SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

____________________________



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



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

____________________________

____________________________

____________________________

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 ☐

Large accelerated filer ☒

☒

Accelerated filer

☐

Non-accelerated filer ☐

~~(Do not check if smaller reporting company)~~

☐

Smaller reporting company ☐

☐

Emerging growth company

☐

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

There were ~~78,645,411~~79,131,665 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~August 1, 2018.~~

July 30, 2019.

QUARTERLY REPORT ON FORM10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS⁽¹⁾

(in thousands)

         June 30,
2018      December 31,
2017
Assets

Current assets:

  Cash and cash equivalents
   $ 144,291      $ 162,279
  Marketable securities
   99,292      61,469




   Total cash, cash equivalents, and marketable securities
   243,583      223,748
  Accounts receivable
   141,384      222,735
  Unbilled receivables
   151,354      158,898
  Other current assets
   63,864      41,135




     Total current assets
   600,185      646,516
Long-term unbilled receivables
   169,330      160,708
Goodwill
   72,911      72,952
Other long-term assets
   130,614      131,391




   Total assets
   $ 973,040      $ 1,011,567




Liabilities and stockholders’ equity

Current liabilities:

  Accounts payable
   $ 14,411      $ 17,370
  Accrued expenses
   44,882      45,508
  Accrued compensation and related expenses
   48,691      66,040
  Deferred revenue
   163,525      166,297




Total current liabilities
   271,509      295,215
Deferred income tax liabilities
   38,208      38,463
Other long-term liabilities
   24,151      23,652




       Total liabilities
   333,868      357,330
Stockholders’ equity:

  Preferred stock, 1,000 shares authorized; no shares issued and outstanding
   —      —
  Common stock, 200,000 shares authorized; 78,748 and 78,081 shares issued and outstanding at
  June 30, 2018 and December 31, 2017, respectively
   787      781
  Additionalpaid-in capital
   141,400      152,097
  Retained earnings
   506,769      508,051
  Accumulated other comprehensive loss
   (9,784)    (6,692)




   Total stockholders’ equity
   639,172      654,237




   Total liabilities and stockholders’ equity
   $ 973,040      $ 1,011,567

⁽¹⁾

~~On January 1, 2018 the Company adopted the ASC 606 revenue recognition standard and has adjusted prior periods to conform. See Note 2. “New Accounting Pronouncements” for additional information.~~



	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	95,500		$	114,422
Marketable securities	59,549			93,001
Total cash, cash equivalents, and marketable securities	155,049			207,423
Accounts receivable	134,965			180,872
Unbilled receivables	169,554			172,656
Other current assets	77,290			49,684
Total current assets	536,858			610,635
Long-term unbilled receivables	117,889			151,237
Goodwill	79,037			72,858
Other long-term assets	206,833			147,823
Total assets	$	940,617		$	982,553
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	14,586		$	16,487
Accrued expenses	50,372			45,506
Accrued compensation and related expenses	62,880			84,671
Deferred revenue	169,009			185,145
Other current liabilities	14,576			—
Total current liabilities	311,423			331,809
Operating lease liabilities	54,292			—
Deferred income tax liabilities	6,918			6,939
Other long-term liabilities	10,697			22,274
Total liabilities	383,330			361,022
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—			—
Common stock, 200,000 shares authorized; 79,144 and 78,526 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	791			785
Additional paid-in capital	122,880			123,205
Retained earnings	445,108			510,863
Accumulated other comprehensive (loss)	(11,492		)	(13,322		)
Total stockholders’ equity	557,287			621,531
Total liabilities and stockholders’ equity	$	940,617		$	982,553

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS⁽¹⁾

(in thousands, except per share amounts)

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Revenue

Software license
   $ 44,784    $ 51,150    $ 132,557    $ 178,158
Maintenance
   65,906    59,424    130,431    118,137
Services
   86,089    76,022    168,973    146,610








  Total revenue
   196,779    186,596    431,961    442,905








Cost of revenue

Software license
   1,262    1,250    2,517    2,550
Maintenance
   5,874    7,011    11,956    14,229
Services
   66,681    59,614    134,958    119,186








  Total cost of revenue
   73,817    67,875    149,431    135,965








Gross profit
   122,962    118,721    282,530    306,940








Operating expenses

Selling and marketing
   93,972    75,200    182,355    144,881
Research and development
   41,972    39,762    88,757    80,058
General and administrative
   10,181    12,706    26,645    25,041








  Total operating expenses
   146,125    127,668    297,757    249,980








(Loss)/income from operations
   (23,163)    (8,947)    (15,227)    56,960
Foreign currency transaction gain/(loss)
   1,244    (2,242)    159    (1,497)
Interest income, net
   629    202    1,393    407
Other income, net
   —    566    363    287








(Loss)/income before (benefit) from income taxes
   (21,290)    (10,421)    (13,312)    56,157
(Benefit) from income taxes
   (10,881)    (14,123)    (15,103)    (508)








        Net (loss)/income
   $             (10,409)    $             3,702    $             1,791    $             56,665








(Loss)/earnings per share

Basic
   $ (0.13)    $ 0.05    $ 0.02    $ 0.74
Diluted
   $ (0.13)    $ 0.04    $ 0.02    $ 0.69
Weighted-average number of common shares outstanding

Basic
   78,635    77,313    78,436    77,039
Diluted
   78,635    82,945    83,247    82,412
Cash dividends declared per share
   $ 0.03    $ 0.03    $ 0.06    $ 0.06

⁽¹⁾

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)~~/INCOME~~⁽¹⁾

(in thousands)

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Net (loss)/income
   $ (10,409)    $ 3,702    $ 1,791    $ 56,665
Other comprehensive (loss)/income, net of tax

Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax
   73    (1)    (115)    126
Foreign currency translation adjustments
   (7,414)    4,043    (2,977)    6,272








  Total other comprehensive (loss)/income, net of tax
   (7,341)    4,042    (3,092)    6,398








Comprehensive (loss)/income
   $         (17,750)    $         7,744    $         (1,301)    $         63,063

⁽¹⁾

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~⁽¹⁾

STOCKHOLDERS’ EQUITY

(in ~~thousands)~~

   Six Months Ended
June 30,
   2018    2017
Operating activities:

Net income
   $ 1,791      $ 56,665
Adjustments to reconcile net income to cash provided by operating activities:

  Change in operating assets and liabilities, net
   30,158      (14,874)
  Stock-based compensation expense
   31,165      26,440
  Depreciation and amortization of intangible assets
   12,474      12,356
  Othernon-cash
   (156)    5,182




     Cash provided by operating activities
   75,432      85,769
Investing activities:

Purchases of investments
   (51,395)    (16,656)
Proceeds from maturities and called investments
   11,546      20,824
Other
   (6,520)    (5,327)




     Cash used in investing activities
   (46,369)    (1,159)
Financing activities:

Dividend payments to shareholders
   (4,702)    (4,613)
Common stock repurchases
   (41,123)    (30,247)




     Cash used in financing activities
   (45,825)    (34,860)
Effect of exchange rates on cash and cash equivalents
   (1,226)    1,282




Net (decrease)/increase in cash and cash equivalents
   (17,988)    51,032
Cash and cash equivalents, beginning of period
   162,279      70,594




Cash and cash equivalents, end of period
   $             144,291      $             121,626

⁽¹⁾

thousands, except per share amounts)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
	Number of Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
December 31, 2017	78,081		$	781		$	152,097		$	509,697		$	(6,705	)	$	655,870
Repurchase of common stock	(101	)	(1		)	(5,688		)	—			—			(5,689		)
Issuance of common stock for share-based compensation plans	566		5			(15,556		)	—			—			(15,551		)
Stock-based compensation	—		—			15,109			—			—			15,109
Cash dividends declared ($0.12 per share)	—		—			—			(2,355		)	—			(2,355		)
Other comprehensive income	—		—			—						4,262			4,262
Net income	—		—			—			12,200			—			12,200
March 31, 2018	78,546		785			145,962			519,542			(2,443		)	663,846
Repurchase of common stock	(171	)	(2		)	(10,179		)	—			—			(10,181		)
Issuance of common stock for share-based compensation plans	358		4			(11,395		)	—			—			(11,391		)
Issuance of common stock under Employee Stock Purchase Plan	15		—			849			—			—			849
Stock-based compensation	—		—			16,163			—			—			16,163
Cash dividends declared ($0.12 per share)	—		—			—			(2,364		)	—			(2,364		)
Other comprehensive loss	—		—			—			—			(7,341		)	(7,341		)
Net loss	—		—			—			(10,409		)	—			(10,409		)
June 30, 2018	78,748		$	787		$	141,400		$	506,769		$	(9,784	)	$	639,172

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 ($0.12 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 Employee Stock Purchase Plan	16		—			1,103			—			—			1,103
Stock-based compensation	—		—			20,113			—			—			20,113
Cash dividends declared ($0.12 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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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, ~~2017.~~

~~On January 1, 2018 the Company adopted Accounting Standards Update (“ASU”)No. 2014-09,~~ “Revenue from Contracts with Customers (Topic 606)” using the full retrospective method which required each prior reporting period presented be adjusted to reflect the application of this ASU. See Note 2. “New Accounting Pronouncements” for additional information.

2018.

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.

The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2018.~~

2019.

2. NEW ACCOUNTING PRONOUNCEMENTS

Financial ~~Instruments~~

instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update No. 2016-13, “Financial ~~Instruments—~~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 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.~~model. 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~~does not expect the ~~effect~~adoption of this ~~ASU~~standard will have a material effect on its ~~consolidated~~ financial ~~statements and related disclosures.~~

position or results of operations.

Leases

~~In February 2016, the FASB issued ASUNo. 2016-02,~~ ~~“Leases (Topic 842),” which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease payments 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~~

On January 1, 2019, ~~with early adoption permitted. The Company expects that most of its operating lease commitments will be subject to this ASU and recognized as operating lease liabilities andright-of-use~~ ~~assets upon adoption with no material impact to its results of operations and cash flows.~~

~~ASC 606 and ASC340-40~~

~~On January 1, 2018~~ the Company adopted Accounting Standards Codification 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC ~~606 revenue recognition standard~~842, while prior period amounts were not adjusted and ~~has adjusted prior periods~~continue to ~~conform.~~

~~The most significant impacts of adopting ASC 606 and ASC340-40~~ ~~were as follows:~~

•

~~Perpetual licenses~~be reported in accordance with ~~extended payment terms and term licenses~~- Revenue from perpetual licenses with extended payment terms and term licenses is now recognized when control is transferred to the client, the point in time when the client can use and benefit from the license. Previously, the Company recognized revenue over the term of the agreements as payments became due or earlier if prepaid. Any unrecognized license revenue from these arrangements is recognized in the period that control transfers or as a cumulative adjustment to retained earnings as of December 31, 2015. Unbilled receivables in the Company’s unaudited condensed consolidated balance sheets increased significantly upon adoption due to the revenue from term licenses being recognized prior to amounts billed, or prepaid by, clients and perpetual licenses with extended payment terms.

•

~~Allocation of future credits and significant discounts~~ - Perpetual or term licenses delivered are a separate performance obligation which now requires us to allocate any future credits and discounts to the performance obligations in the arrangement based upon their relative stand-alone selling prices.

•

~~Deferred contract costs~~ ~~- Sales incentive programs and other incremental costs to obtain a contract were previously expensed when incurred. ASC340-40~~ requires these costs be recognized as an asset when incurred and expensed over the period of expected benefit, which is on average five years. This change primarily impacts the Company’s contracts related to multi-year cloud offerings, maintenance on term and perpetual licenses, and those long-term term and perpetual licenses with client usage rights that increase over time.

