PEGASYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) March 31, 2026 December 31, 2025 Assets Current assets: Cash and cash equivalents $ 269,962 $ 212,447 Marketable securities 203,992 213,352 Total cash, cash equivalents, and marketable securities 473,954 425,799 Accounts receivable, net 173,856 264,713 Unbilled receivables, net 142,057 166,478 Other current assets 114,010 121,305 Total current assets 903,877 978,295 Long-term unbilled receivables, net 87,459 102,544 Goodwill 81,380 81,506 Long-term deferred income taxes 174,251 175,472 Other long-term assets 304,031 294,027 Total assets $ 1,550,998 $ 1,631,844 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 14,206 $ 12,924 Accrued expenses 79,464 44,847 Accrued compensation and related expenses 67,222 148,797 Deferred revenue 557,449 509,275 Other current liabilities 25,061 21,935 Total current liabilities 743,402 737,778 Long-term operating lease liabilities 57,075 60,825 Other long-term liabilities 44,606 45,860 Total liabilities 845,083 844,463 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, 1,000 shares authorized; none issued — — Common stock, 400,000 shares authorized; 168,768 and 170,347 shares issued and outstanding at March 31, 2026 and December 31, 2025, respectively 1,688 1,703 Additional paid-in capital 227,005 330,926 Retained earnings 491,090 463,389 Accumulated other comprehensive (loss) ( 13,868 ) ( 8,637 ) Total stockholders’ equity 705,915 787,381 Total liabilities and stockholders’ equity $ 1,550,998 $ 1,631,844 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 March 31, 2026 2025 Revenue Subscription services $ 280,348 $ 227,491 Subscription license 94,852 187,721 Consulting 54,773 60,421 Total revenue 429,973 475,633 Cost of revenue Subscription services 49,449 38,128 Subscription license 471 388 Consulting 56,834 63,934 Total cost of revenue 106,754 102,450 Gross profit 323,219 373,183 Operating expenses Selling and marketing 155,603 138,069 Research and development 82,047 74,286 General and administrative 48,573 33,828 Restructuring ( 153 ) 11 Total operating expenses 286,070 246,194 Income from operations 37,149 126,989 Foreign currency transaction gain (loss) 1,850 ( 5,325 ) Interest income 2,954 5,335 Interest expense ( 44 ) ( 1,027 ) (Loss) on capped call transactions — ( 223 ) Other (loss) income, net ( 2,204 ) 561 Income before provision for income taxes 39,705 126,310 Provision for income taxes 6,941 40,888 Net income $ 32,764 $ 85,422 Earnings per share Basic $ 0.19 $ 0.50 Diluted $ 0.18 $ 0.46 Weighted-average number of common shares outstanding Basic 168,817 171,804 Diluted 178,841 188,826 See notes to unaudited condensed consolidated financial statements. 4 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended March 31, 2026 2025 Net income $ 32,764 $ 85,422 Other comprehensive (loss) income, net of tax Unrealized (loss) on available-for-sale securities ( 739 ) ( 262 ) Foreign currency translation adjustments ( 4,492 ) 8,810 Total other comprehensive (loss) income, net of tax ( 5,231 ) 8,548 Comprehensive income $ 27,533 $ 93,970 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, 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 December 31, 2025 170,347 $ 1,703 $ 330,926 $ 463,389 $ ( 8,637 ) $ 787,381 Repurchase of common stock ( 3,523 ) ( 35 ) ( 167,917 ) — — ( 167,952 ) Issuance of common stock for stock compensation plans 1,887 19 16,114 — — 16,133 Issuance of common stock under the employee stock purchase plan 57 1 2,067 — — 2,068 Stock-based compensation — — 45,815 — — 45,815 Cash dividends declared ($ 0.03 per share) — — — ( 5,063 ) — ( 5,063 ) Other comprehensive (loss) — — — — ( 5,231 ) ( 5,231 ) Net income — — — 32,764 — 32,764 March 31, 2026 168,768 $ 1,688 $ 227,005 $ 491,090 $ ( 13,868 ) $ 705,915 See notes to unaudited condensed consolidated financial statements. 