PEGASYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2026 December 31, 2025 Assets Current assets: Cash and cash equivalents $ 202,190 $ 212,447 Marketable securities 107,521 213,352 Total cash, cash equivalents, and marketable securities 309,711 425,799 Accounts receivable, net 130,121 264,713 Unbilled receivables, net 151,240 166,478 Other current assets 112,807 121,305 Total current assets 703,879 978,295 Long-term unbilled receivables, net 79,355 102,544 Goodwill 81,270 81,506 Long-term deferred income taxes 172,493 175,472 Other long-term assets 293,296 294,027 Total assets $ 1,330,293 $ 1,631,844 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 57,619 $ 12,924 Accrued expenses 77,067 44,847 Accrued compensation and related expenses 91,609 148,797 Deferred revenue 429,469 509,275 Other current liabilities 23,231 21,935 Total current liabilities 678,995 737,778 Long-term operating lease liabilities 54,643 60,825 Other long-term liabilities 47,594 45,860 Total liabilities 781,232 844,463 Commitments and contingencies (Note 16) Stockholders’ equity: Preferred stock, 1,000 shares authorized; none issued — — Common stock, 400,000 shares authorized; 163,580 and 170,347 shares issued and outstanding at September 30, 2026 and December 31, 2025, respectively 1,636 1,703 Additional paid-in capital 52,667 330,926 Retained earnings 508,679 463,389 Accumulated other comprehensive (loss) ( 13,921 ) ( 8,637 ) Total stockholders’ equity 549,061 787,381 Total liabilities and stockholders’ equity $ 1,330,293 $ 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 September 30, Nine Months Ended September 30, 2026 2025 2026 2025 Revenue Subscription services $ 291,578 $ 264,198 $ 860,388 $ 737,703 Subscription license 55,578 60,758 232,458 329,153 Consulting 46,203 56,394 151,202 174,639 Total revenue 393,359 381,350 1,244,048 1,241,495 Cost of revenue Subscription services 54,490 42,978 157,880 122,616 Subscription license 268 314 1,006 1,066 Consulting 49,088 62,601 159,743 194,235 Total cost of revenue 103,846 105,893 318,629 317,917 Gross profit 289,513 275,457 925,419 923,578 Operating expenses Selling and marketing 143,754 140,129 464,765 425,329 Research and development 74,311 78,756 240,526 231,826 General and administrative 38,612 42,108 130,925 107,724 Litigation settlement 16,000 — 16,000 — Restructuring 1,975 ( 5 ) 4,557 ( 38 ) Total operating expenses 274,652 260,988 856,773 764,841 Income from operations 14,861 14,469 68,646 158,737 Foreign currency transaction gain (loss) 589 7,154 1,075 ( 12,179 ) Interest income 1,814 2,660 7,268 11,243 Interest expense ( 64 ) ( 144 ) ( 153 ) ( 1,172 ) (Loss) on capped call transactions — — — ( 223 ) Other income (loss), net 578 ( 43 ) ( 840 ) 19,247 Income before provision for (benefit from) income taxes 17,778 24,096 75,996 175,653 Provision for (benefit from) income taxes 3,686 ( 19,268 ) 15,806 16,790 Net income $ 14,092 $ 43,364 $ 60,190 $ 158,863 Earnings per share Basic $ 0.09 $ 0.25 $ 0.36 $ 0.93 Diluted $ 0.08 $ 0.24 $ 0.35 $ 0.86 Weighted-average number of common shares outstanding Basic 163,757 170,567 166,043 171,045 Diluted 168,642 184,095 173,064 185,005 See notes to unaudited condensed consolidated financial statements. 4 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2026 2025 2026 2025 Net income $ 14,092 $ 43,364 $ 60,190 $ 158,863 Other comprehensive (loss) income, net of tax Unrealized (loss) gain on available-for-sale securities ( 503 ) 89 ( 1,321 ) 11 Foreign currency translation adjustments ( 365 ) ( 4,595 ) ( 3,963 ) 21,416 Total other comprehensive (loss) income, net of tax ( 868 ) ( 4,506 ) ( 5,284 ) 21,427 Comprehensive income $ 13,224 $ 38,858 $ 54,906 $ 180,290 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 Repurchase of common stock ( 3,147 ) ( 31 ) ( 132,454 ) — — ( 132,485 ) Issuance of common stock for stock compensation plans 3,086 30 64,876 — — 64,906 Issuance of common stock under the employee stock purchase plan 39 — 1,816 — — 1,816 Stock-based compensation — — 36,730 — — 36,730 Cash dividends declared ($ 0.03 per share) — — — ( 5,156 ) — ( 5,156 ) Other comprehensive income — — — — 17,385 17,385 Net income — — — 30,077 — 30,077 June 30, 2025 171,102 $ 1,711 $ 431,466 $ 195,677 $ ( 4,312 ) $ 624,542 Repurchase of common stock ( 2,675 ) ( 27 ) ( 142,549 ) — — ( 142,576 ) Issuance of common stock for stock compensation plans 2,078 21 36,082 — — 36,103 Issuance of common stock under the employee