x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019 |
For the quarterly period ended September 30, 2018
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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) |
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company |
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 | ||||
2018 | ||||
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018 | ||||
Notes to Unaudited Condensed Consolidated Financial Statements | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||
PART II - OTHER INFORMATION | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Item 6. Exhibits | ||||
Signature | ||||
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September 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 106,195 | $ | 162,279 | ||||
Marketable securities | 99,782 | 61,469 | ||||||
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Total cash, cash equivalents, and marketable securities | 205,977 | 223,748 | ||||||
Accounts receivable | 150,733 | 222,735 | ||||||
Unbilled receivables | 155,964 | 158,898 | ||||||
Other current assets | 73,464 | 41,135 | ||||||
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Total current assets | 586,138 | 646,516 | ||||||
Long-term unbilled receivables | 168,929 | 160,708 | ||||||
Goodwill | 72,897 | 72,952 | ||||||
Other long-term assets | 134,679 | 131,391 | ||||||
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Total assets | $ | 962,643 | $ | 1,011,567 | ||||
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Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 12,926 | $ | 17,370 | ||||
Accrued expenses | 39,829 | 45,508 | ||||||
Accrued compensation and related expenses | 71,318 | 66,040 | ||||||
Deferred revenue | 158,178 | 166,297 | ||||||
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Total current liabilities | 282,251 | 295,215 | ||||||
Deferred income tax liabilities | 36,166 | 38,463 | ||||||
Other long-term liabilities | 23,371 | 23,652 | ||||||
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| |||||
Total liabilities | 341,788 | 357,330 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, 1,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, 200,000 shares authorized; 78,816 and 78,081 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 788 | 781 | ||||||
Additionalpaid-in capital | 135,132 | 152,097 | ||||||
Retained earnings | 496,815 | 508,051 | ||||||
Accumulated other comprehensive loss | (11,880) | (6,692) | ||||||
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Total stockholders’ equity | 620,855 | 654,237 | ||||||
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Total liabilities and stockholders’ equity | $ | 962,643 | $ | 1,011,567 | ||||
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March 31, 2019 | December 31, 2018 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 110,367 | $ | 114,422 | |||
Marketable securities | 91,804 | 93,001 | |||||
Total cash, cash equivalents, and marketable securities | 202,171 | 207,423 | |||||
Accounts receivable | 135,352 | 180,872 | |||||
Unbilled receivables | 161,480 | 172,656 | |||||
Other current assets | 63,731 | 49,684 | |||||
Total current assets | 562,734 | 610,635 | |||||
Long-term unbilled receivables | 130,494 | 151,237 | |||||
Goodwill | 72,898 | 72,858 | |||||
Other long-term assets | 190,433 | 147,823 | |||||
Total assets | $ | 956,559 | $ | 982,553 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 11,559 | $ | 16,487 | |||
Accrued expenses | 40,947 | 45,506 | |||||
Accrued compensation and related expenses | 56,349 | 84,671 | |||||
Deferred revenue | 180,845 | 185,145 | |||||
Other current liabilities | 12,447 | — | |||||
Total current liabilities | 302,147 | 331,809 | |||||
Operating lease liabilities | 45,325 | — | |||||
Deferred income tax liabilities | 8,319 | 6,939 | |||||
Other long-term liabilities | 12,339 | 22,274 | |||||
Total liabilities | 368,130 | 361,022 | |||||
Stockholders’ equity: | |||||||
Preferred stock, 1,000 shares authorized; none issued | — | — | |||||
Common stock, 200,000 shares authorized; 78,896 and 78,526 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 789 | 785 | |||||
Additional paid-in capital | 119,182 | 123,205 | |||||
Retained earnings | 479,779 | 510,863 | |||||
Accumulated other comprehensive loss | (11,321 | ) | (13,322 | ) | |||
Total stockholders’ equity | 588,429 | 621,531 | |||||
Total liabilities and stockholders’ equity | $ | 956,559 | $ | 982,553 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | ||||||||||||||||
Software license | $ | 52,342 | $ | 53,234 | $ | 184,899 | $ | 231,392 | ||||||||
Maintenance | 66,017 | 61,812 | 196,448 | 179,949 | ||||||||||||
Services | 84,904 | 75,911 | 253,877 | 222,521 | ||||||||||||
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Total revenue | 203,263 | 190,957 | 635,224 | 633,862 | ||||||||||||
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Cost of revenue | ||||||||||||||||
Software license | 1,255 | 1,276 | 3,772 | 3,826 | ||||||||||||
Maintenance | 6,079 | 6,716 | 18,035 | 20,945 | ||||||||||||
Services | 67,089 | 61,739 | 202,047 | 180,925 | ||||||||||||
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Total cost of revenue | 74,423 | 69,731 | 223,854 | 205,696 | ||||||||||||
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Gross profit | 128,840 | 121,226 | 411,370 | 428,166 | ||||||||||||
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Operating expenses | ||||||||||||||||
Selling and marketing | 87,490 | 69,363 | 269,845 | 214,244 | ||||||||||||
Research and development | 46,504 | 41,031 | 135,261 | 121,089 | ||||||||||||
General and administrative | 12,104 | 13,133 | 38,749 | 38,174 | ||||||||||||
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Total operating expenses | 146,098 | 123,527 | 443,855 | 373,507 | ||||||||||||
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(Loss) income from operations | (17,258) | (2,301) | (32,485) | 54,659 | ||||||||||||
Foreign currency transaction gain (loss) | 399 | (5,052) | 558 | (6,549) | ||||||||||||
Interest income, net | 683 | 140 | 2,076 | 547 | ||||||||||||
Other income, net | — | — | 363 | 287 | ||||||||||||
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(Loss) income before benefit from income taxes | (16,176) | (7,213) | (29,488) | 48,944 | ||||||||||||
Benefit from income taxes | (8,589) | (8,501) | (23,692) | (9,009) | ||||||||||||
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Net (loss) income | $ | (7,587) | $ | 1,288 | $ | (5,796) | $ | 57,953 | ||||||||
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(Loss) earnings per share | ||||||||||||||||
Basic | $ | (0.10) | $ | 0.01 | $ | (0.07) | $ | 0.75 | ||||||||
Diluted | $ | (0.10) | $ | 0.01 | $ | (0.07) | $ | 0.70 | ||||||||
Weighted-average number of common shares outstanding | ||||||||||||||||