6 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, 2026 2025 Operating activities Net income $ 32,764 $ 85,422 Adjustments to reconcile net income to cash provided by operating activities Stock-based compensation 45,815 41,425 Amortization of deferred commissions 16,101 18,504 Amortization of intangible assets and depreciation 2,933 3,137 Amortization of right-of-use lease assets 3,430 2,826 Foreign currency transaction (gain) loss ( 1,850 ) 5,325 Loss on capped call transactions — 223 Deferred income taxes 318 179 (Accretion) of investments ( 321 ) ( 1,526 ) Loss (gain) on investments 2,188 ( 751 ) Other non-cash 67 1,067 Change in operating assets and liabilities, net 110,806 48,397 Cash provided by operating activities 212,251 204,228 Investing activities Purchases of investments ( 18,079 ) ( 69,318 ) Proceeds from maturities and called investments 26,565 324,596 Sales of investments — 8,497 Investment in property and equipment ( 5,726 ) ( 1,880 ) Cash provided by investing activities 2,760 261,895 Financing activities Repurchases of convertible senior notes — ( 467,864 ) Dividend payments to stockholders ( 5,110 ) ( 2,583 ) Proceeds from employee stock plans 20,307 13,969 Common stock repurchases for tax withholdings for net settlement of equity awards ( 2,106 ) ( 2,304 ) Common stock repurchases under stock repurchase program ( 167,254 ) ( 117,204 ) Cash (used in) financing activities ( 154,163 ) ( 575,986 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 2,898 ) 3,570 Net increase (decrease) in cash, cash equivalents, and restricted cash 57,950 ( 106,293 ) Cash, cash equivalents, and restricted cash, beginning of period 216,360 341,529 Cash, cash equivalents, and restricted cash, end of period $ 274,310 $ 235,236 Cash and cash equivalents $ 269,962 $ 231,129 Restricted cash included in other current assets 2,448 49 Restricted cash included in other long-term assets 1,900 4,058 Total cash, cash equivalents, and restricted cash $ 274,310 $ 235,236 Supplemental disclosures Non-cash investing and financing activity: Investment in property and equipment included in accounts payable and accrued liabilities $ 2,279 $ 1,219 Dividends payable $ 5,063 $ 2,567 U.S. excise tax payable on net stock repurchase $ 698 $ — 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, 2025. 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 2026. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS 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. Targeted Improvements to the Accounting for Internal-Use Software In September 2025, the FASB issued ASU 2025-06, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software (“ASU 2025-06”). ASU 2025-06 introduces a more principles-based framework to the capitalization of software intended for internal use focused on management’s authorization and commitment to fund a development project and the probability of whether the project will be completed and used for its intended function. ASU 2025-06 will be effective for the Company beginning January 1, 2028. The Company is currently evaluating the impact ASU 2025-06 will have on its consolidated financial statements. NOTE 3. MARKETABLE SECURITIES March 31, 2026 December 31, 2025 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Government debt $ 4,504 $ — $ ( 3 ) $ 4,501 $ 5,755 $ 3 $ ( 4 ) $ 5,754 Corporate debt 199,890 133 ( 532 ) 199,491 207,278 428 ( 108 ) 207,598 $ 204,394 $ 133 $ ( 535 ) $ 203,992 $ 213,033 $ 431 $ ( 112 ) $ 213,352 As of March 31, 2026, marketable securities’ maturities ranged from April 2026 to March 2029, with a weighted-average remaining maturity of 1.3 years. NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Receivables (in thousands) March 31, 2026 December 31, 2025 Accounts receivable, net $ 173,856 $ 264,713 Unbilled receivables, net 142,057 166,478 Long-term unbilled receivables, net 87,459 102,544 $ 403,372 $ 533,735 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) March 31, 2026 1 year or less $ 142,057 62 % 1-2 years 75,408 33 % 2-5 years 12,051 5 % $ 229,516 100 % Unbilled receivables by contract effective date: (Dollars in thousands) March 31, 2026 2026 $ 38,856 17 % 2025 118,744 52 % 2024 41,918 18 % 2023 27,371 12 % 2022 and prior 2,627 1 % $ 229,516 100 % 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) March 31, 2026 December 31, 2025 Contract assets (1) $ 21,888 $ 17,678 Long-term contract assets (2) 36,038 17,421 $ 57,926 $ 35,099 (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) March 31, 2026 December 31, 2025 Deferred revenue $ 557,449 $ 509,275 Long-term deferred revenue (1) 7,154 9,568 $ 564,603 $ 518,843 (1) Included in other long-term liabilities. The change in deferred revenue during the three months ended March 31, 2026 was primarily due to new billings in advance of revenue recognition and $ 225.6 million of revenue recognized during the period included in deferred revenue as of December 31, 2025. NOTE 5. DEFERRED COMMISSIONS (in thousands) March 31, 2026 December 31, 2025 Deferred commissions (1) $ 96,876 $ 104,574 (1) Included in other long-term assets. Three Months Ended March 31, (in thousands) 2026 2025 Amortization of deferred commissions (1) $ 16,101 $ 18,504 (1) Included in selling and marketing expenses. 