UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended June 30, 2021

~~For the quarterly period ended June 30, 2020~~


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________

Massachusetts

04-2787865

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

One Rogers Street, Cambridge, MA 02142-1209

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~80,415,254~~81,455,672 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July ~~14, 2020.~~19, 2021.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020			4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020			6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1619
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2226
Item 4. Controls and Procedures			2326

PART II - OTHER INFORMATION

Item 1A. Risk Factors			2427
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 6. Exhibits			2827

Signature			2928

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(in thousands)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	512,111	$	68,363	Cash and cash equivalents	$	139,878	$	171,899

Marketable securities						Marketable securities	271,459		293,269
Total cash, cash equivalents, and marketable securities						Total cash, cash equivalents, and marketable securities	411,337		465,168
Accounts receivable	Accounts receivable	181,686		199,720		Accounts receivable	166,226		215,827
Unbilled receivables	Unbilled receivables	198,253		180,219		Unbilled receivables	236,451		207,155
Other current assets	Other current assets	77,889		57,308		Other current assets	96,215		88,760
Total current assets	Total current assets	969,939		505,610		Total current assets	910,229		976,910
Unbilled receivables	Unbilled receivables	109,308		121,736		Unbilled receivables	144,065		113,278
Goodwill	Goodwill	78,675		79,039		Goodwill	82,173		79,231
Other long-term assets	Other long-term assets	338,363		278,427		Other long-term assets	466,103		434,843
Total assets	Total assets	$	1,496,285	$	984,812	Total assets	$	1,602,570	$	1,604,262
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	18,426	$	17,475	Accounts payable	$	22,931	$	24,028
Accrued expenses	Accrued expenses	44,228		48,001		Accrued expenses	64,093		59,261
Accrued compensation and related expenses	Accrued compensation and related expenses	78,834		104,126		Accrued compensation and related expenses	84,900		123,012
Deferred revenue	Deferred revenue	195,996		190,080		Deferred revenue	242,194		232,865
Other current liabilities	Other current liabilities	18,613		18,273		Other current liabilities	16,126		20,969
Total current liabilities	Total current liabilities	356,097		377,955		Total current liabilities	430,244		460,135
Convertible senior notes, net	Convertible senior notes, net	509,423		—		Convertible senior notes, net	589,092		518,203
Operating lease liabilities	Operating lease liabilities	53,057		52,610		Operating lease liabilities	42,063		59,053
Other long-term liabilities	Other long-term liabilities	21,426		15,237		Other long-term liabilities	18,703		24,699
Total liabilities	Total liabilities	940,003		445,802		Total liabilities	1,080,102		1,062,090
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; NaN issued	Preferred stock, 1,000 shares authorized; NaN issued	—		—		Preferred stock, 1,000 shares authorized; NaN issued	0		0
Common stock, 200,000 shares authorized; 80,420 and 79,599 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		804		796
Common stock, 200,000 shares authorized; 81,456 and 80,890 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively						Common stock, 200,000 shares authorized; 81,456 and 80,890 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively	815		809
Additional paid-in capital	Additional paid-in capital	207,103		140,523		Additional paid-in capital	147,670		204,432
Retained earnings	Retained earnings	359,989		410,919		Retained earnings	375,069		339,879
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(11,614)		(13,228)		Accumulated other comprehensive (loss)	(1,086)		(2,948)
Total stockholders’ equity	Total stockholders’ equity	556,282		539,010		Total stockholders’ equity	522,468		542,172
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,496,285	$	984,812	Total liabilities and stockholders’ equity	$	1,602,570	$	1,604,262

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in thousands, except per share amounts)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Revenue	Revenue									Revenue
Software license	Software license	$	53,323	$	44,274	$	147,239	$	107,538	Software license	$	116,892	$	53,323	$	233,853	$	147,239
Maintenance	Maintenance	72,222		69,329		145,917		137,035		Maintenance	78,782		72,222		154,343		145,917
Pega Cloud	Pega Cloud	48,838		31,699		92,304		59,457		Pega Cloud	73,293		48,838		141,151		92,304
Consulting	Consulting	52,992		60,290		107,506		114,108		Consulting	56,735		52,992		109,854		107,506
Total revenue	Total revenue	227,375		205,592		492,966		418,138		Total revenue	325,702		227,375		639,201		492,966
Cost of revenue	Cost of revenue									Cost of revenue
Software license	Software license	979		928		1,663		2,306		Software license	656		979		1,306		1,663
Maintenance	Maintenance	5,591		6,292		11,167		12,627		Maintenance	4,995		5,591		10,781		11,167
Pega Cloud	Pega Cloud	18,988		16,647		36,521		29,945		Pega Cloud	24,051		18,988		46,608		36,521
Consulting	Consulting	51,133		53,213		106,868		106,639		Consulting	54,829		51,133		108,283		106,868
Total cost of revenue	Total cost of revenue	76,691		77,080		156,219		151,517		Total cost of revenue	84,531		76,691		166,978		156,219
Gross profit	Gross profit	150,684		128,512		336,747		266,621		Gross profit	241,171		150,684		472,223		336,747
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	127,607		116,962		263,631		225,827		Selling and marketing	156,423		127,607		305,162		263,631
Research and development	Research and development	58,869		49,714		117,596		100,310		Research and development	64,395		58,869		126,837		117,596
General and administrative	General and administrative	15,655		14,174		31,285		26,850		General and administrative	19,161		15,655		37,431		31,285
Total operating expenses	Total operating expenses	202,131		180,850		412,512		352,987		Total operating expenses	239,979		202,131		469,430		412,512
(Loss) from operations		(51,447)		(52,338)		(75,765)		(86,366)
Foreign currency transaction gain (loss)		4,256		2,105		(1,691)		(1,607)
Income (loss) from operations										Income (loss) from operations	1,192		(51,447)		2,793		(75,765)
Foreign currency transaction (loss) gain										Foreign currency transaction (loss) gain	(403)		4,256		(5,501)		(1,691)
Interest income	Interest income	242		544		849		1,267		Interest income	236		242		389		849
Interest expense	Interest expense	(5,529)		—		(7,835)		—		Interest expense	(1,959)		(5,529)		(3,839)		(7,835)
Gain on capped call transactions	Gain on capped call transactions	19,419		—		827		—		Gain on capped call transactions	26,309		19,419		7,192		827
Other income, net	Other income, net	—		55		1,374		55		Other income, net	0		0		106		1,374
(Loss) before (benefit from) income taxes		(33,059)		(49,634)		(82,241)		(86,651)
Income (loss) before (benefit from) income taxes										Income (loss) before (benefit from) income taxes	25,375		(33,059)		1,140		(82,241)
(Benefit from) income taxes	(Benefit from) income taxes	(12,319)		(17,338)		(36,129)		(25,638)		(Benefit from) income taxes	(11,916)		(12,319)		(29,534)		(36,129)
Net (loss)		$	(20,740)	$	(32,296)	$	(46,112)	$	(61,013)
(Loss) per share
Net income (loss)										Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Earnings (loss) per share										Earnings (loss) per share
Basic	Basic	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	Basic	$	0.46	$	(0.26)	$	0.38	$	(0.58)
Diluted	Diluted	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	Diluted	$	0.43	$	(0.26)	$	0.36	$	(0.58)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	80,224		78,987		80,016		78,787		Basic	81,316		80,224		81,161		80,016
Diluted	Diluted	80,224		78,987		80,016		78,787		Diluted	90,320		80,224		86,006		80,016

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)~~

~~(in thousands)~~

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
Net (loss) $ (20,740) $ (32,296) $ (46,112) $ (61,013)
Other comprehensive income (loss), net of tax
Unrealized gain on available-for-sale securities — 238 100 612
Foreign currency translation adjustments 2,028 (409) 1,514 1,218
Total other comprehensive income (loss), net of tax 2,028 (171) 1,614 1,830
Comprehensive (loss) $ (18,712) $ (32,467) $ (44,498) $ (59,183)


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Other comprehensive income, net of tax
Unrealized gain on available-for-sale securities	121		0		1,131		100
Foreign currency translation adjustments	1,461		2,028		731		1,514
Total other comprehensive income, net of tax	$	1,582	$	2,028	$	1,862	$	1,614
Comprehensive income (loss)	$	38,873	$	(18,712)	$	32,536	$	(44,498)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)																										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, 2018		78,526	$	785	$	123,205	$	510,863	$	(13,322)	$	621,531
Repurchase of common stock		(144)	(1)		(7,586)		—		—		(7,587)
Issuance of common stock for share-based compensation plans		514	5		(14,843)		—		—		(14,838)
Stock-based compensation		—	—		18,406		—		—		18,406
Cash dividends declared ($0.03 per share)		—	—		—		(2,367)		—		(2,367)
Other comprehensive income		—	—		—		—		2,001		2,001
Net (loss)		—	—		—		(28,717)		—		(28,717)
March 31, 2019		78,896	789		119,182		479,779		(11,321)		588,429
Repurchase of common stock		(88)	(1)		(6,301)		—		—		(6,302)
Issuance of common stock for share-based compensation plans		320	3		(11,217)		—		—		(11,214)
Issuance of common stock under the employee stock purchase plan		16	—		1,103		—		—		1,103
Stock-based compensation		—	—		20,113		—		—		20,113
Cash dividends declared ($0.03 per share)		—	—		—		(2,375)		—		(2,375)
Other comprehensive (loss)		—	—		—		—		(171)		(171)
Net (loss)		—	—		—		(32,296)		—		(32,296)
June 30, 2019		79,144	$	791	$	122,880	$	445,108	$	(11,492)	$	557,287