Basic | 78,700 | 77,691 | 78,525 | 77,258 | ||||||||||||
Diluted | 78,700 | 83,323 | 78,525 | 82,717 | ||||||||||||
Cash dividends declared per share | $ | 0.03 | $ | 0.03 | $ | 0.09 | $ | 0.09 |
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Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Revenue | |||||||
Software license | $ | 63,264 | $ | 87,773 | |||
Maintenance | 67,706 | 64,525 | |||||
Services | 81,576 | 82,884 | |||||
Total revenue | 212,546 | 235,182 | |||||
Cost of revenue | |||||||
Software license | 1,378 | 1,255 | |||||
Maintenance | 6,335 | 6,082 | |||||
Services | 66,724 | 68,277 | |||||
Total cost of revenue | 74,437 | 75,614 | |||||
Gross profit | 138,109 | 159,568 | |||||
Operating expenses | |||||||
Selling and marketing | 108,865 | 88,383 | |||||
Research and development | 50,596 | 46,785 | |||||
General and administrative | 12,676 | 16,464 | |||||
Total operating expenses | 172,137 | 151,632 | |||||
(Loss) income from operations | (34,028 | ) | 7,936 | ||||
Foreign currency transaction loss | (3,712 | ) | (1,085 | ) | |||
Interest income, net | 723 | 764 | |||||
Other income, net | — | 363 | |||||
(Loss) income before benefit from income taxes | (37,017 | ) | 7,978 | ||||
Benefit from income taxes | (8,300 | ) | (4,222 | ) | |||
Net (loss) income | $ | (28,717 | ) | $ | 12,200 | ||
(Loss) earnings per share | |||||||
Basic | $ | (0.37 | ) | $ | 0.16 | ||
Diluted | $ | (0.37 | ) | $ | 0.15 | ||
Weighted-average number of common shares outstanding | |||||||
Basic | 78,584 | 78,236 | |||||
Diluted | 78,584 | 83,102 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net (loss) income | $ | (7,587) | $ | 1,288 | $ | (5,796) | $ | 57,953 | ||||||||
Other comprehensive (loss) income, net of tax | ||||||||||||||||
Unrealized (loss) gain onavailable-for-sale marketable securities, net of tax | (162) | 22 | (277) | 148 | ||||||||||||
Foreign currency translation adjustments | (1,934) | 2,576 | (4,911) | 8,848 | ||||||||||||
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Total other comprehensive (loss) income, net of tax | (2,096) | 2,598 | (5,188) | 8,996 | ||||||||||||
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Comprehensive (loss) income | $ | (9,683) | $ | 3,886 | $ | (10,984) | $ | 66,949 | ||||||||
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Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net (loss) income | $ | (28,717 | ) | $ | 12,200 | ||
Other comprehensive income, net of tax | |||||||
Unrealized gain (loss) on available-for-sale marketable securities, net of tax | 374 | (188 | ) | ||||
Foreign currency translation adjustments | 1,627 | 4,450 | |||||
Total other comprehensive income, net of tax | 2,001 | 4,262 | |||||
Comprehensive (loss) income | $ | (26,716 | ) | $ | 16,462 |
STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Operating activities: | ||||||||
Net (loss) income | $ | (5,796) | $ | 57,953 | ||||
Adjustment to reconcile net (loss) income to cash provided by operating activities: | ||||||||
Change in operating assets and liabilities, net | 8,698 | (15,455) | ||||||
Stock-based compensation expense | 47,573 | 39,929 | ||||||
Amortization of intangible assets and depreciation | 18,692 | 18,703 | ||||||
Othernon-cash | (2,079) | 12,796 | ||||||
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Cash provided by operating activities | 67,088 | 113,926 | ||||||
Investing activities: | ||||||||
Purchases of investments | (68,177) | (25,687) | ||||||
Proceeds from maturities and called investments | 26,456 | 23,124 | ||||||
Other | (7,874) | (9,403) | ||||||
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Cash used in investing activities | (49,595) | (11,966) | ||||||
Financing activities: | ||||||||
Dividend payments to shareholders | (7,067) | (6,941) | ||||||
Common stock repurchases | (64,597) | (37,099) | ||||||
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Cash used in financing activities | (71,664) | (44,040) | ||||||
Effect of exchange rates on cash and cash equivalents | (1,913) | 2,054 | ||||||
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Net (decrease) increase in cash and cash equivalents | (56,084) | 59,974 | ||||||
Cash and cash equivalents, beginning of period | 162,279 | 70,594 | ||||||
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Cash and cash equivalents, end of period | $ | 106,195 | $ | 130,568 | ||||
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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 | |||||||||||||||||||||
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 | ||||||||||
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 |
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Operating activities: | |||||||
Net (loss) income | $ | (28,717 | ) | $ | 12,200 | ||
Adjustments to reconcile net (loss) income to cash provided by operating activities: | |||||||
Stock-based compensation | 18,350 | 15,109 | |||||
Amortization and depreciation | 18,774 | 10,322 | |||||
Foreign currency transaction loss | 3,712 | 1,085 | |||||
Other non-cash | 1,471 | 1,137 | |||||
Change in operating assets and liabilities, net | 9,113 | 15,802 | |||||
Cash provided by operating activities | 22,703 | 55,655 | |||||
Investing activities: | |||||||
Purchases of investments | (7,224 | ) | (35,204 | ) | |||
Proceeds from maturities and called investments | 8,548 | 5,995 | |||||
Other | (2,790 | ) | (2,069 | ) | |||
Cash used in investing activities | (1,466 | ) | (31,278 | ) | |||
Financing activities: | |||||||
Dividend payments to shareholders | (2,363 | ) | (2,344 | ) | |||
Common stock repurchases | (23,224 | ) | (20,708 | ) | |||
Cash used in financing activities | (25,587 | ) | (23,052 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 295 | 2,186 | |||||
Net (decrease) increase in cash and cash equivalents | (4,055 | ) | 3,511 | ||||
Cash and cash equivalents, beginning of period | 114,422 | 162,279 | |||||
Cash and cash equivalents, end of period | $ | 110,367 | $ | 165,790 |
2018.
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 that each prior reporting period presented be adjusted to reflect the application of this ASU. See Note 2. “New Accounting Pronouncements” for additional information.
2019.
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
ASC 606 and ASC340-40
On January 1, 2018, the Company adopted Accounting Standards Codifications 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 standard842, while prior period amounts were not adjusted and has adjusted prior periodscontinue to conform.
The most significant adoption impacts were as follows:
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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For additional information on the Company’s historic accounting policies as a resultunder ASC 840 “Leases”.