stock purchase plan 40 — 1,978 — — 1,978 Stock-based compensation — — 43,041 — — 43,041 Cash dividends declared ($ 0.03 per share) — — — ( 5,116 ) — ( 5,116 ) Other comprehensive (loss) — — — — ( 4,506 ) ( 4,506 ) Net income — — — 43,364 — 43,364 September 30, 2025 170,545 $ 1,705 $ 370,018 $ 233,925 $ ( 8,818 ) $ 596,830 6 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, 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 Repurchase of common stock ( 5,335 ) ( 53 ) ( 201,565 ) — — ( 201,618 ) Issuance of common stock for stock compensation plans 855 8 8,856 — — 8,864 Issuance of common stock under the employee stock purchase plan 70 1 1,778 — — 1,779 Stock-based compensation — — 36,226 — — 36,226 Cash dividends declared ($ 0.03 per share) — — — ( 4,931 ) — ( 4,931 ) Other comprehensive income — — — — 815 815 Net income — — — 13,334 — 13,334 June 30, 2026 164,358 $ 1,644 $ 72,300 $ 499,493 $ ( 13,053 ) $ 560,384 Repurchase of common stock ( 2,020 ) ( 20 ) ( 65,190 ) — — ( 65,210 ) Issuance of common stock for stock compensation plans 1,181 11 15,144 — — 15,155 Issuance of common stock under the employee stock purchase plan 61 1 1,734 — — 1,735 Stock-based compensation — — 28,679 — — 28,679 Cash dividends declared ($ 0.03 per share) — — — ( 4,906 ) — ( 4,906 ) Other comprehensive (loss) — — — — ( 868 ) ( 868 ) Net income — — — 14,092 — 14,092 September 30, 2026 163,580 $ 1,636 $ 52,667 $ 508,679 $ ( 13,921 ) $ 549,061 See notes to unaudited condensed consolidated financial statements. 7 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, 2026 2025 Operating activities Net income $ 60,190 $ 158,863 Adjustments to reconcile net income to cash provided by operating activities Stock-based compensation 110,720 121,196 Amortization of deferred commissions 46,552 50,494 Amortization of intangible assets and depreciation 9,303 9,414 Amortization of right-of-use lease assets 10,359 8,988 Foreign currency transaction (gain) loss ( 1,075 ) 12,179 Deferred income taxes 2,286 235 (Accretion) of investments ( 712 ) ( 2,574 ) Loss (gain) on investments 1,595 ( 19,438 ) Other non-cash 168 1,749 Change in operating assets and liabilities, net 64,913 5,690 Cash provided by operating activities 304,299 346,796 Investing activities Purchases of investments ( 76,543 ) ( 238,956 ) Proceeds from maturities and called investments 65,595 362,436 Sales of investments 114,460 99,902 Investment in property and equipment ( 14,474 ) ( 8,485 ) Cash provided by investing activities 89,038 214,897 Financing activities Repurchases of convertible senior notes — ( 467,864 ) Dividend payments to stockholders ( 15,104 ) ( 10,306 ) Proceeds from employee stock plans 49,460 129,112 Common stock repurchases for tax withholdings for net settlement of equity awards ( 3,726 ) ( 12,644 ) Common stock repurchases under stock repurchase program ( 432,700 ) ( 394,689 ) Cash (used in) financing activities ( 402,070 ) ( 756,391 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 2,590 ) 6,971 Net (decrease) in cash, cash equivalents, and restricted cash ( 11,323 ) ( 187,727 ) Cash, cash equivalents, and restricted cash, beginning of period 216,360 341,529 Cash, cash equivalents, and restricted cash, end of period $ 205,037 $ 153,802 Cash and cash equivalents $ 202,190 $ 148,699 Restricted cash included in other current assets 957 — Restricted cash included in other long-term assets 1,890 5,103 Total cash, cash equivalents, and restricted cash $ 205,037 $ 153,802 Supplemental disclosures Non-cash investing and financing activity: Investment in property and equipment included in accounts payable and accrued liabilities $ 1,635 $ 1,840 Dividends payable $ 4,906 $ 5,116 Right of use assets obtained in exchange for operating lease obligations $ 4,322 $ 4,765 U.S. excise tax payable on net stock repurchase $ 2,671 $ 576 See notes to unaudited condensed consolidated financial statements. 