														Common Stock				Additional Paid-In Capital				Retained Earnings		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
														Number of Shares		Amount
December 31, 2019	December 31, 2019	79,599	$	796	$	140,523	$	410,919	$	(13,228)	$	539,010	December 31, 2019	79,599		$	796			$	140,523			$	410,919	$	(13,228)	$	539,010
Equity component of convertible senior notes, net	Equity component of convertible senior notes, net	—	—		61,604		—		—		61,604		Equity component of convertible senior notes, net	—		—		61,604				—		—		61,604
Repurchase of common stock	Repurchase of common stock	(87)	(1)		(5,999)		—		—		(6,000)		Repurchase of common stock	(87)		(1)		(5,999)				—		—		(6,000)
Issuance of common stock for share-based compensation plans		564	6		(23,017)		—		—		(23,011)
Issuance of common stock for stock compensation plans													Issuance of common stock for stock compensation plans	564		6		(23,017)				—		—		(23,011)
Stock-based compensation	Stock-based compensation	—	—		23,199		—		—		23,199		Stock-based compensation	—		—		23,199				—		—		23,199
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—		(2,405)		—		(2,405)		Cash dividends declared ($0.03 per share)	—		—		—				(2,405)		—		(2,405)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—		—		(414)		(414)		Other comprehensive (loss)	—		—		—				—		(414)		(414)
Net (loss)	Net (loss)	—	—		—		(25,372)		—		(25,372)		Net (loss)	—		—		—				(25,372)		—		(25,372)
March 31, 2020	March 31, 2020	80,076	801		196,310		383,142		(13,642)		566,611		March 31, 2020	80,076		$	801	$	196,310			$	383,142	$	(13,642)	$	566,611
Repurchase of common stock	Repurchase of common stock	(23)	—		(2,199)		—		—		(2,199)		Repurchase of common stock	(23)		—		(2,199)				—		—		(2,199)
Issuance of common stock for share-based compensation plans		349	3		(14,085)		—		—		(14,082)
Issuance of common stock for stock compensation plans													Issuance of common stock for stock compensation plans	349		3		(14,085)				—		—		(14,082)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	18	—		1,403		—		—		1,403		Issuance of common stock under the employee stock purchase plan	18		—		1,403				—		—		1,403
Stock-based compensation	Stock-based compensation	—	—		25,674		—		—		25,674		Stock-based compensation	—		—		25,674				—��		—		25,674
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—		(2,413)		—		(2,413)		Cash dividends declared ($0.03 per share)	—		—		—				(2,413)		—		(2,413)
Other comprehensive income	Other comprehensive income	—	—		—		—		2,028		2,028		Other comprehensive income	—		—		—				—		2,028		2,028
Net (loss)	Net (loss)	—	—		—		(20,740)		—		(20,740)		Net (loss)	—		—		—				(20,740)		—		(20,740)
June 30, 2020	June 30, 2020	80,420	$	804	$	207,103	$	359,989	$	(11,614)	$	556,282	June 30, 2020	80,420		$	804	$	207,103			$	359,989	$	(11,614)	$	556,282

December 31, 2020													December 31, 2020	80,890		$	809	$	204,432			$	339,879	$	(2,948)	$	542,172
Cumulative-effect adjustment from adoption of ASU 2020-06, net													Cumulative-effect adjustment from adoption of ASU 2020-06, net	—		—		(61,604)				9,399		—		(52,205)
Repurchase of common stock													Repurchase of common stock	(70)		(1)		(9,145)				—		—		(9,146)
Issuance of common stock for stock compensation plans													Issuance of common stock for stock compensation plans	402		4		(25,513)				—		—		(25,509)
Issuance of common stock under the employee stock purchase plan													Issuance of common stock under the employee stock purchase plan	24		—		2,288				—		—		2,288
Stock-based compensation													Stock-based compensation	—		—		30,100				—		—		30,100
Cash dividends declared ($0.03 per share)													Cash dividends declared ($0.03 per share)	—		—		—				(2,438)		—		(2,438)
Other comprehensive income													Other comprehensive income	—		—		—				—		280		280
Net (loss)													Net (loss)	—		—		—				(6,617)		—		(6,617)
March 31, 2021													March 31, 2021	81,246		$	812	$	140,558			$	340,223	$	(2,668)	$	478,925
Repurchase of common stock													Repurchase of common stock	(81)		(1)		(10,245)				—		—		(10,246)
Issuance of common stock for stock compensation plans													Issuance of common stock for stock compensation plans	267		3		(16,199)				—		—		(16,196)
Issuance of common stock under the employee stock purchase plan													Issuance of common stock under the employee stock purchase plan	24		1		2,858				—		—		2,859
Stock-based compensation													Stock-based compensation	—		—		30,698				—		—		30,698
Cash dividends declared ($0.03 per share)													Cash dividends declared ($0.03 per share)	—		—		—				(2,445)		—		(2,445)
Other comprehensive income													Other comprehensive income	—		—		—				—		1,582		1,582
Net income													Net income	—		—		—				37,291		—		37,291
June 30, 2021													June 30, 2021	81,456		$	815	$	147,670			$	375,069	$	(1,086)	$	522,468

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(in thousands)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
		Six Months Ended June 30,							Six Months Ended June 30,
		2020		2019			2021		2020
Operating activities	Operating activities					Operating activities
Net (loss)		$	(46,112)	$	(61,013)
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities
Net income (loss)						Net income (loss)	$	30,674	$	(46,112)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities						Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Stock-based compensation	Stock-based compensation	48,831		38,397		Stock-based compensation	60,788		48,831
(Gain) on capped call transactions	(Gain) on capped call transactions	(827)		—		(Gain) on capped call transactions	(7,192)		(827)
Deferred income taxes	Deferred income taxes	(18,399)		(190)		Deferred income taxes	(28,232)		(18,399)
Amortization of deferred commissions	Amortization of deferred commissions	16,061		14,179		Amortization of deferred commissions	21,202		16,061
Lease expense		7,819		6,718
Amortization of debt discount and issuance costs	Amortization of debt discount and issuance costs	6,033		—		Amortization of debt discount and issuance costs	1,348		6,033
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	10,134		12,268		Amortization of intangible assets and depreciation	15,504		10,134
Amortization of investments	Amortization of investments	—		623		Amortization of investments	1,988		0
Foreign currency transaction loss	Foreign currency transaction loss	1,691		1,607		Foreign currency transaction loss	5,501		1,691
Other non-cash	Other non-cash	(1,374)		(40)		Other non-cash	(4,869)		6,445
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(45,056)		(4,829)		Change in operating assets and liabilities, net	(77,302)		(45,056)
Cash (used in) provided by operating activities		(21,199)		7,720
Cash provided by (used in) operating activities						Cash provided by (used in) operating activities	19,410		(21,199)
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(1,769)		(10,497)		Purchases of investments	(51,601)		(1,769)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	—		13,545		Proceeds from maturities and called investments	68,798		0
Sales of investments	Sales of investments	1,424		29,965		Sales of investments	2,450		1,424
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	—		(10,921)		Payments for acquisitions, net of cash acquired	(4,993)		0
Investment in property and equipment	Investment in property and equipment	(19,059)		(4,882)		Investment in property and equipment	(4,161)		(19,059)
Cash (used in) provided by investing activities		(19,404)		17,210
Cash provided by (used in) investing activities						Cash provided by (used in) investing activities	10,493		(19,404)
Financing activities	Financing activities					Financing activities
Proceeds from issuance of convertible senior notes	Proceeds from issuance of convertible senior notes	600,000		—		Proceeds from issuance of convertible senior notes	0		600,000
Purchase of capped calls related to convertible senior notes	Purchase of capped calls related to convertible senior notes	(51,900)		—		Purchase of capped calls related to convertible senior notes	0		(51,900)
Payment of debt issuance costs	Payment of debt issuance costs	(14,527)		—		Payment of debt issuance costs	0		(14,527)
Dividend payments to shareholders		(4,793)		(4,730)
Proceeds from employee stock purchase plan						Proceeds from employee stock purchase plan	5,146		1,403
Dividend payments to stockholders						Dividend payments to stockholders	(4,865)		(4,793)

Common stock repurchases	Common stock repurchases	(43,487)		(39,637)		Common stock repurchases	(60,998)		(44,890)
Cash provided by (used in) financing activities		485,293		(44,367)
Cash (used in) provided by financing activities						Cash (used in) provided by financing activities	(60,717)		485,293
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(942)		515		Effect of exchange rate changes on cash and cash equivalents	(1,207)		(942)
Net increase (decrease) in cash and cash equivalents		443,748		(18,922)
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(32,021)		443,748
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	68,363		114,422		Cash and cash equivalents, beginning of period	171,899		68,363
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	512,111	$	95,500	Cash and cash equivalents, end of period	$	139,878	$	512,111

See notes to unaudited condensed consolidated financial statements.

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 accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. These 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, ~~2019.~~2020.

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 ~~have been~~were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2020.~~2021.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

~~Financial instruments~~Convertible debt

In ~~June 2016,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-13, “Financial~~2020-06, “Accounting for Convertible Instruments ~~- Credit Losses (Topic 326): Measurement~~and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of ~~Credit Losses~~liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, “Derivatives and Hedging”, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial assetdiluted earnings per share (“EPS”) be determined using ~~a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when~~ the ~~fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments.~~ if-converted method.

The Company adopted ~~this standard effective~~ASU 2020-06 using the modified retrospective approach on January 1, ~~2020. The~~2021. Upon adoption, the book value of ~~this standard did not have a material effect on~~ the Company’s ~~financial position or results~~Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of ~~operations.~~the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

See "Note 8. Debt" for additional information.

NOTE 3. MARKETABLE SECURITIES


	June 30, 2021								December 31, 2020
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	2,000	$	0	$	0	$	2,000	$	39,996	$	0	$	(8)	$	39,988
Corporate debt	269,649		20		(210)		269,459		253,345		88		(152)		253,281
	$	271,649	$	20	$	(210)	$	271,459	$	293,341	$	88	$	(160)	$	293,269

As of June 30, 2021, marketable securities’ maturities ranged from July 2021 to May 2024, with a weighted-average remaining maturity of approximately 1.3 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	June 30, 2021		December 31, 2020
Accounts receivable	$	166,226	$	215,827
Unbilled receivables	236,451		207,155
Long-term unbilled receivables	144,065		113,278
	$	546,742	$	536,260

(in thousands) June 30, 2020 December 31, 2019
Accounts receivable $ 181,686 $ 199,720
Unbilled receivables 198,253 180,219
Long-term unbilled receivables 109,308 121,736
$ 489,247 $ 501,675
Unbilled receivables

Unbilled receivables are ~~client committed~~client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. ~~They are expected to be billed in the future as follows:~~

(Dollars in thousands) June 30, 2020
1 year or less $ 198,253 64 %
1-2 years 91,929 30 %
2-5 years 17,379 6 %
$ 307,561 100 %

Unbilled receivables ~~based upon~~by expected billing date:


(Dollars in thousands)	June 30, 2021
1 year or less	$	236,451	62	%
1-2 years	88,350		23	%
2-5 years	55,715		15	%
	$	380,516	100	%

Unbilled receivables by contract effective date:

(Dollars in thousands) June 30, 2020
2020 $ 75,893 25 %
2019 100,671 32 %
2018 46,700 15 %
2017 38,899 13 %
2016 and prior 45,398 15 %
$ 307,561 100 %


(Dollars in thousands)	June 30, 2021
2021	$	140,395	37	%
2020	131,618		34	%
2019	55,282		15	%
2018	26,688		7	%
2017 and prior	26,533		7	%
	$	380,516	100	%

Major clients

Clients accounting for 10% or more of the Company’s total receivables:


	June 30, ~~2020~~2021		December 31, ~~2019~~2020
Client A	1113	%	*

* Client accounted for less than 10% of total receivables.