The impact of the adoption of 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 | |||||||||
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Total assets | $ | 721,606 | $ | 289,961 | $ | 1,011,567 | ||||||
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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 | |||||||||
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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 | |||||||||
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Total stockholders’ equity | 371,078 | 283,159 | 654,237 | |||||||||
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Total liabilities and stockholders’ equity | $ | 721,606 | $ | 289,961 | $ | 1,011,567 | ||||||
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PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2017 | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
(in thousands, except per share amounts) | Previously Reported | Adjustments | As Adjusted | Previously Reported | Adjustments | As Adjusted | ||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Software license | $ | 41,793 | $ | 11,441 | $ | 53,234 | $ | 195,220 | $ | 36,172 | $ | 231,392 | ||||||||||||
Maintenance | 62,204 | (392) | 61,812 | 180,759 | (810) | 179,949 | ||||||||||||||||||
Services | 75,818 | 93 | 75,911 | 225,063 | (2,542) | 222,521 | ||||||||||||||||||
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Total revenue | 179,815 | 11,142 | 190,957 | 601,042 | 32,820 | 633,862 | ||||||||||||||||||
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Cost of revenue: | ||||||||||||||||||||||||
Software license | 1,276 | — | 1,276 | 3,826 | — | 3,826 | ||||||||||||||||||
Maintenance | 6,716 | — | 6,716 | 20,945 | — | 20,945 | ||||||||||||||||||
Services | 61,739 | — | 61,739 | 180,925 | — | 180,925 | ||||||||||||||||||
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Total cost of revenue | 69,731 | — | 69,731 | 205,696 | — | 205,696 | ||||||||||||||||||
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Gross profit | 110,084 | 11,142 | 121,226 | 395,346 | 32,820 | 428,166 | ||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||
Selling and marketing | 70,209 | (846) | 69,363 | 217,384 | (3,140) | 214,244 | ||||||||||||||||||
Research and development | 41,031 | — | 41,031 | 121,089 | — | 121,089 | ||||||||||||||||||
General and administrative | 13,133 | — | 13,133 | 38,174 | — | 38,174 | ||||||||||||||||||
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Total operating expenses | 124,373 | (846) | 123,527 | 376,647 | (3,140) | 373,507 | ||||||||||||||||||
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(Loss) income from operations | (14,289) | 11,988 | (2,301) | 18,699 | 35,960 | 54,659 | ||||||||||||||||||
Foreign currency transaction loss | (552) | (4,500) | (5,052) | (793) | (5,756) | (6,549) | ||||||||||||||||||
Interest income, net | 144 | (4) | 140 | 470 | 77 | 547 | ||||||||||||||||||
Other income, net | — | — | — | 287 | — | 287 | ||||||||||||||||||
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(Loss) income before benefit from income taxes | (14,697) | 7,484 | (7,213) | 18,663 | 30,281 | 48,944 | ||||||||||||||||||
Benefit from income taxes | (12,885) | 4,384 | (8,501) | (17,952) | 8,943 | (9,009) | ||||||||||||||||||
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Net (loss) income | $ | (1,812) | $ | 3,100 | $ | 1,288 | $ | 36,615 | $ | 21,338 | $ | 57,953 | ||||||||||||
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(Loss) earnings per share: | ||||||||||||||||||||||||
Basic | $ | (0.03) | $ | 0.01 | $ | 0.47 | $ | 0.75 | ||||||||||||||||
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|
|
|
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| |||||||||||||||||
Diluted | $ | (0.03) | $ | 0.01 | $ | 0.44 | $ | 0.70 | ||||||||||||||||
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|
|
|
|
|
| |||||||||||||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||||||||||
Basic | 77,691 | 77,691 | 77,258 | 77,258 | ||||||||||||||||||||
Diluted | 77,691 | 83,323 | 82,717 | 82,717 |
Adoption of ASC 606 and ASC340-40 did not change the Company’s total cash provided by or used in operating, financing, or investing activities in the Company’s unaudited condensed consolidated statements of cash flows“Leases” for the nine months ended September 30, 2017.
additional information.
September 30, 2018 | ||||||||||||||||
(in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Municipal bonds | $ | 46,633 | $ | — | $ | (267) | $ | 46,366 | ||||||||
Corporate bonds | 53,738 | 1 | (323) | 53,416 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 100,371 | $ | 1 | $ | (590) | $ | 99,782 | |||||||||
|
|
|
|
|
|
|
|
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 | |||||||||
|
|
|
|
|
|
|
|
March 31, 2019 | |||||||||||||||
(in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||
Municipal bonds | $ | 42,693 | $ | 86 | $ | (20 | ) | $ | 42,759 | ||||||
Corporate bonds | 48,966 | 142 | (63 | ) | 49,045 | ||||||||||
$ | 91,659 | $ | 228 | $ | (83 | ) | $ | 91,804 |
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 March 31, 2019, maturities of marketable securities ranged from April 2019 to August 2022, with a weighted-average remaining maturity of approximately 1.4 years.
As of September 30, 2018, remaining maturities of marketable securities ranged from October 2018 to August 2021, with a weighted-average remaining maturity of approximately 1.5 years.
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Accounts receivable | $ | 150,733 | $ | 222,735 | ||||
Unbilled receivables | 155,964 | 158,898 | ||||||
Long-term unbilled receivables | 168,929 | 160,708 | ||||||
|
|
|
| |||||
$ | 475,626 | $ | 542,341 | |||||
|
|
|
|
(in thousands) | March 31, 2019 | December 31, 2018 | |||||
Accounts receivable | $ | 135,352 | $ | 180,872 | |||
Unbilled receivables | 161,480 | 172,656 | |||||
Long-term unbilled receivables | 130,494 | 151,237 | |||||
$ | 427,326 | $ | 504,765 |
(Dollars in thousands) | September 30, 2018 | |||||||
1 Year or Less | $ | 155,964 | 48% | |||||
1-2 Years | 89,177 | 27% | ||||||
2-5 Years | 79,752 | 25% | ||||||
|
|
|
| |||||
$ | 324,893 | 100% | ||||||
|
|
|
|
(Dollars in thousands) | March 31, 2019 | ||||
1 year or less | $ | 161,480 | 55 | % | |
1-2 years | 86,496 | 30 | % | ||
2-5 years | 43,998 | 15 | % | ||
$ | 291,974 | 100 | % |
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Contract assets(1) | $ | 2,888 | $ | 914 | ||||
Long-term contract assets(2) | 1,581 | — | ||||||
|
|
|
| |||||
$ | 4,469 | $ | 914 | |||||
|
|
|
| |||||
Deferred revenue | $ | 158,178 | $ | 166,297 | ||||
Long-term deferred revenue(3) | 5,840 | 3,706 | ||||||
|
|
|
| |||||
$ | 164,018 | $ | 170,003 | |||||
|
|
|
|
(in thousands) | March 31, 2019 | December 31, 2018 | |||||
Contract assets (1) | $ | 3,380 | $ | 3,711 | |||
Long-term contract assets (2) | 1,818 | 2,543 | |||||
$ | 5,198 | $ | 6,254 | ||||
Deferred revenue | $ | 180,845 | $ | 185,145 | |||
Long-term deferred revenue (3) | 5,866 | 5,344 | |||||
$ | 186,711 | $ | 190,489 |
Major clients
No client represented 10% or more of the Company’s total receivables as of September 30, 2018 or December 31, 2017.