8 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 September 30, 2026 December 31, 2025 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Government debt $ — $ — $ — $ — $ 5,755 $ 3 $ ( 4 ) $ 5,754 Corporate debt 108,699 3 ( 1,181 ) 107,521 207,278 428 ( 108 ) 207,598 $ 108,699 $ 3 $ ( 1,181 ) $ 107,521 $ 213,033 $ 431 $ ( 112 ) $ 213,352 As of September 30, 2026, marketable securities’ maturities ranged from October 2026 to September 2029, with a weighted-average remaining maturity of 2.0 years. NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Receivables (in thousands) September 30, 2026 December 31, 2025 Accounts receivable, net $ 130,121 $ 264,713 Unbilled receivables, net 151,240 166,478 Long-term unbilled receivables, net 79,355 102,544 $ 360,716 $ 533,735 9 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) September 30, 2026 1 year or less $ 151,240 66 % 1-2 years 65,071 28 % 2-5 years 14,284 6 % $ 230,595 100 % Unbilled receivables by contract effective date: (Dollars in thousands) September 30, 2026 2026 $ 74,641 32 % 2025 109,856 48 % 2024 29,542 13 % 2023 14,765 6 % 2022 and prior 1,791 1 % $ 230,595 100 % 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) September 30, 2026 December 31, 2025 Contract assets (1) $ 20,302 $ 17,678 Long-term contract assets (2) 36,556 17,421 $ 56,858 $ 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) September 30, 2026 December 31, 2025 Deferred revenue $ 429,469 $ 509,275 Long-term deferred revenue (1) 4,536 9,568 $ 434,005 $ 518,843 (1) Included in other long-term liabilities. The change in deferred revenue during the nine months ended September 30, 2026 was primarily due to new billings in advance of revenue recognition and $ 457.4 million of revenue recognized during the period included in deferred revenue as of December 31, 2025. NOTE 5. DEFERRED COMMISSIONS (in thousands) September 30, 2026 December 31, 2025 Deferred commissions (1) $ 88,967 $ 104,574 (1) Included in other long-term assets. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Amortization of deferred commissions (1) $ 14,605 $ 16,916 $ 46,552 $ 50,494 (1) Included in selling and marketing expenses. 10 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6. GOODWILL Nine Months Ended September 30, (in thousands) 2026 2025 January 1, $ 81,506 $ 81,113 Currency translation adjustments ( 236 ) 289 September 30, $ 81,270 $ 81,402 NOTE 7. OTHER ASSETS AND LIABILITIES Other current assets (in thousands) September 30, 2026 December 31, 2025 Income tax receivables $ 47,124 $ 31,535 Prepaid expenses 39,934 65,293 Contract assets 20,302 17,678 Indirect tax receivable 2,381 2,172 Restricted cash 957 1,577 Other 2,109 3,050 $ 112,807 $ 121,305 Other long-term assets (in thousands) September 30, 2026 December 31, 2025 Deferred commissions $ 88,967 $ 104,574 Right of use assets 54,412 60,574 Property and equipment 52,511 45,240 Contract assets 36,556 17,421 Venture investments 21,313 22,021 Income taxes receivable 16,069 15,459 Restricted cash 1,890 2,336 Intangible assets 1,175 1,202 Other 20,403 25,200 $ 293,296 $ 294,027 Accrued expenses (in thousands) September 30, 2026 December 31, 2025 Outside professional services $ 19,784 $ 15,233 Cloud hosting 18,375 1,064 Litigation settlements 16,000 9,750 Income and other taxes 8,445 7,273 Employee related 6,017 5,464 Marketing and sales program 2,050 1,519 Other 6,396 4,544 $ 77,067 $ 44,847 Other current liabilities (in thousands) September 30, 2026 December 31, 2025 Operating lease liabilities $ 14,382 $ 15,142 Dividends payable 4,906 5,110 Other 3,943 1,683 $ 23,231 $ 21,935 11 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Other long-term liabilities (in thousands) September 30, 2026 December 31, 2025 Income taxes payable $ 26,053 $ 23,331 Deferred revenue 4,536 9,568 Other 17,005 12,961 $ 47,594 $ 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 September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Total revenue $ 393,359 $ 381,350 $ 1,244,048 $ 1,241,495 Total cost of revenue 103,846 105,893 318,629 317,917 Selling 120,470 119,764 385,768 354,932 Marketing 23,284 20,365 78,997 70,397 Research and development 74,311 78,756 240,526 231,826 General and administrative 38,612 42,108 130,925 107,724 Other segment items, net (1) 15,058 ( 9,632 ) 13,207 ( 16,954 ) Provision for (benefit from) income taxes 3,686 ( 19,268 ) 15,806 16,790 Net income $ 14,092 $ 43,364 $ 60,190 $ 158,863 (1) Includes Restructuring, Foreign currency transaction gain (loss), Interest income, Interest expense, (Loss) on capped call transactions, and Other income (loss), 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) September 30, 2026 December 31, 2025 U.S. $ 41,145 78 % $ 40,060 89 % International 11,366 22 % 5,180 11 % $ 52,511 100 % $ 45,240 100 % NOTE 9. DEBT Credit facility In November 2019, and as since amended, the Company entered into a $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. On October 16, 2026, the Credit Facility was amended to, among other changes, increase the borrowing capacity to $ 200 million and extend the expiration date to October 16, 2031. 