~~PEGASYSTEMS INC.~~

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

•

~~Taxes~~ ~~- The corresponding effect on tax balances of the above impacts has also been recognized.~~

~~For additional information on~~ the Company’s historic accounting ~~policies as a result~~under ASC 840 “Leases”.

The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of $41.8 million and lease liabilities of $54.2 million. The difference between the value of the ~~adoption~~right of ~~ASC 606~~use assets and ~~ASC340-40~~ ~~see Note 4. “Receivables, Contract Assets,~~lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and ~~Deferred Revenue”, Note 5. “Deferred Contract Costs”, and~~unamortized lease incentives as of January 1, 2019.

See Note 9. ~~“Revenue”.~~

~~The impact of the adoption ASC 606 and ASC340-40~~ ~~on the Company’s unaudited condensed consolidated balance sheet and unaudited condensed consolidated statement of operations is:~~

   December 31, 2017
(in thousands)        Previously reported                  Adjustments                        As adjusted
Assets

Accounts receivable, unbilled receivables, and contract assets
   $ 248,331    $ 134,216    $ 382,547
Long-term unbilled receivables
   —    160,708    160,708
Deferred income taxes
   57,127    (42,887)    14,240
Deferred contract costs
   —    37,924    37,924
Other assets⁽¹⁾
   416,148    ��    416,148






Total Assets
   $ 721,606    $ 289,961    $ 1,011,567






Liabilities and stockholders’ equity

Deferred revenue
   $ 195,073    $ (28,776)    $ 166,297
Long-term deferred revenue
   6,591    (2,885)    3,706
Deferred income tax liabilities
   —    38,463    38,463
Other liabilities⁽²⁾
   148,864    —    148,864






Total liabilities
   350,528    6,802    357,330
Foreign currency translation adjustments
   (3,494)    (2,966)    (6,460)
Retained earnings
   221,926    286,125    508,051
Other equity⁽³⁾
   152,646    —    152,646






Total stockholders’ equity
   371,078    283,159    654,237






Total liabilities and stockholders’ equity
   $         721,606    $         289,961    $         1,011,567

⁽¹⁾

Includes cash, cash equivalents, marketable securities, income taxes receivable, other current assets, property and equipment, intangible assets, goodwill, and other long-term assets (as reflected in the consolidated balance sheets in the Annual Report on Form~~10-K~~ ~~for the year ended December 31, 2017).~~

⁽²⁾

Includes accounts payable, accrued expenses, accrued compensation and related expenses, income taxes payable, and other long-term liabilities (as reflected in the consolidated balance sheets in the Annual Report on Form~~10-K~~ ~~for the year ended December 31, 2017).~~

⁽³⁾

~~Includes common stock, additionalpaid-in~~ ~~capital, and net unrealized loss onavailable-for-sale~~ ~~marketable securities (as reflected in the consolidated balance sheets in the Annual Report on Form10-K~~ ~~for the year ended December 31, 2017).~~

~~PEGASYSTEMS INC.~~

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

   Three months ended June 30, 2017    Six months ended June 30, 2017
(in thousands, except per share amounts)      Previously
Reported      Adjustments        As Adjusted        Previously
Reported      Adjustments        As Adjusted
Revenue:

Software license
   $ 61,037    $ (9,887)    $ 51,150    $ 153,427    $ 24,731    $ 178,158
Maintenance
   59,590    (166)    59,424    118,555    (418)    118,137
Services
   77,353    (1,331)    76,022    149,245    (2,635)    146,610












  Total revenue
   197,980    (11,384)    186,596    421,227    21,678    442,905












Cost of revenue:

Software license
   1,250    —      1,250    2,550    —      2,550
Maintenance
   7,011    —      7,011    14,229    —      14,229
Services
   59,614    —      59,614    119,186    —      119,186












  Total cost of revenue
   67,875    —      67,875    135,965    —      135,965












Gross profit
   130,105    (11,384)    118,721    285,262    21,678    306,940












Operating expenses:

Selling and marketing
   75,887    (687)    75,200    147,175    (2,294)    144,881
Research and development
   39,762    —      39,762    80,058    —      80,058
General and administrative
   12,706    —      12,706    25,041    —      25,041












  Total operating expenses
   128,355    (687)    127,668    252,274    (2,294)    249,980












Income/(loss) from operations
   1,750    (10,697)    (8,947)    32,988    23,972    56,960
Foreign currency transaction loss
   (917)    (1,325)    (2,242)    (241)    (1,256)    (1,497)
Interest income, net
   161    41    202    326    81    407
Other income, net
   566    —      566    287    —      287












Income/(loss) before benefit from income taxes
   1,560    (11,981)    (10,421)    33,360    22,797    56,157
Benefit from income taxes
   (9,846)    (4,277)    (14,123)    (5,067)    4,559    (508)












  Net income
   $ 11,406    $ (7,704)    $ 3,702    $ 38,427    $ 18,238    $ 56,665












Earnings per share:

Basic
   $ 0.15       $ 0.05    $ 0.50       $ 0.74








Diluted
   $ 0.14       $ 0.04    $ 0.47       $ 0.69








Weighted-average number of common shares outstanding:

Basic
   77,313       77,313    77,039       77,039
Diluted
   82,945       82,945    82,412       82,412

~~Adoption of ASC 606 and ASC340-40~~ ~~had no impact on total cash from or used in operating, financing, or investing activities in the Company’s unaudited condensed consolidated statements of cash flows~~“Leases” for ~~the six months ended June 30, 2017.~~

additional information.

3. MARKETABLE SECURITIES

   June 30, 2018
(in thousands)        Amortized Cost            Unrealized Gains            Unrealized Losses                Fair Value
Municipal bonds
   $ 55,466    $ 20    $ (112)    $ 55,374
Corporate bonds
   44,258    2    (342)    43,918








   $ 99,724    $ 22    $ (454)    $ 99,292

~~PEGASYSTEMS INC.~~

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

   December 31, 2017
(in thousands)        Amortized Cost            Unrealized Gains            Unrealized Losses                Fair Value
Municipal bonds
   $ 32,996    $ —    $ (148)    $ 32,848
Corporate bonds
   28,757    1    (137)    28,621








   $ 61,753    $ 1    $ (285)    $ 61,469



	June 30, 2019
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	29,495	$	156	$	(5	)	$	29,646
Corporate bonds	29,620		291		(8		)	29,903
	$	59,115	$	447	$	(13	)	$	59,549



	December 31, 2018
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Municipal bonds	$	44,802	$	13	$	(110	)	$	44,705
Corporate bonds	48,499		23		(226		)	48,296
	$	93,301	$	36	$	(336	)	$	93,001

As of June 30, ~~2018, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.~~

~~As of June 30, 2018, remaining~~2019, maturities of marketable securities ranged from ~~July 2018~~January 2020 to August ~~2021,~~2022, with a weighted-average remaining maturity of approximately 1.5 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

(in thousands)              June 30,
2018          December 31,
2017
Accounts receivable
   $         141,384    $         222,735
Unbilled receivables
   151,354    158,898
Long-term unbilled receivables
   169,330    160,708




   $ 462,068    $ 542,341



(in thousands)	June 30, 2019		December 31, 2018
Accounts receivable	$	134,965	$	180,872
Unbilled receivables	169,554		172,656
Long-term unbilled receivables	117,889		151,237
	$	422,408	$	504,765

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is ~~the amount due from clients where the only condition on the right of payment is~~solely subject to the passage of time. ~~The Company regularly assesses receivables for collectability. As of June 30, 2018 and December 31, 2017, the allowance for doubtful accounts was not material.~~

Unbilled receivables are expected to be billed in the future as follows:


~~(in thousands)~~	~~June 30,~~ ~~2018~~
~~1 Year or Less~~	$	~~151,354~~
~~1-2~~ ~~Years~~		~~79,654~~
~~2-5~~ ~~Years~~		~~89,676~~

	$	~~320,684~~

(Dollars in thousands) June 30, 2019
1 year or less $ 169,554
59 %
1-2 years 79,128
28 %
2-5 years 38,761
13 %
$ 287,443
100 %

Contract assets and deferred revenue

(in thousands)              June 30,
2018          December 31,
2017
Contract assets⁽¹⁾
   $ 2,425    $ 914
Long-term contract assets⁽²⁾
   1,545    —




   $ 3,970    $ 914




Deferred revenue
   $ 163,525    $ 166,297
Long-term deferred revenue⁽³⁾
   6,210    3,706




   $ 169,735    $ 170,003



(in thousands)	June 30, 2019		December 31, 2018
Contract assets ⁽¹⁾	$	3,770	$	3,711
Long-term contract assets ⁽²⁾	2,190		2,543
	$	5,960	$	6,254

⁽¹⁾Included in other current ~~assets in the unaudited condensed consolidated balance sheets.~~

assets.⁽²⁾ Included in other long-term ~~assets in the unaudited condensed consolidated balance sheets.~~

assets.



(in thousands)	June 30, 2019		December 31, 2018
Deferred revenue	$	169,009	$	185,145
Long-term deferred revenue ⁽¹⁾	4,342		5,344
	$	173,351	$	190,489

⁽³⁾⁽¹⁾Included in other long-term ~~liabilities in the unaudited condensed consolidated balance sheets.~~

~~Contract assets and deferred revenue are presented net at the contract level for each reporting period.~~ liabilities.

Contract assets are amounts under client contracts where revenue recognized exceeds the amount billed to the client 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.

~~PEGASYSTEMS INC.~~

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

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, ~~2018,~~2019 was primarily due to ~~new billings in advance of revenue recognition and $168.2~~$135.8 million of revenue recognized, excluding the impact of ~~the~~ netting of contract assets and deferred revenue at the contract level, during the period that was included in deferred revenue at December 31, ~~2017.~~

~~Major clients~~

~~No client represented 10% or more~~2018, partially offset by new billings in advance of ~~the Company’s total receivables as of June 30, 2018 or December 31, 2017.~~

revenue recognition.

5. DEFERRED CONTRACT COSTS

~~Sales incentives paid by~~

The Company recognizes an asset for the ~~Company are considered~~ incremental ~~and recoverable~~ costs of obtaining a client contract, ~~with~~which primarily relate to sales commissions. The Company expects to benefit from those costs for more than one year, as the Company generally only pays sales commissions on the initial contract, and not any subsequent contract renewals. As a ~~client. These~~result, there are no commensurate commissions paid on contract renewals. Deferred costs are ~~deferred, as~~amortized on a ~~long-term asset, and then amortized using the~~ straight-line ~~method~~basis over the benefit period, ~~of benefit~~ which is on average ~~five~~5 years. The Company determined the period of benefit by taking into consideration client contracts, the Company’s technology, and other factors. The Company utilizes a practical expedient available under ASC 606 to expense costs to obtain a contract as incurred when the original amortization period is one year or less.

(in thousands)        June 30,
2018        December 31,
2017
Deferred contract costs⁽¹⁾
   $                         42,246      $                         37,924



(in thousands)	June 30, 2019		December 31, 2018
Deferred contract costs ⁽¹⁾	$	64,809	$	64,367

⁽¹⁾ Included in other long-term ~~assets in the unaudited condensed consolidated balance sheets.~~

~~Amortization of deferred contract costs was as follows:~~

               Three Months Ended
June 30,            Six Months Ended
June 30,
(in thousands)          2018                2017                2018                2017
Amortization of deferred contract costs⁽¹⁾
   $ 3,809    $ 2,902    $ 7,598    $ 5,496

assets.



