PEGASYSTEMS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words and other similar expressions identify forward-looking statements. These statements represent our views only as of the date the statement was made and are based on current expectations and assumptions. Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to: • our future financial performance and business plans; • the adequacy of our liquidity and capital resources; • the successful execution of investments in artificial intelligence; • the continued payment of our quarterly dividends; • the timing of revenue recognition; • variation in demand for our products and services, including among clients in the public sector; • reliance on key personnel; • reliance on third-party service providers, including hosting providers; • compliance with our debt obligations and covenants; • foreign currency exchange rates; • potential legal and financial liabilities, as well as damage to our reputation, due to cyber-attacks; • security breaches and security flaws; • our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us; • our ongoing litigation with Appian Corp. and associated legal proceedings; • our client retention rate; and • 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 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 October 21, 2025. NON-GAAP MEASURES Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. Management uses these measures to assess the performance of the company's operations and establish operational goals and incentives. They are not a substitute for financial measures prepared under U.S. GAAP. A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure. BUSINESS OVERVIEW 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. 24 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 by industry. Performance metrics We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including: Annual contract value (“ACV”) ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV. ACV is a performance measure that we believe provides useful information to our management and investors. (Dollars in thousands) September 30, 2024 September 30, 2025 Change Constant Currency Change Pega Cloud $ 640,574 $ 815,370 $ 174,796 27 % 27 % Maintenance 306,753 296,955 (9,798) (3) % (4) % Subscription services 947,327 1,112,325 164,998 17 % 17 % Subscription license 412,678 444,601 31,923 8 % 8 % $ 1,360,005 $ 1,556,926 $ 196,921 14 % 14 % Reconciliation of ACV and constant currency ACV (in millions, except percentages) September 30, 2024 September 30, 2025 1-Year Change ACV $ 1,360 $ 1,557 14 % Impact of changes in foreign exchange rates — (5) Constant currency ACV $ 1,360 $ 1,552 14 % Note: Constant currency ACV is calculated by applying the September 30, 2024 foreign exchange rates to current period shown. 25 Cash Flow (Dollars in thousands) Nine Months Ended September 30, Change 2024 2025 Cash provided by operating activities $ 250,697 $ 346,796 38 % Investment in property and equipment (4,921) (8,485) Free cash flow (1) $ 245,776 $ 338,311 38 % Supplemental information (2) Litigation settlement, net of recoveries $ 32,403 $ — Legal fees 9,232 15,022 Restructuring 4,214 1,681 Interest paid on convertible senior notes 3,767 1,754 Income taxes, net of refunds 32,246 7,993 $ 81,862 $ 26,450 (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 and equipment. We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings. This information is not a substitute for financial measures prepared under U.S. GAAP. (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: Legal and related fees arising from proceedings outside the ordinary course of business. • Restructuring: Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities. • Interest paid on convertible senior notes : 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, net of refunds : Direct income taxes paid net of refunds received. 26 Remaining performance obligations (“Backlog”) Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP) (in millions, except percentages) September 30, 2024 September 30, 2025 1-Year Growth Rate Backlog - GAAP $ 1,475 $ 1,755 19 % Impact of changes in foreign exchange rates — (10) Constant currency backlog $ 1,475 $ 1,745 18 % Note: Constant currency Backlog is calculated by applying the September 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 U.S. 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. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future based on the available information. For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2024: • “Critical Accounting Estimates and Significant Judgments” in Item 7; and • “Note 2. Significant Accounting Policies” in Item 8. No significant changes have been made to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024. 