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 $ 300 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. The Credit Facility is secured by substantially all assets of the Company. 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 September 30, 2026, the Company is compliant with all Credit Facility covenants. As of September 30, 2026 and December 31, 2025, the Company had letters of credit of $ 1.7 million and $ 26.7 million, respectively, under the Credit Facility, however we had no cash borrowings. 12 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10. 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 September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Employee severance and related costs $ 1,975 $ ( 11 ) $ 4,557 $ ( 68 ) Office space reductions (1) — 6 — 30 Restructuring $ 1,975 $ ( 5 ) $ 4,557 $ ( 38 ) (1) These primarily relate to non-cash operating lease adjustments. Restructuring activity: Accrued employee severance and related costs: Nine Months Ended September 30, (in thousands) 2026 2025 January 1, $ 12,858 $ 2,000 Costs incurred 4,557 ( 68 ) Cash disbursements ( 15,442 ) ( 1,681 ) Currency translation adjustments ( 12 ) 115 September 30, (1) $ 1,961 $ 366 (1) Included in accrued compensation and related expenses. NOTE 11. 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: September 30, 2026 December 31, 2025 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash equivalents $ 8,631 $ 5,419 $ — $ 14,050 $ 33,043 $ 8,463 $ — $ 41,506 Marketable securities $ — $ 107,521 $ — $ 107,521 $ — $ 213,352 $ — $ 213,352 Venture investments $ — $ — $ 21,313 $ 21,313 $ — $ — $ 22,021 $ 22,021 Changes in venture investments: Nine Months Ended September 30, (in thousands) 2026 2025 January 1, $ 22,021 $ 21,234 New investments 900 13,129 Sales of investments — ( 33,223 ) Changes in foreign exchange rates ( 34 ) 129 Changes in fair value: included in other income (loss), net ( 1,309 ) 19,480 included in other comprehensive income ( 265 ) ( 535 ) September 30, $ 21,313 $ 20,214 The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities. NOTE 12. REVENUE Geographic revenue Revenues by geography are determined based on client location: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2026 2025 2026 2025 U.S. $ 175,734 44 % $ 185,132 49 % $ 591,281 48 % $ 662,440 54 % Other Americas 30,043 8 % 23,511 6 % 96,450 8 % 76,884 6 % United Kingdom (“U.K.”) 45,255 11 % 53,099 14 % 162,165 13 % 134,475 11 % Europe (excluding U.K.), Middle East, and Africa 69,299 18 % 64,410 17 % 216,430 17 % 202,886 16 % Asia-Pacific 73,028 19 % 55,198 14 % 177,722 14 % 164,810 13 % $ 393,359 100 % $ 381,350 100 % $ 1,244,048 100 % $ 1,241,495 100 % Revenue streams Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Pega Cloud $ 218,925 $ 184,549 $ 637,890 $ 502,415 Maintenance 72,653 79,649 222,498 235,288 Consulting 46,203 56,394 151,202 174,639 Revenue recognized over time 337,781 320,592 1,011,590 912,342 Subscription license 55,578 60,758 232,458 329,153 Revenue recognized at a point in time 55,578 60,758 232,458 329,153 Total revenue $ 393,359 $ 381,350 $ 1,244,048 $ 1,241,495 14 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Pega Cloud $ 218,925 $ 184,549 $ 637,890 $ 502,415 Maintenance 72,653 79,649 222,498 235,288 Subscription services 291,578 264,198 860,388 737,703 Subscription license 55,578 60,758 232,458 329,153 Subscription 347,156 324,956 1,092,846 1,066,856 Consulting 46,203 56,394 151,202 174,639 Total revenue $ 393,359 $ 381,350 $ 1,244,048 $ 1,241,495 Remaining performance obligations ("Backlog") Expected future revenue from existing non-cancellable contracts: As of September 30, 2026: (Dollars in thousands) Subscription services Subscription license Consulting Total Pega Cloud Maintenance 1 year or less $ 730,041 $ 180,906 $ 32,317 $ 42,205 $ 985,469 49 % 1-2 years 416,308 85,371 1,476 1,463 504,618 25 % 2-3 years 233,510 46,416 7,348 574 287,848 14 % Greater than 3 years 216,977 12,544 945 963 231,429 12 % $ 1,596,836 $ 325,237 $ 42,086 $ 45,205 $ 2,009,364 100 % As of September 30, 2025: (Dollars in thousands) Subscription services Subscription license Consulting Total Pega Cloud Maintenance 1 year or less $ 609,511 $ 199,651 $ 46,386 $ 43,979 $ 899,527 51 % 1-2 years 319,940 71,730 4,404 2,478 398,552 23 % 2-3 years 164,125 48,668 746 114 213,653 12 % Greater than 3 years 195,133 40,385 7,220 56 242,794 14 % $ 1,288,709 $ 360,434 $ 58,756 $ 46,627 $ 1,754,526 100 % NOTE 13. STOCKHOLDERS' EQUITY Stock-based Compensation Expense Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2026 2025 2026 2025 Cost of revenue $ 6,124 $ 6,626 $ 20,751 $ 21,737 Selling and marketing 9,499 15,009 42,509 45,168 Research and development 6,010 7,914 23,972 23,789 General and administrative 7,046 13,492 23,488 30,502 $ 28,679 $ 43,041 $ 110,720 $ 121,196 Income tax benefit $ ( 5,466 ) $ ( 547 ) $ ( 21,720 ) $ ( 1,700 ) As of September 30, 2026, the Company had $ 116.