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Deferred contract costs(1) | $ | 50,799 | $ | 37,924 |
(in thousands) | March 31, 2019 | December 31, 2018 | |||||
Deferred contract costs (1) | $ | 64,869 | $ | 64,367 |
Three Months Ended March 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Amortization of deferred contract costs (1) | $ | 8,301 | $ | 3,789 |
Amortization of deferred contract costs was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Amortization of deferred contract costs(1) | $ | 4,208 | $ | 3,034 | $ | 11,806 | $ | 8,529 |
(1)Included in selling and marketing expenses.
| ||||
| ||||
| ||||
was:
(in thousands) | Three Months Ended March 31, | ||
2019 | |||
Balance as of January 1, | $ | 72,858 | |
Currency translation adjustments | 40 | ||
Balance as of March 31, | $ | 72,898 |
September 30, 2018 | ||||||||||||||||
(in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value(1) | ||||||||||||
Client-related intangibles | 4-10 years | $ | 63,136 | $ | (49,633) | $ | 13,503 | |||||||||
Technology | 3-10 years | 58,942 | (49,067) | 9,875 | ||||||||||||
Other | 1-5 years | 5,361 | (5,361) | — | ||||||||||||
|
|
|
|
|
| |||||||||||
$ | 127,439 | $ | (104,061) | $ | 23,378 | |||||||||||
|
|
|
|
|
|
March 31, 2019 | |||||||||||||
(in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value (1) | |||||||||
Client-related intangibles | 4-10 years | $ | 63,136 | $ | (52,839 | ) | $ | 10,297 | |||||
Technology | 2-10 years | 59,742 | (51,730 | ) | 8,012 | ||||||||
Other | 1 - 5 years | 5,361 | (5,361 | ) | — | ||||||||
$ | 128,239 | $ | (109,930 | ) | $ | 18,309 |
December 31, 2017 | ||||||||||||||||
(in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value(1) | ||||||||||||
Client-related intangibles | 4-10 years | $ | 63,164 | $ | (44,835) | $ | 18,329 | |||||||||
Technology | 3-10 years | 58,942 | (45,372) | 13,570 | ||||||||||||
Other | 1-5 years | 5,361 | (5,361) | — | ||||||||||||
|
|
|
|
|
| |||||||||||
$ | 127,467 | $ | (95,568) | $ | 31,899 | |||||||||||
|
|
|
|
|
|
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 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cost of revenue | $ | 1,232 | $ | 1,232 | $ | 3,695 | $ | 3,871 | ||||||||
Selling and marketing | 1,603 | 1,873 | 4,813 | 5,608 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 2,835 | $ | 3,105 | $ | 8,508 | $ | 9,479 | |||||||||
|
|
|
|
|
|
|
|
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands) Three Months Ended
March 31,2019 2018 Cost of revenue $ 1,332 $ 1,232 Selling and marketing 1,603 1,605 $ 2,935 $ 2,837
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Outside professional services | $ | 11,638 | $ | 14,468 | ||||
Income and other taxes | 3,971 | 7,420 | ||||||
Marketing and sales program expenses | 4,623 | 6,444 | ||||||
Dividends payable | 2,365 | 2,344 | ||||||
Employee-related expenses | 5,212 | 4,065 | ||||||
Other | 12,020 | 10,767 | ||||||
|
|
|
| |||||
$ | 39,829 | $ | 45,508 | |||||
|
|
|
|
(in thousands) | March 31, 2019 | December 31, 2018 | |||||
Outside professional services expenses | $ | 8,815 | $ | 10,367 | |||
Income and other taxes | 7,954 | 10,387 | |||||
Marketing and sales program expenses | 8,318 | 5,860 | |||||
Dividends payable | 2,367 | 2,363 | |||||
Employee-related expenses | 5,432 | 3,536 | |||||
Other | 8,061 | 12,993 | |||||
$ | 40,947 | $ | 45,506 |
Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - significant other inputs that are observable either directly or indirectly; and
Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
hierarchy.
March 31, 2019.
September 30, 2018 | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | $ | 10,212 | $ | 15,212 | $ | — | $ | 25,424 | ||||||||
Marketable securities: | ||||||||||||||||
Municipal bonds | $ | — | $ | 46,366 | $ | — | $ | 46,366 | ||||||||
Corporate bonds | — | 53,416 | — | 53,416 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total marketable securities | $ | — | $ | 99,782 | $ | — | $ | 99,782 | ||||||||
Investments in privately-held companies(1) | $ | — | $ | — | $ | 2,890 | $ | 2,890 |
were:
March 31, 2019 | |||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Cash equivalents | $ | 12,401 | $ | 10,062 | $ | — | $ | 22,463 | |||||||
Marketable securities: | |||||||||||||||
Municipal bonds | $ | — | $ | 42,759 | $ | — | $ | 42,759 | |||||||
Corporate bonds | — | 49,045 | — | 49,045 | |||||||||||
Total marketable securities | $ | — | $ | 91,804 | $ | — | $ | 91,804 | |||||||
Investments in privately-held companies (1) | $ | — | $ | — | $ | 3,390 | $ | 3,390 |
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2017 | ||||||||||||||||
(in thousands) | 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 |
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 |
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 nine months ended September 30, 2018 and 2017, the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.
Revenue policy
LEASES
Software license revenue is primarily derived from sales ofAccounting policy
Maintenance revenue includes revenue from client support including software upgrades on a whenand-if available basis, telephone support, and bug fixes or patches.
Services revenue is primarily derived from cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications, and consulting revenue, which is primarily related to new license implementations.
Contracts with multiple performance obligations
leases are operating leases. The Company’s license and cloud arrangements often contain multiple performance obligations. For contracts with multiple performance obligations, the Company accounts for individual performance obligations separatelya contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if theymodified. Fixed lease costs are distinct. The transaction price is allocated to the separate performance obligationsrecognized on a relative stand-alone selling price basis. Ifstraight-line basis over the transaction price contains discountsterm of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term, if the Company expects to provide a future price concession, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price are estimated and recognized in revenue as the Company satisfies each performance obligation to the extentis reasonably certain it is probable that a significant reversal of cumulative revenue recognized will exercise those options. The Company’s leases do not occur when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional productscontain any material residual value guarantees or services, the Company assesses whether any discount on the included products and services is in excess of levels normally available to similar clients and, if so, accounts for that discount as an additional performance obligation.