Contract assets

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.


(in thousands)	June 30, 2021		December 31, 2020
Contract assets (1)	$	14,031	$	15,296
Long-term contract assets (2)	10,097		7,777
	$	24,128	$	23,073

(1) Included in other current assets. (2) Included in other long-term assets.

Deferred revenue

Deferred revenue consists of billings and payments received in advance of revenue recognition.


(in thousands)	June 30, 2021		December 31, 2020
Deferred revenue	$	242,194	$	232,865
Long-term deferred revenue (1)	6,041		8,991
	$	248,235	$	241,856

(1) Included in other long-term liabilities.

The change in deferred revenue in the six months ended June 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $172.1 million of revenue recognized that was included in deferred revenue as of December 31, 2020.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5. DEFERRED COMMISSIONS


(in thousands)	June 30, 2021		December 31, 2020
Deferred commissions (1)	$	109,803	$	108,624

(1) Included in other long-term assets.


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Amortization of deferred commissions (1)	$	9,706	$	7,564	$	21,202	$	16,061

(1) Included in selling and marketing expense.

NOTE 6. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	79,231	$	79,039
Acquisition	2,701		0
Currency translation adjustments	241		(364)
June 30,	$	82,173	$	78,675

Intangibles

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.


		June 30, 2021
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,186	$	(56,638)	$	6,548
Technology	2-10 years	67,142		(57,644)		9,498
Other	1-5 years	5,361		(5,361)		0
		$	135,689	$	(119,643)	$	16,046

(1) Included in other long-term assets.


		December 31, 2020
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,168	$	(55,877)	$	7,291
Technology	2-10 years	64,843		(56,386)		8,457
Other	1-5 years	5,361		(5,361)		0
		$	133,372	$	(117,624)	$	15,748

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Contract~~Amortization of intangible assets:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	629	$	647	$	1,258	$	1,294
Selling and marketing	373		370		746		740

	$	1,002	$	1,017	$	2,004	$	2,034

Future estimated intangibles assets amortization:


(in thousands)	June 30, 2021
2021	$	1,983
2022	3,886
2023	3,618
2024	2,849
2025	2,509
2026 and thereafter	1,201
	$	16,046

NOTE 7. LEASES

Headquarters lease

In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company’s landlord of $18 million, which is being amortized over the remaining lease term. Upon modification, the Company reduced its lease liabilities by $21.1 million and ~~deferred revenue~~accelerated depreciation related to its corporate headquarters.

(in thousands) June 30, 2020 December 31, 2019
Contract assets ⁽¹⁾
$ 5,323 $ 5,558
Long-term contract assets ⁽²⁾
4,903 5,420
$ 10,226 $ 10,978
Deferred revenue $ 195,996 $ 190,080
Long-term deferred revenue ⁽³⁾
6,587 5,407
$ 202,583 $ 195,487
Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Fixed lease costs (1)	$	(3,972)	$	4,943	$	(3,672)	$	9,761
Short-term lease costs	515		371		974		826
Variable lease costs	1,340		969		2,727		2,247
	$	(2,117)	$	6,283	$	29	$	12,834

(1) ~~Included~~The decrease in ~~other current assets. (2) Included~~fixed lease costs in ~~other long-term assets. (3) Included in other long-term liabilities.~~

~~Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client~~three and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.

~~The change in deferred revenue in the~~ six months ended June 30, ~~2020~~2021 was ~~primarily~~ due to ~~new billings in advance~~the modification of ~~revenue recognition, partially offset by $136.8 million~~the Headquarters Lease.

Right of ~~revenue recognized~~use assets and lease liabilities


(in thousands)	June 30, 2021		December 31, 2020
Right of use assets (1)	$	51,058	$	67,651
Lease liabilities (2)	$	13,682	$	18,541
Long-term lease liabilities	$	42,063	$	59,053

(1) Represents the Company’s right to use the leased asset during the ~~period that was included in deferred revenue at December 31, 2019.~~

~~4. DEFERRED COMMISSIONS~~

(in thousands) June 30, 2020 December 31, 2019
Deferred commissions ⁽¹⁾
$ 84,770 $ 85,314

~~(1)~~lease term. Included in other long-term assets.

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Amortization of deferred commissions ⁽¹⁾
$ 7,564 $ 5,878 $ 16,061 $ 14,179
(2) Included in other current liabilities.

Weighted-average remaining lease term and discount rate for the Company’s leases were:


	June 30, 2021		December 31, 2020
Weighted-average remaining lease term	4.9 years		4.7 years
Weighted-average discount rate (1)	4.6	%	5.4	%

(1) ~~Included~~The rates implicit in ~~selling and marketing expenses.~~most of 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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maturities of lease liabilities:


(in thousands)	June 30, 2021
Remainder of 2021	$	8,783
2022	13,888
2023	13,300
2024	10,021
2025	6,913
2026	2,653
Thereafter	7,170
Total lease payments	62,728
Less: imputed interest (1)	(6,983)
	$	55,745

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement, unless the discount rate is updated due to a lease reassessment event.

Cash flow information


	Six Months Ended June 30,
(in thousands)	2021		2020
Cash paid for leases	$	11,605	$	10,945
Right of use assets recognized for new leases and amendments (non-cash)	$	10,160	$	10,077

5.NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal ~~amount~~ of $600 million, due March 1, 2025, in a private placement. ~~The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no required~~No principal payments ~~prior to the maturity of the Notes.~~are required before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

~~Proceeds from the Notes and Capped Call Transactions:~~


~~(in thousands)~~	~~Amount~~
~~Principal~~			$	~~600,000~~
~~Less: issuance costs~~			~~(14,527)~~
~~Less: Capped Call Transactions~~			~~(51,900)~~
	$	~~533,573~~

Conversion rights

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of ~~approximately~~ $135.05 per share of common stock. The Company will settle conversions by paying or delivering ~~as applicable,~~ cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon ~~the occurrence of~~ certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

•During any calendar quarter commencing after ~~the calendar quarter ending on~~ June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds ~~one hundred and thirty percent (130%)~~130% of the conversion price for each of at least ~~twenty (20)~~20 trading days (whether or not consecutive) during the ~~thirty (30)~~30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

•During the 5 consecutive business days immediately after any 5 consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.

•Upon ~~the occurrence of~~ certain corporate events or distributions or if the Company calls ~~all or~~ any Notes for redemption, ~~then the noteholder of any Note~~noteholders may convert ~~such Note at any time~~ before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price ~~due on such redemption date~~ in full ~~at any time~~on the redemption date, until the Company pays ~~such~~the redemption ~~price in full)~~price).

As of June 30, ~~2020, no~~2021, the Notes were not eligible for conversion at the noteholders’ election.

Repurchase rights

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

If certain corporate events that constitute a “Fundamental Change” ~~(as described below)~~ occur, ~~at any time,~~ each noteholder will have the right ~~at such noteholder’s option,~~ to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or ~~an integral~~a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A ~~fundamental change~~Fundamental Change relates to ~~events such as~~ mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Impact of the Notes

~~In accounting~~The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for ~~the transaction,~~convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.

Until January 1, 2021, the Notes ~~have been~~were separated into liability and equity components.

•The initial carrying amount of the liability component was calculated by measuring ~~the fair value of~~ a similar debt ~~instrument~~instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount ~~of the Notes~~ over the initial carrying amount of the liability component, the debt discount, iswas amortized as interest expense over the Notes’ contractual ~~term of the Notes.~~term.

•The equity component was recorded as an increase to additional paid-in capital and is not ~~remeasured as long as it continues to meet the conditions for equity classification.~~remeasured.

~~The Company incurred issuance costs~~Upon adoption of ~~$14.5 million related to~~ASU 2020-06, the ~~Notes, which were allocated between the liability and equity components~~book value of the Notes ~~proportionate~~increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the ~~initial carrying amount of~~tax effected difference between the ~~liability and equity components.~~

•~~Issuance costs attributable to the liability component are recorded as an offset to the principal balance~~value of the Notes and ~~are~~the embedded conversion feature before adoption and the combined convertible instrument's amortized ~~as interest expense using the effective interest method over the contractual term~~cost after adoption.

Carrying value of the ~~Notes.~~Notes:


(in thousands)	June 30, 2021		December 31, 2020
Principal	$	600,000	$	600,000
Unamortized debt discount	0		(71,222)
Unamortized issuance costs	(10,908)		(10,575)
Convertible senior notes, net	$	589,092	$	518,203

Conversion options	$	—	$	84,120
Issuance costs	0		(2,037)
Deferred taxes	0		(20,479)
Additional paid-in capital	$	0	$	61,604

•~~Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.~~

~~Net carrying amount of the liability component:~~


~~(in thousands)~~	~~June 30, 2020~~
~~Principal~~	$	~~600,000~~
~~Unamortized debt discount~~	~~(78,867)~~
~~Unamortized issuance costs~~	~~(11,710)~~
	$	~~509,423~~

~~Net carrying amount of the equity component, included in additional paid-in capital:~~


~~(in thousands)~~	~~June 30, 2020~~
~~Conversion options~~ ⁽¹⁾	$	~~61,604~~

~~(1) Net of issuance costs and taxes.~~

Interest expense related to the Notes:

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Contractual interest expense (0.75% coupon) $ 1,125 $ — $ 1,575 $ —
Amortization of debt discount ⁽¹⁾
3,757 — 5,253 —
Amortization of issuance cost ⁽¹⁾
558 — 780 —
$ 5,440 $ — $ 7,608 $ —

~~(1) Amortized based upon an effective interest rate of 4.31%.~~


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	2,250	$	1,575
Amortization of debt discount	0		3,757		0		5,253
Amortization of issuance costs	675		558		1,348		780
	$	1,800	$	5,440	$	3,598	$	7,608

1013

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effective interest rate for the Notes:


	Six Months Ended June 30,
	2021		2020
Weighted-average effective interest rate	1.2	%	4.3	%

Future payments of principal and contractual interest:

June 30, 2020
(in thousands) Principal Interest Total
2020 $ — $ 2,338 $ 2,338
2021 — 4,500 4,500
2022 — 4,500 4,500
2023 — 4,500 4,500
2024 — 4,500 4,500
2025 600,000 1,488 601,488
$ 600,000 $ 21,826 $ 621,826