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.7 years. 15 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Grants Nine Months Ended September 30, 2026 (in thousands) Quantity Total Fair Value Restricted stock units (1) 2,222 $ 97,287 Non-qualified stock options 3,423 $ 58,826 Performance stock options (2) 1,497 $ 25,804 Common stock 27 $ 875 (1) Includes units issued when employees elect to receive 50 % of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. (2) Performance stock options allow the holder to purchase a specified number of Common Stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date. Performance stock options granted in the nine months ended September 30, 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 $ 810.1 million remains available as of September 30, 2026. During the nine months ended September 30, 2026, the Company repurchased 10.9 million shares of its common stock for $ 432.2 million at an average price per share of $ 39.73 . 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 14. INCOME TAXES Effective income tax rate Nine Months Ended September 30, (Dollars in thousands) 2026 2025 Provision for (benefit from) income taxes $ 15,806 $ 16,790 Effective income tax rate 21 % 10 % The Company’s effective income tax rate increased in the nine months ended September 30, 2026 as compared to the prior period, primarily due to a decrease in excess tax benefits from stock-based compensation recognized in the current period and the absence of a benefit related to the valuation allowance associated with substantially all of the Company’s U.S. and U.K. deferred tax assets in the prior period. 16 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15. 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 September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2026 2025 2026 2025 Net income $ 14,092 $ 43,364 $ 60,190 $ 158,863 Weighted-average common shares outstanding 163,757 170,567 166,043 171,045 Earnings per share, basic $ 0.09 $ 0.25 $ 0.36 $ 0.93 Net income $ 14,092 $ 43,364 $ 60,190 $ 158,863 Notes - interest expense, net of tax — — — 742 Numerator for diluted EPS $ 14,092 $ 43,364 $ 60,190 $ 159,605 Weighted-average effect of dilutive securities: Notes — — — 1,599 Stock options 3,170 10,113 4,778 8,971 RSUs 1,715 3,415 2,243 3,390 Effect of dilutive securities 4,885 13,528 7,021 13,960 Weighted-average common shares outstanding, assuming dilution (1) (2) (3) 168,642 184,095 173,064 185,005 Earnings per share, diluted $ 0.08 $ 0.24 $ 0.35 $ 0.86 Outstanding anti-dilutive stock options and RSUs (4) 84 54 217 267 (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. NOTE 16. COMMITMENTS AND CONTINGENCIES 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 September 30, 2026, the Company recorded an estimated $ 16 million accrued loss related to litigation settlements. As of December 31, 2025, the Company recorded an estimated $ 9.75 million accrued loss related to the 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. 17 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) On September 15, 2022, the Company appealed the Virginia Uniform Trade Secrets Act judgment. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a unanimous 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, which was granted on March 7, 2025 for appeal and the Company’s assignments of cross-error. On January 8, 2026, the Supreme Court of Virginia issued a unanimous written opinion 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. 