Software licenses
The Company has concluded that its software licenses are distinct performance obligations, as the client can benefit from the software on its own. Software license revenue is typically recognized at a point in time when control is transferred 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 reevaluates whether the residual approach is appropriate for its license performance obligations when sold with other performance obligations. If the standalone selling price analysis illustrates that software license performance obligations are no longer highly variable, the Company will utilize the relative allocation method for such arrangements.
Term license fees
Three Months Ended March 31, | |||
(in thousands) | 2019 | ||
Operating lease costs | $ | 4,300 | |
Variable lease costs (1) | 1,321 | ||
$ | 5,621 |
(in thousands) | March 31, 2019 | ||
Right of use assets (1) | $ | 46,464 | |
Lease liabilities (2) | $ | 12,447 | |
Long-term lease liabilities | $ | 45,325 |
March 31, 2019 | ||
Weighted-average remaining lease term | 4.3 years | |
Weighted-average discount rate (1) | 5.7 | % |
(in thousands) | March 31, 2019 | ||
Remainder of 2019 | $ | 11,324 | |
2020 | 15,784 | ||
2021 | 13,764 | ||
2022 | 12,761 | ||
2023 | 11,604 | ||
Total lease payments | 65,237 | ||
Less: imputed interest (1) | (7,465 | ) | |
$ | 57,772 |
Maintenance
Maintenance contracts entitle clients to receive technical support and software updates, on a when and if available basis, during the termpresent value of the maintenance contract. Technical support and software updates are considered distinct services but accounted forremaining 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.
(in thousands) | Operating Leases (1) | ||
2019 | $ | 15,993 | |
2020 | 14,807 | ||
2021 | 13,262 | ||
2022 | 12,279 | ||
2023 | 11,084 | ||
$ | 67,425 |
The maintenance performance obligation is priced as a percentage of the selling price of the related software license, which is highly variable. The Company determined the standalone selling price 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.
Maintenance fees are usually payable in advance on a monthly, quarterly, or annual basis over the term of the agreement.
Services
Services revenue is comprised of consulting, 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 other performance obligations.
The stand-alone selling price for time and materials consulting 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 stand-alone selling price for fixed price consulting is based on the estimated hours versus actual hours in similar geographies and for similar contract sizes. Revenue for fixed price consulting is recognized over time as the services are provided. Fees for fixed price consulting 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 other performance obligations 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. Cloud fees for production environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.
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 the term of the service. Cloud fees for development and testing environments are usually payable in advance on a monthly, quarterly, or annual basis over the term of the service.
Contract modifications
The Company enters into amendmentsvacated pursuant to previously executed contracts which constitute contract modifications. The Company assesses each of these contract modifications to determine:
|
|
A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:
|
|
Three Months Ended March 31, | ||
(in thousands) | 2019 | |
Cash paid for leases | 5,197 | |
Right of use assets recognized for new leases (non-cash) | 8,034 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
U.S. | $ | 103,075 | 51% | $ | 105,059 | 55% | $ | 327,409 | 51% | $ | 376,819 | 59% | ||||||||||||||||||||
Other Americas | 10,424 | 5% | 9,307 | 5% | 37,766 | 6% | 32,890 | 5% | ||||||||||||||||||||||||
United Kingdom (“U.K.”) | 19,277 | 9% | 18,537 | 10% | 68,450 | 11% | 67,403 | 11% | ||||||||||||||||||||||||
Europe (excluding U.K.), Middle East, and Africa | 42,254 | 21% | 31,109 | 16% | 101,150 | 16% | 81,557 | 13% | ||||||||||||||||||||||||
Asia-Pacific | 28,233 | 14% | 26,945 | 14% | 100,449 | 16% | 75,193 | 12% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total revenue | $ | 203,263 | 100% | $ | 190,957 | 100% | $ | 635,224 | 100% | $ | 633,862 | 100% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |||||||||||
(Dollars in thousands) | 2019 | 2018 | |||||||||
U.S. | $ | 103,991 | 48 | % | $ | 113,985 | 48 | % | |||
Other Americas | 28,829 | 14 | % | 17,715 | 8 | % | |||||
United Kingdom (“U.K.”) | 24,549 | 12 | % | 26,094 | 11 | % | |||||
Europe (excluding U.K.), Middle East, and Africa | 34,186 | 16 | % | 31,826 | 14 | % | |||||
Asia-Pacific | 20,991 | 10 | % | 45,562 | 19 | % | |||||
$ | 212,546 | 100 | % | $ | 235,182 | 100 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Perpetual license | $ | 20,276 | $ | 12,623 | $ | 56,829 | $ | 81,819 | ||||||||
Term license | 32,066 | 40,611 | 128,070 | 149,573 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Revenue recognized at a point in time | 52,342 | 53,234 | 184,899 | 231,392 | ||||||||||||
Maintenance | 66,017 | 61,812 | 196,448 | 179,949 | ||||||||||||
Cloud | 22,184 | 13,280 | 57,967 | 36,207 | ||||||||||||
Consulting | 62,720 | 62,631 | 195,910 | 186,314 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Revenue recognized over time | 150,921 | 137,723 | 450,325 | 402,470 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 203,263 | $ | 190,957 | $ | 635,224 | $ | 633,862 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Term license | $ | 32,066 | $ | 40,611 | $ | 128,070 | $ | 149,573 | ||||||||
Cloud | 22,184 | 13,280 | 57,967 | 36,207 | ||||||||||||
Maintenance | 66,017 | 61,812 | 196,448 | 179,949 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Subscription(1) | 120,267 | 115,703 | 382,485 | 365,729 | ||||||||||||
Perpetual license | 20,276 | 12,623 | 56,829 | 81,819 | ||||||||||||
Consulting | 62,720 | 62,631 | 195,910 | 186,314 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 203,263 | $ | 190,957 | $ | 635,224 | $ | 633,862 | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Perpetual license | $ | 14,950 | $ | 23,078 | |||
Term license | 48,314 | 64,695 | |||||
Revenue recognized at a point in time | 63,264 | 87,773 | |||||
Maintenance | 67,706 | 64,525 | |||||
Cloud | 27,758 | 15,582 | |||||
Consulting | 53,818 | 67,302 | |||||
Revenue recognized over time | 149,282 | 147,409 | |||||
$ | 212,546 | $ | 235,182 |
(in thousands) | Three Months Ended March 31, | ||||||
2019 | 2018 | ||||||
Term license | $ | 48,314 | $ | 64,695 | |||
Cloud | 27,758 | 15,582 | |||||
Maintenance | 67,706 | 64,525 | |||||
Subscription (1) | 143,778 | 144,802 | |||||
Perpetual license | 14,950 | 23,078 | |||||
Consulting | 53,818 | 67,302 | |||||
$ | 212,546 | $ | 235,182 |
During the nine months ended September 30, 2018 and 2017, there were no material changes in the Company’s estimate of variable fees.