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2019		2018		2019		2018
Amortization of deferred contract costs ⁽¹⁾	$	5,878	$	3,809	$	14,179	$	7,598

⁽¹⁾Included in selling and marketing expenses ~~in the unaudited condensed consolidated statement of operations.~~

~~During the six months ended June 30, 2018 and 2017, impairment of deferred contract costs was not material.~~

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The change in the carrying amount of goodwill ~~was~~was:



(in thousands)	Six Months Ended June 30, 2019
Balance as of January 1,	$	72,858
Acquisition ⁽¹⁾	6,179
Currency translation adjustments	—
Balance as of June 30,	$	79,037

⁽¹⁾ In May 2019, the Company acquired In the Chat Communications Inc., a privately-held software provider of digital customer service software for $10.9 million, net of cash acquired. The Company also expects to issue up to approximately 15 thousand shares in retention-based bonus payments to a key employee upon the achievement of specified retention milestones. The principal assets and liabilities acquired as ~~follows:~~


~~(in thousands)~~	~~Six Months Ended~~ ~~June 30,~~
~~(in thousands)~~	~~2018~~
~~Balance as of January 1,~~	$	~~72,952~~
~~Currency translation adjustments~~		~~(41)~~

~~Balance as of June 30,~~	$	~~72,911~~

part of the business combination were additional goodwill and technology intangibles assets of $6.2 million and $5.1 million. The allocation of the purchase price is preliminary for income taxes as the Company is still gathering information.

Intangible assets are recorded at cost and ~~are~~ amortized using the straight-line method over their estimated useful lives as follows:

June 30, 2018
(in thousands)
        Useful Lives

Cost

Accumulated
Amortization

Net Book Value⁽¹⁾
Client-related intangibles
9-10 years $                63,143 $                 (48,033) $                 15,110
Technology
7-10 years 58,942 (47,835) 11,107
Other intangibles
— 5,361 (5,361) —

$                  127,446 $                  (101,229) $                    26,217



		June 30, 2019
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,115	$	(53,608	)	$	9,507
Technology	2-10 years	64,843		(52,605		)	12,238
Other	1 - 5 years	5,361		(5,361		)	—
		$	133,319	$	(111,574	)	$	21,745

⁽¹⁾Included in other long-term assets.



		December 31, 2018
(in thousands)	Useful Lives	Cost		Accumulated Amortization			Net Book Value ⁽¹⁾
Client-related intangibles	4-10 years	$	63,115	$	(51,224	)	$	11,891
Technology	2-10 years	59,742		(50,398		)	9,344
Other	1 - 5 years	5,361		(5,361		)	—
		$	128,218	$	(106,983	)	$	21,235

⁽¹⁾Included in other long-term assets.

Amortization of intangible assets ~~in the unaudited condensed consolidated balance sheets.~~

was:



(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2019		2018		2019		2018
Cost of revenue	$	875	$	1,231	$	2,207	$	2,463
Selling and marketing	781		1,605		2,385		3,210
	$	1,656	$	2,836	$	4,592	$	5,673

7. ACCRUED EXPENSES



(in thousands)	June 30, 2019		December 31, 2018
Outside professional services expenses	$	8,513	$	10,367
Income and other taxes	6,401		10,387
Marketing and sales program expenses	12,115		5,860
Dividends payable	2,375		2,363
Employee-related expenses	5,378		3,536
Cloud hosting expenses	11,978		4,604
Other	3,612		8,389
	$	50,372	$	45,506

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2017
(in thousands) Useful Lives Cost Accumulated
Amortization Net Book Value⁽¹⁾
Client-related intangibles
9-10 years $ 63,164 $ (44,835) $ 18,329
Technology
7-10 years 58,942 (45,372) 13,570
Other intangibles
— 5,361 (5,361) —

$ 127,467 $ (95,568) $ 31,899

⁽¹⁾ ~~Included in other long-term assets in the unaudited condensed consolidated balance sheets.~~

~~Amortization of intangible assets is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:~~

   (in thousands)                Three Months Ended
June 30,                Six Months Ended
June 30,
   2018    2017    2018    2017
   Cost of revenue
   $                 1,231    $                 1,305    $                 2,463    $                 2,639
   Selling and marketing
   1,605    1,869    3,210    3,735








   $ 2,836    $ 3,174    $ 5,673    $ 6,374

~~7. ACCRUED EXPENSES~~

   (in thousands)    June 30,
2018    December 31,
2017
   Outside professional services
   $                     10,143    $                     14,468
   Income and other taxes
   4,837    7,420
   Marketing and sales program expenses
   9,282    6,444
   Dividends payable
   2,365    2,344
   Employee-related expenses
   5,737    4,065
   Other
   12,518    10,767




   $ 44,882    $ 45,508

8. FAIR VALUE MEASUREMENTS

Assets and ~~Liabilities Measured~~liabilities measured at ~~Fair Value~~fair value on a ~~Recurring Basis~~

recurring basis

The Company records its cash equivalents, marketable securities, and investments in privately-held companies 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:

The Company’s cash equivalents are composed of money market funds and time deposits, which are classified aswithin Level 1 and Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s investments in privately-held companies are classified within Level 3 of the fair value ~~hierarchy and are valued using model-based techniques, including option pricing models and discounted cash flow models.~~

~~PEGASYSTEMS INC.~~

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

hierarchy.

If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between levels during the six months ended June 30, ~~2018.~~

2019.

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

   June 30, 2018
           Level 1                    Level 2                    Level 3                    Total
Cash equivalents
   $                     28      $                     32,009      $                     —      $                     32,037
Marketable securities:

Municipal bonds
   —      55,374      —      55,374
Corporate bonds
   —      43,918      —      43,918








Total marketable securities
   —      99,292      —      99,292
Investments in privately-held companies⁽¹⁾
   —      —      2,060      2,060

  ⁽¹⁾ Included in other long-term assets in the unaudited condensed consolidated balance sheets.

   December 31, 2017
           Level 1                    Level 2                    Level 3                    Total
Cash equivalents
   $ 2,720      $ 40,051      $ —      $ 42,771
Marketable securities:

Municipal bonds
   —      32,848      —      32,848
Corporate bonds
   —      28,621      —      28,621








Total marketable securities
   —      61,469      —      61,469
Investments in privately-held companies⁽¹⁾
   —      —      1,030      1,030

were:



	June 30, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	5,653	$	—	$	—	$	5,653
Marketable securities:
Municipal bonds	$	—	$	29,646	$	—	$	29,646
Corporate bonds	—		29,903		—		29,903
Total marketable securities	$	—	$	59,549	$	—	$	59,549
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,890	$	3,890

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



	December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	10,155	$	10,000	$	—	$	20,155
Marketable securities:
Municipal bonds	$	—	$	44,705	$	—	$	44,705
Corporate bonds	—		48,296		—		48,296
Total marketable securities	$	—	$	93,001	$	—	$	93,001
Investments in privately-held companies ⁽¹⁾	$	—	$	—	$	3,390	$	3,390

⁽¹⁾ Included in ~~the unaudited condensed consolidated balance sheets.~~

other long-term assets.

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

~~Assets Measured at Fair Value on a Nonrecurring Basis~~

Assets recorded at fair value on a nonrecurring basis, including property and equipment and intangible assets, are recognized at fair value when they are impaired. During the six months ended June 30, 2018 and 2017, the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.

9. ~~REVENUE~~

~~Revenue policy~~

LEASES

The Company’s ~~revenue is~~leases are primarily ~~derived from:~~

for office space used in the ordinary course of business.

~~Software license revenue is primarily derived from sales of~~Accounting policy

All the Company’s ~~software applications and Pega Platform.~~

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Software licenses~~

reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.



(in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease costs ⁽¹⁾	$	4,281	$	8,581
Variable lease costs	1,362		2,683
	$	5,643	$	11,264

⁽¹⁾ Lease costs that are fixed.

Right of use assets and lease liabilities



(in thousands)	June 30, 2019
Right of use assets ⁽¹⁾	$	57,772
Lease liabilities ⁽²⁾	$	14,576
Long-term lease liabilities	$	54,292

⁽¹⁾An asset that represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. ⁽²⁾Included in other current liabilities.

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



	June 30, 2019
Weighted-average remaining lease term	4.3 years
Weighted-average discount rate ⁽¹⁾	5.7	%

⁽¹⁾The rates implicit in most of the Company’s leases are not readily determinable, and therefore the Company ~~has concluded that~~uses its ~~software licenses are distinct performance obligations~~incremental borrowing rate as the ~~client can benefit from~~discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the ~~software on its own. Software license revenue is typically recognized at a point in time when control is transferred~~interest rate the Company would incur to borrow an amount equal to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. Stand-alone selling price for software licenses is determined using the residual approach. The Company utilizes the residual approach as license performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company evaluates whether the residual approach is appropriate for its license and cloud performance obligations when sold with other performance obligations. As a result, if the standalone selling price analysis illustrates that the license and cloud performance obligations are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.

~~Term license fees are usually payable in advance~~lease payments on a ~~monthly, quarterly, or annual~~collateralized basis over the term of the ~~license agreement, which is typically three to five years and may be renewed for additional terms~~lease.

Maturities of lease liabilities are:



(in thousands)	June 30, 2019
Remainder of 2019	$	8,290
2020	18,976
2021	17,099
2022	16,166
2023 and thereafter	17,393
Total lease payments	77,924
Less: imputed interest ⁽¹⁾	(9,056		)
	$	68,868

⁽¹⁾Lease liabilities are measured at the ~~client’s option. Perpetual license fees are usually payable when the contract is executed.~~

~~Maintenance~~

~~Software maintenance contracts entitle clients to receive technical support and software updates, on a when and if available basis, during the term~~present value of the ~~maintenance contract. Technical support and software updates are considered distinct services but accounted for~~remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a ~~single performance obligation~~result of a lease reassessment event.

As of December 31, 2018, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as ~~they each constitute a series of distinct services that are substantially the same and have the same pattern of transfer~~determined prior to the ~~client. Software maintenance revenue is recognized over time on a straight-line basis over~~adoption of ASC 842 were:



(in thousands)	Operating Leases ⁽¹⁾
2019	$	15,993
2020	14,807
2021	13,262
2022	12,279
2023	11,084
	$	67,425

⁽¹⁾Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the ~~contract period. Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.~~

Each of the performance obligations included in maintenance are priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price of each performance obligation included in maintenance based on this pricing relationship, which has remained constant within a narrow range, and observable data from standalone sales of maintenance, along with all other observable data.

~~Services~~

The Company’s services revenue is comprised of consulting and training, including software license implementations, training, reimbursable expenses, and cloud which is derived from sales of the Company’s hosted Pega Platform and software application environments. The Company has ~~concluded that most services are distinct performance obligations. Consulting may be provided on a stand-alone basis or bundled with license and software maintenance services.~~

The stand-alone selling price for consulting in time and materials contracts is determined by observable prices in similar transactions without multiple performance obligations and recognized as revenue as the services are performed. Fees for time and materials consulting contracts are usually payable shortly after the service is provided.

The Company estimates the stand-alone selling price for fixed price services based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price services is recognized over time as the services are provided. Fees for fixed price services consulting contracts are usually payable as contract milestones are achieved.

The stand-alone selling price of cloud sales of production environments is determined based on the residual approach when sold with services and is recognized over the term of the service. The Company utilizes the residual approach as cloud performance obligations are sold for a broad range of amounts (the selling price is highly variable) and a stand-alone selling price is not discernible from past transactions or other observable evidence. The stand-alone selling price for cloud sales of development and testing environments is developed using observable prices in similar transactions without multiple performance obligations and is recognized over time over the term of the service. Cloud fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.

