FORM10-Q
(Mark One)
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended March 31, 2022 |
For the quarterly period ended September 30, 2017
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period fromto
Massachusetts | 04-2787865 | |||||||||||||||||||||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||||||||||||||||||
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 |
Large accelerated filer | x | Accelerated filer | ☐ | ||||||||||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||||||||||||
Emerging growth company | ☐ |
April 19, 2022.
PART Item 1. Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 Notes to Unaudited Condensed Consolidated Financial Statements Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 5. Other Information Assets Current assets: Cash and cash equivalents Marketable securities Total cash, cash equivalents, and marketable securities Trade accounts receivable, net of allowance of $6,189 and $4,126 Income taxes receivable Other current assets Total current assets Property and equipment, net Deferred income taxes Long-term other assets Intangible assets, net Goodwill Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued expenses Accrued compensation and related expenses Deferred revenue Total current liabilities Income taxes payable Long-term deferred revenue Other long-term liabilities Total liabilities Stockholders’ equity: Preferred stock, 1,000 shares authorized; no shares issued and outstanding Common stock, 200,000 shares authorized; 77,839 shares and 76,591 shares issued and outstanding Additionalpaid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total liabilities and stockholders’ equity Revenue: Software license Maintenance Services Total revenue Cost of revenue: Software license Maintenance Services Total cost of revenue Gross profit Operating expenses: Selling and marketing Research and development General and administrative Acquisition-related Total operating expenses (Loss)/income from operations Foreign currency transaction (loss)/gain Interest income, net Other income/(expense), net (Loss)/income before (benefit)/provision for income taxes (Benefit)/provision for income taxes Net (loss)/income (Loss)/earnings per share: Basic Diluted Weighted-average number of common shares outstanding: Basic Diluted Cash dividends declared per share Net (loss)/income Other comprehensive income/(loss), net of tax Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax Foreign currency translation adjustments Total other comprehensive income/(loss), net of tax Comprehensive (loss)/income Operating activities: Net income Adjustments to reconcile net income to cash provided by operating activities: Deferred income taxes Depreciation and amortization Stock-based compensation expense Foreign currency transaction loss/(gain) Othernon-cash Change in operating assets and liabilities: Trade accounts receivable Income taxes receivable and other current assets Accounts payable and accrued expenses Deferred revenue Other long-term assets and liabilities Cash provided by operating activities Investing activities: Purchases of marketable securities Proceeds from maturities and called marketable securities Sales of marketable securities Payments for acquisitions, net of cash acquired Investment in property and equipment Cash used in investing activities Financing activities: Dividend payments to shareholders Common stock repurchases for tax withholdings for net settlement of equity awards Common stock repurchases under share repurchase programs Cash used in financing activities Effect of exchange rates on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2021. date:Index to FormPage I—I - FINANCIAL INFORMATIONUnaudited Condensed Consolidated Financial Statements2021 22021 32021 4Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2022 and 20162021561525PART II—OTHER INFORMATIONItem 1. Legal Proceedings Item 1A. Risk Factors 2525Item 6. Exhibits 2627I—I - FINANCIAL INFORMATIONITEM 1.UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSPEGASYSTEMS INC.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands) September 30,
2017 December 31,
2016 $ 130,568 $ 70,594 63,812 63,167 194,380 133,761 191,161 265,028 34,864 14,155 17,679 12,188 438,084 425,132 39,849 38,281 73,459 69,898 5,982 3,990 34,755 44,191 72,941 73,164 $ 665,070 $ 654,656 $ 12,535 $ 14,414 39,681 36,751 53,869 60,660 160,931 175,647 267,016 287,472 4,774 4,263 6,130 10,989 15,449 16,043 293,369 318,767 — — 778 766 146,728 143,903 227,953 198,315 (3,758 ) (7,095 ) 371,701 335,889 $ 665,070 $ 654,656 March 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 132,771 $ 159,965 Marketable securities 199,401 202,814 Total cash, cash equivalents, and marketable securities 332,172 362,779 Accounts receivable 171,181 182,717 Unbilled receivables 226,052 226,714 Other current assets 74,408 68,008 Total current assets 803,813 840,218 Unbilled receivables 135,975 129,789 Goodwill 82,031 81,923 Other long-term assets 516,661 541,601 Total assets $ 1,538,480 $ 1,593,531 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 18,628 $ 15,281 Accrued expenses 63,401 63,890 Accrued compensation and related expenses 54,804 120,946 Deferred revenue 290,873 275,844 Other current liabilities 7,309 9,443 Total current liabilities 435,015 485,404 Convertible senior notes, net 591,440 590,722 Operating lease liabilities 90,699 87,818 Other long-term liabilities 14,658 13,499 Total liabilities 1,131,812 1,177,443 Commitments and contingencies (Note 14) 0 0 Stockholders’ equity: Preferred stock, 1,000 shares authorized; none issued — — 818 817 Additional paid-in capital 141,771 145,810 Retained earnings 273,615 276,449 Accumulated other comprehensive (loss) (9,536) (6,988) Total stockholders’ equity 406,668 416,088 Total liabilities and stockholders’ equity $ 1,538,480 $ 1,593,531 PEGASYSTEMS INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ 41,793 $ 68,833 $ 195,220 $ 207,849 62,204 55,038 180,759 163,174 75,818 58,931 225,063 179,633 179,815 182,802 601,042 550,656 1,276 1,313 3,826 3,646 6,716 6,659 20,945 18,889 61,739 52,465 180,925 154,512 69,731 60,437 205,696 177,047 110,084 122,365 395,346 373,609 70,209 67,032 217,384 202,126 41,031 38,036 121,089 108,530 13,133 11,725 38,174 34,067 — 74 — 2,903 124,373 116,867 376,647 347,626 (14,289 ) 5,498 18,699 25,983 (552 ) 1,082 (793 ) 2,764 144 172 470 650 — (1,237 ) 287 (4,891 ) (14,697 ) 5,515 18,663 24,506 (12,885 ) 2,214 (17,952 ) 6,269 $ (1,812 ) $ 3,301 $ 36,615 $ 18,237 (0.03 ) 0.04 0.47 0.24 (0.03 ) 0.04 0.44 0.23 77,691 76,278 77,258 76,323 77,691 79,548 82,717 79,401 $ 0.03 $ 0.03 $ 0.09 $ 0.09 Three Months Ended
March 31,2022 2021 Revenue Subscription services $ 170,033 $ 143,419 Subscription license 137,533 111,509 Perpetual license 7,440 5,452 Consulting 61,301 53,119 Total revenue 376,307 313,499 Cost of revenue Subscription services 32,030 28,343 Subscription license 622 620 Perpetual license 34 30 Consulting 55,511 53,454 Total cost of revenue 88,197 82,447 Gross profit 288,110 231,052 Operating expenses Selling and marketing 162,236 148,739 Research and development 71,490 62,442 General and administrative 35,764 18,270 Total operating expenses 269,490 229,451 Income from operations 18,620 1,601 Foreign currency transaction gain (loss) 2,876 (5,098) Interest income 207 153 Interest expense (1,946) (1,880) (Loss) on capped call transactions (30,560) (19,117) Other income, net 2,741 106 (Loss) before (benefit from) income taxes (8,062) (24,235) (Benefit from) income taxes (7,683) (17,618) Net (loss) $ (379) $ (6,617) (Loss) per share Basic $ 0.00 $ (0.08) Diluted $ 0.00 $ (0.08) Weighted-average number of common shares outstanding Basic 81,680 81,004 Diluted 81,680 81,004 PEGASYSTEMS INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ (1,812 ) $ 3,301 $ 36,615 $ 18,237 22 (174 ) 148 168 549 (169 ) 3,189 (1,400 ) 571 (343 ) 3,337 (1,232 ) $ (1,241 ) $ 2,958 $ 39,952 $ 17,005 Three Months Ended
March 31,2022 2021 Net (loss) $ (379) $ (6,617) Other comprehensive (loss) income, net of tax Unrealized gain on available-for-sale securities 222 1,010 Foreign currency translation adjustments (2,770) (730) Total other comprehensive (loss) income, net of tax $ (2,548) $ 280 Comprehensive (loss) $ (2,927) $ (6,337) PEGASYSTEMS INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Nine Months Ended
September 30, 2017 2016 $ 36,615 $ 18,237 (2,607 ) (2,841 ) 18,703 17,896 39,929 30,634 793 (2,764 ) (89 ) 153 80,580 3,940 (25,943 ) (11,904 ) (8,546 ) (16,678 ) (25,639 ) (17,698 ) 130 1,581 113,926 20,556 (25,687 ) (22,614 ) 23,124 21,838 — 62,283 (297 ) (49,113 ) (9,106 ) (15,253 ) (11,966 ) (2,859 ) (6,941 ) (6,883 ) (34,113 ) (10,398 ) (2,986 ) (25,750 ) (44,040 ) (43,031 ) 2,054 (1,309 ) 59,974 (26,643 ) 70,594 93,026 $ 130,568 $ 66,383 PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)Common Stock Additional
Paid-In CapitalRetained Earnings Total
Stockholders’ EquityNumber