27 RESULTS OF OPERATIONS Revenue (Dollars in thousands) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2025 2024 2025 2024 Pega Cloud $ 184,549 48 % $ 144,108 44 % $ 40,441 28 % $ 502,415 40 % $ 409,096 41 % $ 93,319 23 % Maintenance 79,649 21 % 80,702 25 % (1,053) (1) % 235,288 20 % 242,047 24 % (6,759) (3) % Subscription services 264,198 69 % 224,810 69 % 39,388 18 % 737,703 60 % 651,143 65 % 86,560 13 % Subscription license 60,600 16 % 45,420 14 % 15,180 33 % 327,118 26 % 193,405 19 % 133,713 69 % Subscription 324,798 85 % 270,230 83 % 54,568 20 % 1,064,821 86 % 844,548 84 % 220,273 26 % Consulting 56,394 15 % 54,364 17 % 2,030 4 % 174,639 14 % 160,451 16 % 14,188 9 % Perpetual license 158 — % 456 — % (298) (65) % 2,035 — % 1,351 — % 684 51 % $ 381,350 100 % $ 325,050 100 % $ 56,300 17 % $ 1,241,495 100 % $ 1,006,350 100 % $ 235,145 23 % • The increases in Pega Cloud revenue in the three and nine months ended September 30, 2025 were primarily due to expanded adoption of Pega Cloud by our clients. • The decreases in maintenance revenue in the three and nine months ended September 30, 2025 were primarily due to our clients’ shift to Pega Cloud-based offerings, which do not result in maintenance revenue. • The increases in subscription license revenue in the three and nine months ended September 30, 2025 were primarily due to several large multi-year contracts recognized in revenue in the three and nine months ended September 30, 2025. • The increases in consulting revenue in the three and nine months ended September 30, 2025 were primarily due to increases in consultant billable hours in our International regions. Gross profit (Dollars in thousands) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2025 2024 2025 2024 Pega Cloud $ 146,811 80 % $ 113,625 79 % $ 33,186 29 % $ 396,450 79 % $ 319,261 78 % $ 77,189 24 % Maintenance 74,409 93 % 74,317 92 % 92 — % 218,637 93 % 222,952 92 % (4,315) (2) % Subscription services 221,220 84 % 187,942 84 % 33,278 18 % 615,087 83 % 542,213 83 % 72,874 13 % Subscription license 60,286 99 % 45,036 99 % 15,250 34 % 326,058 100 % 191,901 99 % 134,157 70 % Subscription 281,506 87 % 232,978 86 % 48,528 21 % 941,145 88 % 734,114 87 % 207,031 28 % Consulting (6,207) (11) % (5,087) (9) % (1,120) (22) % (19,596) (11) % (17,413) (11) % (2,183) (13) % Perpetual license 158 100 % 453 99 % (295) (65) % 2,029 100 % 1,339 99 % 690 52 % $ 275,457 72 % $ 228,344 70 % $ 47,113 21 % $ 923,578 74 % $ 718,040 71 % $ 205,538 29 % • The increases in Pega Cloud gross profit percent in the three and nine months ended September 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 September 30, 2025 was primarily due to an increase in compensation and benefits of $2 million, and contracted services of $1.3 million. Consulting gross profit percent remained flat in the nine months ended September 30, 2025 as an increase in consultant utilization rates were offset by an increase in compensation and benefits of $9.4 million, and contracted services of $5.5 million. 28 Operating expenses (Dollars in thousands) Three Months Ended September 30, Change Nine Months Ended September 30, Change 2025 2024 2025 2024 Selling and marketing $ 140,129 $ 127,669 $ 12,460 10 % $ 425,329 $ 395,125 $ 30,204 8 % % of Revenue 37 % 39 % 34 % 39 % Research and development $ 78,756 $ 74,157 $ 4,599 6 % $ 231,826 $ 221,695 $ 10,131 5 % % of Revenue 21 % 23 % 19 % 22 % General and administrative $ 42,108 $ 35,694 $ 6,414 18 % $ 107,724 $ 84,641 $ 23,083 27 % % of Revenue 11 % 11 % 9 % 8 % Litigation settlement, net of recoveries $ — $ — $ — * $ — $ 32,403 $ (32,403) * % of Revenue — % — % — % 3 % Restructuring $ (5) $ 2,485 $ (2,490) * $ (38) $ 3,283 $ (3,321) * % of Revenue — % 1 % — % — % * Not meaningful • The increases in selling and marketing in the three and nine months ended September 30, 2025 were primarily due to increases in compensation and benefits of $10.4 million and $22 million, respectively, attributable to increases in headcount and incentive compensation. • The increases in research and development in the three and nine months ended September 30, 2025 were primarily due to increases in compensation and benefits of $3.7 million and $7.6 million, respectively, attributable to increases in headcount and incentive compensation. • The increases in general and administrative in the three and nine months ended September 30, 2025 were primarily due to increases in compensation and benefits of $6.5 million and $12.4 million, respectively, attributable to equity compensation and a reallocation of certain headcount from research and development to general and administrative to align with the change in the nature of their responsibilities. In the nine months ended September 30, 2025, we experienced an increase of $8.8 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. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report. • The decrease in litigation settlement, net of recoveries in the nine months ended September 30, 2025 was primarily due to the cost to settle litigation arising from proceedings outside the ordinary course of business in the nine months ended September 30, 2024. See “Note 20. 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 2025 2024 2025 2024 Foreign currency transaction gain (loss) $ 7,154 $ (4,405) $ 11,559 * $ (12,179) $ (7,230) $ (4,949) (68) % Interest income 2,660 6,769 (4,109) (61) % 11,243 18,835 (7,592) (40) % Interest expense (144) (1,639) 1,495 91 % (1,172) (5,047) 3,875 77 % (Loss) on capped call transactions — (689) 689 100 % (223) (667) 444 67 % Other (loss) income, net (43) — (43) * 19,247 1,684 17,563 1043 % $ 9,627 $ 36 $ 9,591 26642 % $ 16,916 $ 7,575 $ 9,341 123 % * Not meaningful • The changes in foreign currency transaction gain (loss) in the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2025 were primarily due to the repayment of the Notes at maturity on March 3, 2025. • The changes in (loss) on capped call transactions were due to the expiration of the capped call transactions in the three months ended March 31, 2025. • The increase in other (loss) income, net in the nine months ended September 30, 2025 was 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. 