9 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6. GOODWILL Three Months Ended March 31, (in thousands) 2026 2025 January 1, $ 81,506 $ 81,113 Currency translation adjustments ( 126 ) 73 March 31, $ 81,380 $ 81,186 NOTE 7. OTHER ASSETS AND LIABILITIES Other current assets (in thousands) March 31, 2026 December 31, 2025 Prepaid expenses $ 53,464 $ 65,293 Income tax receivables 30,853 31,535 Contract assets 21,888 17,678 Indirect tax receivable 2,410 2,172 Restricted cash 2,448 1,577 Other 2,947 3,050 $ 114,010 $ 121,305 Other long-term assets (in thousands) March 31, 2026 December 31, 2025 Deferred commissions $ 96,876 $ 104,574 Right of use assets 57,675 60,574 Property and equipment 49,442 45,240 Contract assets 36,038 17,421 Venture investments 19,662 22,021 Income taxes receivable 15,531 15,459 Restricted cash 1,900 2,336 Intangible assets 1,644 1,202 Other 25,263 25,200 $ 304,031 $ 294,027 Accrued expenses (in thousands) March 31, 2026 December 31, 2025 Outside professional services $ 33,141 $ 15,233 Cloud hosting 12,962 1,064 Litigation settlements 9,750 9,750 Income and other taxes 7,900 7,273 Employee related 5,380 5,464 Marketing and sales program 3,549 1,519 Other 6,782 4,544 $ 79,464 $ 44,847 Other current liabilities (in thousands) March 31, 2026 December 31, 2025 Operating lease liabilities $ 15,052 $ 15,142 Dividends payable 5,063 5,110 Other 4,946 1,683 $ 25,061 $ 21,935 10 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Other long-term liabilities (in thousands) March 31, 2026 December 31, 2025 Income taxes payable $ 24,063 $ 23,331 Deferred revenue 7,154 9,568 Other 13,389 12,961 $ 44,606 $ 45,860 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, 2025. The CODM uses consolidated net income to set financial performance targets, assess performance, and make expense allocation decisions. Three Months Ended March 31, (in thousands) 2026 2025 Total revenue $ 429,973 $ 475,633 Total cost of revenue 106,754 102,450 Selling 133,144 119,118 Marketing 22,459 18,951 Research and development 82,047 74,286 General and administrative 48,573 33,828 Other segment items, net (1) ( 2,709 ) 690 Provision for income taxes 6,941 40,888 Net income $ 32,764 $ 85,422 (1) Includes Restructuring, Foreign currency transaction gain (loss), Interest income, Interest expense, (Loss) on capped call transactions, and Other (loss) 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) March 31, 2026 December 31, 2025 U.S. $ 41,979 85 % $ 40,060 89 % International 7,463 15 % 5,180 11 % $ 49,442 100 % $ 45,240 100 % NOTE 9. LEASES Expense Three Months Ended March 31, (in thousands) 2026 2025 Fixed lease costs $ 4,386 $ 3,776 Short-term lease costs 715 487 Variable lease costs 1,995 1,750 $ 7,096 $ 6,013 11 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Right of use assets and lease liabilities (in thousands) March 31, 2026 December 31, 2025 Right of use assets (1) $ 57,675 $ 60,574 Operating lease liabilities (2) $ 15,052 $ 15,142 Long-term operating lease liabilities $ 57,075 $ 60,825 (1) Included in other long-term assets. (2) Included in other current liabilities. Weighted-average remaining lease term and discount rate for the Company’s leases were: March 31, 2026 December 31, 2025 Weighted-average remaining lease term 5.2 years 5.4 years Weighted-average discount rate (1) 5.2 % 5.2 % (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) March 31, 2026 Remainder of 2026 $ 13,947 2027 16,452 2028 14,751 2029 11,907 2030 10,266 2031 9,134 Thereafter 5,777 Total lease payments 82,234 Less: imputed interest (1) ( 10,107 ) $ 72,127 (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 Three Months Ended March 31, (in thousands) 2026 2025 Cash paid for operating leases, net of tenant improvement allowances $ 4,180 $ 4,581 Right of use assets obtained in exchange for operating lease obligations $ 661 $ — NOTE 10. DEBT 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. Effective as of February 4, 2025, the Credit Facility was amended to extend the expiration date to February 4, 2027. 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. As of March 31, 2026, the Company is compliant with all Credit Facility covenants. As of March 31, 2026 and December 31, 2025, the Company had letters of credit of $ 26.7 million under the Credit Facility, however we had no cash borrowings. 