Remaining performance obligations (formerly reported as “committed not yet recognized revenue”)
Revenue for the remaining performance obligations on existing contracts is expected to be recognized in the future as follows:
September 30, 2018 | ||||||||||||||||||||||||||||
(Dollars in thousands) | Perpetual license | Term license | Maintenance | Cloud | Consulting | Total | ||||||||||||||||||||||
1 year or less | $ | 25,343 | $ | 44,283 | $ | 140,591 | $ | 88,529 | $ | 14,107 | $ | 312,853 | 60% | |||||||||||||||
1-2 years | 6,490 | 10,063 | 8,877 | 70,815 | 1,830 | 98,075 | 19% | |||||||||||||||||||||
2-3 years | 360 | 1,598 | 2,586 | 54,646 | 449 | 59,639 | 11% | |||||||||||||||||||||
Greater than 3 years | 1,306 | 218 | 1,079 | 49,110 | 50 | 51,763 | 10% | |||||||||||||||||||||
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$ | 33,499 | $ | 56,162 | $ | 153,133 | $ | 263,100 | $ | 16,436 | $ | 522,330 | 100% | ||||||||||||||||
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Clients accounting for 10%
March 31, 2019 | |||||||||||||||||||||||||
(Dollars in thousands) | Perpetual license | Term License | Maintenance | Cloud | Consulting | Total | |||||||||||||||||||
1 year or less | $ | 10,263 | $ | 44,404 | $ | 187,324 | $ | 115,548 | $ | 13,251 | $ | 370,790 | 58 | % | |||||||||||
1-2 years | 998 | 4,274 | 9,350 | 91,539 | 1,363 | 107,524 | 17 | % | |||||||||||||||||
2-3 years | 2,180 | 756 | 4,438 | 71,509 | 473 | 79,356 | 13 | % | |||||||||||||||||
Greater than 3 years | — | 135 | 2,008 | 72,742 | 27 | 74,912 | 12 | % | |||||||||||||||||
$ | 13,441 | $ | 49,569 | $ | 203,120 | $ | 351,338 | $ | 15,114 | $ | 632,582 | 100 | % |
March 31, 2018 | |||||||||||||||||||||||||
(Dollars in thousands) | Perpetual license | Term License | Maintenance | Cloud | Consulting | Total | |||||||||||||||||||
1 year or less | $ | 33,859 | $ | 21,087 | $ | 156,702 | $ | 47,764 | $ | 9,403 | $ | 268,815 | 59 | % | |||||||||||
1-2 years | 14,106 | 7,877 | 21,381 | 52,849 | 1,098 | 97,311 | 21 | % | |||||||||||||||||
2-3 years | 1,204 | 5,634 | 4,924 | 37,844 | — | 49,606 | 11 | % | |||||||||||||||||
Greater than 3 years | 382 | 853 | 1,825 | 40,478 | — | 43,538 | 9 | % | |||||||||||||||||
$ | 49,551 | $ | 35,451 | $ | 184,832 | $ | 178,935 | $ | 10,501 | $ | 459,270 | 100 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Total revenue | $ | 203,263 | $ | 190,957 | $ | 635,224 | $ | 633,862 | ||||||||
Client A | 10% | 10% | * | * |
*Client accounted for less than 10% of total revenue.
10.less.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cost of revenues | $ | 4,319 | $ | 3,613 | $ | 12,277 | $ | 10,913 | ||||||||
Selling and marketing | 6,198 | 3,976 | 16,895 | 11,482 | ||||||||||||
Research and development | 3,917 | 3,420 | 11,356 | 10,306 | ||||||||||||
General and administrative | 1,974 | 2,480 | 7,045 | 7,228 | ||||||||||||
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$ | 16,408 | $ | 13,489 | $ | 47,573 | $ | 39,929 | |||||||||
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Income tax benefit | $ | (3,555) | $ | (4,129) | $ | (10,037) | $ | (12,231) |
Three Months Ended March 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Cost of revenues | $ | 4,519 | $ | 3,701 | |||
Selling and marketing | 7,374 | 4,658 | |||||
Research and development | 4,560 | 3,637 | |||||
General and administrative | 1,897 | 3,113 | |||||
$ | 18,350 | $ | 15,109 | ||||
Income tax benefit | $ | (3,740 | ) | $ | (3,141 | ) |
Nine Months Ended September 30, | ||||||||
(in thousands) | Shares | Total Fair Value | ||||||
RSUs(1) | 1,117 | $ | 65,569 | |||||
Non-qualified stock options | 1,623 | $ | 29,372 |
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2019 | ||||||
(in thousands) | Shares | Total Fair Value | ||||
RSUs | 839 | $ | 53,184 | |||
Non-qualified stock options | 1,770 | $ | 33,344 |
11. INCOME TAXES
Effective income tax rate
Nine Months Ended September 30, | ||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
Benefit from income taxes | $ | (23,692 | ) | $ | (9,009 | ) | ||
Effective income tax rate | 80 | % | (18 | )% |
Three Months Ended March 31, | |||||||
(Dollars in thousands) | 2019 | 2018 | |||||
Benefit from income taxes | $ | (8,300 | ) | $ | (4,222 | ) | |
Effective income tax rate | 22 | % | (53 | )% |
Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) 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 than 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 utilization of U.S. research and development tax credits;credits, and
a decrease in uncertain tax provisionspositions as a result of the settlement of a foreign tax audit for 2012 through 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 reductionlapse of the U.S. federal statutory tax rate, aone-time transition taxstatute of limitations on deemed repatriation of deferredcertain foreign earnings, and a provision to tax global intangiblelow-taxedreserves. 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.
In the three months ended December 31, 2017, the Company recognized, under SEC Staff Accounting Bulletin No. 118 (“SAB 118”), provisional income taxes, including $20.4 million of income tax expense tore-measure its net deferred tax assets to the 21% enacted rate. Also, during the same period, the Company reduced its provisional income taxes by a $12.6 million income tax benefit as a result of the remeasurement of its net deferred tax liabilities under the retrospective adoption of ASC 606.