of SharesAmount December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ (2,948) $ 542,172 — — (61,604) 9,399 — (52,205) Repurchase of common stock (70) (1) (9,145) — — (9,146) Issuance of common stock for stock compensation plans 402 4 (25,513) — — (25,509) Issuance of common stock under the employee stock purchase plan 24 — 2,288 — — 2,288 Stock-based compensation — — 30,100 — — 30,100 Cash dividends declared ($0.03 per share) — — — (2,438) — (2,438) Other comprehensive income — — — — 280 280 Net (loss) — — — (6,617) — (6,617) March 31, 2021 81,246 $ 812 $ 140,558 $ 340,223 $ (2,668) $ 478,925 December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ (6,988) $ 416,088 Repurchase of common stock (242) (2) (22,581) — — (22,583) Issuance of common stock for stock compensation plans 297 3 (12,131) — — (12,128) Issuance of common stock under the employee stock purchase plan 35 — 2,446 — — 2,446 Stock-based compensation — — 28,227 — — 28,227 Cash dividends declared ($0.03 per share) — — — (2,455) — (2,455) Other comprehensive (loss) — — — — (2,548) (2,548) Net (loss) — — — (379) — (379) March 31, 2022 81,802 $ 818 $ 141,771 $ 273,615 $ (9,536) $ 406,668 Three Months Ended
March 31,2022 2021 Operating activities Net (loss) $ (379) $ (6,617) Adjustments to reconcile net (loss) to cash provided by operating activities Stock-based compensation 28,227 30,100 Deferred income taxes (9,295) (15,068) Loss on capped call transactions 30,560 19,117 Amortization of deferred commissions 17,221 11,496 Lease expense 3,919 3,238 Amortization of intangible assets and depreciation 4,171 7,006 Foreign currency transaction (gain) loss (2,876) 5,098 Other non-cash (1,100) 1,634 Change in operating assets and liabilities, net (55,332) (34,354) Cash provided by operating activities 15,116 21,650 Investing activities Purchases of investments (33,690) (21,051) Proceeds from maturities and called investments 20,915 40,867 Sales of investments 13,350 2,450 Payments for acquisitions, net of cash acquired — (4,993) Investment in property and equipment (6,657) (1,784) Cash (used in) provided by investing activities (6,082) 15,489 Financing activities Proceeds from employee stock purchase plan 2,446 2,288 Dividend payments to stockholders (2,454) (2,427) Common stock repurchases (35,910) (34,655) Cash (used in) financing activities (35,918) (34,794) Effect of exchange rate changes on cash and cash equivalents (310) (1,536) Net (decrease) increase in cash and cash equivalents (27,194) 809 Cash and cash equivalents, beginning of period 159,965 171,899 Cash and cash equivalents, end of period $ 132,771 $ 172,708 of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form10-K for the year ended December 31, 2016.aredo not necessarily indicative ofindicate the expected results expected for the full year 2017.2. NEW ACCOUNTING PRONOUNCEMENTSStock-Based CompensationIn May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2017-09 “Stock Compensation (Topic 718), Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change2022.terms or conditions. The effective date for the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.Financial InstrumentsIn June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating toavailable-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. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on itsour condensed consolidated financial statements and related disclosures.LeasesIn February 2016,notes thereto have been reclassified to conform to the FASB issued ASUNo. 2016-02, “Leases (Topic 842),”current year presentation. Such reclassifications did not affect total revenues, operating income, or net income.March 31, 2022 December 31, 2021 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Government debt $ 2,000 $ — $ (47) $ 1,953 $ 2,000 $ — $ (10) $ 1,990 Corporate debt 200,371 7 (2,930) 197,448 201,659 2 (837) 200,824 $ 202,371 $ 7 $ (2,977) $ 199,401 $ 203,659 $ 2 $ (847) $ 202,814 (in thousands) March 31, 2022 December 31, 2021 Accounts receivable $ 171,181 $ 182,717 Unbilled receivables 226,052 226,714 Long-term unbilled receivables 135,975 129,789 $ 533,208 $ 539,220 requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease paymentsrevenue recognition precedes billing, and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will bebilling is solely subject to this ASU and recognized as operating lease liabilities andright-of-use assets upon adoption with no material impact to its resultsthe passage of operations and cash flows.RevenueIn May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition, creating the new Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.The Company has elected the full retrospective adoption model,time.(Dollars in thousands) March 31, 2022 1 year or less $ 226,052 62 % 1-2 years 88,003 25 % 2-5 years 47,972 13 % $ 362,027 100 % January 1, 2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form10-K for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.(Dollars in thousands) March 31, 2022 2022 $ 72,143 20 % 2021 163,869 45 % 2020 77,585 21 % 2019 27,163 8 % 2018 and prior 21,267 6 % $ 362,027 100 % The Company has made significant progress on quantifying the impact of its adoption and identifying necessary changes to our policies, processes, systems, and controls.The Company expects the following impacts:Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the termagreementCompany’s total receivables:March 31, 2022 December 31, 2021 Client A Accounts receivable 4 % 1 % Unbilled receivables 15 % 15 % Total receivables 11 % 10 % (in thousands) March 31, 2022 December 31, 2021 $ 11,765 $ 12,530 10,292 10,643 $ 22,057 $ 23,173 becomereceived in advance of revenue recognition.(in thousands) March 31, 2022 December 31, 2021 Deferred revenue $ 290,873 $ 275,844 6,612 5,655 $ 297,485 $ 281,499 or earlier if prepaid, provided all other criteria forto new billings in advance of revenue recognition have been met, and any corresponding maintenance over$124.9 million of revenue recognized during the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the customer. Any unrecognized license revenue from these arrangements,period that was included in deferred revenue atas of December 31, 2015, will not be recognized2021.(in thousands) March 31, 2022 December 31, 2021 $ 125,220 $ 135,911 revenueother long-term assets.Three Months Ended
March 31,(in thousands) 2022 2021 $ 17,221 $ 11,496 future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016selling and 2017 will be recognized in full in the year that control of the license is transferred to the customer instead of over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.marketing expense.
PEGASYSTEMS INC.
3. MARKETABLE SECURITIES
The Company’s marketable securities
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | ||||||||||
January 1, | $ | 81,923 | |||||||||
Acquisition | — | ||||||||||
Currency translation adjustments | 108 | ||||||||||
March 31, | $ | 82,031 |
(in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
September 30, 2017 | ||||||||||||||||
Municipal bonds | $ | 32,764 | $ | 12 | �� | $ | (17 | ) | $ | 32,759 | ||||||
Corporate bonds | 31,079 | 12 | (38 | ) | 31,053 | |||||||||||
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$ | 63,843 | $ | 24 | $ | (55 | ) | $ | 63,812 | ||||||||
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December 31, 2016 | ||||||||||||||||
Municipal bonds | $ | 36,746 | $ | — | $ | (139 | ) | $ | 36,607 | |||||||
Corporate bonds | 26,610 | 1 | (51 | ) | 26,560 | |||||||||||
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$ | 63,356 | $ | 1 | $ | (190 | ) | $ | 63,167 | ||||||||
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Asrecorded at cost and amortized using the straight-line method over their estimated useful lives.
March 31, 2022 | |||||||||||||||||||||||
(in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value (1) | |||||||||||||||||||
Client-related | 4-10 years | $ | 63,142 | $ | (57,662) | $ | 5,480 | ||||||||||||||||
Technology | 2-10 years | 67,142 | (59,531) | 7,611 | |||||||||||||||||||
Other | 1-5 years | 5,361 | (5,361) | — | |||||||||||||||||||
$ | 135,645 | $ | (122,554) | $ | 13,091 |
December 31, 2021 | |||||||||||||||||||||||
(in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value (1) | |||||||||||||||||||
Client-related | 4-10 years | $ | 63,165 | $ | (57,342) | $ | 5,823 | ||||||||||||||||
Technology | 2-10 years | 67,142 | (58,902) | 8,240 | |||||||||||||||||||
Other | 1-5 years | 5,361 | (5,361) | — | |||||||||||||||||||
$ | 135,668 | $ | (121,605) | $ | 14,063 |
As of September 30, 2017, remaining maturities of marketable debt securities ranged from October 2017 to September 2020, with a weighted-average remaining maturity of approximately 14 months.
4. DERIVATIVE INSTRUMENTS
In May 2017, the Company discontinued its forward contracts program; however, it will continue to evaluate periodically its foreign exchange exposures and mayre-initiate this program if it is deemed necessary.
The Company has historically used foreign currency forward contracts (“forward contracts”) to hedge its exposure to fluctuations in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary.
At December 31, 2016, the total notional value of the Company’s outstanding forward contracts was $128.4 million.
The fair value of the Company’s outstanding forward contracts was as follows:
December 31, 2016 | ||||||||
(in thousands) | Recorded In: | Fair Value | ||||||
Asset Derivatives | ||||||||
Foreign currency forward contracts | Other current assets | $ | 628 | |||||
Liability Derivatives | ||||||||
Foreign currency forward contracts | Accrued expenses | $ | 883 |
As of September 30, 2017, the Company did not have any forward contracts outstanding.