~~Contract modifications~~

~~The Company sometimes enters into amendments~~vacated pursuant to ~~previously executed contracts which constitute contract modifications. The Company assesses each of these contract modifications to determine:~~

~~If the additional products and services are distinct from the products and services in the original arrangement, and~~

its restructuring activities.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash flow information


	2.	~~If the amount~~
(in thousands)	Six Months Ended June 30, 2019
Cash paid for leases	9,638
Right of ~~consideration expected~~use assets recognized for ~~the added products~~new leases and ~~services reflects the stand-alone selling price of those products and services.~~ amendments (non-cash)	22,667

~~A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change~~



	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2019				2018				2019				2018
U.S.	$	119,682	59	%	$	110,349	55	%	$	223,673	54	%	$	224,334	52	%
Other Americas	8,873		4	%	9,627		5	%	37,702		9	%	27,342		6	%
United Kingdom (“U.K.”)	16,686		8	%	23,079		12	%	41,235		10	%	49,173		11	%
Europe (excluding U.K.), Middle East, and Africa	33,395		16	%	27,070		14	%	67,581		16	%	58,896		14	%
Asia-Pacific	26,956		13	%	26,654		14	%	47,947		11	%	72,216		17	%
	$	205,592	100	%	$	196,779	100	%	$	418,138	100	%	$	431,961	100	%

Revenue streams



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2019		2018		2019		2018
Perpetual license	$	19,320	$	13,475	$	34,270	$	36,553
Term license	24,954		31,309		73,268		96,004
Revenue recognized at a point in time	44,274		44,784		107,538		132,557
Maintenance	69,329		65,906		137,035		130,431
Cloud	31,699		20,201		59,457		35,783
Consulting	60,290		65,888		114,108		133,190
Revenue recognized over time	161,318		151,995		310,600		299,404
	$	205,592	$	196,779	$	418,138	$	431,961



(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2019		2018		2019		2018
Term license	$	24,954	$	31,309	$	73,268	$	96,004
Cloud	31,699		20,201		59,457		35,783
Maintenance	69,329		65,906		137,035		130,431
Subscription ⁽¹⁾	125,982		117,416		269,760		262,218
Perpetual license	19,320		13,475		34,270		36,553
Consulting	60,290		65,888		114,108		133,190
	$	205,592	$	196,779	$	418,138	$	431,961

⁽¹⁾Reflects client arrangements (term license, cloud, and maintenance) that are subject to ~~the original contract and is accounted for on either:~~

~~a prospective basis as a termination of the existing contract and the creation of a new contract; or~~

~~a cumulativecatch-up~~ ~~basis.~~

~~Geographic revenue~~

   Three Months Ended
June 30,    Six Months Ended
June 30,
(in thousands)    2018    2017    2018    2017
U.S.
   $         110,349            55%    $         102,098            55%    $         224,334            52%    $         271,760            62%
Other Americas
   9,627    5%    13,177    7%    27,342    6%    23,583    5%
United Kingdom (“U.K.”)
   23,079    12%    22,524    12%    49,173    11%    48,866    11%
Europe (excluding U.K.), Middle East, and Africa
   27,070    14%    26,237    14%    58,896    14%    50,448    11%
Asia-Pacific
   26,654    14%    22,560    12%    72,216    17%    48,248    11%








Total revenue
   $ 196,779    100%    $ 186,596    100%    $ 431,961    100%    $ 442,905    100%

~~Major products and services~~

   Three Months Ended
June 30,    Six Months Ended
June 30,
(in thousands)                2018                            2017                            2018                            2017
Perpetual license
   $         13,475    $         31,297    $         36,553    $         69,196
Term license
   31,309    19,853    96,004    108,962








Revenue recognized at a point in time
   44,784    51,150    132,557    178,158
Maintenance
   65,906    59,424    130,431    118,137
Cloud
   20,201    12,525    35,783    22,927
Consulting and training
   65,888    63,497    133,190    123,683








Revenue recognized over time
   151,995    135,446    299,404    264,747








Total revenue
   $ 196,779    $ 186,596    $ 431,961    $ 442,905

~~During the six months ended June 30, 2018 and 2017, there were no material changes in the Company’s estimate of variable fees.~~

~~Committed not yet recognized revenue~~

~~Committed not recognized revenue represents contracted revenue that has not yet been recognized in revenue. Committed not recognized revenue is expected to be recognized in the future as follows:~~

(in thousands)    June 30,
2018
Remainder of 2018
   $ 213,244
2019
   140,209
2020
   63,603
2021 and thereafter
   59,604


   $             476,660

For reporting periods prior to January 1, 2018, the date of initial adoption of ASC 606, the Company has elected the practical expedient and not compiled and disclosed the amount of the transaction price allocated to the remaining performance obligations.

renewal.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Major clients~~

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

Remaining performance obligations (“RPO”)

Expected future revenue ~~were as follows:~~

               Three Months Ended
June 30,                Six Months Ended
June 30,
(in thousands)    2018    2017    2018    2017








Total revenue
   $           196,779    $           186,596        $ 431,961    $ 442,905
Client A
   *    11%    *    *

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

~~10.~~on existing contracts:



	June 30, 2019
(Dollars in thousands)	Perpetual license		Term License		Maintenance		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	%



	June 30, 2018
(Dollars in thousands)	Perpetual license		Term License		Maintenance		Cloud		Consulting		Total
1 year or less	$	28,626	$	20,457	$	111,086	$	41,036	$	12,039	$	213,244	45	%
1-2 years	15,862		9,878		43,837		66,529		4,103		140,209		29	%
2-3 years	2,423		5,665		5,265		50,250		—		63,603		13	%
Greater than 3 years	362		944		2,103		55,995		200		59,604		13	%
	$	47,273	$	36,944	$	162,291	$	213,810	$	16,342	$	476,660	100	%

11. STOCK-BASED COMPENSATION

Expense

                   Three Months Ended
June 30,                    Six Months Ended
June 30,
(in thousands)    2018    2017    2018    2017








Cost of revenues
   $           4,257      $           3,677      $           7,958      $           7,299
Selling and marketing
   6,038      4,101      10,696      7,506
Research and development
   3,802      3,575      7,439      6,887
General and administrative
   1,959      2,579      5,072      4,748








   $ 16,056      $ 13,932      $ 31,165      $ 26,440








Income tax benefit
   $ (3,341)    $ (4,287)    $ (6,482)    $ (8,102)

~~The Company recognizes stock-based compensation using the accelerated recognition method, treating each vesting tranche as if it were an individual grant.~~



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2019			2018			2019			2018
Cost of revenues	$	4,911		$	4,257		$	9,430		$	7,958
Selling and marketing	8,364			6,038			15,738			10,696
Research and development	4,572			3,802			9,132			7,439
General and administrative	2,200			1,959			4,097			5,072
	$	20,047		$	16,056		$	38,397		$	31,165
Income tax benefit	$	(4,056	)	$	(3,341	)	$	(7,796	)	$	(6,482	)

As of June 30, ~~2018,~~2019, the Company had ~~net of estimated forfeitures, $79.7~~$99.5 million of unrecognized stock-based compensation expense, ~~related to all unvested restricted stock units (“RSUs”) and stock options,~~net of estimated forfeitures, which ~~was~~is expected to be recognized over a weighted-average period of 2.2 years.

The Company granted the following stock-based compensation awards:

               Six Months Ended
June 30,
(in thousands)            Shares                 Total Fair Value
RSUs⁽¹⁾
   931 $ 54,100
Non-qualified stock options
   1,446 $ 26,000

⁽¹⁾

Includes approximately 0.1 million RSUs which were granted in connection with the election by certain employees to receive 50% of their 2018 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $8.2 million associated with this RSU grant is expected to be recognized over a~~one-year~~ ~~period beginning on the grant date.~~

~~RSU vestings~~

Six Months Ended
June 30, 2019
(in thousands) Shares Total Fair Value
RSUs 949
$ 60,855
Non-qualified stock options 1,828
$ 34,481

Vestings and ~~stock option~~ exercises

During the six months ended June 30, ~~2018, 0.9~~2019, 0.8 million shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~11.~~

Effective income tax rate

The Company computes its benefit from income taxes by applying the estimated annual effective income tax rate to year to date (loss)/income before benefit from income taxes and adjusts for discrete tax items recorded in the period.

               Six Months Ended
June 30,
(Dollars in thousands)    2018    2017
(Benefit) from income taxes
   $             (15,103)       $                 (508)
Effective income tax rate
   113%    (1)%



	Six Months Ended June 30,
(Dollars in thousands)	2019			2018
(Benefit from) income taxes	$	(25,638	)	$	(15,103	)
Effective income tax rate	30		%	113		%

During the six months ended June 30, ~~2018,~~2019, the Company’s effective income tax rate ~~changed~~decreased primarily due to the ~~following factors:~~

Global Intangible Low-Taxed Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, ~~were disproportionately greater relative to the (loss)/income before benefit from income taxes;~~

~~a decrease in the estimated annual effective income tax rate primarily due to the reduction of the U.S. statutory federal tax rate from 35% to 21% pursuant to the Tax Reform Act;~~

an increase in U.S. research and development tax ~~credits;~~credits, and

a decrease in uncertain tax ~~benefits~~positions as a result of the ~~settlement of a foreign tax audit for 2012, 2013, 2014, and 2015.~~

~~Tax reform act~~

~~On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was enacted into law, which significantly changed U.S. tax law and included many provisions, such as a reduction~~lapse of the ~~U.S. federal statutory tax rate, imposed aone-time~~ ~~transition tax~~statute of limitations on ~~deemed repatriation of deferred~~certain foreign ~~earnings, and included a provision to tax global intangiblelow-taxed~~ income (“GILTI”) of foreign subsidiaries, a special tax deduction for foreign derived intangible income, and a base erosion anti-abuse tax measure (“BEAT”) that may tax payments between a U.S. corporation and its foreign subsidiaries, among other tax changes.

Under the SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recognized the provisional tax impacts in the three months ended December 31, 2017 that included $20.4 million of income tax expense to~~re-measure~~ its net deferred tax assets to the 21% enacted rate. However, the Company has revised its provisional amount to reflect the impact of the retrospective adoption of ASC 606 and has recognized a $12.6 million income tax benefit for the remeasurement of its net deferred tax liabilities on a retrospective basis in the three months ended December 31, 2017.

The final amounts may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act.

~~The Tax Reform Act also provided for aone-time~~ deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through December 31, 2017. However, based on the Company’s provisional analysis performed as of that date, the Company does not expect to be subject to the~~one-time~~ transition tax due to the Company’s foreign subsidiaries being in a net accumulated deficit position. During the six months ended June 30, 2018, the Company recognized no significant adjustments to these estimates.

~~The Tax Reform Act provides the following new anti-abuse provisions beginning in 2018:~~

reserves.

The GILTI provisions require the Company to include in its U.S. income tax base foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax resulting from GILTI inclusions beginning in 2018. As of June 30, 2018, the Company has included an estimate of the effect of its GILTI provisions in its estimated annual effective tax rate. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.

The BEAT provisions in the Tax Reform Act impose an alternative minimum tax on taxpayers with substantial base-erosion payments. The Company’s preliminary assessment is that the Company will not be subject to the BEAT in 2018. The Company continues to monitor IRS guidance and will update its estimates as guidance is issued.

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method. In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.

