 685 $ 675 $ 789 $ 1,376 $ 1,753 10 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. OTHER ASSETS AND LIABILITIES Other current assets (in thousands) June 30, 2025 December 31, 2024 Prepaid expenses $ 45,877 $ 38,155 Income tax receivables 25,869 58,359 Contract assets 16,689 13,498 Indirect tax receivable 1,843 2,488 Capped call transactions — 223 Restricted cash — 98 Other 3,125 2,357 $ 93,403 $ 115,178 Other long-term assets (in thousands) June 30, 2025 December 31, 2024 Deferred commissions $ 104,355 $ 105,405 Right of use assets 60,786 62,429 Property and equipment 40,856 41,806 Venture investments 18,651 21,234 Contract assets 23,345 18,321 Income taxes receivable 14,495 13,299 Intangible assets 2,456 3,832 Deferred income taxes 4,124 4,268 Restricted cash 4,546 4,328 Other 19,343 17,127 $ 292,957 $ 292,049 Accrued expenses (in thousands) June 30, 2025 December 31, 2024 Cloud hosting $ 16,985 $ 1,802 Outside professional services 13,718 10,639 Marketing and sales program 5,973 2,150 Income and other taxes 4,671 5,055 Employee related 5,202 4,833 Repurchases of common stock unsettled 1,000 1,500 Other 3,881 5,565 $ 51,430 $ 31,544 Other current liabilities (in thousands) June 30, 2025 December 31, 2024 Operating lease liabilities $ 13,825 $ 14,551 Dividends payable 5,156 2,583 Other 1,406 1,732 $ 20,387 $ 18,866 Other long-term liabilities (in thousands) June 30, 2025 December 31, 2024 Deferred revenue $ 3,256 $ 2,121 Income taxes payable 19,173 15,956 Other 12,637 11,011 $ 35,066 $ 29,088 11 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8. SEGMENT INFORMATION Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market. To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on a consolidated basis. Therefore, the Company determined it has one operating segment and one reportable segment. The accounting policies of the Company’s operating segment are the same as those described in "Note 2. Significant Accounting Policies" included in the Annual Report on Form 10-K for the year ended December 31, 2024. The CODM uses consolidated net income (loss) to set financial performance targets, assess performance, and make expense allocation decisions. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Total revenue $ 384,512 $ 351,153 $ 860,145 $ 681,300 Total cost of revenue 109,574 96,946 212,024 191,604 Selling 116,050 111,874 235,168 221,963 Marketing 31,081 27,887 50,032 45,493 Research and development 78,784 75,425 153,070 147,538 General and administrative 31,788 25,420 65,616 48,947 Other segment items, net (1) ( 8,012 ) ( 1,654 ) ( 7,322 ) 25,662 (Benefit from) provision for income taxes ( 4,830 ) 8,642 36,058 5,604 Net income (loss) $ 30,077 $ 6,613 $ 115,499 $ ( 5,511 ) (1) Includes Litigation settlement, net of recoveries, Restructuring, Foreign currency transaction (loss) gain, Interest income, Interest expense, Gain (loss) on capped call transactions, and Other income, net. Long-lived assets related to the Company’s U.S. and international operations consist of property and equipment, which are included in Other long-term assets in the Company’s consolidated balance sheet: (in thousands) June 30, 2025 December 31, 2024 U.S. $ 36,890 90 % $ 37,405 89 % International 3,966 10 % 4,401 11 % $ 40,856 100 % $ 41,806 100 % NOTE 9. LEASES On January 1, 2025, the Company relocated its corporate headquarters to 225 Wyman Street, Waltham, Massachusetts. Expense Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Fixed lease costs $ 3,924 $ 5,271 $ 7,700 $ 9,533 Short-term lease costs 423 410 910 953 Variable lease costs 1,808 1,763 3,558 3,372 $ 6,155 $ 7,444 $ 12,168 $ 13,858 Right of use assets and lease liabilities (in thousands) June 30, 2025 December 31, 2024 Right of use assets (1) $ 60,786 $ 62,429 Operating lease liabilities (2) $ 13,825 $ 14,551 Long-term operating lease liabilities $ 65,191 $ 67,647 (1) Included in other long-term assets. (2) Included in other current liabilities. 