The final income tax amounts may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions by the Company, 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 theone-time transition tax due to the Company’s foreign subsidiaries being in a net accumulated deficit position. During the nine months ended September 30, 2018, the Company recognized no material adjustments to these estimates.
The Tax Reform Act provides the following new anti-abuse provisions beginning in 2018:
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 September 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.
12.13. EARNINGS PER SHARE
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The calculation of the basic and diluted earnings per share is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Basic | ||||||||||||||||
Net (loss) income | $ | (7,587) | $ | 1,288 | $ | (5,796) | $ | 57,953 | ||||||||
Weighted-average common shares outstanding | 78,700 | 77,691 | 78,525 | 77,258 | ||||||||||||
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(Loss) earnings per share, basic | $ | (0.10) | $ | 0.01 | $ | (0.07) | $ | 0.75 | ||||||||
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Net (loss) income | $ | (7,587) | $ | 1,288 | $ | (5,796) | $ | 57,953 | ||||||||
Weighted-average effect of dilutive securities: | ||||||||||||||||
Stock options | — | 3,681 | — | 3,519 | ||||||||||||
RSUs | — | 1,951 | — | 1,940 | ||||||||||||
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Effect of dilutive securities | — | 5,632 | — | 5,459 | ||||||||||||
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Weighted-average common shares outstanding, assuming dilution | 78,700 | 83,323 | 78,525 | 82,717 | ||||||||||||
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(Loss) earnings per share, diluted | $ | (0.10) | $ | 0.01 | $ | (0.07) | $ | 0.70 | ||||||||
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Outstanding anti-dilutive stock options and RSUs(1) | 6,119 | 105 | 6,380 | 219 |
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Three Months Ended March 31, | |||||||
(in thousands, except per share amounts) | 2019 | 2018 | |||||
Basic | |||||||
Net (loss) income | $ | (28,717 | ) | $ | 12,200 | ||
Weighted-average common shares outstanding | 78,584 | 78,236 | |||||
(Loss) earnings per share, basic | $ | (0.37 | ) | $ | 0.16 | ||
Diluted | |||||||
Net (loss) income | $ | (28,717 | ) | $ | 12,200 | ||
Weighted-average effect of dilutive securities: | |||||||
Stock options | — | 3,119 | |||||
RSUs | — | 1,747 | |||||
Effect of dilutive securities | — | 4,866 | |||||
Weighted-average common shares outstanding, assuming dilution | 78,584 | 83,102 | |||||
(Loss) earnings per share, diluted | $ | (0.37 | ) | $ | 0.15 | ||
Outstanding anti-dilutive stock options and RSUs (1) | 5,563 | 397 |
2018. strategic business needs. industry needs. Total revenue Subscription(1) Net (loss) income Diluted (loss) earnings per shareand 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.These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. 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 impactrelationships, 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, 20172018 as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”).subsequentnew information, future events, or risks may cause our viewactual 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.customer engagement and digital process automation, in addition to licensing our Pega Platformrapid application development product forto clients that wish to build and extend their own business applications. TheOur 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 toscale their customers in real-time across channels, streamline business operations, and adaptenterprise applications to meet changing requirements.includeare Global 3000 companiesorganizations and government agencies that seekrequire applications to manage complex enterprise systemsdifferentiate themselves in the markets they serve. Our applications achieve and customer service issues with greaterfacilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and cost-effectiveness. Our strategy isretaining customers, and reducing risk. We deliver applications tailored to sell a client a series of licenses, each focused on aour clients’ specific purpose or area of operations in support of longer term enterprise-wide digital transformation initiatives.(Dollars in thousands, except per share amounts) Three Months Ended
September 30, Nine Months Ended
September 30, 2018 2017 Change 2018 2017 Change $ 203,263 $ 190,957 $ 12,306 6% $ 635,224 $ 633,862 $ 1,362 —% $ 120,267 $ 115,703 $ 4,564 4% $ 382,485 $ 365,729 $ 16,756 5% $ (7,587) $ 1,288 $ (8,875) * $ (5,796) $ 57,953 $ (63,749) * $ (0.10) $ 0.01 $ (0.11) * $ (0.07) $ 0.70 $ (0.77) * Three Months Ended
March 31, Change 2019 2018 Total revenue $ 212,546 $ 235,182 $ (22,636 ) (10 )% $ 143,778 $ 144,802 $ (1,024 ) (1 )% Net (loss) income $ (28,717 ) $ 12,200 $ (40,917 ) * (Loss) earnings per share, diluted $ (0.37 ) $ 0.15 $ (0.52 ) * (1)Subscription revenue reflects client arrangements (term license, cloud, and maintenance) which may be subject to a renewal.
(1) Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
September 30, | ||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | |||||||||||||
Term and cloud ACV | $ | 272,693 | $ | 200,180 | $ | 72,513 | 36% | |||||||||
Maintenance ACV | 264,068 | 247,248 | 16,820 | 7% | ||||||||||||
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Total ACV | $ | 536,761 | $ | 447,428 | $ | 89,333 | 20% | |||||||||
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(1)ACV, as of a given date, is |
the sum of the following two components:
and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four.
We do not provide hosting for Client Cloud arrangements1 year or less 1-2 years 2-3 years Greater than 3 years duration of one year or less.(formerly reported as “committed not yet recognized revenue”)for the remaining performance obligationsrecognition timing on existing contracts: March 31, 2019 (Dollars in thousands) Perpetual license Term license Maintenance Cloud Consulting Total 1 year or less $ 10,263 $ 44,404 $ 187,324 $ 115,548 $ 13,251 $ 370,790 58 % 1-2 years 998 4,274 9,350 91,539 1,363 107,524 17 % 2-3 years 2,180 756 4,438 71,509 473 79,356 13 % Greater than 3 years — 135 2,008 72,742 27 74,912 12 % $ 13,441 $ 49,569 $ 203,120 $ 351,338 $ 15,114 $ 632,582 100 % March 31, 2018 (Dollars in thousands) Perpetual license Term license Maintenance Cloud Consulting Total 1 year or less $ 33,859 $ 21,087 $ 156,702 $ 47,764 $ 9,403 $ 268,815 59 % 1-2 years 14,106 7,877 21,381 52,849 1,098 97,311 21 % 2-3 years 1,204 5,634 4,924 37,844 — 49,606 11 % Greater than 3 years 382 853 1,825 40,478 — 43,538 9 % $ 49,551 $ 35,451 $ 184,832 $ 178,935 $ 10,501 $ 459,270 100 % isthat have an original expected to be recognized as follows: September 30, 2018 (Dollars in thousands) Perpetual license Term license Maintenance Cloud Consulting Total $ 25,343 $ 44,283 $ 140,591 $ 88,529 $ 14,107 $ 312,853 60% 6,490 10,063 8,877 70,815 1,830 98,075 19% 360 1,598 2,586 54,646 449 59,639 11% 1,306 218 1,079 49,110 50 51,763 10% $ 33,499 $ 56,162 $ 153,133 $ 263,100 $ 16,436 $ 522,330 100%
For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following locations:
“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
Note 2. “New Accounting Pronouncements”, Note 4. “Receivables, Contract Assets, and Deferred Revenue”, and Note 9. “Revenue” contained in Item 1. “Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report on Form10-Q for the quarterly period ended September 30, 2018.