12 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11. RESTRUCTURING The Company has undertaken the following restructuring activities intended to better align roles and capacity to an AI-first delivery model: Three Months Ended March 31, (in thousands) 2026 2025 Employee severance and related costs $ ( 153 ) $ ( 3 ) Office space reductions (1) — 14 Restructuring $ ( 153 ) $ 11 (1) These primarily relate to non-cash operating lease adjustments. Restructuring activity: Accrued employee severance and related costs: Three Months Ended March 31, (in thousands) 2026 2025 January 1, $ 12,858 $ 2,000 Costs incurred ( 153 ) ( 3 ) Cash disbursements ( 6,711 ) ( 1,184 ) Currency translation adjustments ( 37 ) 53 March 31, (1) $ 5,957 $ 866 (1) Included in accrued compensation and related expenses. NOTE 12. FAIR VALUE MEASUREMENTS Assets and liabilities measured at fair value on a recurring basis The Company records its cash equivalents, marketable securities, 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 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. 13 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Assets and liabilities measured at fair value on a recurring basis: March 31, 2026 December 31, 2025 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash equivalents $ 37,653 $ — $ — $ 37,653 $ 33,043 $ 8,463 $ — $ 41,506 Marketable securities $ — $ 203,992 $ — $ 203,992 $ — $ 213,352 $ — $ 213,352 Venture investments $ — $ — $ 19,662 $ 19,662 $ — $ — $ 22,021 $ 22,021 Changes in venture investments: Three Months Ended March 31, (in thousands) 2026 2025 January 1, $ 22,021 $ 21,234 New investments — 200 Changes in foreign exchange rates ( 35 ) 65 Changes in fair value: included in other (loss) income, net ( 2,059 ) 751 included in other comprehensive income ( 265 ) ( 535 ) March 31, $ 19,662 $ 21,715 The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities. NOTE 13. REVENUE Geographic revenue Revenues by geography are determined based on client location: Three Months Ended March 31, (Dollars in thousands) 2026 2025 U.S. $ 219,255 51 % $ 269,192 56 % Other Americas 39,259 9 % 33,741 7 % United Kingdom (“U.K.”) 51,510 12 % 40,742 9 % Europe (excluding U.K.), Middle East, and Africa 73,839 17 % 74,056 16 % Asia-Pacific 46,110 11 % 57,902 12 % $ 429,973 100 % $ 475,633 100 % Revenue streams Three Months Ended March 31, (in thousands) 2026 2025 Pega Cloud $ 205,031 $ 151,123 Maintenance 75,317 76,368 Consulting 54,773 60,421 Revenue recognized over time 335,121 287,912 Subscription license 94,852 187,721 Revenue recognized at a point in time 94,852 187,721 Total revenue $ 429,973 $ 475,633 14 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Three Months Ended March 31, (in thousands) 2026 2025 Pega Cloud $ 205,031 $ 151,123 Maintenance 75,317 76,368 Subscription services 280,348 227,491 Subscription license 94,852 187,721 Subscription 375,200 415,212 Consulting 54,773 60,421 Total revenue $ 429,973 $ 475,633 Remaining performance obligations ("Backlog") Expected future revenue from existing non-cancellable contracts: As of March 31, 2026: (Dollars in thousands) Subscription services Subscription license Consulting Total Pega Cloud Maintenance 1 year or less $ 709,105 $ 212,262 $ 64,878 $ 42,884 $ 1,029,129 51 % 1-2 years 384,966 77,207 1,402 3,758 467,333 23 % 2-3 years 213,496 53,806 11,150 1,378 279,830 14 % Greater than 3 years 204,057 28,945 1,013 430 234,445 12 % $ 1,511,624 $ 372,220 $ 78,443 $ 48,450 $ 2,010,737 100 % As of March 31, 2025: (Dollars in thousands) Subscription services Subscription license Consulting Total Pega Cloud Maintenance 1 year or less $ 572,341 $ 229,180 $ 33,519 $ 45,320 $ 880,360 50 % 1-2 years 331,572 73,500 3,718 2,291 411,081 24 % 2-3 years 161,259 37,779 731 144 199,913 12 % Greater than 3 years 185,939 43,939 7,215 52 237,145 14 % $ 1,251,111 $ 384,398 $ 45,183 $ 47,807 $ 1,728,499 100 % NOTE 14. STOCKHOLDERS' EQUITY Stock-based Compensation Expense Three Months Ended March 31, (in thousands) 2026 2025 Cost of revenue $ 7,876 $ 7,823 Selling and marketing 18,454 15,781 Research and development 10,019 8,385 General and administrative 9,466 9,436 $ 45,815 $ 41,425 Income tax benefit $ ( 9,164 ) $ ( 587 ) As of March 31, 2026, the Company had $ 206 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.9 years. Grants Three Months Ended March 31, 2026 (in thousands) Quantity Total Fair Value Restricted stock units (1) 1,939 $ 87,387 Non-qualified stock options 2,992 $ 52,784 Performance stock options (2) 1,497 $ 25,804 (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. 