The Company had forward contracts outstanding with total notional values as of September 30, 2016 as follows:
(in thousands) | ||||
Euro | € | 21,810 | ||
British pound | £ | 5,919 | ||
Australian dollar | A$ | 19,515 | ||
United States dollar | $ | 59,450 |
intangible assets:
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Cost of revenue | $ | 629 | $ | 629 | |||||||||||||||||||
Selling and marketing | 343 | 373 | |||||||||||||||||||||
$ | 972 | $ | 1,002 |
(in thousands) | March 31, 2022 | ||||
Remainder of 2022 | $ | 2,914 | |||
2023 | 3,618 | ||||
2024 | 2,849 | ||||
2025 | 2,509 | ||||
2026 | 874 | ||||
2027 | 327 | ||||
$ | 13,091 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Income tax receivables | $ | 27,679 | $ | 25,691 | |||||||
Contract assets | 11,765 | 12,530 | |||||||||
Other | 34,964 | 29,787 | |||||||||
$ | 74,408 | $ | 68,008 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Deferred income taxes | $ | 188,155 | $ | 180,656 | |||||||
Deferred commissions | 125,220 | 135,911 | |||||||||
Right of use assets | 87,212 | 87,521 | |||||||||
Capped call transactions | 29,404 | 59,964 | |||||||||
Property and equipment | 28,603 | 26,837 | |||||||||
Intangible assets | 13,091 | 14,063 | |||||||||
Contract assets | 10,292 | 10,643 | |||||||||
Other | 34,684 | 26,006 | |||||||||
$ | 516,661 | $ | 541,601 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Operating lease liabilities | $ | 4,855 | $ | 6,989 | |||||||
Dividends payable | 2,454 | 2,454 | |||||||||
$ | 7,309 | $ | 9,443 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Deferred revenue | $ | 6,612 | $ | 5,655 | |||||||
Other | 8,046 | 7,844 | |||||||||
$ | 14,658 | $ | 13,499 |
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Fixed lease costs (1) | $ | 5,093 | $ | 300 | |||||||||||||||||||
Short-term lease costs | 806 | 459 | |||||||||||||||||||||
Variable lease costs | 764 | 1,387 | |||||||||||||||||||||
$ | 6,663 | $ | 2,146 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Right of use assets (1) | $ | 87,212 | $ | 87,521 | |||||||
Operating lease liabilities (2) | $ | 4,855 | $ | 6,989 | |||||||
Long-term operating lease liabilities | $ | 90,699 | $ | 87,818 |
March 31, 2022 | December 31, 2021 | ||||||||||
Weighted-average remaining lease term | 7.5 years | 7.7 years | |||||||||
Weighted-average discount rate (1) | 4.3 | % | 4.4 | % |
(in thousands) | March 31, 2022 | ||||
Remainder of 2022 | $ | 3,887 | |||
2023 | 20,317 | ||||
2024 | 17,141 | ||||
2025 | 14,352 | ||||
2026 | 10,664 | ||||
2027 and thereafter | 48,381 | ||||
Total lease payments | 114,742 | ||||
Less: imputed interest (1) | (19,188) | ||||
$ | 95,554 |
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Cash paid for leases | $ | 3,650 | $ | 6,716 | |||||||
Right of use assets recognized for new leases and amendments (non-cash) | $ | 3,854 | $ | 714 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Principal | $ | 600,000 | $ | 600,000 | |||||||
Unamortized issuance costs | (8,560) | (9,278) | |||||||||
Convertible senior notes, net | $ | 591,440 | $ | 590,722 |
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Contractual interest expense (0.75% coupon) | $ | 1,125 | $ | 1,125 | |||||||||||||||||||
Amortization of issuance costs | 719 | 673 | |||||||||||||||||||||
$ | 1,844 | $ | 1,798 |
Three Months Ended March 31, | |||||||||||
2022 | 2021 | ||||||||||
Weighted-average effective interest rate | 1.2 | % | 1.2 | % |
March 31, 2022 | |||||||||||||||||
(in thousands) | Principal | Interest | Total | ||||||||||||||
Remainder of 2022 | $ | — | $ | 2,250 | $ | 2,250 | |||||||||||
2023 | — | 4,500 | 4,500 | ||||||||||||||
2024 | — | 4,500 | 4,500 | ||||||||||||||
2025 | 600,000 | 2,250 | 602,250 | ||||||||||||||
$ | 600,000 | $ | 13,500 | $ | 613,500 |
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
January 1, | $ | 59,964 | $ | 83,597 | |||||||
Fair value adjustment | (30,560) | (19,117) | |||||||||
March 31, | $ | 29,404 | $ | 64,480 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Gain (loss) from the change in the fair value of forward contracts included in other income (expense), net | $ | — | $ | (1,237 | ) | $ | 286 | $ | (4,955 | ) | ||||||
Foreign currency transaction (loss) gain from the remeasurement of foreign currency assets and liabilities | (552 | ) | 1,082 | (793 | ) | 2,764 | ||||||||||
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| |||||||||
$ | (552 | ) | $ | (155 | ) | $ | (507 | ) | $ | (2,191 | ) | |||||
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5.affiliate transactions.
recurring basis
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
underlying equity security. The Company’s assetsventure investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
Cash equivalents | $ | 19,626 | $ | — | $ | — | $ | 19,626 | $ | 3,216 | $ | — | $ | — | $ | 3,216 | |||||||||||||||||||||||||||||||
Marketable securities | $ | — | $ | 199,401 | $ | — | $ | 199,401 | $ | — | $ | 202,814 | $ | — | $ | 202,814 | |||||||||||||||||||||||||||||||
Capped Call Transactions (1) | $ | — | $ | 29,404 | $ | — | $ | 29,404 | $ | — | $ | 59,964 | $ | — | $ | 59,964 | |||||||||||||||||||||||||||||||
Venture investments (1) (2) | $ | — | $ | — | $ | 12,830 | $ | 12,830 | $ | — | $ | — | $ | 7,648 | $ | 7,648 |
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
January 1, | $ | 7,648 | $ | 8,345 | |||||||
New investments | — | 500 | |||||||||
Sales of investments | — | (400) | |||||||||
Changes in foreign exchange rates | (61) | (9) | |||||||||
Changes in fair value: | |||||||||||
included in other income | 2,741 | 100 | |||||||||
included in other comprehensive income | 2,502 | 1,220 | |||||||||
March 31, | $ | 12,830 | $ | 9,756 |
Fair Value Measurements at Reporting Date Using | Total | |||||||||||||||||||
(in thousands) | Level 1 | Level 2 | ||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Fair Value Assets: | ||||||||||||||||||||
Money market funds | $ | 655 | $ | — | $ | 655 | ||||||||||||||
Marketable securities: | ||||||||||||||||||||
Municipal bonds | $ | — | $ | 32,759 | 32,759 | |||||||||||||||
Corporate bonds | — | 31,053 | 31,053 | |||||||||||||||||
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| |||||||||||||||
$ | — | $ | 63,812 | $ | 63,812 | |||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Fair Value Assets: | ||||||||||||||||||||
Money market funds | $ | 458 | $ | — | $ | 458 | ||||||||||||||
Marketable securities: | ||||||||||||||||||||
Municipal bonds | $ | — | $ | 36,607 | $ | 36,607 | ||||||||||||||
Corporate bonds | — | 26,560 | 26,560 | |||||||||||||||||
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| |||||||||||||||
$ | — | $ | 63,167 | $ | 63,167 | |||||||||||||||
Foreign currency forward contracts | — | 628 | 628 | |||||||||||||||||
Fair Value Liabilities: | ||||||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 883 | $ | 883 |
For certain other financial instruments, including accounts receivablereceivables and accounts payable, the carrying value approximates their fair value due to these items’ short maturity.
Assets Measured at Fair Value on a Nonrecurring Basis
Assets recorded atNotes
6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Trade accounts receivable | $ | 164,530 | $ | 234,473 | ||||
Unbilled trade accounts receivable | 32,820 | 34,681 | ||||||
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|
|
| |||||
Total trade accounts receivable | 197,350 | 269,154 | ||||||
Allowance for sales credit memos | (6,189 | ) | (4,126 | ) | ||||
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|
| |||||
$ | 191,161 | $ | 265,028 | |||||
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|
|
Unbilled trade accounts receivable primarily relate to services earned under time and materials arrangements and to license, maintenance, and cloud arrangements that have commenced or been delivered in excess of scheduled invoicing.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 as follows:
(in thousands) | ||||
Balance as of January 1, | $ | 73,164 | ||
Purchase price adjustments to goodwill | (354 | ) | ||
Currency translation adjustments | 131 | |||
|
| |||
Balance as of September 30, | $ | 72,941 | ||
|
|
hierarchy.
Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
U.S. | $ | 217,272 | 58 | % | $ | 194,568 | 62 | % | |||||||||||||||||||||||||||
Other Americas | 45,751 | 12 | % | 11,901 | 4 | % | |||||||||||||||||||||||||||||
United Kingdom (“U.K.”) | 30,932 | 8 | % | 28,212 | 9 | % | |||||||||||||||||||||||||||||
Europe (excluding U.K.), Middle East, and Africa | 49,136 | 13 | % | 51,659 | 16 | % | |||||||||||||||||||||||||||||
Asia-Pacific | 33,216 | 9 | % | 27,159 | 9 | % | |||||||||||||||||||||||||||||
$ | 376,307 | 100 | % | $ | 313,499 | 100 | % |
Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful lives as follows:
(in thousands) | Range of Remaining Useful Lives | Cost | Accumulated Amortization | Net Book Value | ||||||||||||
September 30, 2017 | ||||||||||||||||
Customer related intangibles | 4-10 years | $ | 63,158 | $ | (43,205 | ) | $ | 19,953 | ||||||||
Technology | 7-10 years | 58,942 | (44,140 | ) | 14,802 | |||||||||||
Other intangibles | — | 5,361 | (5,361 | ) | — | |||||||||||
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|
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|
|
| |||||||||||
$ | 127,461 | $ | (92,706 | ) | $ | 34,755 | ||||||||||
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|
| |||||||||||
December 31, 2016 | ||||||||||||||||
Customer related intangibles | 4-10 years | $ | 63,091 | $ | (37,573 | ) | $ | 25,518 | ||||||||
Technology | 3-10 years | 58,942 | (40,269 | ) | 18,673 | |||||||||||
Other intangibles | — | 5,361 | (5,361 | ) | — | |||||||||||
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|
| |||||||||||
$ | 127,394 | $ | (83,203 | ) | $ | 44,191 | ||||||||||
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|
Amortization expense
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Perpetual license | $ | 7,440 | $ | 5,452 | |||||||||||||||||||
Subscription license | 137,533 | 111,509 | |||||||||||||||||||||
Revenue recognized at a point in time | 144,973 | 116,961 | |||||||||||||||||||||
Maintenance | 79,716 | 75,561 | |||||||||||||||||||||
Pega Cloud | 90,317 | 67,858 | |||||||||||||||||||||
Consulting | 61,301 | 53,119 | |||||||||||||||||||||
Revenue recognized over time | 231,334 | 196,538 | |||||||||||||||||||||
Total revenue | $ | 376,307 | $ | 313,499 |
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Pega Cloud | $ | 90,317 | $ | 67,858 | |||||||||||||||||||
Maintenance | 79,716 | 75,561 | |||||||||||||||||||||
Subscription services | 170,033 | 143,419 | |||||||||||||||||||||
Subscription license | 137,533 | 111,509 | |||||||||||||||||||||
Subscription | 307,566 | 254,928 | |||||||||||||||||||||
Perpetual license | 7,440 | 5,452 | |||||||||||||||||||||
Consulting | 61,301 | 53,119 | |||||||||||||||||||||
$ | 376,307 | $ | 313,499 |
(Dollars in thousands) | Subscription services | Subscription license | Perpetual license | Consulting | Total | |||||||||||||||||||||||||||||||||
Maintenance | Pega Cloud | |||||||||||||||||||||||||||||||||||||
1 year or less | $ | 228,984 | $ | 329,857 | $ | 47,428 | $ | 7,281 | $ | 40,661 | $ | 654,211 | 55 | % | ||||||||||||||||||||||||
1-2 years | 63,870 | 208,875 | 16,111 | 4,505 | 10,955 | 304,316 | 26 | % | ||||||||||||||||||||||||||||||
2-3 years | 33,617 | 106,156 | 2,422 | 2,252 | 3,876 | 148,323 | 13 | % | ||||||||||||||||||||||||||||||
Greater than 3 years | 22,611 | 44,596 | 1,758 | — | 522 | 69,487 | 6 | % | ||||||||||||||||||||||||||||||
$ | 349,082 | $ | 689,484 | $ | 67,719 | $ | 14,038 | $ | 56,014 | $ | 1,176,337 | 100 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of revenue | $ | 1,232 | $ | 1,642 | $ | 3,871 | $ | 4,626 | ||||||||
Selling and marketing | 1,873 | 1,867 | 5,608 | 5,274 | ||||||||||||
General and administrative | — | 90 | — | 268 | ||||||||||||
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| |||||||||
$ | 3,105 | $ | 3,599 | $ | 9,479 | $ | 10,168 | |||||||||
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|
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Future estimated amortization expense related to intangible assets as of September 30, 2017 is as follows:
(in thousands) | ||||
Remainder of 2017 | $ | 2,846 | ||
2018 | 11,347 | |||
2019 | 5,555 | |||
2020 | 2,659 | |||
2021 | 2,637 | |||
2022 and thereafter | 9,711 | |||
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| |||
$ | 34,755 | |||
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8. ACCRUED EXPENSES
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Outside professional services | $ | 13,447 | $ | 10,204 | ||||
Income and other taxes | 5,947 | 10,422 | ||||||
Marketing and sales program expenses | 4,679 | 3,707 | ||||||
Dividends payable | 2,336 | 2,298 | ||||||
Employee related expenses | 4,715 | 3,806 | ||||||
Other | 8,557 | 6,314 | ||||||
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| |||||
$ | 39,681 | $ | 36,751 | |||||
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|
|
March 31, 2021:
(Dollars in thousands) | Subscription services | Subscription license | Perpetual license | Consulting | Total | |||||||||||||||||||||||||||||||||
Maintenance | Pega Cloud | |||||||||||||||||||||||||||||||||||||
1 year or less | $ | 220,100 | $ | 252,104 | $ | 41,025 | $ | 9,649 | $ | 21,068 | $ | 543,946 | 55 | % | ||||||||||||||||||||||||
1-2 years | 52,366 | 187,456 | 9,874 | 629 | 914 | 251,239 | 26 | % | ||||||||||||||||||||||||||||||
2-3 years | 33,337 | 91,861 | 7,055 | — | 1,756 | 134,009 | 14 | % | ||||||||||||||||||||||||||||||
Greater than 3 years | 16,834 | 32,895 | 377 | — | 510 | 50,616 | 5 | % | ||||||||||||||||||||||||||||||
$ | 322,637 | $ | 564,316 | $ | 58,331 | $ | 10,278 | $ | 24,248 | $ | 979,810 | 100 | % |
9. DEFERRED REVENUE
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Term license | $ | 5,636 | $ | 15,843 | ||||
Perpetual license | 20,844 | 23,189 | ||||||
Maintenance | 105,588 | 112,397 | ||||||
Cloud | 18,805 | 13,604 | ||||||
Professional Services | 10,058 | 10,614 | ||||||
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| |||||
Current deferred revenue | 160,931 | 175,647 | ||||||
Perpetual license | 4,085 | 7,909 | ||||||
Maintenance | 828 | 1,802 | ||||||
Cloud | 1,217 | 1,278 | ||||||
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| |||||
Long-term deferred revenue | 6,130 | 10,989 | ||||||
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| |||||
$ | 167,061 | $ | 186,636 | |||||
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10.
Stock-based compensation expense is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of revenues | $ | 3,613 | $ | 3,117 | $ | 10,913 | $ | 8,711 | ||||||||
Selling and marketing | 3,976 | 3,468 | 11,482 | 9,395 | ||||||||||||
Research and development | 3,420 | 2,260 | 10,306 | 7,480 | ||||||||||||
General and administrative | 2,480 | 1,983 | 7,228 | 4,706 | ||||||||||||
Acquisition-related | — | (10 | ) | — | 342 | |||||||||||
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Total stock-based compensation before tax | $ | 13,489 | $ | 10,818 | $ | 39,929 | $ | 30,634 | ||||||||
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| |||||||||
Income tax benefit | $ | (4,129 | ) | $ | (3,227 | ) | $ | (12,231 | ) | $ | (8,917 | ) |
During the nine months ended September 30, 2017, the Company issued approximately 1,299,000 shares of common stock to its employees and 18,000 shares of common stock to itsnon-employee directors under the Company’s stock-based compensation plans.
During the nine months ended September 30, 2017, the Company granted approximately 1,052,000 restricted stock units (“RSUs”) and 1,520,000non-qualified stock options to its employees with total fair values of approximately $47.5 million and $20.6 million, respectively. This includes approximately 175,000 RSUs which were granted in connection with the election by employees to receive 50% of their 2017 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $7.7 million associated with this RSU grant will be recognized over aone-year period beginning on the grant date.
The Company recognizes stock based compensation on the accelerated recognition method, treating each vesting tranche as if it were an individual grant.