12 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Weighted-average remaining lease term and discount rate for the Company’s leases were: June 30, 2025 December 31, 2024 Weighted-average remaining lease term 5.9 years 6.2 years Weighted-average discount rate (1) 4.9 % 4.8 % (1) The rates implicit in the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment. Maturities of lease liabilities: (in thousands) June 30, 2025 Remainder of 2025 $ 9,007 2026 16,241 2027 14,974 2028 14,159 2029 11,403 2030 9,776 Thereafter 15,431 Total lease payments 90,991 Less: imputed interest (1) ( 11,975 ) $ 79,016 (1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event. Cash flow information Six Months Ended June 30, (in thousands) 2025 2024 Cash paid for operating leases, net of tenant improvement allowances $ 9,970 $ 9,493 Right of use assets recognized for new leases and amendments (non-cash) $ 3,077 $ 12,290 NOTE 10. DEBT Convertible senior notes and capped calls Convertible senior notes In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $ 600 million, due March 1, 2025, in a private placement. No principal payments were due before maturity. The Notes accrued interest at an annual rate of 0.75 %, paid semi-annually in arrears on March 1 and September 1, beginning September 1, 2020. The remaining outstanding principal balance on the Notes and accrued interest totaling $ 469.6 million was repaid in its entirety at maturity during the three months ended March 31, 2025. Conversion rights The conversion rate was 14.809 shares of Common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $ 67.53 per share of Common stock. Carrying value of the Notes: (in thousands) June 30, 2025 December 31, 2024 Principal $ — $ 467,864 Unamortized issuance costs — ( 394 ) Convertible senior notes, net $ — $ 467,470 Interest expense related to the Notes: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Contractual interest expense ( 0.75 % coupon) $ — $ 942 $ 595 $ 1,884 Amortization of issuance costs — 619 394 1,236 $ — $ 1,561 $ 989 $ 3,120 13 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The average interest rate on the Notes during the three months ended March 31, 2025 and six months ended June 30, 2024 was 1.2 %. Capped call transactions In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions initially covered approximately 8.8 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s Common Stock. As of December 31, 2024, Capped Call Transactions covering approximately 7.0 million shares were outstanding, and expired upon maturity of the Notes during the three months ended March 31, 2025. Change in capped call transactions: Six Months Ended June 30, (in thousands) 2025 2024 January 1, $ 223 $ 893 Fair value adjustment ( 223 ) 22 June 30, $ — $ 915 Credit facility In November 2019, and as since amended, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $ 200 million. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0. Effective as of February 4, 2025, the Credit Facility was amended to extend the expiration date to February 4, 2027. As of June 30, 2025 and December 31, 2024, the Company had letters of credit of $ 26.7 million and $ 27.3 million, respectively, under the Credit Facility, however had no cash borrowings. NOTE 11. RESTRUCTURING The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Employee (benefit) severance and related costs $ ( 54 ) $ ( 622 ) $ ( 57 ) $ ( 238 ) Office space reductions (1) 10 1,257 24 1,036 Restructuring $ ( 44 ) $ 635 $ ( 33 ) $ 798 (1) These primarily relate to non-cash operating lease adjustments. Restructuring activity: Accrued employee severance and related costs: Six Months Ended June 30, (in thousands) 2025 2024 January 1, $ 2,000 $ 8,095 (Benefit) costs incurred ( 57 ) ( 238 ) Cash disbursements ( 1,354 ) ( 3,852 ) Currency translation adjustments 117 ( 169 ) June 30, (1) $ 706 $ 3,836 (1) Included in accrued compensation and related expenses. 14 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12. FAIR VALUE MEASUREMENTS Assets and liabilities measured at fair value on a recurring basis The Company records its cash equivalents, marketable securities, capped call transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: • Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities; • Level 2 - significant other inputs that are observable either directly or indirectly; and • Level 3 - significant unobservable inputs with little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applied judgment when determining expected volatility. The Company considered the underlying equity security’s historical and implied volatility levels. The Capped Call Transactions expired upon maturity of the Notes during the three months ended March 31, 2025. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds. Assets and liabilities measured at fair value on a recurring basis: June 30, 2025 December 31, 2024 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash equivalents $ 23,724 $ 12,870 $ — $ 36,594 $ 5,318 $ 148,926 $ — $ 154,244 Marketable securities $ — $ 210,002 $ — $ 210,002 $ — $ 402,870 $ — $ 402,870 Capped Call Transactions $ — $ — $ — $ — $ — $ 223 $ — $ 223 Venture investments $ — $ — $ 18,651 $ 18,651 $ — $ — $ 21,234 $ 21,234 Changes in venture investments: Six Months Ended June 30, (in thousands) 2025 2024 January 1, $ 21,234 $ 19,450 New investments 11,529 350 Sales of investments ( 33,223 ) — Changes in foreign exchange rates 166 ( 19 ) Changes in fair value: included in other income, net 19,480 1,628 included in other comprehensive income (loss) ( 535 ) ( 362 ) June 30, $ 18,651 $ 21,047 During the three months ended June 30, 2025, one of the Company’s investees was acquired by a privately held company. As a result, the Company received $ 33.2 million in consideration for its equity interest in the investee, composed of $ 22.1 million cash and $ 11.1 million of an ownership interest in the privately held company, and recognized a $ 18.7 million gain in excess of cost in other income, net on the condensed consolidated statements of operations. The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities. Fair value of the Convertible Senior Notes The fair value of the Notes outstanding (including the embedded conversion feature) was $ 463.9 million as of December 31, 2024. The Notes were repaid in full at maturity during the three months ended March 31, 2025. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy. 15 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 13. REVENUE Geographic revenue Revenues by geography are determined based on client location: Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2025 2024 2025 2024 U.S. $ 208,116 54 % $ 189,214 54 % $ 477,308 56 % $ 370,197 55 % Other Americas 19,632 5 % 21,314 6 % 53,373 6 % 43,100 6 % United Kingdom (“U.K.”) 40,634 11 % 38,628 11 % 81,376 9 % 70,745 10 % Europe (excluding U.K.), Middle East, and Africa 64,420 17 % 53,360 15 % 138,476 16 % 115,207 17 % Asia-Pacific 51,710 13 % 48,637 14 % 109,612 13 % 82,051 12 % $ 384,512 100 % $ 351,153 100 % $ 860,145 100 % $ 681,300 100 % Revenue streams Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Pega Cloud $ 166,743 $ 134,086 $ 317,866 $ 264,988 Maintenance 79,271 80,344 155,639 161,345 Consulting 57,824 52,040 118,245 106,087 Revenue recognized over time 303,838 266,470 591,750 532,420 Subscription license 79,963 84,647 266,518 147,985 Perpetual license 711 36 1,877 895 Revenue recognized at a point in time 80,674 84,683 268,395 148,880 Total revenue $ 384,512 $ 351,153 $ 860,145 $ 681,300 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Pega Cloud $ 166,743 $ 134,086 $ 317,866 $ 264,988 Maintenance 79,271 80,344 155,639 161,345 Subscription services 246,014 214,430 473,505 426,333 Subscription license 79,963 84,647 266,518 147,985 Subscription 325,977 299,077 740,023 574,318 Consulting 57,824 52,040 118,245 106,087 Perpetual license 711 36 1,877 895 Total revenue $ 384,512 $ 351,153 $ 860,145 $ 681,300 16 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Remaining performance obligations ("Backlog") Expected future revenue from existing non-cancellable contracts: As of June 30, 2025: (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total Pega Cloud Maintenance 1 year or less $ 603,683 $ 220,954 $ 61,905 $ 317 $ 39,798 $ 926,657 51 % 1-2 years 334,586 79,345 4,262 — 2,846 421,039 23 % 2-3 years 172,513 49,587 746 — 252 223,098 12 % Greater than 3 years 210,416 46,843 7,220 — 56 264,535 14 % $ 1,321,198 $ 396,729 $ 74,133 $ 317 $ 42,952 $ 1,835,329 100 % As of June 30, 2024: (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total Pega Cloud Maintenance 1 year or less $ 470,379 $ 209,655 $ 23,931 $ 2,696 $ 25,953 $ 732,614 52 % 1-2 years 301,070 63,266 10,078 — 2,469 376,883 27 % 2-3 years 152,839 30,032 2,884 — 2,473 188,228 13 % Greater than 3 years 90,474 17,953 97 — — 108,524 8 % $ 1,014,762 $ 320,906 $ 36,990 $ 2,696 $ 30,895 $ 1,406,249 100 % NOTE 14. STOCKHOLDERS' EQUITY Stock-based Compensation Expense Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Cost of revenue $ 7,288 $ 7,092 $ 15,111 $ 13,664 Selling and marketing 14,378 13,564 30,159 27,452 Research and development 7,490 7,825 15,875 15,471 General and administrative 7,574 7,743 17,010 14,418 $ 36,730 $ 36,224 $ 78,155 $ 71,005 Income tax benefit $ ( 566 ) $ ( 554 ) $ ( 1,153 ) $ ( 865 ) As of June 30, 2025, the Company had $ 134.