	June 30, 2021
(in thousands)	Principal		Interest		Total
2021	$	0	$	2,250	$	2,250
2022	0		4,500		4,500
2023	0		4,500		4,500
2024	0		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	17,238	$	617,238

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions ~~(“Capped~~(the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common ~~stock and~~stock. The Capped Call Transactions are generally expected to reduce ~~potential dilution to the~~ common stock ~~upon any conversion of Notes~~dilution and/or offset any potential cash payments the Company ~~is required to~~must make, ~~in excess~~other than for principal and interest, upon conversion of the ~~principal amount of converted~~ Notes, ~~as the case may be,~~ with such reduction and/or offset subject to a ~~cap.~~cap of $196.44. The cap price of the Capped Call Transactions is ~~$196.44,~~ subject to adjustment upon the occurrence of specified extraordinary events affecting ~~us,~~the Company, including ~~merger events~~mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as ~~“other~~other long-term ~~assets”~~assets and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

Change in ~~value of Capped Call Transactions:~~


~~(in thousands)~~	Six Months Ended June 30, 2020
~~Value at issuance~~	$	~~51,900~~
~~Fair value adjustment~~	~~827~~
~~Balance as of June 30,~~	$	~~52,727~~

capped call transactions:


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	83,597	$	0
Issuance	0		51,900
Fair value adjustment	7,192		827
June 30,	$	90,789	$	52,727

Credit ~~Facility~~facility

In November 2019, and as amended inas of February 2020, July 2020, and ~~July~~September 2020, the Company entered into a ~~five-year~~five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National ~~Association (“PNC”).~~Association. The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million.

The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. 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 Company is also required to comply with financial covenants, ~~including~~including:

•Beginning with the fiscal quarter ended September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $200 million in cash and investments held by Pegasystems Inc.

•Beginning with the quarter ended March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of ~~3.5. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.~~3.5 to 1.0.

As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had 0 outstanding borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;

•Level 2 - significant other inputs that are observable either directly or indirectly; and

•Level 3 - significant unobservable inputs on which there is 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 to minimize ~~the use of~~ unobservable inputs when determining fair value.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend ~~yield, as applicable.~~yield. The Company applies judgment ~~in its determination of~~when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity ~~security and to a lesser extent historical peer group volatility levels.~~security. The Company’s venture investments are recorded at fair value based on valuation methods, ~~using the~~including observable public companies and transaction ~~price~~prices and ~~other~~ unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

~~The Company’s assets~~Assets and liabilities measured at fair value on a recurring basis:

June 30, 2020 December 31, 2019
(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents ⁽¹⁾
$ 450,465 $ — $ — $ 450,465 $ — $ — $ — $ —
Capped Call Transactions ^{(2) (3)}
$ — $ 52,727 $ — $ 52,727 $ — $ — $ — $ —
Venture investments ^{(2) (4)}
$ — $ — $ 6,640 $ 6,640 $ — $ — $ 4,871 $ 4,871


	June 30, 2021								December 31, 2020
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	4,650	$	0	$	0	$	4,650	$	42,339	$	14,000	$	0	$	56,339
Marketable securities	$	0	$	271,459	$	0	$	271,459	$	0	$	293,269	$	0	$	293,269
Capped Call Transactions (1)	$	0	$	90,789	$	0	$	90,789	$	0	$	83,597	$	0	$	83,597
Venture investments (1) (2)	$	0	$	0	$	9,779	$	9,779	$	0	$	0	$	8,345	$	8,345

(1) ~~Composed of investments in money market funds. (2)~~ Included in other long-term assets. ~~(3) See "5. Debt" for additional information. (4) Composed of investments~~(2) Investments in privately-held companies.

~~Change~~Changes in venture investments:


~~(in thousands)~~	Six Months Ended June 30, 2020
~~December 31, 2019~~	$	~~4,871~~
~~New investments~~	~~1,769~~
~~Sales of investments~~	~~(1,424)~~
~~Changes in foreign exchange rates~~	~~(50)~~
~~Fair value adjustment~~	~~1,474~~
~~June 30, 2020~~	$	~~6,640~~


	Six Months Ended June 30,
(in thousands)	2021		2020
January 1,	$	8,345	$	4,871
New investments	500		1,769
Sales of investments	(400)		(1,424)
Changes in foreign exchange rates	14		(50)
Changes in fair value:
included in other income	100		1,374
included in other comprehensive income	1,220		100
June 30,	$	9,779	$	6,640

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to ~~the~~these items’ relatively short ~~maturity of these items.~~maturity.

Fair value of the Notes

The Notes’ fair value of the Company’s Notes was recorded at $515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature. The fair value of the debt component was determined based on a discounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $600 million.

~~The fair value of the Notes~~ (inclusive of the conversion feature ~~which is~~ embedded in the Notes) was ~~$602~~$726.2 million as of June 30, 2021 and $706.5 million as of December 31, 2020. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and ~~has been~~ classified within Level 2 in the fair value hierarchy. See ~~"5.~~"Note 8. Debt" for additional information.

~~7. REVENUE~~

~~Geographic revenue~~

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2020 2019 2020 2019
U.S. $ 142,811 63 % $ 119,682 59 % $ 315,228 63 % $ 223,673 54 %
Other Americas 8,930 4 % 8,873 4 % 24,272 5 % 37,702 9 %
United Kingdom (“U.K.”) 21,259 9 % 16,686 8 % 43,096 9 % 41,235 10 %
Europe (excluding U.K.), Middle East, and Africa 34,878 15 % 33,395 16 % 66,816 14 % 67,581 16 %
Asia-Pacific 19,497 9 % 26,956 13 % 43,554 9 % 47,947 11 %
$ 227,375 100 % $ 205,592 100 % $ 492,966 100 % $ 418,138 100 %

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Revenue streams~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Perpetual license $ 9,057 $ 19,320 $ 12,716 $ 34,270
Term license 44,266 24,954 134,523 73,268
Revenue recognized at a point in time 53,323 44,274 147,239 107,538
Maintenance 72,222 69,329 145,917 137,035
Pega Cloud 48,838 31,699 92,304 59,457
Consulting 52,992 60,290 107,506 114,108
Revenue recognized over time 174,052 161,318 345,727 310,600
$ 227,375 $ 205,592 $ 492,966 $ 418,138

(in thousands) Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
Term license $ 44,266 $ 24,954 $ 134,523 $ 73,268
Pega Cloud 48,838 31,699 92,304 59,457
Maintenance 72,222 69,329 145,917 137,035
Subscription ⁽¹⁾
165,326 125,982 372,744 269,760
Perpetual license 9,057 19,320 12,716 34,270
Consulting 52,992 60,290 107,506 114,108
$ 227,375 $ 205,592 $ 492,966 $ 418,138

~~(1) Reflects client arrangements (term license, Pega Cloud, and maintenance) that are subject to renewal.~~

~~Remaining performance obligations ("Backlog")~~

~~Expected future revenue on existing contracts:~~

June 30, 2020
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 8,120 $ 53,550 $ 186,618 $ 191,187 $ 21,923 $ 461,398 57 %
1-2 years 1,700 6,187 40,153 140,860 1,986 190,886 23 %
2-3 years — 6,460 20,671 88,273 631 116,035 14 %
Greater than 3 years — 646 10,517 37,071 626 48,860 6 %
$ 9,820 $ 66,843 $ 257,959 $ 457,391 $ 25,166 $ 817,179 100 %

June 30, 2019
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 8,429 $ 38,080 $ 173,421 $ 124,134 $ 16,259 $ 360,323 57 %
1-2 years 915 4,678 12,530 98,842 942 117,907 19 %
2-3 years 1,306 641 5,801 75,828 227 83,803 13 %
Greater than 3 years — 185 2,812 63,259 — 66,256 11 %
$ 10,650 $ 43,584 $ 194,564 $ 362,063 $ 17,428 $ 628,289 100 %

1315

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.NOTE 10. REVENUE

Geographic revenue


	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2021				2020				2021				2020
U.S.	$	189,297	58	%	$	142,811	63	%	$	383,865	60	%	$	315,228	63	%
Other Americas	14,058		4	%	8,930		4	%	25,959		4	%	24,272		5	%
United Kingdom (“U.K.”)	32,553		10	%	21,259		9	%	60,765		10	%	43,096		9	%
Europe (excluding U.K.), Middle East, and Africa	45,798		14	%	34,878		15	%	97,457		15	%	66,816		14	%
Asia-Pacific	43,996		14	%	19,497		9	%	71,155		11	%	43,554		9	%
	$	325,702	100	%	$	227,375	100	%	$	639,201	100	%	$	492,966	100	%

Revenue streams


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Perpetual license	$	12,596	$	9,057	$	18,048	$	12,716
Term license	104,296		44,266		215,805		134,523
Revenue recognized at a point in time	116,892		53,323		233,853		147,239
Maintenance	78,782		72,222		154,343		145,917
Pega Cloud	73,293		48,838		141,151		92,304
Consulting	56,735		52,992		109,854		107,506
Revenue recognized over time	208,810		174,052		405,348		345,727
	$	325,702	$	227,375	$	639,201	$	492,966


(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Pega Cloud	$	73,293	$	48,838	$	141,151	$	92,304
Client Cloud	$	183,078	$	116,488	$	370,148	$	280,440
Maintenance	78,782		72,222		154,343		145,917
Term license	104,296		44,266		215,805		134,523
Subscription (1)	256,371		165,326		511,299		372,744
Perpetual license	12,596		9,057		18,048		12,716
Consulting	56,735		52,992		109,854		107,506
	$	325,702	$	227,375	$	639,201	$	492,966

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

Remaining performance obligations ("Backlog")

Expected future revenue on existing non-cancellable contracts:


	June 30, 2021
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	6,707	$	46,146	$	214,645	$	281,793	$	17,863	$	567,154	56	%
1-2 years	234		15,708		59,164		194,841		2,675		272,622		26	%
2-3 years	0		909		36,076		88,855		762		126,602		12	%
Greater than 3 years	0		255		26,564		37,246		693		64,758		6	%
	$	6,941	$	63,018	$	336,449	$	602,735	$	21,993	$	1,031,136	100	%


	June 30, 2020
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	8,120	$	53,550	$	186,618	$	191,187	$	21,923	$	461,398	57	%
1-2 years	1,700		6,187		40,153		140,860		1,986		190,886		23	%
2-3 years	0		6,460		20,671		88,273		631		116,035		14	%
Greater than 3 years	0		646		10,517		37,071		626		48,860		6	%
	$	9,820	$	66,843	$	257,959	$	457,391	$	25,166	$	817,179	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients accounting for 10% or more of the Company’s total revenue:


	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2021			2020		2021		2020
Total revenue	$	325,702		$	227,375	$	639,201	$	492,966
Client A	13		%	*		*		*

*Client accounted for less than 10% of total revenue.