The calculation of the basic and diluted earnings per share ~~is as follows:~~

             Three Months Ended
June 30,              Six Months Ended
June 30,
(in thousands, except per share amounts)    2018    2017    2018    2017
Basic

Net (loss)/income
   $             (10,409)    $             3,702    $             1,791    $             56,665
Weighted-average common shares outstanding
               78,635                77,313                78,436    77,039








(Loss)/earnings per share, basic
   $ (0.13)    $ 0.05    $ 0.02    $ 0.74









Diluted

Net (loss)/income
   $ (10,409)    $ 3,702    $ 1,791    $ 56,665
Weighted-average effect of dilutive securities:

Stock options
   —    3,694    3,132    3,439
RSUs
   —    1,938    1,679    1,934








Effect of dilutive securities
   —    5,632    4,811    5,373








Weighted-average common shares outstanding, assuming dilution
   78,635    82,945    83,247    82,412








(Loss)/earnings per share, diluted
   $ (0.13)    $ 0.04    $ 0.02    $ 0.69









Outstanding anti-dilutive stock options and RSUs⁽¹⁾
   6,500    237    242    276

⁽¹⁾	Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.

was:



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2019			2018			2019			2018
Basic
Net (loss) income	$	(32,296	)	$	(10,409	)	$	(61,013	)	$	1,791
Weighted-average common shares outstanding	78,987			78,635			78,787			78,436
(Loss) earnings per share, basic	$	(0.41	)	$	(0.13	)	$	(0.77	)	$	0.02

Diluted
Net (loss) income	$	(32,296	)	$	(10,409	)	$	(61,013	)	$	1,791
Weighted-average effect of dilutive securities:
Stock options	—			—			—			3,132
RSUs	—			—			—			1,679
Effect of dilutive securities	—			—			—			4,811
Weighted-average common shares outstanding, assuming dilution	78,987			78,635			78,787			83,247
(Loss) earnings per share, diluted	$	(0.41	)	$	(0.13	)	$	(0.77	)	$	0.02

Outstanding anti-dilutive stock options and RSUs ⁽¹⁾	6,253			6,500			5,908			242

⁽¹⁾ Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, ~~and~~ the timing of revenue recognition, and are described more completely in Part I of our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

2018.

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 intended 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, variation in demand for our products and ~~services;~~services, reliance on third party ~~relationships; our beliefs and the timing of the completion of our analysis regarding the impact of the Tax Cuts and Jobs Act of 2017, including its impact~~relationships, reliance on ~~income tax expense and deferred tax assets;~~key personnel, the inherent risks associated with international operations and the continued uncertainties in the global ~~economy;~~economy, our continued effort to market and sell both domestically and ~~internationally;~~internationally, foreign currency exchange ~~rates; the financial impact of any future acquisitions;~~rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security ~~breaches;~~breaches, and management of our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of our Annual Report on Form10-K for the year ended December 31, ~~2017 as well as~~2018 and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the results contained in such statements will be achieved. Although ~~subsequent~~new information, future events, or risks may cause ~~our view~~actual results to ~~change,~~differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.

We develop, market, license, and support enterprise software applications that help organizations transform the way they engage with their customers and process and complete work across their enterprise. We also license our no-code Pega Platform™ for ~~customer engagement and digital process automation, in addition to licensing our Pega Platform~~rapid application development ~~product for~~to clients that wish to build and extend their own business applications. ~~The~~Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified no-code Pega Platform, empowering businesses to quickly design, extend, and ~~applications help connect enterprises to~~scale their ~~customers in real-time across channels, streamline business operations, and adapt~~enterprise applications to meet ~~changing requirements.~~

strategic business needs.

Our target clients ~~include~~are Global 3000 ~~companies~~organizations and government agencies that ~~seek~~require applications to ~~manage complex enterprise systems~~differentiate themselves in the markets they serve. Our applications achieve and ~~customer service issues with greater~~facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and ~~cost-effectiveness. Our strategy is~~retaining customers, and reducing risk. We deliver applications tailored to ~~sell~~our clients’ specific industry needs.

We utilize a ~~client a series~~number of ~~licenses, each focused on a specific purpose or area of operations~~performance measures in ~~support of longer term enterprise-wide digital transformation initiatives.~~

~~Our license revenue is primarily derived from sales of~~analyzing and assessing our ~~applications~~overall performance, making operating decisions, and ~~Pega Platform. Our cloud revenue is derived from our hosted software applications~~forecasting and ~~Pega Platform environments. Our consulting revenue is primarily related to new license implementations.~~

~~Financial and Performance Metrics~~

(Dollars in thousands, except per share
amounts)    Three Months Ended
June 30,          Six Months Ended
June 30,
   2018    2017    Change    2018    2017    Change
Total revenue
   $     196,779    $     186,596    $     10,183    5%    $     431,961    $     442,905    $     (10,944)    (2)%
Net (loss)/income
   $ (10,409)    $ 3,702    $ (14,111)    n/m    $ 1,791    $ 56,665    $ (54,874)    (97)%
Diluted (loss)/earnings per share
   $ (0.13)    $ 0.04    $ (0.17)    n/m    $ 0.02    $ 0.69    $ (0.67)    (97)%
Cash provided by operating activities
               $ 75,432    $ 85,769    $ (10,337)    (12)%

~~n/m -~~planning for future periods.



(Dollars in thousands, except per share amounts)	Three Months Ended June 30,						Change					Six Months Ended June 30,					Change
(Dollars in thousands, except per share amounts)	2019			2018			Change					2019			2018		Change
Total revenue	$	205,592		$	196,779		$	8,813		4	%	$	418,138		$	431,961	$	(13,823	)	(3	)%
Subscription revenue ⁽¹⁾	$	125,982		$	117,416		$	8,566		7	%	$	269,760		$	262,218	$	7,542		3	%
Net (loss) income	$	(32,296	)	$	(10,409	)	$	(21,887	)	(210	)%	$	(61,013	)	$	1,791	$	(62,804	)	*
(Loss) earnings per share, diluted	$	(0.41	)	$	(0.13	)	$	(0.28	)	(215	)%	$	(0.77	)	$	0.02	$	(0.79	)	*

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

Annual Contract Value (“ACV”)^{(1) (2)}

The change in ACV measures the growth and predictability of future cash flows from ~~committed term, cloud,~~Pega Cloud and ~~maintenance~~Client Cloud committed arrangements as of the end of the particular reporting period.

   June 30,
(in thousands)    2018    2017    Change
Term and Cloud ACV
   $         250,904    $         191,634    $         59,270            31%
Maintenance ACV
   263,624    237,696    25,928    11%





Total ACV
   $ 514,528    $ 429,330    $ 85,198    20%

⁽¹⁾



	June 30,				Change				Constant Currency Change
(Dollars in thousands)	2019		2018		Change				Constant Currency Change
Maintenance ACV	$	277,316	$	263,624	$	13,692	5	%	7	%
Term ACV	199,299		168,528		$	30,771	18	%	19	%
Client Cloud ACV	476,615		432,152		$	44,463	10	%	12	%
Pega Cloud ACV	136,074		82,376		53,698		65	%	67	%
Total ACV	$	612,689	$	514,528	$	98,161	19	%	21	%

⁽¹⁾Total ACV, as of a given date, is the sum of the following two components:


•	Client Cloud: the sum of (1) the ~~following two components:~~ annual value of each term license contract in effect on such date, which is equal to its total license value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting for Client Cloud arrangements.


•	Pega Cloud: the total of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.

⁽²⁾As foreign currency exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of ACV growth rates on a constant currency basis enhances the understanding of our results and evaluation of our performance in comparison to prior periods. The ~~sum of~~percent change in constant currency is calculated by applying the ~~annual value of each term and cloud contract in effect~~applicable current period exchange rates to prior period ACV.

Remaining performance obligations (“RPO”)

Expected future revenue on ~~such date, with the annual value of a term or cloud contract being equal to the total value of the contract divided by the total number of years of the contract.~~

~~Maintenance revenue reported for the quarter ended on such date, multiplied by four.~~

~~Committed not yet recognized revenue~~

~~We expect to recognize revenue from~~ existing ~~contracts as follows:~~

   June 30,
2018
(in thousands)    Perpetual license        Term license            Maintenance        Cloud    Consulting and
training    Total
Remainder of 2018
   $         28,626    $ 20,457    $ 111,086    $ 41,036    $ 12,039    $ 213,244
2019
   15,862    9,878    43,837    66,529    4,103    140,209
2020
   2,423    5,665    5,265    50,250    —    63,603
2021 and thereafter
   362    944    2,103    55,995    200    59,604












   $ 47,273    $         36,944    $         162,291    $         213,810    $         16,342    $         476,660

contracts:



	June 30, 2019
(Dollars in thousands)	Perpetual license			Term license			Maintenance			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	%
Change in RPO Since June 30, 2018
	$	(36,623	)	$	6,640		$	32,273		$	148,253		$	1,086		$	151,629
	(77		)%	18		%	20		%	69		%	7		%	32		%



	June 30, 2018
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Cloud		Consulting		Total
1 year or less	$	28,626	$	20,457	$	111,086	$	41,036	$	12,039	$	213,244	45	%
1-2 years	15,862		9,878		43,837		66,529		4,103		140,209		29	%
2-3 years	2,423		5,665		5,265		50,250		—		63,603		13	%
Greater than 3 years	362		944		2,103		55,995		200		59,604		13	%
	$	47,273	$	36,944	$	162,291	$	213,810	$	16,342	$	476,660	100	%

CRITICAL ACCOUNTING POLICES

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 accounting principles generally accepted in the United States ~~(U.S.~~(“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 available information.

~~Except as described below, there have been no changes in our critical accounting policies as disclosed in our Annual Report on Form10-K~~ ~~for the year ended December 31, 2017.~~

For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following ~~locations:~~

locations in our Annual Report on Form 10-K for the year ended December 31, 2018:

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

Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data” ~~both of which are contained~~.

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

2018.

~~Note 2. “New Accounting Pronouncements”, Note 4. “Receivables, Contract Assets,~~

RESULTS OF OPERATIONS

Revenue



(Dollars in thousands)	Three Months Ended June 30,								Change					Six Months Ended June 30,								Change
(Dollars in thousands)	2019				2018				Change					2019				2018				Change
Cloud	$	31,699	15	%	$	20,201	10	%	$	11,498		57	%	$	59,457	14	%	$	35,783	8	%	$	23,674		66	%
Term license	24,954		12	%	31,309		16	%	(6,355		)	(20	)%	73,268		18	%	96,004		22	%	(22,736		)	(24	)%
Maintenance	69,329		34	%	65,906		34	%	3,423			5	%	137,035		33	%	130,431		31	%	6,604			5	%
Subscription ⁽¹⁾	125,982		61	%	117,416		60	%	8,566			7	%	269,760		65	%	262,218		61	%	7,542			3	%
Perpetual license	19,320		9	%	13,475		7	%	5,845			43	%	34,270		8	%	36,553		8	%	(2,283		)	(6	)%
Consulting	60,290		30	%	65,888		33	%	(5,598		)	(8	)%	114,108		27	%	133,190		31	%	(19,082		)	(14	)%
	$	205,592	100	%	$	196,779	100	%	$	8,813		4	%	$	418,138	100	%	$	431,961	100	%	$	(13,823	)	(3	)%

⁽¹⁾Reflects client arrangements (term license, cloud, and ~~Deferred Revenue”, and Note 9. “Revenue” contained in Item 1. “Unaudited Condensed Consolidated Financial Statements” of this Quarterly Reporting on Form10-Q~~ ~~for the three months ended June 30, 2018.~~

maintenance) that are subject to renewal.

~~Revenue~~

~~We account for~~

Our license revenue ~~in accordance with ASC 606. Our revenue recognition policies require us to make significant judgments and estimates.~~

~~Our clients’ contracts with us typically contain promises by us to provide multiple products and services. Judgment~~ is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to the distinct performance obligations based on relative stand-alone selling price. We estimate stand-alone selling price based on the prices charged to clients, or by using information such as market conditions and other observable inputs. However, the selling pricederived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software ~~licenses and~~applications.

