What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2026-02-10 compared with 2025-02-12 · 67 added, 69 removed, 246 unchanged (36% of the section changed)

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

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

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

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

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

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

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 can leverage Blueprint to rapidly prototype and accelerate the development and deployment of applications quickly and collaboratively.

We focus on enterprise-scale businesses and government agencies that require advanced solutions to distinguish themselves in the competitive markets they serve.

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

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

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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”) represents the annualized value of our active contracts as of the measurement date.

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.

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$ 1,372 $ 1,562 14 %

Constant currency ACV is calculated by applying the December 31, 2023 foreign exchange rates to all periods shown.

(Dollars in thousands) 2024 2023

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

(Dollars in thousands) 2024 2025 Change

Cash provided by operating activities $ 345,926 $ 505,227 46 %

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Restructuring 5,252 2,056

Interest on convertible senior notes 3,810 4,134

82,317 11,664

Interest paid on convertible senior notes 3,810 1,754

Income taxes, net of refunds 82,317 21,630

$ 139,979 $ 60,924

(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.

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

◦ Interest on convertible senior notes :

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

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

Fees related to canceled in-person sales and marketing events.

◦ Income taxes :

◦ Interest paid on convertible senior notes :

In February 2020, we issued 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.

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Constant currency backlog $ 1,623 $ 1,994 23 %

Constant currency Backlog is calculated by applying the December 31, 2023 foreign exchange rates to all periods shown.

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

RESULTS OF OPERATIONS

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Subscription 1,517,863 87 % 1,283,907 86 % 233,956 18 %

Perpetual license 3,767 — % 10,101 1 % (6,334) (63) %

Consulting 227,949 13 % 213,273 14 % 14,676 7 %

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

• The decrease in subscription license revenue in 2024 was primarily due to our clients’ shift to Pega Cloud-based offerings, and several large multi-year subscription license contracts recognized in revenue in 2023.

• The decrease in perpetual license revenue in 2024 reflects our strategy of promoting subscription-based arrangements.

• The decrease in consulting revenue in 2024 was primarily due to decreases in consultant billable hours.

• The increase in subscription license revenue in 2025 was primarily due to our clients’ shift to Pega Cloud-based offerings, and several large multi-year subscription license contracts recognized in revenue in 2025.

• The increase in consulting revenue in 2025 was primarily due to an increase in consultant billable hours in our International regions.

(Dollars in thousands) Gross Profit % Gross Profit % Change

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Subscription 1,347,234 89 % 1,132,084 88 % 215,150 19 %

Perpetual license 3,750 100 % 10,034 99 % (6,284) (63) %

Consulting (22,804) (10) % (25,569) (12) % 2,765 11 %

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Also contributing to the change was:

• The increase in Pega Cloud gross profit percent in 2024 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 decrease in consulting gross profit percent in 2024 was primarily due to a decrease in utilization rates.

• The increase in Pega Cloud gross profit percent in 2025 was 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 increase in consulting gross profit percent in 2025 was primarily due to an increase in consultant utilization rates offset by an increase in contracted services of $6.1 million.

Operating expenses

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* Not meaningful

• The decrease in selling and marketing in 2024 was primarily due to a decrease in compensation and benefits of $27.8 million due to reduced headcount from the optimization of our go-to-market strategy.

For additional information, see "Note 12.

Restructuring" in Item 8 of this Annual Report.

• The increase in general and administrative in 2024 was primarily due to an increase of $10.7 million in compensation and benefits including $4.8 million of stock based compensation expense associated with performance stock options granted in 2023 (see "Note 16.

Stock-Based Compensation" ) and an increase of $4.8 million in legal fees and related expenses arising from legal proceedings outside the ordinary course of business.

• The increase in selling and marketing in 2025 was primarily due to an increase in compensation and benefits of $31.3 million attributable to increases in headcount and incentive compensation.

• The increase in research and development in 2025 was primarily due to an increase in compensation and benefits of $11.6 million attributable to increases in headcount and incentive compensation.

• The increase in general and administrative in 2025 was primarily due to an increase of $20.4 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.

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Commitments And Contingencies" in Item 8 of this Annual Report.

• The restructuring in 2024 and 2023 was primarily due to our efforts to optimize our go-to-market organization and office space.

In 2025 we experienced an increase of $11.8 million in compensation and benefits 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.

• The decrease in litigation settlement, net of recoveries in 2025 was primarily due to the estimated cost to settle ongoing litigation arising from proceedings outside the ordinary course of business.

For additional information, see "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report.

• During the fourth quarter of 2025, management committed to a restructuring plan, primarily within our consulting organization, intended to better align roles and capacity to an AI-first delivery model.

The plan resulted in a restructuring expense of approximately $13 million in 2025, associated with severance and benefits for impacted employees.

For additional information, see "Note 12.

Restructuring" in Item 8 of this Annual Report.

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(Dollars in thousands) 2025 2024 Change

Foreign currency transaction (loss) gain $ (912) $ (5,242) $ 4,330 83 %

Foreign currency transaction (loss) $ (14,890) $ (912) $ (13,978) *

Interest income 13,641 25,779 (12,138) (47) %

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$ 17,527 $ 18,754 $ (1,227) (7) %

• The change in foreign currency transaction (loss) gain in 2024 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increase in interest income in 2024 was primarily due to higher investment balances and higher interest rate yields.