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.6 years. Grants Six Months Ended June 30, 2025 (in thousands) Quantity Total Fair Value Restricted stock units (1) 1,963 $ 76,969 Non-qualified stock options 3,152 $ 49,730 Performance stock options (2) 1,346 $ 34,924 Common stock 1 $ 52 (1) Includes units issued when employees elect to receive 50 % of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. (2) Performance stock options allow the holder to purchase a specified number of Common Stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date. The performance stock options granted in the six months ended June 30, 2025 vest quarterly over two years , beginning after the achievement of specific performance conditions. The options expire ten years from the grant date. 17 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Stock repurchase program 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, bringing the total repurchase authorization to $ 810 million, of which $ 489.3 million remains available as of June 30, 2025. During the six months ended June 30, 2025, the Company repurchased 6.1 million of its common stock for $ 251.2 million at an average price per share of $ 41.39 . All purchases under this program have been made on the open market. Stock Split 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. NOTE 15. INCOME TAXES Effective income tax rate Six Months Ended June 30, (Dollars in thousands) 2025 2024 (Benefit from) provision for income taxes $ 36,058 $ 5,604 Effective income tax rate 24 % * * Not meaningful The Company’s 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. and U.K. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projected information. In assessing the Company’s ability to realize its net deferred tax assets, the Company considered various factors including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results to determine whether it is more likely than not that some portion or all of its net deferred tax assets will not be realized. The Company intends to maintain a valuation allowance on its U.S. and U.K. net deferred tax assets until positive sufficient evidence exists to support their realization. Given the Company’s recent earnings, the Company believes that there is a reasonable possibility that in a future period sufficient positive evidence may become available to allow the Company to reach a conclusion that a substantial portion of the valuation allowance will no longer be needed. However, the exact timing and amount of the valuation allowance release are subject to significant judgement. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. On July 4, 2025, the One Big Beautiful Bill Act (“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. 18 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 16. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and Notes. Calculation of earnings (loss) per share: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) (1) 2025 2024 2025 2024 Net income (loss) $ 30,077 $ 6,613 $ 115,499 $ ( 5,511 ) Weighted-average common shares outstanding 170,776 170,314 171,287 169,424 Earnings (loss) per share, basic $ 0.18 $ 0.04 $ 0.67 $ ( 0.03 ) Net income (loss) $ 30,077 $ 6,613 $ 115,499 $ ( 5,511 ) Notes - interest expense, net of tax — — 742 — Numerator for diluted EPS $ 30,077 $ 6,613 $ 116,241 $ ( 5,511 ) Weighted-average effect of dilutive securities: Notes — — 2,412 — Stock options 8,190 4,328 8,400 — RSUs 3,194 2,358 3,378 — Effect of dilutive securities 11,384 6,686 14,190 — Weighted-average common shares outstanding, assuming dilution (2) (3) (4) 182,160 177,000 185,477 169,424 Earnings (loss) per share, diluted $ 0.17 $ 0.04 $ 0.63 $ ( 0.03 ) Outstanding anti-dilutive stock options and RSUs (5) 502 10 373 6,519 (1) The number of shares and per share amounts have been recast for all prior periods presented to reflect the effect of the Company’s Stock Split effected in the form of a stock dividend distributed on June 20, 2025. (2) All securities are excluded when their inclusion would be anti-dilutive. (3) The weighted-average shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. (4) The Company’s Capped Call Transactions represented the equivalent number of shares of the Company’s common stock (representing the number of shares for which the Notes are convertible). The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive. (5) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted earnings (loss) per share. These awards may be dilutive in the future. NOTE 17. COMMITMENTS AND CONTINGENCIES Commitments See "Note 9. Leases" for additional information. Legal proceedings In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors. In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material. The Company had no accrued losses for litigation for the below matters as of June 30, 2025 and December 31, 2024. 