15 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (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. Performance stock options granted in the three months ended March 31, 2026 vest on the second anniversary of the grant date, up to 200 %, subject to the achievement of specified performance metrics over fiscal years 2026 and 2027. The options expire ten years from the grant date. Stock repurchase program On February 10, 2026, the Company’s Board of Directors 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, of which $ 1.1 billion remains available as of March 31, 2026. During the three months ended March 31, 2026, the Company repurchased 3.5 million shares of its common stock for $ 167.3 million at an average price per share of $ 47.47 . The share repurchase and authorization amounts disclosed within this Form 10-Q exclude the U.S. excise tax on share repurchases. All purchases under this program have been made on the open market. NOTE 15. INCOME TAXES Effective income tax rate Three Months Ended March 31, (Dollars in thousands) 2026 2025 Provision for income taxes $ 6,941 $ 40,888 Effective income tax rate 17 % 32 % The Company’s effective income tax rate decreased in the three months ended March 31, 2026 as compared to the prior period, primarily due to excess tax benefits from stock-based compensation recognized in the current period and the absence of a valuation allowance on substantially all of the Company’s U.S. and U.K. deferred tax assets. NOTE 16. EARNINGS PER SHARE Basic earnings per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings 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 Convertible Senior Notes (the “Notes”), which were repaid in its entirety at maturity during the three months ended March 31, 2025. Calculation of earnings per share: Three Months Ended March 31, (in thousands, except per share amounts) 2026 2025 Net income $ 32,764 $ 85,422 Weighted-average common shares outstanding 168,817 171,804 Earnings per share, basic $ 0.19 $ 0.50 Net income $ 32,764 $ 85,422 Notes - interest expense, net of tax — 742 Numerator for diluted EPS $ 32,764 $ 86,164 Weighted-average effect of dilutive securities: Notes — 4,850 Stock options 7,044 8,610 RSUs 2,980 3,562 Effect of dilutive securities 10,024 17,022 Weighted-average common shares outstanding, assuming dilution (1) (2) (3) 178,841 188,826 Earnings per share, diluted $ 0.18 $ 0.46 Outstanding anti-dilutive stock options and RSUs (4) 368 244 (1) All securities are excluded when their inclusion would be anti-dilutive. (2) 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. (3) In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions expired upon maturity of the Notes during the three months ended March 31, 2025. 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. (4) 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 per share. These awards may be dilutive in the future. 16 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. As of March 31, 2026 and December 31, 2025, the Company recorded an estimated $ 9.75 million accrued loss related to the agreed in principle settlement of the In re Pegasystems Inc. Derivative Litigation matter, see additional discussion below. 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 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 Virginia Uniform Trade Secrets Act 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 and ordered a new trade secrets claim trial. 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. On March 7, 2025, the Supreme Court of Virginia granted Appian’s petition for appeal and Pega’s assignments of cross-error. The Supreme Court of Virginia heard appellate oral argument on October 28, 2025. On January 8, 2026, the Supreme Court of Virginia issued a written opinion unanimously affirming the ruling of the Court of Appeals of Virginia. On January 13, 2026, the Circuit Court of Fairfax County, Virginia notified the parties that this case has been reassigned to Judge David A. Oblon for further proceedings. On January 29, 2026, the Supreme Court of Virginia remanded Appian’s trade secret case to the Court of Appeals with direction to remand to the Circuit Court of Fairfax County for further proceedings in accordance with its written opinion. Also on January 29, Judge Oblon scheduled a first status conference for the remanded trial proceedings for May 7, 2026. On February 27, 2026, the Court of Appeals of Virginia issued a mandate stating that the judgment is affirmed in part, reversed in part, and remanded to the Circuit Court of Fairfax County for further proceedings consistent with the views expressed in the written opinion of the Court of Appeals of Virginia. 