• The change in (loss) on capped call transactions in 2024 was due to fair value adjustments for our capped call transactions.

• The decrease in other income, net in 2024, was due to a reduction of $7.4 million in the gain from repurchases of our convertible senior notes and a reduction of $10 million in the gain in the value of equity securities held in our venture investments portfolio.

* Not meaningful

• The change in foreign currency transaction (loss) in 2025 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated receivables held by our subsidiary in the United Kingdom.

• The decrease in interest income in 2025 was primarily due to lower investment balances as a result of the repayment of the Notes at maturity during the three months ended March 31, 2025.

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

• The increase in other income, net in 2025 was primarily due to the gain from the partial sale of a venture investment.

For additional information, see "Note 13.

Debt" and "Note 13.

Fair Value Measurements" in Item 8 of this Annual Report.

Provision for income taxes

(Benefit from) provision for income taxes

(Dollars in thousands) 2025 2024

Provision for income taxes $ 43,447 $ 27,632

(Benefit from) provision for income taxes $ (112,810) $ 43,447

Effective income tax rate (40) % 30 %

The effective income tax rate in 2024 was primarily driven by the valuation allowance on our deferred tax assets and tax expense in the U.S.

and U.K., partially offset by available tax attributes.

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported by over 130 countries worldwide.

The EU effective dates were January 1, 2024, and January 1, 2025, for different aspects of the directive.

The impact of the Pillar Two Framework on the Company’s income tax provision in 2024 was not material.

The Company is continuing to evaluate the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.

The effective income tax rate and tax benefit recorded in 2025 was primarily driven by the release of the valuation allowance on our net deferred tax assets in the U.S.

The Organization for Economic Co-operation 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

(in thousands) 2025 2024

Cash provided by (used in)

Cash (used in) provided by

Operating activities $ 505,227 $ 345,926

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash 6,988 (4,434)

Net increase in cash, cash equivalents, and restricted cash $ 108,702 $ 87,773

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (125,169) $ 108,702

(in thousands)

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$ 429,712 $ 744,399

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, settlement of our convertible senior notes due on March 1, 2025, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations.

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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.

However, estimating the taxes we would have to pay on the amounts we consider indefinitely reinvested is impracticable due to the complexity of income tax laws and regulations.

We have provided a deferred tax liability associated with the tax cost of repatriating unremitted earnings which we do not consider indefinitely reinvested.

For additional information, see risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report.

Operating activities

The change in cash provided by operating activities in 2024 was primarily due to growth in client collections and the impact of our cost-efficiency initiatives.

For additional information, see "Note 12.

Restructuring" in Item 8 of this Annual Report.

We expect to continue to incur legal fees and related costs arising from proceedings outside the ordinary course of business.

For additional information, see "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report.

The change in cash provided by operating activities in 2025 was primarily due to increase in client collections.

Investing activities

The change in cash (used in) investing activities in 2024 was primarily due to our increased investments in financial instruments and reduced investment in property and equipment as we optimized our office space.

The change in cash provided by (used in) investing activities in 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

Debt financing

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

In 2024, we paid $33.9 million to repurchase $34.4 million in aggregate principal amount of convertible senior notes.

As of December 31, 2024, we had $468 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025.

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

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.

For additional information, see "Note 11.

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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.

As of December 31, 2024 and December 31, 2023, we had $27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings.

For additional information, see "Note 11.

Debt" in Item 8 of this Annual Report.

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

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

Stock repurchase program

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December 31, 2025 $ 242,254

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

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

(1) Amounts presented are exclusive of the U.S.

excise tax on share repurchases.

(2) On April 22, 2025, our 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.

On February 10, 2026, our Board of Directors further extended the expiration date of the share repurchase program from June 30, 2026 to June 30, 2027 and increased the authorized repurchase amount by $1 billion.

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

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Stock repurchase program (1)

10,659 498,189 1,650 69,557

Tax withholdings for net settlement of equity awards 328 17,541 150 5,435

10,987 $ 515,730 1,800 $ 74,992

(1) Amounts presented are exclusive of the U.S.

excise tax on share repurchases.

On June 20, 2025, we effected the Stock Split of our Common Stock described within "Note 1.

Basis Of Presentation" in Item 8 of this Annual Report.

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

In 2025 and 2024, instead of receiving cash from the equity holders, we withheld shares with a value of $22.4 million and $6.3 million, respectively, for the exercise price of options.

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Dividend payments to stockholders $ 15,422 $ 10,199

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 paid and intend to continue 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.

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(in thousands) 2026 2027 2028 2029 2030 and thereafter Other Total

Convertible senior notes (1)

$ 469,618 $ — $ — $ — $ — $ — $ 469,618

Purchase obligations (1)

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$ 163,353 $ 207,156 $ 61,368 $ 12,767 $ 26,038 $ 23,331 $ 494,013

(1) Includes principal and interest.

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

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In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.

The Company determined that the objectively and verifiable negative evidence outweighed the positive evidence, as such maintained a valuation allowance on our U.S.

deferred tax assets.

As of December 31, 2025, we concluded that substantially all of our deferred tax assets are more likely than not to be realized.

We assess our income tax positions and record tax benefits based on management’s evaluation of the facts, circumstances, and information available at the reporting date.

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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-K

Item 7. Management’s Discussion and Analysis