We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud ~~performance obligations are highly variable. Thus, we estimate stand-alone selling price for software licenses and cloud performance obligations using the residual approach, determined based on~~arrangements, which could result in slower total ~~transaction price minus the stand-alone selling price of other performance obligations promised~~revenue growth in the ~~contract.~~

In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently and which portions must be deferred and recognized in future periods. We analyze various factors including, but not limited to, the selling price of undelivered services when sold on a stand-alone basis, our pricing policies, and contractual terms and conditions to help us make such judgments about revenue recognition. Changes in judgment on any of these factors could materially impact the timing and amount of revenue recognized in a given period.

~~RESULTS OF OPERATIONS~~

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)    2018    2017    Change    2018    2017    Change
Total revenue
   $     196,779    $     186,596    $ 10,183    5 %    $     431,961    $     442,905    $     (10,944)    (2)%
Gross profit
   $ 122,962    $ 118,721    $ 4,241    4 %    $ 282,530    $ 306,940    $ (24,410)    (8)%
(Loss)/income from operations
   $ (23,163)    $ (8,947)    $     (14,216)    159 %    $ (15,227)    $ 56,960    $ (72,187)    (127)%
Net (loss)/income
   $ (10,409)    $ 3,702    $ (14,111)    (381)%    $ 1,791    $ 56,665    $ (54,874)    (97)%

~~Revenue~~

~~License and Cloud Revenue~~

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2018 2017 Change 2018 2017 Change
Perpetual license
$ 13,475 21% $ 31,297 49% $ (17,822) (57)% $ 36,553 22% $ 69,196 34% $ (32,643) (47)%
Term license
31,309 48% 19,853 31% $ 11,456 58 % 96,004 57% 108,962 55% $ (12,958) (12)%
Cloud
20,201 31% 12,525 20% $ 7,676 61 % 35,783 21% 22,927 11% $ 12,856 56 %

Total license and cloud
$ 64,985 100% $ 63,675 100% $ 1,310 2 % $ 168,340 100% $ 201,085 100% $ (32,745) (16)%

~~We continue to experience a shift in client preferences from perpetual arrangements to term and cloud arrangements.~~near term. Revenue ~~for~~from cloud arrangements is generally recognized over the service period, ~~of the cloud contract, as compared to~~while revenue from term and perpetual license arrangements ~~which~~ is generally recognized atupfront when the ~~contract effective date.~~

license rights become effective.

Subscription revenue

The ~~decrease~~increases in cloud revenue in the three and six months ended June 30, 2019 reflect the shift in client preferences to cloud arrangements from other types of arrangements.

The decreases in term license revenue in the three and six months ended June 30, 2019 were due to revenue recognized from several large, multi-year term license contracts in the three and six months ended June 30, 2018 and reflect the shift in client preferences in favor of our cloud offerings. The decreases are also attributable to revenue recognized from term license contracts in the six months ended June 30, ~~2018 was primarily due~~2019 with multi-year committed maintenance periods, which resulted in a greater portion of the contract value being allocated to ~~$35.3 million in revenue recognized in the three months ended March 31, 2017 from a large term license renewal.~~

~~Maintenance~~

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)            2018                    2017                    Change                    2018                    2017                    Change
Maintenance
   $     65,906    $     59,424    $     6,482    11%    $     130,431    $     118,137    $     12,294    10%

maintenance.

The increases in maintenance revenue in the three and six months ended June 30, 2019 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%.

Perpetual license

The increase in perpetual license revenue in the three months ended June 30, 2019 was primarily due to revenue recognized from a large perpetual license contract in the second quarter of 2019. The decrease in perpetual license revenue in the six months ended June 30, 2019 reflects the shift in client preferences in favor of our cloud offerings instead of our perpetual license arrangements.

Consulting ~~and training~~

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)            2018                    2017                    Change                    2018                    2017                    Change
Consulting and training
   $     65,888    $     63,497    $     2,391    4%    $     133,190    $     123,683    $     9,507    8%

Our consulting ~~and training~~ revenue ~~may fluctuate in future periods~~fluctuates depending onupon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.

The ~~increases~~decreases in consulting ~~and training~~ revenue ~~were primarily due to higher billable hours driven by an increase~~ in ~~the number of projects during~~ the three and six months ended June 30, ~~2018.~~

2019 were primarily due to a decrease in billable hours.

Gross profit

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2018 2017 Change 2018 2017 Change
Software license
$ 43,522 97% $ 49,900 98% $ (6,378) (13)% $ 130,040 98% $ 175,608 99% $ (45,568) (26)%
Maintenance
60,032 91% 52,413 88% 7,619 15 % 118,475 91% 103,908 88% 14,567 14 %
Cloud
11,423 57% 7,000 56% 4,423 63 % 19,284 54% 11,669 51% 7,615 65 %
Consulting and training
7,985 12% 9,408 15% (1,423) (15)% 14,731 11% 15,755 13% (1,024) (6)%

Services
19,408 23% 16,408 22% 3,000 18 % 34,015 20% 27,424 19% 6,591 24 %

Total gross profit
$ 122,962 62% $ 118,721 64% $ 4,241 4 % $ 282,530 65% $ 306,940 69% $ (24,410) (8)%



	Three Months Ended June 30,								Change					Six Months Ended June 30,								Change
(Dollars in thousands)	2019				2018				Change					2019				2018				Change
Software license	$	43,346	98	%	$	43,522	97	%	$	(176	)	—	%	$	105,232	98	%	$	130,040	98	%	$	(24,808	)	(19	)%
Maintenance	63,037		91	%	60,032		91	%	3,005			5	%	124,408		91	%	118,475		91	%	5,933			5	%
Cloud	15,052		47	%	11,423		57	%	3,629			32	%	29,512		50	%	19,284		54	%	10,228			53	%
Consulting	7,077		12	%	7,985		12	%	(908		)	(11	)%	7,469		7	%	14,731		11	%	(7,262		)	(49	)%
	$	128,512	63	%	$	122,962	62	%	$	5,550		5	%	$	266,621	64	%	$	282,530	65	%	$	(15,909	)	(6	)%

The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from 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 increase in total gross profit in the three months ended June 30, ~~2018~~2019 was primarily due to an increase in cloud revenue reflecting the shift in client preferences to cloud arrangements from other types of arrangements, and an increase in maintenance revenue due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90%. The decrease in total gross profit in the six months ended June 30, 2019 was primarily due to a ~~large~~decrease in term and perpetual license ~~recognized~~revenue reflecting the shift in client preferences toward our cloud offerings and a decrease in consulting revenue due to a decrease in billable hours.

The increase in total gross profit percent in the three months ended June 30, ~~2018.~~

~~Maintenance and cloud gross profit percent~~

2019 was driven by an increase in higher margin maintenance revenue. The ~~increases~~decrease in ~~maintenance~~total gross profit percent in the ~~three and~~ six months ended June 30, ~~2018 were~~2019 was driven by ~~decreases of $0.7 million and $1 million, respectively, in compensation and benefits due to decreased headcount and a decrease~~the shift in client ~~support expenses as we transferred resources to provide dedicated support to~~preferences in favor of cloud arrangements, which are lower margin than our ~~growing cloud business.~~

term and perpetual license revenue streams.

The ~~increases~~decreases in cloud gross profit percent in the three and six months ended June 30, ~~2018~~2019 were driven ~~by cost efficiency gains as our cloud business continues to grow and scale, partially offset~~ by an increase in ~~client support expenses~~costs as we ~~expanded~~accelerated our investments in cloud ~~client~~infrastructure and service delivery to support ~~function to sustain our growing cloud business.~~

~~Consulting and training~~future growth. The decrease in consulting gross profit percent

~~The decreases~~ in the six months ended June 30, 2019 was driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project and an increase in consulting resource availability as we continue growing and ~~training gross profit percent~~leveraging our partner network.

Operating expenses

Selling and marketing



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
Selling and marketing ⁽¹⁾	$	116,962		$	93,972		$	22,990	24	%	$	225,827		$	182,355		$	43,472	24	%
As a percent of total revenue	57		%	48		%					54		%	42		%
Selling and marketing headcount, end of period											1,428			1,159			269		23	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with selling and marketing activities, as well as advertising, promotions, trade shows, seminars, and the amortization of client-related intangibles.

The increases in the three and six months ended June 30, ~~2018~~2019 were ~~driven~~ primarily ~~by lower utilization rates~~due to increases in compensation and ~~the impact~~benefits of ~~our policy introduced late in the three months ended June 30, 2017 to offer ourweb-based~~ ~~training free of charge to users which reduced training revenue for the three and six months ended June 30, 2018 by $0.9~~$17.7 million and ~~$1.6~~$35.4 million, ~~respectively.~~

~~Operating expenses~~

~~Selling~~attributable to increased headcount, equity compensation, and ~~marketing~~

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)            2018                    2017                    Change                    2018                    2017                    Change
Selling and marketing
   $     93,972       $     75,200       $     18,772    25%    $     182,355    $     144,881        $     37,474    26%
As a percent of total revenue
   48%    40%          42%    33%
Selling and marketing headcount, end of period
               1,159    916       243    27%

~~Selling~~increases of $2.1 million 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 client-related intangibles.$6.6 million in deferred contract cost amortization. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts ~~in existing industries, as well as to expand coverage in new industries and geographies, and to increase the number of sales opportunities.~~

The increases in the three and six months ended June 30, 2018 were primarily due to increases in compensation and benefits of $13.7 million and $25.4 million, increased employee travel and entertainment, and increased expenses related to the realignment of contract negotiation resources.

Research and development

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)            2018                    2017                    Change                    2018                    2017                    Change
Research and development
   $     41,972        $     39,762        $     2,210    6%    $     88,757        $     80,058        $     8,699    11%
As a percent of total revenue
   21%    21%          21%    18%
Research and Development headcount, end of period
               1,563      1,455        108    7%

~~Research and development expenses include~~



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
Research and development ⁽¹⁾	$	49,714		$	41,972		$	7,742	18	%	$	100,310		$	88,757		$	11,553	13	%
As a percent of total revenue	24		%	21		%					24		%	21		%
Research and development headcount, end of period											1,667			1,563			104		7	%

⁽¹⁾ Includes 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 the integration of acquired technologies.

The increases in the three and six months ended June 30, ~~2018~~2019 were primarily due to increases in compensation and benefits of $1$4.6 million and ~~$5.5~~$6.7 million, ~~respectively,~~ attributable to ~~increased~~an increase in headcount and ~~the expansion~~equity compensation, and increases of $1.7 million and $3.3 million in cloud hosting expenses as we expand our ~~application~~cloud-focused research and development ~~team to support the continued development of our expanding suite of software.~~

activities.

General and administrative

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)            2018                    2017                    Change                    2018                    2017                    Change
General and administrative
   $ 10,181        $ 12,706        $ (2,525)    (20)%    $ 26,645        $ 25,041        $ 1,604    6 %
As a percent of total revenue
   5%    7%          6%    6%
General and administrative headcount, end of period
               310        401       (91)    (23)%

~~General and administrative expenses include~~



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			Change				2019			2018			Change
General and administrative ⁽¹⁾	$	14,174		$	10,181		$	3,993	39	%	$	26,850		$	26,645		$	205	1	%
As a percent of total revenue	7		%	5		%					6		%	6		%
General and administrative headcount, end of period ⁽²⁾											383			310			73		24	%

⁽¹⁾ Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. ~~They also include~~Also includes accounting, legal, and other professional consulting and administrative fees. ⁽²⁾The ~~general and administrative~~ headcount includes employees in ~~human resources, information technology, and~~ corporate services departments, whose costs are partially allocated to other operating expense areas.