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 a new trial resulting from the appellate proceedings. 17 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 Federal court cases 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 and 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 certain claims against Ken Stillwell; and (iii) took the motion to dismiss under advisement as to all other claims. On January 8, 2026, the Court issued a written order granting the motion to dismiss as to the Section 10(b) and common law fraud claims against Ken Stillwell and denying the motion to dismiss as to the remaining claims. The Court also entered a scheduling order setting trial for February 2027. State court cases 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 believes it has strong defenses to the claims brought against the defendants and intends to defend against these claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits. In re Pegasystems Inc. Derivative Litigation Federal court cases 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). 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 (the “Consolidated Action”) and, after defendants moved to dismiss the complaint in the Consolidated Action on December 4, 2024, the plaintiffs moved to voluntarily dismiss the Consolidated Action, and the Court granted the motion to dismiss on December 18, 2024. 18 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company separately received confidential demand letters raising substantially the same allegations set forth in the Consolidated Action. 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) were 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 (the “Demand Review Committee”). The Demand Review Committee, with the assistance of independent legal counsel, conducted an extensive investigation of the allegations raised in the demand letters and on October 7, 2024 issued a report concluding that there are no valid claims against the Company’s directors and officers with respect to the matters raised in the demands and that it would not be in the Company’s best interests to pursue litigation against them. 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, (the “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. 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. The Court held a hearing on defendants’ motions to dismiss and state court plaintiffs’ motion to intervene on July 21, 2025. Following argument, the Court took the motions under advisement. On October 14, 2025, the parties jointly notified the Court that on October 2, 2025 the Massachusetts Superior Court granted defendants’ motion to dismiss the related state court derivative action (see below) and proposed that the Court refrain from issuing a decision on the motions to dismiss pending a joint submission by the parties of their respective positions on the impact of the state court dismissal on the federal court case within thirty (30) days. On December 17, 2025, the court entered an order administratively closing this action in light of the developments in the State court cases, described below. On January 7, 2026, the Collective Plaintiffs agreed in principle to a proposed settlement of the litigation. See discussion below within the “State court cases” subsection. State court cases 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 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, 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 asserts the same claims asserted in the Dwyer Action. On February 12, 2025, after submission by the parties of a stipulation and proposed order, 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 moved to dismiss the complaint and after briefing by the parties, the Court held a hearing on defendants’ motion on September 4, 2025. On October 2, 2025, the Court granted Defendants’ motion to dismiss. On January 13, 2026, the court entered final judgment in defendants’ favor. On January 7, 2026, the parties to the federal and state court cases agreed in principle to a proposed settlement of the litigation. Under the terms of the proposed settlement, the plaintiffs in the federal and state court cases (“Collective Plaintiffs”) agreed to the dismissal of all claims upon the Company adopting certain governance reforms and payment of an estimated aggregate sum of $ 9.75 million, inclusive of a $ 7 million special dividend to shareholders (excluding