NOTE 11. STOCK-BASED COMPENSATION

Expense

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Cost of revenues $ 5,384 $ 4,911 $ 10,536 $ 9,430
Selling and marketing 11,592 8,364 21,310 15,738
Research and development 5,805 4,572 11,302 9,132
General and administrative 2,874 2,200 5,683 4,097
$ 25,655 $ 20,047 $ 48,831 $ 38,397
Income tax benefit $ (5,107) $ (4,056) $ (9,689) $ (7,796)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Cost of revenue	$	5,849	$	5,384	$	11,774	$	10,536
Selling and marketing	14,748		11,592		28,468		21,310
Research and development	6,343		5,805		13,113		11,302
General and administrative	3,748		2,874		7,433		5,683
	$	30,688	$	25,655	$	60,788	$	48,831
Income tax benefit	$	(6,192)	$	(5,107)	$	(12,183)	$	(9,689)

As of June 30, ~~2020,~~2021, the Company had ~~$130.3~~$157.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

Grants

~~The Company granted the following stock-based compensation awards:~~

Six Months Ended
June 30, 2020
(in thousands) Shares Total Fair Value
RSUs 939 $ 82,823
Non-qualified stock options 1,696 $ 38,551


	Six Months Ended June 30, 2021
(in thousands)	Shares	Total Fair Value
RSUs	753	$	97,483
Non-qualified stock options	1,368	$	51,594

9.NOTE 12. INCOME TAXES

Effective income tax rate


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(11,916)	$	(12,319)	$	(29,534)		$	(36,129)
Effective income tax benefit rate	0		0		(2,591)		%	44		%

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2020 2019 2020 2019
(Benefit from) income taxes $ (12,319) $ (17,338) $ (36,129) $ (25,638)
Effective income tax rate 44 % 30 %

~~During~~The change in the ~~six months ended June 30, 2020, the Company’s~~ effective income tax benefit rate ~~benefit increased~~was primarily due to the impact of discrete tax items on a proportionately larger income (loss) before income taxes in the prior period. The most significant discrete items were excess tax benefits from stock-based compensation and ~~a carryback claim benefit as a result~~the impact of ~~the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).~~changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

~~10.~~NOTE 13. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and ~~the conversion spread of the Company’s~~ convertible senior notes.

1417

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of ~~the basic and diluted~~ earnings (loss) per share:

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands, except per share amounts) 2020 2019 2020 2019
Net (loss) $ (20,740) $ (32,296) $ (46,112) $ (61,013)
Weighted-average common shares outstanding 80,224 78,987 80,016 78,787
(Loss) per share, basic $ (0.26) $ (0.41) $ (0.58) $ (0.77)
Net (loss) $ (20,740) $ (32,296) $ (46,112) $ (61,013)
Weighted-average common shares outstanding, assuming dilution ^{(1) (2)}
80,224 78,987 80,016 78,787
(Loss) per share, diluted $ (0.26) $ (0.41) $ (0.58) $ (0.77)
Outstanding anti-dilutive stock options and RSUs ⁽³⁾
5,929 6,253 5,939 5,908


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2021		2020		2021		2020
Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Weighted-average common shares outstanding	81,316		80,224		81,161		80,016
Earnings (loss) per share, basic	$	0.46	$	(0.26)	$	0.38	$	(0.58)

Net income (loss)	$	37,291	$	(20,740)	$	30,674	$	(46,112)
Interest expense associated with convertible debt instruments, net of tax	1,351		0		0		0
Numerator for diluted EPS	$	38,642	$	(20,740)	$	30,674	$	(46,112)
Weighted-average effect of dilutive securities:
Convertible debt (1)	4,443		0		0		0
Stock options	3,266		0		3,416		0
RSUs	1,295		0		1,429		0
Effect of dilutive securities (2)	9,004		0		4,845		0
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	90,320		80,224		86,006		80,016
Earnings (loss) per share, diluted	$	0.43	$	(0.26)	$	0.36	$	(0.58)

Outstanding anti-dilutive stock options and RSUs (4)	19		5,929		22		5,939

(1) The ~~Company expects to settle the principal amount of the Notes in cash. As a result, only the amount by which~~shares underlying the conversion ~~value exceeds the aggregated principal amount of the Notes is included~~options in the ~~diluted earnings per share computation under~~Company’s Notes are included using the ~~treasury stock method. The~~if-converted method, if dilutive in the period. If the outstanding conversion spread has a dilutive impact on diluted net income per share when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $135.05 per share for the Notes. In connection with the Notes’ issuance,options were fully exercised, the Company ~~entered into Capped Call Transactions, which were not included in calculating the number of diluted shares outstanding, as their effect~~ would ~~have been anti-dilutive.~~issue an additional 4.4 million shares.

(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

(3) ~~Certain~~The Company’s Capped Call Transactions convert to approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. 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 (loss) per ~~share because they were anti-dilutive in the period presented.~~share. These awards may be dilutive in the future.

NOTE 14. SUBSEQUENT EVENTS

On July 6, 2021, the Company entered into an office space lease (the “Lease”) for 131 thousand square feet in Waltham, Massachusetts. The lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date. The annual rent equals the base rent plus the Company’s portion of building operating costs and real estate taxes for the year. Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date. Base rent for the first year is $6 million and will increase by 3% annually. In addition, the Company will receive an improvement allowance from the landlord of $11.8 million.

1518

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, ~~intends to,~~ projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions ~~are intended to~~ identify forward-looking statements, which are based on current expectations and assumptions.

~~These forward-looking~~Forward-looking statements deal with future events and are subject to ~~various~~ risks and uncertainties that are difficult to predict, including, but not limited ~~to, statements about~~ to:

•our future financial performance and business ~~plans,~~ plans;

•the adequacy of our liquidity and capital ~~resources,~~ resources;

•the continued payment of our quarterly ~~dividends,~~ dividends;

•the timing of revenue ~~recognition,~~ recognition;

•management of our transition to a more subscription-based business ~~model,~~ model;

•variation in demand for our products and services, including among clients in the public ~~sector,~~ sector;

•the impact of actual or threatened public health emergencies, such as the Coronavirus ~~(COVID-19),~~ (“COVID-19”);

•reliance on third-party service ~~providers,~~ providers;

•compliance with our debt obligations and ~~debt covenants,~~ covenants;

•the potential impact of our convertible senior notes and ~~related~~ Capped Call ~~Transactions,~~ Transactions;

•reliance on key ~~personnel,~~ personnel;

•the relocation of our corporate headquarters;

•the continued uncertainties in the global ~~economy,~~ economy;

•foreign currency exchange ~~rates,~~ rates;

•the potential legal and financial liabilities and reputation damage due to ~~cyber-attacks,~~ cyber-attacks;

•security breaches and security ~~flaws,~~ flaws;

•our ability to protect our intellectual property rights and costs associated with defending such ~~rights, maintenance of~~ rights;

•our client retention ~~rate,~~rate; and

•management of our growth.

These risks and ~~other factors~~others that ~~could~~may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to ~~publicly~~ update or revise these forward-looking statements publicly, whether ~~as the result of~~from new information, future events, or otherwise.

The forward-looking statements contained in this Quarterly Report represent our views as of July 28, 2021.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity. Our intelligent technology and scalable architecture enables the world’s leading brands and government agencies to solve problems quickly and transform ~~the way they engage with their customers~~for tomorrow. Our clients are able to make better decisions and ~~process~~get work across their enterprise. We also license our low-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leveragesdone using real-time artificial intelligence (“AI”)~~, case management,~~ and ~~robotic~~intelligent automation ~~technology,~~on applications built on the low-code, cloud-native Pega Platform™, enabling our ~~unified low-code~~clients to streamline service, increase customer lifetime value, and boost efficiency. Our consulting and client success teams, along with our world-class partners, leverage our Pega ~~Platform, empowering businesses~~Express™ methodology and low code to allow clients to design and deploy critical applications quickly ~~design, extend,~~ and ~~scale their enterprise applications to meet strategic business needs.~~collaboratively.

Our target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve. Our applications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. We deliver applications tailored to our clients’ specific industry needs.

~~COVID-19~~

Cloud Transition

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Until we substantially complete our Cloud Transition, which we anticipate will occur in 2023, we may experience lower revenue growth and lower operating cash flow growth or negative cash flow. Operating performance and the actual mix of revenue and new arrangements in a given period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Coronavirus (“COVID-19”)

As of June 30, ~~2020,~~2021, COVID-19 has not had a material impact on our results of operations or financial condition.

The ultimate impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, and impact on our partners, vendors, or employees, all of which are uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, our product mix, the fact that many of our clients are well-known and of large size, and the critical nature of our products to our clients may reduce or delay the impact of COVID-19 on our business, however, it is not possible to estimate the ultimate impact that COVID-19 will have on our business. See “Coronavirus (“COVID-19”)” ~~under Item 1A. Risk Factors~~in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Performance metrics

We utilize ~~several~~ performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | ~~+21%~~Increased 22% since June 30, ~~2019~~2020

•ACV, as reported, represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud ~~contracts is calculated by dividing the contract’s total value by the duration of the contract in years. ACV for maintenance is calculated as maintenance~~contracts. Maintenance revenue for the quarter then ended is multiplied by ~~four.~~four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and ~~ACV from~~ term license ~~contracts. We~~ACV. ACV is a performance measure that we believe ~~the presentation of ACV on a constant currency basis enhances the understanding of~~provides useful information to our ~~results, as it provides visibility into the impact of changes in foreign~~management and investors, particularly during our Cloud Transition.

* Foreign currency exchange ~~rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of June 30, 2020.~~rate changes contributed 3-4% to total ACV growth in 2021.

1620

Remaining performance obligations (“Backlog”) | ~~+30%~~Increased 26% since June 30, ~~2019~~2020

•Backlog represents ~~contracted~~expected future revenue ~~that has not yet been recognized and includes deferred revenue and~~on existing non-cancellable ~~amounts that are expected to be invoiced and recognized as revenue in future periods.~~contracts.