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2022 | 2021 | |||||||||||||||||||||
Cost of revenue | $ | 6,378 | $ | 5,925 | |||||||||||||||||||
Selling and marketing | 10,958 | 13,720 | |||||||||||||||||||||
Research and development | 7,346 | 6,770 | |||||||||||||||||||||
General and administrative | 3,545 | 3,685 | |||||||||||||||||||||
$ | 28,227 | $ | 30,100 | ||||||||||||||||||||
Income tax benefit | $ | (5,311) | $ | (5,991) |
11. EARNINGS
Three Months Ended March 31, 2022 | |||||||||||
(in thousands) | Shares | Total Fair Value | |||||||||
Restricted stock units | 1,096 | $ | 94,538 | ||||||||
Non-qualified stock options | 2,212 | $ | 60,514 | ||||||||
Three Months Ended March 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | |||||||||||||||||||||
(Benefit from) income taxes | $ | (7,683) | $ | (17,618) | |||||||||||||||||||
Effective income tax benefit rate | 95 | % | 73 | % |
Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands, except per share amounts) | 2022 | 2021 | |||||||||||||||||||||
Net (loss) | $ | (379) | $ | (6,617) | |||||||||||||||||||
Weighted-average common shares outstanding | 81,680 | 81,004 | |||||||||||||||||||||
(Loss) per share, basic | $ | 0.00 | $ | (0.08) | |||||||||||||||||||
Net (loss) | $ | (379) | $ | (6,617) | |||||||||||||||||||
Weighted-average common shares outstanding, assuming dilution (1) (2) (3) | 81,680 | 81,004 | |||||||||||||||||||||
(Loss) per share, diluted | $ | 0.00 | $ | (0.08) | |||||||||||||||||||
Outstanding anti-dilutive stock options and RSUs (4) | 4,178 | 6,465 |
period. If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Basic | ||||||||||||||||
Net (loss)/income | $ | (1,812 | ) | $ | 3,301 | $ | 36,615 | $ | 18,237 | |||||||
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Weighted-average common shares outstanding | 77,691 | 76,278 | 77,258 | 76,323 | ||||||||||||
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(Loss)/earnings per share, basic | $ | (0.03 | ) | $ | 0.04 | $ | 0.47 | $ | 0.24 | |||||||
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Diluted | ||||||||||||||||
Net (loss)/income | $ | (1,812 | ) | $ | 3,301 | $ | 36,615 | $ | 18,237 | |||||||
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Weighted-average effect of dilutive securities: | ||||||||||||||||
Stock options | — | 1,933 | 3,519 | 1,851 | ||||||||||||
RSUs | — | 1,337 | 1,940 | 1,227 | ||||||||||||
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Effect of assumed exercise of stock options and RSUs | — | 3,270 | 5,459 | 3,078 | ||||||||||||
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Weighted-average common shares outstanding, assuming dilution | 77,691 | 79,548 | 82,717 | 79,401 | ||||||||||||
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(Loss)/earnings per share, diluted | $ | (0.03 | ) | $ | 0.04 | $ | 0.44 | $ | 0.23 | |||||||
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| |||||||||
Outstanding stock options and RSUs excluded as impact would be anti-dilutive | 7,232 | 296 | 219 | 368 |
In periodsinterest, upon conversion of loss, all equity awardsthe 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 the inclusion of any equity awardstheir effect would be anti-dilutive.
12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS
Geographic Information
Operating segments are defined as components of an enterprise, about which separate financial information is available
The Company develops and licenses software applications for customer engagement and its Pega® Platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenuethe period were excluded from the sale and supportcomputation of one group of similar products and services—software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellencediluted (loss) per share. These awards may be dilutive in the enterprise applications market. To assess performance,future.
The Company’s international revenue, based uponproceedings that arise from time to time relating to matters incidental to the clients’ location, is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
U.S. | $ | 95,087 | 53 | % | $ | 111,274 | 61 | % | $ | 351,330 | 59 | % | $ | 308,049 | 56 | % | ||||||||||||||||
Other Americas | 8,722 | 5 | % | 7,952 | 4 | % | 30,243 | 5 | % | 49,494 | 9 | % | ||||||||||||||||||||
U.K. | 18,485 | 10 | % | 21,490 | 12 | % | 68,003 | 11 | % | 77,181 | 14 | % | ||||||||||||||||||||
Other EMEA(1) | 28,100 | 16 | % | 23,656 | 13 | % | 76,958 | 13 | % | 67,314 | 12 | % | ||||||||||||||||||||
Asia Pacific | 29,421 | 16 | % | 18,430 | 10 | % | 74,508 | 12 | % | 48,618 | 9 | % | ||||||||||||||||||||
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$ | 179,815 | 100 | % | $ | 182,802 | 100 | % | $ | 601,042 | 100 | % | $ | 550,656 | 100 | % | |||||||||||||||||
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major Clients
Clients accounting for 10% or moreordinary course of the Company’s total revenue were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Total revenue | $ | 179,815 | $ | 182,802 | $ | 601,042 | $ | 550,656 | ||||||||
Client A | 10.6 | % | * | * | * |
Clients accounting for 10% or morebusiness, including actions concerning contracts, intellectual property, employment, benefits, and securities matters.
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Total trade accounts receivable | 197,350 | 269,154 | ||||||
Client A | 12.4 | % | * |
to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.
Forward-Looking Statements
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intendedtransition to” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, a more subscription-based business model;
We have no (“SEC”).
Business overview
Quarterly Report represent our views as of April 28, 2022.
Our clients includeare Global 3000 companiesorganizations and government agencies that seekrequire solutions to manage complex enterprise systemsdistinguish themselves in the markets they serve. Our solutions achieve and customer service issuesfacilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with greater agility and cost-effectiveness. Our strategy isour partners, we deliver solutions tailored to our clients’ specific industry needs.
Our license revenue is primarily derived from salesthe “Risk Factors” section of our applicationsAnnual Report on Form 10-K for the year ended December 31, 2021 for additional information.
Financial and Performance Metrics
Management evaluates our financial performance, based a number of select financial and performance metrics. The performance metrics are periodically reviewed and revised to reflect any changes in our business. Historically, Recurring Revenue and License and Cloud Backlog have been our primary performance metrics. However, due to the change in the revenue recognition patterns of term license arrangements as a result of the expected implementation of the new revenue accounting standard (See Note 2) in the first quarter of 2018, we have started tracking Annual Contract Value (“ACV”), a new performance measure.
Select Financial Metrics
(Dollars in thousands, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
Total revenue | $ | 179,815 | $ | 182,802 | (2,987 | ) | (2 | )% | $ | 601,042 | $ | 550,656 | $ | 50,386 | 9 | % | ||||||||||||||||
Operating margin | (8 | )% | 3 | % | 3 | % | 5 | % | ||||||||||||||||||||||||
Diluted (loss)/earnings per share | $ | (0.03 | ) | $ | 0.04 | $ | (0.07 | ) | (175 | )% | $ | 0.44 | $ | 0.23 | $ | 0.21 | 91 | % | ||||||||||||||
Cash flow provided by operating activities | 113,926 | 20,556 | 93,370 | 454 | % |
Select Performance Metrics
Annual Contract Value (“ACV”)
The change in ACV measures the growth and predictability of future cash flows from committed term license, cloud, and maintenance arrangementsactive contracts as of the end ofmeasurement date. The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the particular reporting period.
quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is the sum of the following two components:
September 30, | ||||||||||||||||
(in thousands) | 2017 | 2016 | Change | |||||||||||||
Term License and Cloud ACV | $ | 200,180 | $ | 163,408 | $ | 36,772 | 23 | % | ||||||||
Maintenance ACV | 248,816 | 220,152 | $ | 28,664 | 13 | % | ||||||||||
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Term License, Cloud and Maintenance ACV | $ | 448,996 | $ | 383,560 | $ | 65,436 | 17 | % | ||||||||
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Recurring Revenue
A measure of the predictability and repeatability of our revenue.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Recurring revenue | ||||||||||||||||||||||||||||||||
Term license | $ | 21,678 | $ | 28,919 | $ | (7,241 | ) | (25 | )% | $ | 106,170 | $ | 102,115 | $ | 4,055 | 4 | % | |||||||||||||||
Maintenance | 62,204 | 55,038 | $ | 7,166 | 13 | % | 180,759 | 163,174 | $ | 17,585 | 11 | % | ||||||||||||||||||||
Cloud | 13,354 | 10,873 | $ | 2,481 | 23 | % | 36,914 | 30,640 | $ | 6,274 | 20 | % | ||||||||||||||||||||
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Total recurring revenue | $ | 97,236 | $ | 94,830 | $ | 2,406 | 3 | % | $ | 323,843 | $ | 295,929 | $ | 27,914 | 9 | % | ||||||||||||||||
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Recurring revenue as a percent of total revenue | 54 | % | 52 | % | 54 | % | 54 | % |
License and Cloud Backlog
A measure of the continued growth of our business as a result of future contractual commitments by our clients.
License and Cloud Backlog is the sum of the following two components:
License and cloud backlog may vary in any given period depending on the amount and timing of when the arrangements are executed, as well as the mix between perpetual, term, and cloud license arrangements, which may depend on our clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term and cloud license arrangements executed will generally result in revenue being recognized over longer periods.