defendants) and Collective Plaintiffs’ attorney fees. 19 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) On January 23, 2026, the parties jointly moved the court for relief from the final judgment in this action for the sole purpose of permitting the parties to seek Court approval of the proposed settlement. On February 10, 2026, the plaintiffs submitted the proposed settlement to the Court for preliminary approval. On March 18, 2026, the Court held a preliminary approval hearing and granted the parties relief from the final judgment. On April 16, 2026, the Court held a further preliminary approval hearing. The Court has preliminarily approved the proposed settlement and scheduled a final approval hearing for June 25, 2026. Although the outcome of the litigation is not certain until final court approval, the Company has recorded an estimated $ 9.75 million accrued loss as of December 31, 2025. However, it is possible that actual future losses related to the litigation could exceed the accrual amount if and to the extent that the court does not approve the proposed settlement. Pegasystems v. Appian Defamation Litigation On August 2, 2023, the Company filed a complaint against Appian in the U.S. District Court for the District of Massachusetts, captioned Pegasystems Inc. v. Appian Corporation, 1:23-cv-11776-LTS (D. Mass.). The complaint asserts claims for defamation, trade libel, and violations of the Lanham Act, 15 U.S.C. § 1125(a) based on statements Appian made following the verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above. In response to a motion to dismiss filed by Appian on August 18, 2023, the Company amended the complaint to add additional factual allegations in support of the same claims. On September 22, 2023, Appian moved to dismiss the amended complaint, which the Court denied on January 5, 2024. On February 20, 2024, Appian answered the complaint, asserted counterclaims against the Company for defamation, trade libel, violations of the Lanham Act, 15 U.S.C. § 1125(a), and violations of Mass. Gen. Laws ch. 93A §§ 2 and 11, and sought a declaratory judgment that the Company was not entitled to the recovery sought in the amended complaint. On April 11, 2024, the Company moved for a more definite statement and to partially strike the counterclaims, which the Court denied on August 1, 2024. On August 15, 2024, the Company moved to dismiss the counterclaims, which the Court allowed in part and denied in part on October 8, 2024; specifically, the Court allowed the Company’s motion to dismiss the trade libel counterclaim with respect to Appian’s allegations regarding the Company’s Code of Conduct. On November 26, 2024, Appian moved for judgment on the pleadings. On March 11, 2025, the Court allowed the motion for judgment on the pleadings in part and entered judgment for Appian on the basis of a statement made by Appian’s chief executive officer, but otherwise denied the motion. The parties exchanged opening expert reports in March 2026. The Company claims $ 41.9 million in damages from Appian’s conduct. Appian seeks $ 31.8 million in lost profits damages and further requests that the Company be required to disgorge $ 109.5 million in profits as unjust enrichment arising from business contracts Appian contends it competed with Pegasystems on from 2022-2025. Apart from Company revenues in which Appian contends it competed with Pegasystems for business, Appian further seeks that the Company be forced to disgorge the entirety of its profits ($ 2.33 billion) from 2022-2025. The Company vehemently disagrees with Appian’s entitlement to any recovery, and believes the disgorgement claim is consistent with Appian’s efforts to denigrate the Company that are the subject of the Company’s claims asserted in this litigation. The Company remains confident in the merits of its claims against Appian and the damages claimed, and disputes Appian’s counterclaims, including the amount of and legal basis for the damages sought, believes it has strong defenses to the counterclaims, and intends to vigorously defend against the counterclaims. Motions for summary judgment are due in June 2026, at which time the Company also expects to file Daubert motions. A jury trial is currently scheduled for November 2026. The Company is unable to reasonably estimate likelihood of success for either party or a range of possible gain or loss given the uncertainty as to the likelihood, amount, and timing of any potential gain or loss related to its claims or Appian’s counterclaims. 20