Year to date Pega Cloud revenue | ~~+55%~~Increased 53% since the six months ended June 30, ~~2019~~2020

•Pega Cloud revenue is revenue ~~as reported~~ under USU.S. GAAP for cloud contracts.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared ~~in accordance with~~following accounting principles generally accepted in the United States ~~(“U.S.”)~~ and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, ~~and~~ expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.

For more information regarding our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, ~~2019:~~2020:

•“Critical Accounting Estimates and Significant Judgments” in Item ~~7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;~~7; and

•“Note 2. ~~“Significant~~Significant Accounting Policies” in Item 8. ~~“Financial Statements and Supplementary Data.”~~

There have been no significant changes other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019 other than those listed below.~~

~~Capped Call Transactions~~

In February 2020, we entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and to a lesser extent historical peer group volatility levels.

~~The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.~~

~~See "5. Debt" and “6. Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.~~2020.

RESULTS OF OPERATIONS

Revenue

~~Our license revenue is derived from sales~~Cloud Transition

We are in the process of transitioning our ~~applications and Pega Platform. Our Pega Cloud revenue is derived from our hosted Pega Platform and~~business to sell software ~~applications. We expect our revenue mix to continue to shift in favor of our~~primarily through subscription ~~offerings,~~arrangements, particularly Pega ~~Cloud arrangements, which could result in~~Cloud. Revenue growth has been slower ~~total revenue growth in the near term.~~because of this transition. Revenue from Pega Cloud and maintenance arrangements is ~~generally~~typically recognized over the ~~service period, while~~contract term. In contrast, revenue from ~~term and perpetual~~ license ~~arrangements~~sales is ~~generally~~ recognized ~~upfront~~ when the license rights become ~~effective.~~

(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2020 2019 2020 2019
Pega Cloud $ 48,838 21 % $ 31,699 15 % $ 17,139 54 % $ 92,304 19 % $ 59,457 14 % $ 32,847 55 %
Maintenance 72,222 33 % 69,329 34 % 2,893 4 % 145,917 30 % 137,035 33 % 8,882 6 %
Term license 44,266 19 % 24,954 12 % 19,312 77 % 134,523 27 % 73,268 18 % 61,255 84 %
Subscription ⁽¹⁾
165,326 73 % 125,982 61 % 39,344 31 % 372,744 76 % 269,760 65 % 102,984 38 %
Perpetual license 9,057 4 % 19,320 9 % (10,263) (53) % 12,716 3 % 34,270 8 % (21,554) (63) %
Consulting 52,992 23 % 60,290 30 % (7,298) (12) % 107,506 21 % 114,108 27 % (6,602) (6) %
Total revenue $ 227,375 100 % $ 205,592 100 % $ 21,783 11 % $ 492,966 100 % $ 418,138 100 % $ 74,828 18 %
effective, typically upfront.


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2021				2020								2021				2020
Pega Cloud	$	73,293	23	%	$	48,838	21	%	$	24,455	50	%	$	141,151	22	%	$	92,304	19	%	$	48,847	53	%
Client Cloud	$	183,078	56	%	$	116,488	52	%	$	66,590	57	%	$	370,148	58	%	$	280,440	57	%	$	89,708	32	%
Maintenance	78,782		24	%	72,222		33	%	6,560		9	%	154,343		24	%	145,917		30	%	8,426		6	%
Term license	104,296		32	%	44,266		19	%	60,030		136	%	215,805		34	%	134,523		27	%	81,282		60	%
Subscription (1)	$	256,371	79	%	$	165,326	73	%	91,045		55	%	511,299		80	%	372,744		76	%	138,555		37	%
Perpetual license	12,596		4	%	9,057		4	%	3,539		39	%	18,048		3	%	12,716		3	%	5,332		42	%
Consulting	56,735		17	%	52,992		23	%	3,743		7	%	109,854		17	%	107,506		21	%	2,348		2	%
	$	325,702	100	%	$	227,375	100	%	$	98,327	43	%	$	639,201	100	%	$	492,966	100	%	$	146,235	30	%

(1) Reflects client arrangements ~~(term license, Pega Cloud, and maintenance) that are~~ subject to ~~renewal.~~renewal (Pega Cloud, maintenance, and term license).

•The ~~increases in~~ total revenue changes in the three and six months ended June 30, ~~2020 were primarily due to the increases in subscription~~2021 generally reflect our Cloud Transition. Other factors impacting our revenue ~~partially offset by decreases in perpetual revenue, reflecting the shift in client preferences to subscription arrangements from other types of arrangements.~~include:

•An increasing portion of our term license contracts include multi-year committed maintenance ~~periods.~~periods instead of annually renewable maintenance. Under ~~such~~multi-year committed maintenance arrangements, a ~~greater~~larger portion of the total contract value ~~has been reflected~~is recognized as maintenance revenue over the contract term rather than as term license revenue upon the effectiveness of the ~~contract. Additionally,~~license rights. In the three months ended June 30, 2021, multi-year committed maintenance contributed $4.3 million to maintenance revenue growth and reduced term revenue growth by $15.4 million. In the six months ended June 30, 2021, multi-year committed maintenance contributed $7.8 million to maintenance revenue growth and reduced term revenue growth by $20.9 million.

•Maintenance renewal rates ~~in excess~~ of higher than 90% ~~contributed to the increases in maintenance revenue.~~.

•The ~~decreases~~increases in term license revenue in the three and six months ended June 30, 2021 were driven by a large, existing customer that expanded their use of our software, renewed an existing multi-year contract, and extended the term of the agreement earlier in the year than anticipated.

•The increases in perpetual license revenue were primarily due to several large perpetual license contracts recognized in revenue in the three and six months ended June 30, 2021.

•The increases in consulting revenue in the three and six months ended June 30, ~~2020~~2021 were primarily due to ~~decreases~~increases in billable ~~hours~~hours. As part of our long-term strategy, we intend to continue growing and ~~to a lesser extent due to reductions in billable travel expenses from reduced travel as a result~~leveraging our ecosystem of ~~COVID-19.~~partners on implementation projects, potentially reducing our future consulting revenue growth.

Gross profit


	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
(Dollars in thousands)	2021				2020								2021				2020
Software license	$	116,236	99	%	$	52,344	98	%	$	63,892	122	%	$	232,547	99	%	$	145,576	99	%	$	86,971	60	%
Maintenance	73,787		94	%	66,631		92	%	7,156		11	%	143,562		93	%	134,750		92	%	8,812		7	%
Pega Cloud	49,242		67	%	29,850		61	%	19,392		65	%	94,543		67	%	55,783		60	%	38,760		69	%
Consulting	1,906		3	%	1,859		4	%	47		3	%	1,571		1	%	638		1	%	933		146	%
	$	241,171	74	%	$	150,684	66	%	$	90,487	60	%	$	472,223	74	%	$	336,747	68	%	$	135,476	40	%

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
(Dollars in thousands) 2020 2019 2020 2019
Software license $ 52,344 98 % $ 43,346 98 % $ 8,998 21 % $ 145,576 99 % $ 105,232 98 % $ 40,344 38 %
Maintenance 66,631 92 % 63,037 91 % 3,594 6 % 134,750 92 % 124,408 91 % 10,342 8 %
Pega Cloud 29,850 61 % 15,052 47 % 14,798 98 % 55,783 60 % 29,512 50 % 26,271 89 %
Consulting 1,859 4 % 7,077 12 % (5,218) (74) % 638 1 % 7,469 7 % (6,831) (91) %
$ 150,684 66 % $ 128,512 63 % $ 22,172 17 % $ 336,747 68 % $ 266,621 64 % $ 70,126 26 %

•The recent shift in our revenue mix toward Pega Cloud arrangements has resulted in slower total gross profit growth as Pega Cloud grows and scales. Revenue from Pega Cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.

~~The increases~~changes in gross profit in the three and six months ended June 30, ~~2020~~2021 were primarily due to ~~increases in term~~our Cloud Transition, revenue growth, and ~~Pega Cloud revenue, which reflects the shift in client preferences to subscription arrangements from other types of arrangements.~~

~~The increases in the three and six months ended June 30, 2020 in gross profit percent were primarily due to the:~~

•~~increases in the three and six months ended June 30, 2020 in Pega Cloud gross profit percent, driven by cost efficiency~~cost-efficiency gains as Pega Cloud grows and ~~scales, and~~scales.

•decreases in the three and six months ended June 30, 2020 in consulting gross profit percent, primarily due to increases in consulting resource availability in anticipation of future projects. Our consulting resource availability is impacted by several factors, including the scope and timing of new implementation projects, and our level of involvement in implementation projects compared to our consulting partners and enabled clients. To support our long-term strategy, we intend to grow and increasingly leverage our partners and enabled clients for future implementation projects, which may reduce the future growth rate.

Operating expenses

(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2020 2019 2020 2019
% of Revenue % of Revenue % of Revenue % of Revenue
Selling and marketing $ 127,607 56 % $ 116,962 57 % $ 10,645 9 % $ 263,631 53 % $ 225,827 54 % $ 37,804 17 %
Research and development $ 58,869 26 % $ 49,714 24 % $ 9,155 18 % $ 117,596 24 % $ 100,310 24 % $ 17,286 17 %
General and administrative $ 15,655 7 % $ 14,174 7 % $ 1,481 10 % $ 31,285 6 % $ 26,850 6 % $ 4,435 17 %


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2021				2020								2021				2020
			% of Revenue				% of Revenue								% of Revenue				% of Revenue
Selling and marketing	$	156,423	48	%	$	127,607	56	%	$	28,816	23	%	$	305,162	48	%	$	263,631	53	%	$	41,531	16	%
Research and development	$	64,395	20	%	$	58,869	26	%	$	5,526	9	%	$	126,837	20	%	$	117,596	24	%	$	9,241	8	%
General and administrative	$	19,161	6	%	$	15,655	7	%	$	3,506	22	%	$	37,431	6	%	$	31,285	6	%	$	6,146	20	%

•The increases in ~~sales~~selling and marketing in the three and six months ended June 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$29.2~~$22.6 million and ~~$51.6~~$48.0 million, attributable to increases in headcount and equity compensation. The ~~increases~~increase in headcount ~~reflect~~reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts. These increases were partially offset by decreases in travel and entertainment of $8.1 million and $8.9 million as a result of COVID-19 and decreases in PegaWorld costs as a result of the cancellation of the live event portion. The three months ended June 30, 2020 include a reduction of expenses of $2.8 million due to the favorable settlement of cancellation fees owed to vendors of the live event portion.

•The increases in research and development in the three and six months ended June 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$8.6~~$7.2 million and ~~$15.7~~$11.8 million, attributable to increases in headcount and equity compensation.