September 30, | Change | |||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | ||||||||||||||||||
Deferred license and cloud revenue on the balance sheet | ||||||||||||||||||||
Term license and cloud | $ | 25,658 | 51 | % | $ | 19,627 | 42 | % | 31 | % | ||||||||||
Perpetual license | 24,929 | 49 | % | 27,653 | 58 | % | (10 | )% | ||||||||||||
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Total deferred license and cloud revenue | 50,587 | 100 | % | 47,280 | 100 | % | 7 | % | ||||||||||||
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License and cloud contractual commitments not on the balance sheet | ||||||||||||||||||||
Term license and cloud | 450,535 | 91 | % | 352,804 | 94 | % | 28 | % | ||||||||||||
Perpetual license | 46,459 | 9 | % | 23,483 | 6 | % | 98 | % | ||||||||||||
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Total license and cloud commitments | 496,994 | 100 | % | 376,287 | 100 | % | 32 | % | ||||||||||||
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Total license (term and perpetual) and cloud backlog | $ | 547,581 | $ | 423,567 | 29 | % | ||||||||||||||
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Total term license and cloud backlog | 476,193 | 87 | % | 372,431 | 88 | % | 28 | % | ||||||||||||
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Critical accounting policies
Results of Operations
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Total revenue | $ | 179,815 | $ | 182,802 | $ | (2,987 | ) | (2 | )% | $ | 601,042 | $ | 550,656 | $ | 50,386 | 9 | % | |||||||||||||||
Gross profit | $ | 110,084 | $ | 122,365 | $ | (12,281 | ) | (10 | )% | $ | 395,346 | $ | 373,609 | $ | 21,737 | 6 | % | |||||||||||||||
Total operating expenses | $ | 124,373 | $ | 116,867 | $ | 7,506 | 6 | % | $ | 376,647 | $ | 347,626 | $ | 29,021 | 8 | % | ||||||||||||||||
(Loss)/income from operations | $ | (14,289 | ) | $ | 5,498 | $ | (19,787 | ) | (360 | )% | $ | 18,699 | $ | 25,983 | $ | (7,284 | ) | (28 | )% | |||||||||||||
Operating margin | (8 | )% | 3 | % | 3 | % | 5 | % | ||||||||||||||||||||||||
(Loss)/income before (benefit)/provision for income taxes | $ | (14,697 | ) | $ | 5,515 | $ | (20,212 | ) | (366 | )% | $ | 18,663 | $ | 24,506 | $ | (5,843 | ) | (24 | )% |
Revenue
Software license revenue
(Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||||||||||||||||||
Perpetual license | $ | 20,115 | 48 | % | $ | 39,914 | 58 | % | $ | (19,799 | ) | (50 | )% | $ | 89,050 | 46 | % | $ | 105,734 | 51 | % | ($ | 16,684 | ) | (16 | )% | ||||||||||||||||||||||
Term license | 21,678 | 52 | % | 28,919 | 42 | % | (7,241 | ) | (25 | )% | 106,170 | 54 | % | 102,115 | 49 | % | 4,055 | 4 | % | |||||||||||||||||||||||||||||
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Total license revenue | $ | 41,793 | 100 | % | $ | 68,833 | 100 | % | $ | (27,040 | ) | (39 | )% | $ | 195,220 | 100 | % | $ | 207,849 | 100 | % | ($ | 12,629 | ) | (6 | )% | ||||||||||||||||||||||
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The mix between perpetual and term licensemaintenance arrangements executed in a particular period varies based on clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed will generally result in license revenue beingis typically recognized over longer periods. Additionally, some of our perpetualthe contract term, while revenue from license arrangements include extended payment terms or additionalsales is recognized when the license rights of use, which may also result in the recognition ofbecome effective, typically upfront.
(Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pega Cloud | $ | 90,317 | 24 | % | $ | 67,858 | 22 | % | $ | 22,459 | 33 | % | |||||||||||||||||||||||||||||||||||||||||
Maintenance | 79,716 | 21 | % | 75,561 | 23 | % | 4,155 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription services | 170,033 | 45 | % | 143,419 | 45 | % | 26,614 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription license | 137,533 | 37 | % | 111,509 | 36 | % | 26,024 | 23 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription | 307,566 | 82 | % | 254,928 | 81 | % | 52,638 | 21 | % | ||||||||||||||||||||||||||||||||||||||||||||
Perpetual license | 7,440 | 2 | % | 5,452 | 2 | % | 1,988 | 36 | % | ||||||||||||||||||||||||||||||||||||||||||||
Consulting | 61,301 | 16 | % | 53,119 | 17 | % | 8,182 | 15 | % | ||||||||||||||||||||||||||||||||||||||||||||
$ | 376,307 | 100 | % | $ | 313,499 | 100 | % | $ | 62,808 | 20 | % |
The decrease in perpetual license revenuechanges in the three months ended September 30, 2017 was primarily due to a decrease inMarch 31, 2022 generally reflect the average valueimpact of perpetual arrangements executed and a lower percentage of perpetual arrangements executed and recognized inour subscription transition. Other factors impacting our revenue in the current period. The decrease in perpetual license revenue in the nine months ended September 30, 2017 was primarily due to a lower percentage of perpetual arrangements executed and recognized in revenue.
The decrease in term license revenue in the three months ended September 30, 2017 was primarily due to a large term license renewal for which the second year of the term was recognized as revenue in the three months ended September 30, 2016. If the second year of this term license arrangement was not paid in advance in the three months ended September 30, 2016, term license revenue would have decreased 2%. include:
The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable perpetual arrangements not reflected in deferred revenue was $13.3 million as of September 30, 2017 compared to $3.9 million as of September 30, 2016.
The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable term and cloud arrangements not reflected in deferred revenue was $37.7 million as of September 30, 2017 compared to $26.7 million as of September 30, 2016. For additional information see “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources.”
Maintenance revenue
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Maintenance | $ | 62,204 | $ | 55,038 | $ | 7,166 | 13 | % | $ | 180,759 | $ | 163,174 | $ | 17,585 | 11 | % |
The increases were primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates significantly in excess of 90%.
Services revenue
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||
Consulting services | $ | 61,535 | 81 | % | $ | 46,829 | 80 | % | $ | 14,706 | 31 | % | $ | 183,447 | 82 | % | $ | 144,263 | 80 | % | $ | 39,184 | 27 | % | ||||||||||||||||||||||||
Cloud | 13,354 | 18 | % | 10,873 | 18 | % | 2,481 | 23 | % | 36,914 | 16 | % | 30,640 | 17 | % | 6,274 | 20 | % | ||||||||||||||||||||||||||||||
Training | 929 | 1 | % | 1,229 | 2 | % | (300 | ) | (24 | )% | 4,702 | 2 | % | 4,730 | 3 | % | (28 | ) | (1 | )% | ||||||||||||||||||||||||||||
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Total services | $ | 75,818 | 100 | % | $ | 58,931 | 100 | % | $ | 16,887 | 29 | % | $ | 225,063 | 100 | % | $ | 179,633 | 100 | % | $ | 45,430 | 25 | % | ||||||||||||||||||||||||
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Consulting services revenue is primarily generated from new license implementations. Our consulting services revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.
The increases in consulting services revenue were primarily due to higher billable hours during the three and nine months ended September 30, 2017 driven by a large project which began in the second half of 2016.
Cloud revenue represents revenue from our Pega Cloud offerings. The increases in cloud revenue were primarily due to continued growth of our cloud client base.
Gross profit
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Software license | $ | 40,517 | $ | 67,520 | $ | (27,003 | ) | (40 | )% | $ | 191,394 | $ | 204,203 | $ | (12,809 | ) | (6 | )% | ||||||||||||||
Maintenance | 55,488 | 48,379 | 7,109 | 15 | % | 159,814 | 144,285 | 15,529 | 11 | % | ||||||||||||||||||||||
Services | 14,079 | 6,466 | 7,613 | 118 | % | 44,138 | 25,121 | 19,017 | 76 | % | ||||||||||||||||||||||
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Total gross profit | $ | 110,084 | $ | 122,365 | $ | (12,281 | ) | (10 | )% | $ | 395,346 | $ | 373,609 | $ | 21,737 | 6 | % | |||||||||||||||
Software license gross profit % | 97 | % | 98 | % | 98 | % | 98 | % | ||||||||||||||||||||||||
Maintenance gross profit % | 89 | % | 88 | % | 88 | % | 88 | % | ||||||||||||||||||||||||
Services gross profit % | 19 | % | 11 | % | 20 | % | 14 | % | ||||||||||||||||||||||||
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Total gross profit % | 61 | % | 67 | % | 66 | % | 68 | % |
The decrease in total gross profit in the three months ended September 30, 20172022 was primarily due to a shift in the mix of license arrangements executed from perpetual to term licenses and an increase in lower margin services revenue.
The increaseconsultant billable hours in total grossNorth America.
(Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pega Cloud | $ | 63,418 | 70 | % | $ | 45,301 | 67 | % | $ | 18,117 | 40 | % | |||||||||||||||||||||||||||||||||||||||||
Maintenance | 74,585 | 94 | % | 69,775 | 92 | % | 4,810 | 7 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription services | 138,003 | 81 | % | 115,076 | 80 | % | 22,927 | 20 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription license | 136,911 | 100 | % | 110,889 | 99 | % | 26,022 | 23 | % | ||||||||||||||||||||||||||||||||||||||||||||
Subscription | 274,914 | 89 | % | 225,965 | 89 | % | 48,949 | 22 | % | ||||||||||||||||||||||||||||||||||||||||||||
Perpetual license | 7,406 | 100 | % | 5,422 | 99 | % | 1,984 | 37 | % | ||||||||||||||||||||||||||||||||||||||||||||
Consulting | 5,790 | 9 | % | (335) | (1) | % | 6,125 | * | |||||||||||||||||||||||||||||||||||||||||||||
$ | 288,110 | 77 | % | $ | 231,052 | 74 | % | $ | 57,058 | 25 | % |
Operating expenses
Selling and marketing
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Selling and marketing | $ | 70,209 | $ | 67,032 | $ | 3,177 | 5 | % | $ | 217,384 | $ | 202,126 | $ | 15,258 | 8 | % | ||||||||||||||||
As a percent of total revenue | 39 | % | 37 | % | 36 | % | 37 | % | ||||||||||||||||||||||||
Selling and marketing headcount, end of period | 934 | 875 | 59 | 7 | % |
Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.