29 (Benefit from) provision for income taxes Nine Months Ended September 30, (Dollars in thousands) 2025 2024 (Benefit from) provision for income taxes $ 16,790 $ 8,369 Effective income tax rate 10 % (73) % Our effective income tax rate for the nine months ended September 30, 2025, was impacted by excess tax benefits from stock-based compensation, and by the enactment of the One Big Beautiful Bill Act (“OBBBA”) on July 4, 2025. The OBBBA introduced several U.S. tax law changes, including the ability to immediately expense domestic research and experimental (“R&E”) expenditures starting in 2025, and an election to accelerate any unamortized domestic R&E expenditures over a one or two year period beginning with the 2025 tax year. In accordance with ASC 740, Accounting for Income Taxes , the impacts of the OBBBA are reflected in our results for the quarter ended September 30, 2025. The enactment of the OBBBA reduced our forecasted U.S. income tax expense for 2025. However, the changes did not affect our U.S. deferred tax assets or liabilities, as we continue to maintain a full valuation allowance against those balances. 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. 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. 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, (in thousands) 2025 2024 Cash provided by (used in): Operating activities $ 346,796 $ 250,697 Investing activities 214,897 (215,999) Financing activities (756,391) 26,949 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 6,971 4,591 Net (decrease) increase in cash, cash equivalents, and restricted cash $ (187,727) $ 66,238 (in thousands) September 30, 2025 December 31, 2024 Held in U.S. entities $ 72,252 $ 474,509 Held in foreign entities 279,110 265,464 Total cash, cash equivalents, and marketable securities 351,362 739,973 Restricted cash included in other current assets — 98 Restricted cash included in other long-term assets 5,103 4,328 Total cash, cash equivalents, marketable securities, and restricted cash $ 356,465 $ 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, 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. We may utilize available funds or seek external financing if we require additional capital resources. If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation. However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations. Operating activities The change in cash provided by operating activities in the nine months ended September 30, 2025 was primarily due to increase in client collections. Investing activities The change in cash provided by (used in) investing activities in the nine months ended September 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. 30 Financing activities Debt financing 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 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 September 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. Debt" in Part I, Item 1 of this Quarterly Report. Stock repurchase program Changes in the remaining stock repurchase authority: (in thousands) (1) Nine Months Ended September 30, 2025 December 31, 2024 $ 240,443 Authorizations (2) 500,000 Repurchases (3) (393,189) September 30, 2025 $ 347,254 (1) Amounts presented are exclusive of the U.S. excise tax on share repurchases. (2) 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. (3) All purchases under this program have been made on the open market. Common stock repurchases Nine Months Ended September 30, 2025 2024 (in thousands) Shares Amount Shares Amount Repurchases paid 8,743 $ 393,189 328 $ 11,249 Repurchases unpaid at period end — — 14 500 Stock repurchase program (1) 8,743 393,189 342 11,749 Tax withholdings for net settlement of equity awards 250 12,644 96 2,987 8,993 $ 405,833 438 $ 14,736 (1) Amounts presented are exclusive of the U.S. excise tax on share repurchases. 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 nine months ended September 30, 2025 and 2024, instead of receiving cash from the equity holders, we withheld shares with a value of $16.2 million and $3.3 million, respectively, for the exercise price of options. These amounts are not included in the table above. Dividends 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. Nine Months Ended September 30, (in thousands) 2025 2024 Dividend payments to stockholders $ 10,306 $ 7,626 31 Contractual obligations As of September 30, 2025, our contractual obligations were: Payments due by period (in thousands) Remainder of 2025 2026 2027 2028 2029 2030 and after Other Total Purchase obligations (1) $ 25,483 $ 163,337 $ 184,290 $ 45,931 $ 493 $ 510 $ — $ 420,044 Operating lease obligations 4,615 16,971 15,494 14,357 11,343 25,165 — 87,945 Venture investment commitments (2) 500 500 — — — — — 1,000 Liability for uncertain tax positions (3) — — — — — — 20,983 20,983 $ 30,598 $ 180,808 $ 199,784 $ 60,288 $ 11,836 $ 25,675 $ 20,983 $ 529,972 (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. Our venture investment agreements generally allow us to withhold unpaid funds at our discretion. (3) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.