•The increases in general and administrative in the three and six months ended June 30, ~~2020~~2021 were primarily due to increases in compensation and benefits of ~~$0.8~~$2.2 million and ~~$2.2~~$3.5 million, ~~attributed~~attributable to increases in headcount and equity ~~compensation.~~compensation, and increases in professional services fees of $1.8 million and $3.4 million.

19•In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to decreases in facilities expenses of $2.1 million and $3.3 million in selling and marketing, $2.4 million and $3.6 million in research and development, and $1.1 million and $1.6 million in general and administrative, in the three and six months ended June 30, 2021.

Other income (expense), net

(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2020 2019 2020 2019
Foreign currency transaction gain (loss) $ 4,256 $ 2,105 $ 2,151 102 % $ (1,691) $ (1,607) $ (84) (5) %
Interest income 242 544 (302) (56) % $ 849 $ 1,267 (418) (33) %
Interest expense (5,529) — (5,529) * $ (7,835) $ — (7,835) *
Gain on capped call transactions 19,419 — 19,419 * 827 — 827 *
Other income, net — 55 (55) (100) % $ 1,374 $ 55 1,319 2,398 %

$ 18,388 $ 2,704 $ 15,684 580 % $ (6,476) $ (285) $ (6,191) (2,172) %


(Dollars in thousands)	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2021		2020						2021		2020
Foreign currency transaction (loss) gain	$	(403)	$	4,256	$	(4,659)	*		$	(5,501)	$	(1,691)	$	(3,810)	(225)	%
Interest income	236		242		(6)		(2)	%	389		849		(460)		(54)	%
Interest expense	(1,959)		(5,529)		3,570		65	%	(3,839)		(7,835)		3,996		51	%
Gain on capped call transactions	26,309		19,419		6,890		35	%	7,192		827		6,365		770	%
Other income, net	—		—		—		*		106		1,374		(1,268)		(92)	%
	$	24,183	$	18,388	$	5,795	32	%	$	(1,653)	$	(6,476)	$	4,823	74	%

* not meaningful

•The changes in foreign currency transaction (loss) gain ~~(loss)~~ in the three and six months ended June 30, ~~2020~~2021 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, ~~accounts receivable,~~receivables, and intercompany ~~receivables and payables~~balances held by our subsidiary in the United ~~Kingdom (“U.K.”) subsidiary.~~Kingdom.

•The decreases in interest income in the three and six months ended June 30, 2021 were primarily due to declines in market interest rates.

•The decreases in interest expense in the three and six months ended June 30, 2021 were primarily due to our adoption of ASU 2020-06 on January 1, 2021. See "Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.

Interest expense related to the Notes:


	Three Months Ended June 30,				Change		Six Months Ended June 30,				Change
(in thousands)	2021		2020				2021		2020
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	—	$	2,250	$	1,575	$	675
Amortization of debt discount	—		3,757		(3,757)		—		5,253		(5,253)
Amortization of issuance costs	675		558		117		1,348		780		568
	$	1,800	$	5,440	$	(3,640)	$	3,598	$	7,608	$	(4,010)

•The increases in the gain on capped call transactions in the three and six months ended June 30, ~~2020~~2021, were due to fair value adjustments ~~on the Capped Call Transactions, entered into~~driven by increases in ~~connection with~~ our ~~issuance of the Notes. See "5. Debt" in Item 1 of this Quarterly Report for additional information.~~stock price.

•The ~~decreases in interest income in the three and six months ended June 30, 2020 were due to the decreases in market interest rates.~~

•~~The increase~~decrease in other income, net in the six months ended June 30, ~~2020~~2021, was due to ~~a gain from~~larger fair value adjustments on equity securities held in our venture investments ~~portfolio.~~

•~~The increases~~portfolio in ~~interest expense in~~ the ~~three and~~ six months ended June 30, ~~2020 were due to our issuance of $600 million in aggregate principal amount of our convertible senior notes (“Notes”) on February 24,~~ 2020. ~~See "5. Debt" in Item 1 of this Quarterly Report for additional information.~~

~~Interest expense related to the Notes:~~

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
(in thousands) 2020 2019 2020 2019
Contractual interest expense (0.75% coupon) $ 1,125 $ — $ 1,125 $ 1,575 $ — $ 1,575
Amortization of debt discount 3,757 — $ 3,757 5,253 — $ 5,253
Amortization of issuance cost 558 — $ 558 780 — $ 780
$ 5,440 $ — $ 5,440 $ 7,608 $ — $ 7,608

(Benefit from) income taxes

The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, depending on our future stock price in relation to the fair value of awards, the timing of the vestings of RSU awards, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021			2020
(Benefit from) income taxes	$	(11,916)	$	(12,319)	$	(29,534)		$	(36,129)
Effective income tax benefit rate					(2,591)		%	44		%

During the six months ended June 30, ~~2020,~~2021, the change in our effective income tax benefit rate ~~benefit increased~~was primarily due to the impact of discrete tax items on a proportionately larger income (loss) before income taxes in the prior period. The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a ~~carryback claim benefit as a result~~given period depends on our profitability, the attributes of ~~the Coronavirus Aid, Relief,~~our stock compensation awards we grant, and ~~Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).~~

award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


	Six Months Ended June 30,
(in thousands)	2021		2020
Cash provided by (used in):
Operating activities	$	19,410	$	(21,199)
Investing activities	10,493		(19,404)
Financing activities	(60,717)		485,293
Effect of exchange rates on cash and cash equivalents	(1,207)		(942)
Net (decrease) increase in cash and cash equivalents	$	(32,021)	$	443,748

Six Months Ended
June 30,
(in thousands) 2020 2019
Cash provided by (used in):
Operating activities $ (21,199) $ 7,720
Investing activities (19,404) 17,210
Financing activities 485,293 (44,367)
Effect of exchange rates on cash and cash equivalents (942) 515
Net increase (decrease) in cash and cash equivalents $ 443,748 $ (18,922)


(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		(in thousands)	June 30, 2021		December 31, 2020
Held by U.S. entities	Held by U.S. entities	$	468,237	$	23,437	Held by U.S. entities	$	306,754	$	399,138
Held by foreign entities	Held by foreign entities	43,874		44,926		Held by foreign entities	104,583		66,030
Total cash and cash equivalents		$	512,111	$	68,363
Total cash, cash equivalents, and marketable securities						Total cash, cash equivalents, and marketable securities	$	411,337	$	465,168

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments required to ~~respond to the possible increased demand for~~support our ~~services.~~operations. If we require additional capital resources to grow our business, we may seek to finance our operations from available funds or additional external financing.

If it ~~became~~becomes necessary to repatriate foreign funds, we may be required to pay U.S. and foreign taxes upon repatriation. Due to the complexity of income tax laws and regulations, ~~and the effects of the Tax Reform Act,~~ it is impracticable to estimate the amount of taxes we would have to pay.

~~Cash (used in) provided by operating~~Operating activities

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has impacted and is expected to continue to impact the timing of our billings and cash collections. Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective. As client preferences ~~continue to~~ shift in favor of Pega Cloud arrangements, we could ~~continue to~~ experience slower operating cash flow growth, or negative cash flow, in the near term. Cash from most Pega Cloud and term arrangements is collected over an average service period of three years, while cash from most perpetual license arrangements is collected upfront, shortly after the license rights become effective.

The ~~primary driver of the decrease~~change in cash provided by (used in) operating activities in the six months ended June 30, ~~2020~~2021 was ~~the recent shift~~primarily due to a significant increase in ~~our revenue mix toward Pega Cloud arrangements and increased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.~~client collections.

Corporate headquarters

In February 2021, we agreed to accelerate our exit from our existing Cambridge, Massachusetts corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which is expected to be paid in the ~~six months ended June 30, 2020, COVID-19 did not have a material impact~~last quarter of 2021. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million. On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our future corporate headquarters. The approximately 4.5 year lease includes base rent of approximately $2 million per year.

New Waltham Office

On July 6, 2021, we entered into an office space lease (the “Lease”) for 131 thousand square feet in Waltham, Massachusetts. The lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date. The annual rent equals the base rent plus our ~~cash flows~~portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date. Base rent for the first year is $6 million and will increase by 3% annually. In addition, we will receive an improvement allowance from ~~operations. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.~~the landlord of $11.8 million.

~~Cash (used in) provided by investing~~

Investing activities

The change in cash provided by (used in) ~~provided by~~ investing activities in the six months ended June 30, ~~2020~~2021 was primarily driven by investments in ~~property~~financial instruments, an acquisition, and ~~equipment at several of our~~a decrease in office ~~locations.~~space related capital expenditures.

~~Cash provided by (used in) financing~~Financing activities

In February 2020, we issued $600 million in aggregate principal amount of ~~our~~ convertible senior notes ~~(“Notes”)~~ due March 1, ~~2025, which provided proceeds~~2025.

In November 2019, and as ~~follows:~~


~~(in thousands)~~	~~Amount~~
~~Principal~~			$	~~600,000~~
~~Less: issuance costs~~			~~(14,527)~~
~~Less: Capped Call Transactions~~			~~(51,900)~~
	$	~~533,573~~

~~A portion~~amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of June 30, 2021, we had no outstanding borrowings under the ~~proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes.~~Credit Facility. See ~~"5.~~"Note 8. Debt" in Item 1 of this Quarterly Report for additional information.

~~In November 2019, and as amended in February 2020 and July 2020, we entered into a~~ ~~five~~-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of June 30, 2020 and December 31, 2019, we had 0 outstanding borrowings under the Credit Facility.

Stock repurchase program⁽¹⁾

Changes in the remaining stock repurchase authority:


(in thousands)	Six Months Ended June 30, 2021
December 31, ~~2019~~	$	~~45,484~~
~~Authorizations~~ ⁽²⁾	~~20,516~~
~~Repurchases~~	~~(8,199)~~
~~June 30,~~ 2020	$	~~57,801~~37,726
Authorizations (1)	38,467
Repurchases (2)	(19,392)
June 30, 2021	$	56,801

⁽¹⁾ On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining common stock repurchase authority to $60 million.

(2) Purchases under this program have been made on the open market.⁽²⁾ On June 15, 2020, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2021 and increased the remaining stock repurchase authority to $60 million.