The increaseconsulting gross profit percent in the three months ended September 30, 2017March 31, 2022 was due to an increase in consultant realization rates in North America.
(Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Selling and marketing | $ | 162,236 | 43 | % | $ | 148,739 | 47 | % | $ | 13,497 | 9 | % | |||||||||||||||||||||||||||||||||||||||||
Research and development | $ | 71,490 | 19 | % | $ | 62,442 | 20 | % | $ | 9,048 | 14 | % | |||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 35,764 | 10 | % | $ | 18,270 | 6 | % | $ | 17,494 | 96 | % |
The increase in the nine months ended September 30, 2017March 31, 2022 was primarily due to an increase in compensation and benefits of $12.7$5.7 million, respectively, driven by increasedattributable to increases in headcount and equity compensation, and an increase in employee travel and entertainment, partially offset by a decrease in brand marketing program expenses of $2.2 million.
incentive compensation. The increase in headcount reflects additional investments in developing our efforts tosolutions, particularly for Pega Cloud.
Research and development
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Research and development | $ | 41,031 | $ | 38,036 | $ | 2,995 | 8 | % | $ | 121,089 | $ | 108,530 | $ | 12,559 | 12 | % | ||||||||||||||||
As a percent of total revenue | 23 | % | 21 | % | 20 | % | 20 | % | ||||||||||||||||||||||||
Research and Development headcount, end of period | 1,474 | 1,437 | 37 | 3 | % |
Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products, as well as enhancements and design changes to existing products and integration of acquired technologies.
The increasesadministrative in the three and nine months ended September 30, 2017 wereMarch 31, 2022 was primarily due to increasesan increase of $15.4 million in compensationlegal fees and benefitsrelated expenses arising from proceedings outside the ordinary course of $2.9 millionbusiness. We have incurred and $12.6 million, respectively, attributableexpect to increased headcountcontinue to incur additional expenses for these proceedings in 2022. See "Note 14. Commitments and equity compensation.
GeneralContingencies" in Part I, Item 1 and administrative
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
General and administrative | $ | 13,133 | $ | 11,725 | $ | 1,408 | 12 | % | $ | 38,174 | $ | 34,067 | $ | 4,107 | 12 | % | ||||||||||||||||
As a percent of total revenue | 7 | % | 6 | % | 6 | % | 6 | % | ||||||||||||||||||||||||
General and administrative headcount, end of period | 407 | 371 | 36 | 10 | % |
General“Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information.
(Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||
Foreign currency transaction gain (loss) | $ | 2,876 | $ | (5,098) | $ | 7,974 | * | ||||||||||||||||||||||||||||||||||
Interest income | 207 | 153 | 54 | 35 | % | ||||||||||||||||||||||||||||||||||||
Interest expense | (1,946) | (1,880) | (66) | (4) | % | ||||||||||||||||||||||||||||||||||||
(Loss) on capped call transactions | (30,560) | (19,117) | (11,443) | (60) | % | ||||||||||||||||||||||||||||||||||||
Other income, net | 2,741 | 106 | 2,635 | 2,486 | % | ||||||||||||||||||||||||||||||||||||
$ | (26,682) | $ | (25,836) | $ | (846) | (3) | % |
The increasesforeign currency transaction gain (loss) in the three and nine months ended September 30, 2017 were primarily due to increases in compensation and benefits of $0.4 million and $4 million, respectively, attributable to increased headcount and equity compensation. The increase in the nine months ended September 30, 2017March 31, 2022 was partially offset by a decrease of $1.5 million in legal fees.
Stock-based compensation
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Cost of revenues | $ | 3,613 | $ | 3,117 | $ | 496 | 16 | % | $ | 10,913 | $ | 8,711 | $ | 2,202 | 25 | % | ||||||||||||||||
Selling and marketing | 3,976 | 3,468 | 508 | 15 | % | 11,482 | 9,395 | 2,087 | 22 | % | ||||||||||||||||||||||
Research and development | 3,420 | 2,260 | 1,160 | 51 | % | 10,306 | 7,480 | 2,826 | 38 | % | ||||||||||||||||||||||
General and administrative | 2,480 | 1,983 | 497 | 25 | % | 7,228 | 4,706 | 2,522 | 54 | % | ||||||||||||||||||||||
Acquisition-related | — | (10 | ) | 10 | (100 | )% | — | 342 | (342 | ) | (100 | )% | ||||||||||||||||||||
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Total stock-based compensation before tax | $ | 13,489 | $ | 10,818 | $ | 2,671 | 25 | % | $ | 39,929 | $ | 30,634 | $ | 9,295 | 30 | % | ||||||||||||||||
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Income tax benefit | $ | (4,129 | ) | $ | (3,227 | ) | $ | (902 | ) | 28 | % | $ | (12,231 | ) | $ | (8,917 | ) | $ | (3,314 | ) | 37 | % |
The increases were primarily due to the increased valueimpact of our annual periodic equity awards granted in March 2016 and 2017. These awards generally have a five-year vesting schedule.
Amortization of intangibles
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Cost of revenue | $ | 1,232 | $ | 1,642 | $ | (410 | ) | (25 | )% | $ | 3,871 | $ | 4,626 | $ | (755 | ) | (16 | )% | ||||||||||||||
Selling and marketing | 1,873 | 1,867 | 6 | — | % | 5,608 | 5,274 | 334 | 6 | % | ||||||||||||||||||||||
General and administrative | — | 90 | (90 | ) | (100 | )% | — | 268 | (268 | ) | (100 | )% | ||||||||||||||||||||
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$ | 3,105 | $ | 3,599 | $ | (494 | ) | (14 | )% | $ | 9,479 | $ | 10,168 | $ | (689 | ) | (7 | )% | |||||||||||||||
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The decreases in amortization of intangibles in the three and nine months ended September 30, 2017 were due to the amortization in full of certain intangibles acquired through past acquisitions.
Non-operating (expense)/income, net
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(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
Foreign currency transaction (loss)/gain | $ | (552 | ) | $ | 1,082 | $ | (1,634 | ) | n/m | $ | (793 | ) | $ | 2,764 | $ | (3,557 | ) | n/m | ||||||||||||||
Interest income, net | 144 | 172 | $ | (28 | ) | (16 | )% | 470 | 650 | (180 | ) | (28 | )% | |||||||||||||||||||
Other (expense)/income, net | — | (1,237 | ) | $ | 1,237 | (100 | )% | 287 | (4,891 | ) | 5,178 | n/m | ||||||||||||||||||||
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$ | (408 | ) | $ | 17 | $ | (425 | ) | n/m | $ | (36 | ) | $ | (1,477 | ) | $ | 1,441 | (98 | )% | ||||||||||||||
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n/m - not meaningful
In May 2017, we discontinued our forward contracts program; however, we will continue to evaluate periodically our foreign exchange exposures and mayre-initiate this program if it is deemed necessary.
Historically, we have used foreign currency forward contracts (“forward contracts”) to hedge our exposure to fluctuations in foreign currency exchange rates associated with our foreign currency denominatedcurrency-denominated cash, accounts receivable,receivables, and intercompany receivables and payablesbalances held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary. See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-Q for additional information.
The total changeour subsidiary in the fair value of our foreign currency forward contracts recorded in other income (expense), net, during the three months ended September 30, 2016 was a loss of $1.2 million. The total change in the fair value of our foreign currency forward contracts recorded in other (expense)/income, net, during the nine months ended September 30, 2017 and 2016 was a gain of $0.3 million and a loss of $5 million, respectively.
(Benefit)/provision for income taxes
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||
(Benefit)/provision for income taxes | $ | (12,885 | ) | $ | 2,214 | $ | (15,099 | ) | n/m | $ | (17,952 | ) | $ | 6,269 | $ | (24,221 | ) | n/m | ||||||||||||||
Effective income tax rate | 88 | % | 40 | % | (96 | )% | 26 | % |
n/m - not meaningful
The (benefit)/provision for income taxes represents current and future amounts for federal, state, and foreign taxes.
United Kingdom.
Three Months Ended March 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | |||||||||||||||||||||
(Benefit from) income taxes | $ | (7,683) | $ | (17,618) | |||||||||||||||||||
Effective income tax benefit rate | 95 | % | 73 | % |
The decrease in the effective income tax rate in the nine months ended September 30, 2017 is primarily due to the significant increase of $19.1 million in excess tax benefits generated bydepend upon our stock compensation plans, on significantly lower income before (benefit)/provision for income taxes, which decreased by $5.8 million.
The inclusion of excess tax benefits as a component of the provision for income taxes may increase volatility in the effective tax rates of future periods as the amount of excess tax benefits from share-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU vesting and exercise behavior of our stock option holders, and the total value of future grants of share-based compensation awards.
Liquidity and capital resources
Nine Months Ended September 30, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | 113,926 | $ | 20,556 | ||||
Investing activities | (11,966 | ) | (2,859 | ) | ||||
Financing activities | (44,040 | ) | (43,031 | ) | ||||
Effect of exchange rate on cash | 2,054 | (1,309 | ) | |||||
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Net increase/(decrease) in cash and cash equivalents | $ | 59,974 | $ | (26,643 | ) | |||
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(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Total cash, cash equivalents, and marketable securities | $ | 194,380 | $ | 133,761 |
award holders' exercise behavior.