The ~~decrease~~increase in the three months ended June 30, 2018 was primarily due to a decrease in compensation and benefits of $1.6 million, due to decreased headcount reflecting the realignment of contract negotiation and product development resources to augment our selling and marketing and research development functions, respectively.

~~The increase in the six months ended June 30, 2018~~2019 was primarily due to an increase in compensation and benefits of ~~$1.2~~$1.7 million, ~~in legal fees.~~

due to increased headcount.

Stock-based compensation

   Three Months Ended
June 30,          Six Months Ended
June 30,
(in thousands)    2018    2017    Change    2018    2017    Change
Cost of revenues
   $         4,257    $         3,677    $         580            16 %    $         7,958    $         7,299    $         659            9 %
Selling and marketing
   6,038    4,101    1,937    47 %    10,696    7,506    3,190    42 %
Research and development
   3,802    3,575    227    6 %    7,439    6,887    552    8 %
General and administrative
   1,959    2,579    (620)    (24)%    5,072    4,748    324    7 %









   $ 16,056    $ 13,932    $ 2,124    15 %    $ 31,165    $ 26,440    $ 4,725    18 %









Income tax benefit
   $ (3,341)    $ (4,287)    $ 946    (22)%    $ (6,482)    $ (8,102)    $ 1,620    (20)%



	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
(Dollars in thousands)	2019		2018		Change				2019		2018		Change
Cost of revenues	$	4,911	$	4,257	$	654	15	%	$	9,430	$	7,958	$	1,472		18	%
Selling and marketing	8,364		6,038		2,326		39	%	15,738		10,696		5,042			47	%
Research and development	4,572		3,802		770		20	%	9,132		7,439		1,693			23	%
General and administrative	2,200		1,959		241		12	%	4,097		5,072		(975		)	(19	)%
	$	20,047	$	16,056	$	3,991	25	%	$	38,397	$	31,165	$	7,232		23	%

The ~~increase~~increases in the three and six months ended June 30, ~~2018 was~~2019 were primarily due to the increased value of our annual periodic equity awards granted in March ~~2018~~2019 and ~~2017.~~2018. These awards generally have a five-year vesting schedule.

~~Non-operating~~ ~~income/~~

Other income (expense), net

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)    2018    2017    Change    2018    2017    Change
Foreign currency transaction gain/(loss)
   $         1,244    $         (2,242)    $         3,486            n/m    $         159    $         (1,497)    $         1,656            n/m
Interest income, net
   629    202    $ 427    211 %    1,393    407    986    242 %
Other income, net
   —    566    $ (566)    (100)%    363    287    76    26 %









   $ 1,873    $ (1,474)    $ 3,347    n/m    $ 1,915    $ (803)    $ 2,718    n/m

~~n/m -~~



	Three Months Ended June 30,				Change					Six Months Ended June 30,					Change
(Dollars in thousands)	2019		2018		Change					2019			2018		Change
Foreign currency transaction gain (loss)	$	2,105	$	1,244	$	861		69	%	$	(1,607	)	$	159	$	(1,766	)	*
Interest income, net	544		629		(85		)	(14	)%	1,267			1,393		(126		)	(9	)%
Other income, net	55		—		55			—	%	55			363		(308		)	(85	)%
	$	2,704	$	1,873	$	831		44	%	$	(285	)	$	1,915	$	(2,200	)	*

* not meaningful

The ~~change~~changes in foreign currency transaction ~~gain/~~gain (loss) was primarily due to unrealized gains on foreign currency denominated receivables. The change in interest income was primarily due to an increase in prevailing interest rates and an increase in the size of our holdings in marketable securities.

~~(Benefit) from income taxes~~

   Three Months Ended
June 30,          Six Months Ended
June 30,
(Dollars in thousands)    2018    2017    Change    2018    2017    Change
(Benefit) from income taxes
   $          (10,881)    $         (14,123)    $         3,242    (23)%    $         (15,103)        $         (508)        $         (14,595)            2,873%
Effective income tax rate
               113%    (1)%

~~During the six months ended June 30, 2018, our effective income tax rate changed~~were primarily due to the ~~following factors:~~

~~excess tax benefits from stock-based compensation for the six months ended June 30, 2018~~impact of fluctuations in foreign currency exchange rates associated with our foreign currency denominated cash, accounts receivable, and ~~2017 of $11.4 million~~intercompany receivables and ~~$18.1 million were disproportionately greater relative to~~payables held by our United Kingdom (“U.K.”) subsidiary.

(Benefit from) income ~~before benefit from income taxes;~~

taxes

~~a decrease in the estimated annual effective income tax rate primarily due to the reduction of the U.S. statutory federal tax rate from 35% to 21% pursuant to the Tax Reform Act;~~



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2019			2018			2019			2018
(Benefit from) income taxes	$	(17,338	)	$	(10,881	)	$	(25,638	)	$	(15,103	)
Effective income tax rate							30		%	113		%

~~an increase in U.S. research and development tax credits; and~~

~~a decrease in the balance of our uncertain tax positions as a result of the settlement of a foreign tax audit for 2012, 2013, 2014, and 2015.~~

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

During the six months ended June 30, 2019, the Company’s effective income tax rate changed primarily due to the Global Intangible Low-Taxed Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.

LIQUIDITY AND CAPITAL RESOURCES

   Six Months Ended
June 30,
(in thousands)    2018    2017
Cash provided by (used in):

Operating activities
   $                 75,432    $                 85,769
Investing activities
   (46,369)    (1,159)
Financing activities
   (45,825)    (34,860)
Effect of exchange rates on cash and cash equivalents
   (1,226)    1,282




Net (decrease)/increase in cash and cash equivalents
   $ (17,988)    $ 51,032




(in thousands)    June 30,
2018    December 31,
2017
Held in U.S. entities
   $ 160,384    $ 136,444
Held in foreign entities
   83,199    87,304




Total cash, cash equivalents, and marketable securities
   $ 243,583    $ 223,748



	Six Months Ended June 30,
(in thousands)	2019			2018
Cash provided by (used in):
Operating activities	$	7,720		$	75,432
Investing activities	17,210			(46,369		)
Financing activities	(44,367		)	(45,825		)
Effect of exchange rates on cash and cash equivalents	515			(1,226		)
Net (decrease) in cash and cash equivalents	$	(18,922	)	$	(17,988	)



(in thousands)	June 30, 2019		December 31, 2018
Held by U.S. entities	$	81,482	$	143,533
Held by foreign entities	73,567		63,890
Total cash, cash equivalents, and marketable securities	$	155,049	$	207,423

We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, quarterly cash dividends, and stock repurchases for at least the next 12 months.

If it became necessary to repatriate foreign funds, we may be required to pay U.S. state and local taxes, as well as foreign taxes, upon repatriation. Due to the complexity of ~~the~~ 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 provided by operating activities

As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth in the near term. Cash from cloud arrangements is generally collected over an average service period of three years, while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective.

The primary ~~drivers during~~driver of the decrease in the six months ended June 30, ~~2018~~2019 was ~~$71.8 million~~the recent shift in our revenue mix toward cloud arrangements, which are generally collected over an average service period of three years, and increased costs as the Company accelerated investments in its cloud offerings and selling and marketing activities to support future growth.

Cash provided by (used in) investing activities

The change in cash ~~generated from receivables and contract assets, largely due to increased cash collections and the timing of billings.~~

~~The primary driver during the six months ended June 30, 2017 was net income of $56.7 million.~~

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

~~Cash used in investing activities is~~ was primarily driven by the timing of investment maturities and sales, purchases of new ~~investments.~~

investments, and the payment of consideration for the acquisition of In the Chat Communications Inc. in May 2019.

Cash (used in) financing activities

We primarily used cash in financing activities

~~We used cash primarily~~ for repurchases of our common stock under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.

Stock ~~Repurchase Program~~

~~Since 2004, our Board of Directors has approved annual~~repurchase program ⁽¹⁾

The changes in the remaining stock repurchase ~~programs with the aggregate~~ authority ~~to repurchase up to $221.8 million of our common stock.~~was:



	Six Months Ended June 30,
(in thousands)	2019
January 1,	$	6,620
Authorizations ⁽²⁾	60,000
Repurchases	(13,889		)
June 30,	$	52,731

⁽¹⁾ Purchases under these programs have been made on the open market. As⁽²⁾On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, ~~2018, $169.4~~2020 and increased the amount of common stock we are authorized to repurchase by $60 million ~~had been repurchased, $46 million remained available for repurchase,~~between March 15, 2019 and ~~$6.4 million had expired.~~

June 30, 2020.

Common stock repurchases

   Six Months Ended
June 30,
   2018    2017
    (in thousands)    Shares    Amount    Shares    Amount
Tax withholdings for net settlement of equity awards
   $ 454      $ 26,992      $ 560      $ 27,900
    Stock repurchase program⁽¹⁾

    Repurchases paid
   254      14,871      68      2,986
    Repurchases unsettled at period end
   18      998      —      —








    Activity in Period⁽²⁾
   726      $ 42,861      628      $ 30,886

⁽¹⁾

~~Represents activity under our publicly announced stock repurchase programs.~~

⁽²⁾

During the six months ended June 30, 2018 and 2017, instead of receiving cash from the equity holders, we withheld shares with a value of $21.1 million and $20.7 million for the exercise price of options. These amounts have been excluded from the table above.

~~Dividends~~



	Six Months Ended June 30,
	2019			2018
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	390	$	26,054	454	$	26,992
Stock repurchase program ⁽¹⁾
Repurchases paid	229	13,689		254	14,871
Repurchases unsettled at period end	3	200		18	998
Activity in period ⁽²⁾	622	$	39,943	726	$	42,861

⁽¹⁾ Represents activity under our publicly announced stock repurchase programs. ⁽²⁾During the six months ended June 30, 2019 and 2018, ~~and 2017,~~instead of receiving cash from the equity holders, we ~~paid cash dividends~~withheld shares with a value of ~~$4.7~~$23.1 million and ~~$4.6 million.~~ $21.1 million, respectively, for the exercise price of options. These amounts have been excluded from the table above.

Dividends



	Six Months Ended June 30,
(in thousands)	2019		2018
Dividend payments to shareholders	$	4,730	$	4,702

It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify ~~this~~the dividend program at any time without prior notice.

~~ITEM 3.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

~~Market risk represents the risk of loss that may affect us due to adverse~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates. Other than the item discussed below, there were no significant changes to our market risk exposure during the ~~first~~ six months ended June 30, ~~2018.~~

~~See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” and Item 1A. “Risk Factors—We are exposed~~2019 to ~~fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” included~~the market risk exposure disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017 for a more complete discussion of our market risk exposure.~~

~~Foreign currency exposure~~

~~Translation Risk~~

Our international sales are usually denominated in foreign currencies. However, the operating expenses of our foreign operations are also primarily denominated in foreign currencies, which partially offset 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,

2018

2017
Revenue
(4)% (3)%
Net Income
(31)% (1)%

~~Remeasurement Risk~~

We have experienced and expect to continue to experience fluctuations in our results of operations as a result of transaction gains or losses related to remeasuring 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 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 in the following impact:~~

    (in millions)         June 30,
2018         December 31,
2017
    Foreign currency transaction gain/(loss)
$ (4) $ (6)

2018.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of ~~Disclosure Controls~~disclosure controls and ~~Procedures~~

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 Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, ~~2018.~~2019. 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, ~~2018.~~

2019.