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. On May 7, 2026, Judge Oblon held a first status conference for the remanded trial proceedings and set the retrial to commence on January 11, 2027. On September 24, 2026, Judge Oblon entered a Scheduling Order which he amended on October 1, 2026. In those orders, Appian was granted the opportunity to have pretrial motions heard on October 16 and November 13, 2026; the Company was granted the opportunity to have pretrial motions heard on November 6 and December 18, 2026. On October 16, 2026, the Court granted Appian’s motion to present a reasonable royalty damages theory it was barred from presenting at the original trial. In that reasonable royalty claim, Appian seeks $ 284.6 million in damages for accused marketing and sales activities and $ 1.36 billion in damages for accused Pega Platform revisions. If the jury finds there was trade secret misappropriation, it could award either unjust enrichment or reasonable royalty damages. 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. 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 was 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 was 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. 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. On September 18, 2026, the parties to the federal and state court opt out securities cases agreed to a final settlement of these suits. Under the terms of the final settlement, the plaintiffs in the federal and state court opt out securities cases agreed to the dismissal of all claims with prejudice. On October 5, 2026, stipulations of dismissal with prejudice were filed with the Court. 18 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. On September 18, 2026, the parties to the federal and state court cases agreed to a final settlement of the litigation and on October 6, 2026, a notice of voluntary dismissal was prejudice was filed with the Court. See discussion above within the “Federal court cases” subsection. In re Pegasystems Inc. Derivative Litigation As previously disclosed, the Company entered into a settlement of derivative lawsuits 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, and Pegasystems Inc., nominal defendant (Case 1:25-cv-10303), filed in the United States District Court for the District of Massachusetts, and 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, and Pegasystems Inc., Nominal Defendant (Case 2484CV01734), and 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, and Pegasystems Inc., Nominal Defendant (Case 2484CV03076-BLS-1), filed in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts. On June 30, 2026, the Massachusetts Superior Court entered an order for final approval of the settlement, including a $ 7 million special dividend to shareholders (excluding defendants) and payment by the Company of $ 2.75 million in plaintiffs’ attorney fees. On July 2, 2026, in light of the settlement, the parties to the federal court action filed a stipulation and proposed order of dismissal with prejudice as to all claims. On July 16, 2026, the Court signed the order dismissing the federal court action with prejudice. Also on July 2, 2026, the state court entered a final judgment and order of dismissal dismissing the consolidated state cases with prejudice. On September 16, 2026, the special dividend was paid, concluding the matter. 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 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 sought that the Company be forced to disgorge the entirety of its profits ($ 2.33 billion) from 2022-2025. Oral argument on summary judgment motions was held on July 24, 2026. On August 21, 2026, the Court issued an opinion granting in part and denying in part the parties’ cross-motions for summary judgment. Among other things, the Court dismissed Appian’s $ 2.33 billion disgorgement claim. The Court allowed the Company’s defamation, trade libel, and Lanham Act claims to proceed to trial on certain challenged statements, and it allowed Appian’s Lanham Act and Chapter 93A counterclaims to proceed to trial on certain challenged statements. The parties’ Daubert motions challenging expert witnesses were fully briefed as of October 9, 2026 and are pending with the Court. On October 8, 2026, Appian filed a motion for “realignment” of the parties to put Appian in the position of plaintiff and the Company in the position of defendant for the trial in this matter. 19 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) A jury trial is currently scheduled to begin on November 30, 2026. The Company vehemently disagrees with Appian’s entitlement to any recovery, and remains confident in the merits of its claims against Appian and the damages claimed. 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