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Cash provided by (used in): | |||||||||||
Operating activities | $ | 15,116 | $ | 21,650 | |||||||
Investing activities | (6,082) | 15,489 | |||||||||
Financing activities | (35,918) | (34,794) | |||||||||
Effect of exchange rates on cash and cash equivalents | (310) | (1,536) | |||||||||
Net (decrease) increase in cash and cash equivalents | $ | (27,194) | $ | 809 |
(in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Held by U.S. entities | $ | 251,554 | $ | 274,813 | |||||||
Held by foreign entities | 80,618 | 87,966 | |||||||||
Total cash, cash equivalents, and marketable securities | $ | 332,172 | $ | 362,779 |
As of September 30, 2017, approximately $61.1 million ofmonths and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and cash equivalents was held inthe investments needed to support our foreign subsidiaries. operations. We may utilize available funds or seek additional external financing if we require additional capital resources.
Cashcash provided by operating activities
The primary drivers during in the ninethree months ended September 30, 2017 were net income of $36.6 million and $80.6 million from trade accounts receivable, largelyMarch 31, 2022 was primarily due to our subscription transition and increased cash collectionscosts as we made investments in our Pega Cloud offering and selling and marketing activities to support future growth. In addition, in the timing of billings.
The primary driver during the ninethree months ended September 30, 2016 was net income of $18.2 million.
Future Cash ReceiptsMarch 31, 2022 we incurred $17.4 million in legal fees and related expenses arising from Committed License and Cloud Arrangements
As of September 30, 2017, noneproceedings that originated outside of the amounts shownordinary course of business. We expect to continue to incur additional expenses for these proceedings. See "Note 14. Commitments and Contingencies" in the table below had been billed and no revenue had been recognized.
The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a resultPart I, Item 1 of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form10-Qfor additional information)
September 30, 2017 | ||||||||||||
(in thousands) | Term and cloud contracts | Perpetual contracts (1) | Total | |||||||||
Remainder of 2017 | $ | 37,723 | $ | 13,274 | $ | 50,997 | ||||||
2018 | 150,629 | 21,213 | 171,842 | |||||||||
2019 | 125,165 | 10,033 | 135,198 | |||||||||
2020 | 85,939 | 1,572 | 87,511 | |||||||||
2021 | 38,203 | 367 | 38,570 | |||||||||
2022 and thereafter | 12,876 | — | 12,876 | |||||||||
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Total | $ | 450,535 | $ | 46,459 | $ | 496,994 | ||||||
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Total contractual futureinformation.
Cash used(used in) provided by investing activities in investing activities
During the ninethree months ended September 30, 2017,March 31, 2022 was primarily driven by our investments in financial instruments and an acquisition in 2021.
(in thousands) | Amount | |||||||
Principal | $ | 600,000 | ||||||
Less: issuance costs | (14,527) | |||||||
Less: Capped Call Transactions | (51,900) | |||||||
$ | 533,573 |
Duringthis Quarterly Report for additional information.
(in thousands) | Three Months Ended March 31, 2022 | ||||
December 31, 2021 | $ | 22,583 | |||
Authorizations (1) | — | ||||
Repurchases (2) | (22,583) | ||||
March 31, 2022 | $ | — |
Cash used in financing activities
We used cash primarily for repurchases of our common stock, share repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.
Since 2004,announced that our Board of Directors has approved annualextended the current stock repurchase programs that have authorizedprogram’s expiration date to June 30, 2022 and increased the remaining common stock repurchase in the aggregate of upauthority to $195 million of our common stock. Purchases$60 million.
The following table is a summary of our repurchase activity:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(in thousands) | Shares | Amount | Authorization Remaining Under Publicly Announced Share Repurchased Programs | Shares | Amount | Authorization Remaining Under Publicly Announced Share Repurchased Programs | ||||||||||||||||||
Balance as of January 1, | $ | 39,385 | $ | 40,534 | ||||||||||||||||||||
Authorizations | — | — | — | — | — | 25,879 | ||||||||||||||||||
Repurchase for net settlement of tax under stock-based compensation | 682 | (34,791 | ) | — | 414 | (10,791 | ) | — | ||||||||||||||||
Repurchases paid under authorized share repurchase program | 68 | (2,986 | ) | (2,986 | ) | 1,028 | (25,530 | ) | (25,530 | ) | ||||||||||||||
Repurchases unsettled | — | — | — | 6 | (177 | ) | (177 | ) | ||||||||||||||||
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Activity in Period | 750 | $ | (37,777 | ) | $ | (2,986 | ) | 1,448 | $ | (36,498 | ) | $ | 172 | |||||||||||
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Balance as of September 30, | $ | 36,399 | $ | 40,706 | ||||||||||||||||||||
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In addition to the share
Three Months Ended March 31, | |||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | |||||||||||||||||||
Repurchases paid | 242 | $ | 22,583 | 67 | $ | 8,846 | |||||||||||||||||
Repurchases unpaid at period end | — | — | 3 | 300 | |||||||||||||||||||
Stock repurchase program | 242 | 22,583 | 70 | 9,146 | |||||||||||||||||||
Tax withholdings for net settlement of equity awards | 141 | 12,128 | 197 | 25,509 | |||||||||||||||||||
383 | $ | 34,711 | 267 | $ | 34,655 |
These amounts are not included in the table above.
Nine Months Ended September 30, | ||||||||
(per share) | 2017 | 2016 | ||||||
Dividends Declared | $ | 0.09 | $ | 0.09 | ||||
Dividends Paid | $ | 0.09 | $ | 0.09 |
It is our current intention
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Dividend payments to stockholders | $ | 2,454 | $ | 2,427 |
Payments due by period | |||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | 2027 and thereafter | Other | Total | |||||||||||||||||||||||||||||||||||||||
Convertible senior notes (1) | $ | 2,250 | $ | 4,500 | $ | 4,500 | $ | 602,250 | $ | — | $ | — | $ | — | $ | 613,500 | |||||||||||||||||||||||||||||||
Purchase obligations (2) | 49,936 | 14,311 | 9,198 | 13,072 | 13,750 | — | — | 100,267 | |||||||||||||||||||||||||||||||||||||||
Operating lease obligations | 3,887 | 20,317 | 17,141 | 14,352 | 10,664 | 48,381 | — | 114,742 | |||||||||||||||||||||||||||||||||||||||
Liability for uncertain tax positions (3) | — | — | — | — | — | — | 1,705 | 1,705 | |||||||||||||||||||||||||||||||||||||||
$ | 56,073 | $ | 39,128 | $ | 30,839 | $ | 629,674 | $ | 24,414 | $ | 48,381 | $ | 1,705 | $ | 830,214 |
Ascurrencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.
Three Months Ended March 31, | |||||||||||
2022 | 2021 | ||||||||||
(Decrease) increase in revenue | (3) | % | (4) | % | |||||||
Increase (decrease) in net income | 186 | % | 20 | % |
Othermonetary assets and liabilities denominated in currencies other than the item discussed above, there were no significantfunctional currency of the entities in which they are recorded.
Three Months Ended March 31, | |||||||||||
(in thousands) | 2022 | 2021 | |||||||||
Foreign currency gain (loss) | $ | (7,937) | $ | (7,522) |
procedures
March 31, 2022.
financial reporting
We
The following table sets forth information regarding our repurchases
(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) | |||||||||||||||||||
January 1, 2022 - January 31, 2022 | 118 | $ | 99.46 | 101 | $ | 12,584 | |||||||||||||||||
February 1, 2022 - February 28, 2022 | 141 | 90.97 | 103 | $ | 3,085 | ||||||||||||||||||
March 1, 2022 - March 31, 2022 | 196 | 82.52 | 38 | $ | — | ||||||||||||||||||
455 | $ | 89.54 | 242 |
Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (1) (in thousands) | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs (1) (in thousands) | ||||||||||||
July 1, 2017 - July 31, 2017 | 12 | $ | 58.54 | — | $ | 36,399 | ||||||||||
August 1, 2017 - August 31, 2017 | 55 | 56.16 | — | 36,399 | ||||||||||||
September 1, 2017 - September 30, 2017 | 108 | 56.56 | — | 36,399 | ||||||||||||
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Total | 175 | $ | 56.57 | |||||||||||||
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ITEM 5. OTHER INFORMATION Effective on March 31, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Amendment modifies the financial covenants as reflected in Note 8. Debt of Part I, Item 1 of this Quarterly Report on Form 10-Q and transitions the Credit Agreement from the U.S. dollar London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) for floating rate loan commitments under the Credit Agreement. 28 The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q. ITEM 6. EXHIBITS
++ Indicates that the exhibit is being furnished with this report and is not filed as |
The following exhibits are filed or furnished, as the case may be, as part of it.
EXHIBIT INDEX
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exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations.
Pegasystems Inc. | |||||||||||||||
April 28, 2022 | /s/ KENNETH STILLWELL | ||||||||||||||
Kenneth Stillwell | |||||||||||||||
Chief | |||||||||||||||
(Principal Financial Officer) |
27