(b) Changes in ~~Internal Control~~internal control over ~~Financial Reporting~~

financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange ~~Act~~Act) during the quarter ended June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

~~ITEM 1A.~~

~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report onForm 10-K for the year ended December 31, ~~2017.~~2018. These risk factors could materially affect our business, financial condition, and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form10-Q or elsewhere by management from time to time.

There have been no material changes during the six months ended June 30, ~~2018~~2019 to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017.~~

2018.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

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

Issuer Purchases of Equity Securities

The following table sets forth information regarding our repurchases of our common stock during the three months ended June 30, ~~2018:~~

(in thousands, except per share

amounts)

Total Number
of Shares
Purchased⁽¹⁾
Average
Price Paid
per
Share⁽¹⁾

Total Number
of Shares Purchased as Part
of Publicly Announced Share
Repurchase Program
Approximate Dollar
Value of Shares That
May Yet Be Purchased at Period End
Under Publicly Announced Share
Repurchase Programs⁽²⁾
April 1, 2018 - April 30, 2018
111      $     61.60      48   $                                                   26,291
May 1, 2018 - May 31, 2018
140      62.18      35   24,092
June 1, 2018 - June 30, 2018
263      60.85      88   46,026


Total
514      61.37

2019.



(in thousands, except per share amounts)	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
April 1, 2019 - April 30, 2019	39	$	70.05	30	$	56,930
May 1, 2019 - May 31, 2019	189	$	71.57	30	$	54,731
June 1, 2019 - June 30, 2019	170	$	71.19	28	$	52,731
	398	$	71.26

⁽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 March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of Rule 10b5-1 under the Exchange Act, and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All stock repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.

Recent Sales of Unregistered Securities

In connection with our acquisition of In the Chat Communications Inc. on May 10, 2019 and in reliance on the Regulation D exemption from registration requirements under the Securities Act, we granted an employee the right to obtain up to 14,497 shares of our common stock, which will be issued in five equal tranches contingent upon continued employment. No general solicitation or advertising to market the securities occurred.

ITEM 6. EXHIBITS

⁽¹⁾

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

⁽²⁾

Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $221.8 million of our common stock. On June 21, 2018, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2019 and increased the amount of common stock we are authorized to repurchase to $50 million between June 15, 2018 and June 30, 2019 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a~~pre-arranged~~ ~~stock repurchase plan, intended to comply with the requirements of Rule10b5-1~~ ~~under the Exchange Act, and Rule10b-18~~ ~~under the Exchange Act (the“10b5-1~~ ~~Plan”). All stock repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1~~ ~~Plan.~~

~~ITEM 6.~~

~~EXHIBITS~~


Exhibit No.		Description

31.1		Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Executive Officer.

31.2		Certification pursuant to Exchange Act Rules13a-14 and15d-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		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		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Label Linkbase Document.

101.PRE		XBRL Taxonomy Presentation Linkbase Document.

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

++~~Management contracts and compensatory plan or arrangements~~

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: August 8, 2018~~		Pegasystems Inc.
			~~By:~~
Dated:	August 7, 2019	By:	/s/ KENNETH STILLWELL
					Kenneth Stillwell
					Chief Financial Officer and Chief Administrative Officer
					(Principal Financial Officer)


~~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)~~*		*~~(Zip Code)~~*



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



		Page
PART I - FINANCIAL INFORMATION


Item 1. Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017~~ 2018			3

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~ 2018			4

Unaudited Condensed Consolidated Statements of Comprehensive (Loss)~~/Income~~ for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~ 2018			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2019 and 2018	6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2018~~2019 and ~~2017~~ 2018			6	7

Notes to Unaudited Condensed Consolidated Financial Statements			7	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk			26	22

Item 4. Controls and Procedures	23
	26

PART II - OTHER INFORMATION


Item 1A. Risk Factors			28	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6. Exhibits	24
28
Signature
~~Item 6. Exhibits~~25			28

~~Signature~~			29


	June 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	144,291	$	162,279
Marketable securities		99,292		61,469

Total cash, cash equivalents, and marketable securities		243,583		223,748
Accounts receivable		141,384		222,735
Unbilled receivables		151,354		158,898
Other current assets		63,864		41,135

Total current assets		600,185		646,516
Long-term unbilled receivables		169,330		160,708
Goodwill		72,911		72,952
Other long-term assets		130,614		131,391

Total assets	$	973,040	$	1,011,567

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	14,411	$	17,370
Accrued expenses		44,882		45,508
Accrued compensation and related expenses		48,691		66,040
Deferred revenue		163,525		166,297

Total current liabilities		271,509		295,215
Deferred income tax liabilities		38,208		38,463
Other long-term liabilities		24,151		23,652

Total liabilities		333,868		357,330
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—		—
Common stock, 200,000 shares authorized; 78,748 and 78,081 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		787		781
Additionalpaid-in capital		141,400		152,097
Retained earnings		506,769		508,051
Accumulated other comprehensive loss		(9,784)		(6,692)

Total stockholders’ equity		639,172		654,237

Total liabilities and stockholders’ equity	$	973,040	$	1,011,567


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenue
Software license	$	44,784	$	51,150	$	132,557	$	178,158
Maintenance		65,906		59,424		130,431		118,137
Services		86,089		76,022		168,973		146,610

Total revenue		196,779		186,596		431,961		442,905

Cost of revenue
Software license		1,262		1,250		2,517		2,550
Maintenance		5,874		7,011		11,956		14,229
Services		66,681		59,614		134,958		119,186

Total cost of revenue		73,817		67,875		149,431		135,965

Gross profit		122,962		118,721		282,530		306,940

Operating expenses
Selling and marketing		93,972		75,200		182,355		144,881
Research and development		41,972		39,762		88,757		80,058
General and administrative		10,181		12,706		26,645		25,041

Total operating expenses		146,125		127,668		297,757		249,980

(Loss)/income from operations		(23,163)		(8,947)		(15,227)		56,960
Foreign currency transaction gain/(loss)		1,244		(2,242)		159		(1,497)
Interest income, net		629		202		1,393		407
Other income, net		—		566		363		287

(Loss)/income before (benefit) from income taxes		(21,290)		(10,421)		(13,312)		56,157
(Benefit) from income taxes		(10,881)		(14,123)		(15,103)		(508)

Net (loss)/income	$	(10,409)	$	3,702	$	1,791	$	56,665

(Loss)/earnings per share
Basic	$	(0.13)	$	0.05	$	0.02	$	0.74
Diluted	$	(0.13)	$	0.04	$	0.02	$	0.69
Weighted-average number of common shares outstanding
Basic		78,635		77,313		78,436		77,039
Diluted		78,635		82,945		83,247		82,412
Cash dividends declared per share	$	0.03	$	0.03	$	0.06	$	0.06


	Six Months Ended June 30,
	2018		2017
Operating activities:
Net income	$	1,791	$	56,665
Adjustments to reconcile net income to cash provided by operating activities:
Change in operating assets and liabilities, net		30,158		(14,874)
Stock-based compensation expense		31,165		26,440
Depreciation and amortization of intangible assets		12,474		12,356
Othernon-cash		(156)		5,182

Cash provided by operating activities		75,432		85,769
Investing activities:
Purchases of investments		(51,395)		(16,656)
Proceeds from maturities and called investments		11,546		20,824
Other		(6,520)		(5,327)

Cash used in investing activities		(46,369)		(1,159)
Financing activities:
Dividend payments to shareholders		(4,702)		(4,613)
Common stock repurchases		(41,123)		(30,247)

Cash used in financing activities		(45,825)		(34,860)
Effect of exchange rates on cash and cash equivalents		(1,226)		1,282

Net (decrease)/increase in cash and cash equivalents		(17,988)		51,032
Cash and cash equivalents, beginning of period		162,279		70,594

Cash and cash equivalents, end of period	$	144,291	$	121,626


	December 31, 2017
(in thousands)	Previously reported		Adjustments		As adjusted
Assets
Accounts receivable, unbilled receivables, and contract assets	$	248,331	$	134,216	$	382,547
Long-term unbilled receivables		—		160,708		160,708
Deferred income taxes		57,127		(42,887)		14,240
Deferred contract costs		—		37,924		37,924
Other assets⁽¹⁾		416,148		��		416,148

Total Assets	$	721,606	$	289,961	$	1,011,567

Liabilities and stockholders’ equity
Deferred revenue	$	195,073	$	(28,776)	$	166,297
Long-term deferred revenue		6,591		(2,885)		3,706
Deferred income tax liabilities		—		38,463		38,463
Other liabilities⁽²⁾		148,864		—		148,864

Total liabilities		350,528		6,802		357,330
Foreign currency translation adjustments		(3,494)		(2,966)		(6,460)
Retained earnings		221,926		286,125		508,051
Other equity⁽³⁾		152,646		—		152,646

Total stockholders’ equity		371,078		283,159		654,237

Total liabilities and stockholders’ equity	$	721,606	$	289,961	$	1,011,567


	Three months ended June 30, 2017						Six months ended June 30, 2017
(in thousands, except per share amounts)	Previously Reported		Adjustments		As Adjusted		Previously Reported		Adjustments		As Adjusted
Revenue:
Software license	$	61,037	$	(9,887)	$	51,150	$	153,427	$	24,731	$	178,158
Maintenance		59,590		(166)		59,424		118,555		(418)		118,137
Services		77,353		(1,331)		76,022		149,245		(2,635)		146,610

Total revenue		197,980		(11,384)		186,596		421,227		21,678		442,905

Cost of revenue:
Software license		1,250		—		1,250		2,550		—		2,550
Maintenance		7,011		—		7,011		14,229		—		14,229
Services		59,614		—		59,614		119,186		—		119,186

Total cost of revenue		67,875		—		67,875		135,965		—		135,965

Gross profit		130,105		(11,384)		118,721		285,262		21,678		306,940

Operating expenses:
Selling and marketing		75,887		(687)		75,200		147,175		(2,294)		144,881
Research and development		39,762		—		39,762		80,058		—		80,058
General and administrative		12,706		—		12,706		25,041		—		25,041

Total operating expenses		128,355		(687)		127,668		252,274		(2,294)		249,980

Income/(loss) from operations		1,750		(10,697)		(8,947)		32,988		23,972		56,960
Foreign currency transaction loss		(917)		(1,325)		(2,242)		(241)		(1,256)		(1,497)
Interest income, net		161		41		202		326		81		407
Other income, net		566		—		566		287		—		287

Income/(loss) before benefit from income taxes		1,560		(11,981)		(10,421)		33,360		22,797		56,157
Benefit from income taxes		(9,846)		(4,277)		(14,123)		(5,067)		4,559		(508)

Net income	$	11,406	$	(7,704)	$	3,702	$	38,427	$	18,238	$	56,665

Earnings per share:
Basic	$	0.15			$	0.05	$	0.50			$	0.74

Diluted	$	0.14			$	0.04	$	0.47			$	0.69

Weighted-average number of common shares outstanding:
Basic		77,313				77,313		77,039				77,039
Diluted		82,945				82,945		82,412				82,412


(in thousands)	June 30, 2018		December 31, 2017
Accounts receivable	$	141,384	$	222,735
Unbilled receivables		151,354		158,898
Long-term unbilled receivables		169,330		160,708

	$	462,068	$	542,341


(in thousands)	June 30, 2018
Remainder of 2018	$	213,244
2019		140,209
2020		63,603
2021 and thereafter		59,604

	$	476,660


	Six Months Ended June 30,
(Dollars in thousands)	2018		2017
(Benefit) from income taxes	$	(15,103)	$	(508)
Effective income tax rate		113%		(1)%