Common stock repurchases


	Six Months Ended June 30,
	2021			2020
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	328	$	41,706	411	$	37,093
Stock repurchase program	151	19,392		110	8,199
	479	$	61,098	521	$	45,292

Six Months Ended
June 30,
2020 2019
(in thousands) Shares Amount Shares Amount
Tax withholdings for net settlement of equity awards 411 $ 37,093 390 $ 26,054
Stock repurchase program ⁽¹⁾
110 8,199 232 13,889
Activity in period ⁽²⁾
521 $ 45,292 622 $ 39,943

⁽¹⁾ ~~Represents activity under our stock repurchase program.~~ ⁽²⁾During the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$31.2~~$27.8 million and ~~$23.1~~$31.2 million, respectively, for the exercise price of options. These amounts ~~have been excluded from~~are not included in the table above.

Dividends

Six Months Ended
June 30,
(in thousands) 2020 2019
Dividend payments to shareholders $ 4,793 $ 4,730

We ~~currently~~ intend to pay a quarterly cash dividend of $0.03 per ~~share, however,~~share. However, the Board of Directors may terminate or modify the dividend program at any time without prior notice.


	Six Months Ended June 30,
(in thousands)	2021		2020
Dividend payments to stockholders	$	4,865	$	4,793

Contractual obligations

As of June 30, ~~2020,~~2021, our contractual obligations were:

Payments due by period
(in thousands) 2020 2021 2022-2023 2024-2025 2026 and thereafter Other Total
Purchase obligations ⁽¹⁾
$ 43,197 $ 56,689 $ 57,498 $ — $ — $ — $ 157,384
Investment commitments ⁽²⁾
992 706 — — — — 1,698
Liability for uncertain tax positions⁽³⁾
— — — — — 5,250 5,250
Operating lease obligations 9,391 20,414 37,326 7,205 1,735 — 76,071
Total $ 53,580 $ 77,809 $ 94,824 $ 7,205 $ 1,735 $ 5,250 $ 240,403


	Payments due by period
(in thousands)	2021		2022		2023		2024		2025		2026 and thereafter		Other		Total
Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	4,500	$	601,488	$	—	$	—	$	617,238
Purchase obligations (2)	28,215		60,242		12,539		1,938		429		—		—		103,363
Operating lease obligations (3)	8,783		13,888		13,300		10,021		6,913		9,823		—		62,728
Liability for uncertain tax positions (4)	—		—		—		—		—		—		1,665		1,665
	$	39,248	$	78,630	$	30,339	$	16,459	$	608,830	$	9,823	$	1,665	$	784,994

(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing ~~programs.~~

(2) Represents the maximum funding that would be expected under existing venture investment agreements. Our investment agreements generally allow us to withhold unpaid committed funds at our discretion.programs

(3) Excludes the Waltham lease, which we entered into on July 6, 2021. See "Note 14. Subsequent Events" in Item 1 of this Quarterly Report for additional information.

(4) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss ~~that may affect us due to~~from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our foreign operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would ~~result in the following impact:~~

Six Months Ended
June 30,
2020 2019
(Decrease) increase in revenue (3) % (4) %
(Decrease) increase in net (loss) (15) % (7) %
have resulted in:


	Six Months Ended June 30,
	2021		2020
(Decrease) increase in revenue	(4)	%	(3)	%
(Decrease) increase in net income	(1)	%	(15)	%

Remeasurement risk

We experience fluctuations in transaction gains orand losses from the remeasurement of monetary assets and liabilities ~~that are~~ denominated in currencies other than the functional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash and cash equivalents, ~~accounts receivable, unbilled~~ receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would ~~result~~have resulted in the following impact:

Six Months Ended
June 30,
(in millions) 2020 2019
Foreign currency gain (loss) $ 9 $ (2)


	Six Months Ended June 30,
(in thousands)	2021		2020
Foreign currency gain (loss)	$	(5,676)	$	8,932

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, ~~2020.~~2021. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, ~~2020.~~2021.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, ~~2020~~2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~COVID-19~~

In response to COVID-19, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures. However, those changes have so far not been material.

2326

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

We encourage you to consider carefully ~~consider~~ the risk factors identified ~~below and~~ in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the U.S. Securities and Exchange ~~Commission on February 12, 2020.~~Commission. These risk factors could materially affect our business, financial condition, and future results, and ~~they could~~may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.

~~Coronavirus (“COVID-19”)~~

~~Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.~~

The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemics pose the risk that our employees, partners, and clients may be prevented from conducting business activities at full capacity for an indefinite period, including due to spread of the disease within these groups or due to shutdowns that are requested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending and may adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of their contracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.

We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorld conference and by encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implement them without adversely affecting our business operations.

We continue to monitor the situation and may adjust our policies as more information and public health guidance become available. Precautionary measures that have been adopted, or may be adopted in the future, could negatively affect our client success efforts, sales, and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 may disrupt our clients’, vendors’, and partners’ operations for an indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.

At this time, it is not possible to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods. The extent to which COVID-19 impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to predict accurately, including:

•~~the duration and scope of the pandemic;~~

•~~governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;~~

•~~the actions taken in response to economic disruption;~~

•~~the impact of business disruptions and reductions in our clients’ business and the resulting impact on their demand for our services and solutions; and~~

•~~our ability to provide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of offices and facilities.~~

~~Risks related to our Convertible Senior Notes~~

We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results.

~~As of June 30, 2020, we had $600 million aggregate principal amount of indebtedness under our Convertible Senior Notes due 2025 (the “Notes”).~~

~~Our indebtedness may:~~

•~~limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other business purposes;~~

•~~limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;~~

•~~require us to use a substantial portion of our cash flow from operations to make debt service payments;~~

•~~limit our flexibility to plan for, or react to, changes in our business and industry;~~

•~~place us at a competitive disadvantage compared to our less leveraged competitors;~~

•~~dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and~~

•~~increase our vulnerability to the impact of adverse economic and industry conditions.~~

Our ability to pay our debt when due or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, result in that and our other indebtedness becoming immediately payable in full. In addition, we may incur additional debt to meet future financing needs. If we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.

~~The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.~~

Under certain circumstances, the noteholders may convert their Notes at their option prior to the scheduled maturities. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020, between U.S. Bank National Association, as trustee (the “Trustee”) and us (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and we currently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Notes when the Indenture requires the repurchase or to pay any cash payable on future conversions of the Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

~~The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material impact on our reported financial results.~~

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record non-cash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock, and the trading price of the Notes.

In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, is included in the denominator to calculate diluted earnings per share. We cannot be sure that the accounting standards will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.

~~The Capped Call Transactions may affect the value of the Notes and our common stock.~~

In connection with the Notes’ issuance, we entered into Capped Call Transactions with certain financial institutions (“option counterparties”). The Capped Call Transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the option counterparties that are parties to the Capped Call Transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.

~~We are subject to counterparty risk with respect to the Capped Call Transactions.~~

The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure depends on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.

~~Provisions in the indenture for the Notes may deter or prevent a business combination that may be favorable to our stockholders.~~

If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.

~~Conversion of the Notes may dilute the ownership interest of existing stockholders.~~

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of equity securities

Common stock repurchased in the three months ended June 30, ~~2020 was:~~

(in thousands, except per share amounts)
Total Number of Shares Purchased ^{(1) (2)}
Average
Price Paid
per Share ^{(1) (2)}
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program ⁽²⁾
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
April 1, 2020 - April 30, 2020 16 $ 73.07 — $ 39,484
May 1, 2020 - May 31, 2020 155 $ 87.87 — $ 39,484
June 1, 2020 - June 30, 2020 179 $ 97.43 23 $ 57,801
350 $ 92.06 23
2021:


(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
April 1, 2021 - April 30, 2021	53	$	125.24	25	$	25,430
May 1, 2021 - May 31, 2021	96	121.41		25	$	22,431
June 1, 2021 - June 30, 2021	204	126.99		31	$	56,801
	353	$	125.20	81

(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

(2) On June ~~15, 2020,~~8, 2021, we announced that our Board of Directors extended the ~~expiration date of the~~ current stock repurchase ~~program~~program’s expiration date to June 30, ~~2021~~2022 and increased the remaining stock ~~purchase~~repurchase authority to $60 million. See "Liquidity and Capital Resources" in Item 2 of this Quarterly Report for additional information.

ITEM 6. EXHIBITS


~~Exhibit No.~~						~~Description~~
~~3.1~~						~~Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)~~
~~3.2~~						~~Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s June 15, 2020 Form 8-K and incorporated herein by reference.)~~
~~10.1~~						~~2004 Long-Term Incentive Plan (as amended and restated). (Filed as Exhibit 10.1 to the Registrant’s June 24, 2020 Form 8-K and incorporated herein by reference.)~~
~~10.2+~~						~~Amendment 2 to Loan Documents, dated July 22, 2020, between Pegasystems Inc. and PNC Bank, National Association.~~
10.3+*						~~Offer Letter, dated April 27, 2020, between Pegasystems Inc. and Hayden Stafford~~.
~~31.1+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.~~
~~31.2+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.~~
32*						~~Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.~~
~~101.INS~~						~~Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~
~~101.SCH~~						~~Inline XBRL Taxonomy Extension Schema Document.~~
~~101.CAL~~						~~Inline XBRL Taxonomy Calculation Linkbase Document.~~
~~101.DEF~~						~~Inline XBRL Taxonomy Extension Definition Linkbase Document.~~
~~101.LAB~~						~~Inline XBRL Taxonomy Label Linkbase Document.~~
~~101.PRE~~						~~Inline XBRL Taxonomy Presentation Linkbase Document.~~
~~104~~						~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)~~

~~+ Filed herewith.~~

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1

Sublease, dated March 31, 2021 for Office Space at One Main Street, Cambridge, MA

10.2**

Lease between Pegasystems Inc. and 275 Wyman LLC

8-K

10.1

July 9, 2021

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

32++

Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

* ~~Indicates a management contract or arrangement in which an executive officer~~* Certain portions of ~~the Company participates.~~this exhibit are considered confidential and have been omitted as permitted under SEC rules and regulations.

2827

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Pegasystems Inc.

Dated:

July 28, ~~2020~~2021

By:

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief ~~Financial~~Operating Officer and Chief ~~Administrative~~Financial Officer

(Principal Financial Officer)


	Six Months Ended June 30,
(in millions)	2020		2019
Foreign currency gain (loss)	$	9	$	(2)


(in thousands, except per share amounts)	Total Number of Shares Purchased ^{(1) (2)}	Average Price Paid per Share ^{(1) (2)}		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program ⁽²⁾	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
April 1, 2020 - April 30, 2020	16	$	73.07	—	$	39,484
May 1, 2020 - May 31, 2020	155	$	87.87	—	$	39,484
June 1, 2020 - June 30, 2020	179	$	97.43	23	$	57,801
	350	$	92.06	23