19 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Appian Corp. v. Pegasystems Inc. & Youyong Zou The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $ 2,060,479,287 , consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0 % per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $ 25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a written opinion on July 30, 2024. The Court of Appeals reversed the judgment on Appian’s Virginia Uniform Trade Secrets Act claim and ordered a new trial on that claim. Appian filed a petition for appeal with the Supreme Court of Virginia on August 29, 2024, and the Company filed a response to the petition on October 21, 2024. The Supreme Court of Virginia heard oral argument on February 11, 2025, and, on March 7, 2025, the Supreme Court of Virginia granted Appian’s petition for appeal and Pega’s assignments of cross-error. The parties have completed briefing before the Supreme Court of Virginia. There is no date for oral argument. Although it is not possible to predict timing, the entirety of the appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings. PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell and Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell On December 4, 2024, the shareholders representing approximately 3 % of the settlement class that opted out of the court approved settlement in the class action matter captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD) (the “Class Action”) filed two lawsuits against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in the United States District Court for the District of Massachusetts. The first is captioned Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., and Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:24-cv-12999-WGY); the second is captioned PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:24-cv-11220-WGY). The complaints, which are substantially similar, generally allege, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaints also assert claims for common law fraud and negligent misrepresentation, and seek unspecified damages. The defendants moved to dismiss the complaints on March 13, 2025. The plaintiffs filed a brief in opposition to the motion to dismiss on April 10, 2025. The defendants filed a reply brief in support of the motion to dismiss on April 10, 2025. On May 21, 2025, the Court held a hearing on the motion to dismiss. At the conclusion of the hearing, the Court (i) granted the motion to dismiss as to the plaintiffs’ scheme liability claims; (ii) granted the motion to dismiss as to all claims against Ken Stillwell, except for the plaintiffs’ control person liability claims; and (iii) took the motion to dismiss under advisement as to all other claims. The parties are awaiting a written order ruling on the motion to dismiss as to the remaining claims. On February 26, 2025, the same shareholders filed two lawsuits against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in Massachusetts Superior Court. The first is captioned Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., and Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case No. 2584CV00541-BLS1); the second is captioned PS Lit Recovery, LLC v. Pegasystems, Inc., Alan Trefler, and Kenneth Stillwell (Case No. 2584CV00539-BLS1). The complaints, which are substantially similar, allege the same state law claims raised in the two federal lawsuits brought by the same plaintiffs in the United States District Court for the District of Massachusetts. On April 14, 2025, the court granted the parties’ joint stipulations to stay both cases pending the resolution of the parallel federal actions and ordered the plaintiffs to file periodic status reports regarding the federal cases showing cause why the state cases should remain open. The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being no specified quantum of damages sought in the complaints. 20 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) In re Pegasystems Inc., Derivative Litigation On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation. On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc., asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit. On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court (“Consolidated Action”). The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints. On April 12, 2023, the Company’s board of directors (other than Mr. Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters. On December 4, 2024, the defendants moved to dismiss the complaint in the Consolidated Action. On December 17, 2024, the plaintiffs moved to voluntarily dismiss the Consolidated Action, and the Court granted the motion on December 18, 2024. On February 7, 2025, the plaintiffs in the Consolidated Action filed a new complaint against the members of the Company’s board of directors, certain employees of the Company, and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin and Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc. v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Leon Trefler, Larry Weber, Kenneth Stillwell, Don Schuerman, Kerim Akgonul, and Benjamin Baril, defendants, and Pegasystems Inc., nominal defendant (Case 1:25-cv-10303). The complaint asserts against Defendants claims for breach of fiduciary duty, unjust enrichment, and violations of the Exchange Act relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above; (ii) alleged misconduct by Company employees alleged in that litigation; and the Class Action, described above. The defendants filed motions to dismiss the complaint on April 28, 2025. The plaintiffs filed a brief in opposition to the motions to dismiss on June 9, 2025, and the defendants filed a reply brief in support of their motions to dismiss on June 30, 2025. The Court has scheduled a hearing on the motions to dismiss for July 21, 2025. On June 6, 2025, the plaintiffs in the consolidated derivative matter currently pending in Massachusetts Superior Court, Case No. 2484CV01734 (discussed below), moved to intervene in this matter and to stay it pending the resolution of the state derivative matter. After briefing by the parties, the Court scheduled a hearing on the motions for July 21, 2025. On June 28, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned John Dwyer and Ray Gerber, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Don Schuerman, Kerim Akgonul, and Benjamin Baril, Defendants, and Pegasystems Inc., Nominal Defendant (Case 2484CV01734) (“Dwyer Action”). The complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the approximately $ 2 billion verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, the settlement of the Class Action, and litigation costs from various proceedings. On October 18, 2024, the defendants served a motion to dismiss the complaint, which the defendants then withdrew on November 26, 2024 pending resolution of whether this complaint and the other derivative actions would be consolidated in Superior Court in Suffolk County, Massachusetts. On November 22, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned Jayne Birch and Robert Garfield, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Kerim Akgonul, Don Schuerman, Leon Trefler, Douglas Kim, John Petronio, Benjamin Baril, and Kenneth Stillwell, Defendants, and Pegasystems Inc., Nominal Defendant (Case 2484CV03076-BLS-1) (“Birch Action”). The complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the approximately $ 2 billion verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, the settlement of the Class Action, and litigation costs from various proceedings. The parties agreed on November 26, 2024 to suspend indefinitely the deadlines for any response to the complaint pending resolution of whether this complaint and the other derivative actions would be consolidated in the Superior Court in Suffolk County, Massachusetts. 21 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) On February 4, 2025, the parties to the Dwyer and Birch Actions filed a stipulation and proposed order in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts consolidating the two actions and setting a schedule for the filing of a consolidated complaint and any motion to dismiss. On February 12, 2025, an order was entered consolidating the Dwyer and Birch Actions and approving the schedule for the filing of a consolidated complaint and a motion to dismiss. On March 14, 2025, the plaintiffs filed a consolidated complaint in Case No. 2484CV01734. The consolidated complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and in connection with the investigation conducted and the report issued by the Demand Review Committee of the Company’s board regarding the same. The defendants served motions to dismiss the complaint on May 15, 2025, and the plaintiffs served a brief in opposition to the motions to dismiss on July 11, 2025. Defendants’ reply briefs in support of their motions to dismiss are due on August 1, 2025. The court scheduled a hearing on the motion to dismiss for September 4, 2025. The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being no specified quantum of damages sought in the complaints. 22