Except as described below, thereThere 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.
Revenue
We account for 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 price of our software licenses and 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 total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.
In applying our revenue recognition policy, we must determine which portions of our revenue are recognized in the current period 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.
2018.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||
Total revenue | $ | 203,263 | $ | 190,957 | $ | 12,306 | 6 % | $ | 635,224 | $ | 633,862 | $ | 1,362 | — % | ||||||||||||||||||
Gross profit | $ | 128,840 | $ | 121,226 | $ | 7,614 | 6 % | $ | 411,370 | $ | 428,166 | $ | (16,796) | (4)% | ||||||||||||||||||
(Loss) income from operations | $ | (17,258) | $ | (2,301) | $ | (14,957) | 650 % | $ | (32,485) | $ | 54,659 | $ | (87,144) | * | ||||||||||||||||||
Net (loss) income | $ | (7,587) | $ | 1,288 | $ | (8,875) | * | $ | (5,796) | $ | 57,953 | $ | (63,749) | * |
* not meaningful
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||||||||||||||||||
Term license | $ | 32,066 | 16% | $ | 40,611 | 21% | $ | (8,545) | (21)% | $ | 128,070 | 20% | $ | 149,573 | 24% | $ | (21,503) | (14)% | ||||||||||||||||||||||||||||||
Cloud | 22,184 | 11% | 13,280 | 7% | 8,904 | 67 % | 57,967 | 9% | 36,207 | 6% | 21,760 | 60 % | ||||||||||||||||||||||||||||||||||||
Maintenance | 66,017 | 32% | 61,812 | 33% | 4,205 | 7 % | 196,448 | 31% | 179,949 | 28% | 16,499 | 9 % | ||||||||||||||||||||||||||||||||||||
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Subscription(1) | 120,267 | 59% | 115,703 | 61% | 4,564 | 4 % | 382,485 | 60% | 365,729 | 58% | 16,756 | 5 % | ||||||||||||||||||||||||||||||||||||
Perpetual license | 20,276 | 10% | 12,623 | 7% | 7,653 | 61 % | 56,829 | 9% | 81,819 | 13% | (24,990) | (31)% | ||||||||||||||||||||||||||||||||||||
Consulting | 62,720 | 31% | 62,631 | 32% | 89 | — % | 195,910 | 31% | 186,314 | 29% | 9,596 | 5 % | ||||||||||||||||||||||||||||||||||||
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Total revenue | $ | 203,263 | 100% | $ | 190,957 | 100% | $ | 12,306 | 6 % | $ | 635,224 | 100% | $ | 633,862 | 100% | $ | 1,362 | — % | ||||||||||||||||||||||||||||||
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(Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||
2019 | 2018 | ||||||||||||||||
Term license | $ | 48,314 | 23 | % | $ | 64,695 | 28 | % | $ | (16,381 | ) | (25 | )% | ||||
Cloud | 27,758 | 13 | % | 15,582 | 7 | % | 12,176 | 78 | % | ||||||||
Maintenance | 67,706 | 32 | % | 64,525 | 27 | % | 3,181 | 5 | % | ||||||||
Subscription revenue (1) | 143,778 | 68 | % | 144,802 | 62 | % | (1,024 | ) | (1 | )% | |||||||
Perpetual license | 14,950 | 7 | % | 23,078 | 10 | % | (8,128 | ) | (35 | )% | |||||||
Consulting | 53,818 | 25 | % | 67,302 | 28 | % | (13,484 | ) | (20 | )% | |||||||
$ | 212,546 | 100 | % | $ | 235,182 | 100 | % | $ | (22,636 | ) | (10 | )% |
We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud arrangements, which could result in slower total revenue growth in the near term. Revenue from cloud arrangements is generally recognized over time throughout the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
The increases in cloud revenue in the three and nine months ended September 30, 2018 reflect2019 reflects the shift in client preferences to cloud arrangements from other types of arrangements.
The increasedecrease in consulting revenue in the ninethree months ended September 30, 2018March 31, 2019 was primarily due to highera decrease in billable hours driven by an increasehours.
Three Months Ended March 31, | Change | ||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | |||||||||||||||
Software license | $ | 61,886 | 98 | % | $ | 86,518 | 99 | % | $ | (24,632 | ) | (28 | )% | ||||
Maintenance | 61,371 | 91 | % | 58,443 | 91 | % | 2,928 | 5 | % | ||||||||
Cloud | 14,460 | 52 | % | 7,861 | 50 | % | 6,599 | 84 | % | ||||||||
Consulting | 392 | 1 | % | 6,746 | 10 | % | (6,354 | ) | (94 | )% | |||||||
$ | 138,109 | 65 | % | $ | 159,568 | 68 | % | $ | (21,459 | ) | (13 | )% |
Gross profit
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||||||||||||||||||
Software license | $ | 51,087 | 98% | $ | 51,958 | 98% | $ | (871 | ) | (2)% | $ | 181,127 | 98% | $ | 227,566 | 98% | $ | (46,439) | (20)% | |||||||||||||||||||||||||||||
Maintenance | 59,938 | 91% | 55,096 | 89% | 4,842 | 9 % | 178,413 | 91% | 159,004 | 88% | 19,409 | 12 % | ||||||||||||||||||||||||||||||||||||
Cloud | 12,569 | 57% | 7,269 | 55% | 5,300 | 73 % | 31,853 | 55% | 18,938 | 52% | 12,915 | 68 % | ||||||||||||||||||||||||||||||||||||
Consulting | 5,246 | 8% | 6,903 | 11% | (1,657 | ) | (24)% | 19,977 | 10% | 22,658 | 12% | (2,681) | (12)% | |||||||||||||||||||||||||||||||||||
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Total gross profit | $ | 128,840 | 63% | $ | 121,226 | 63% | $ | 7,614 | 6 % | $ | 411,370 | 65% | $ | 428,166 | 68% | $ | (16,796) | (4)% | ||||||||||||||||||||||||||||||
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service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
The decrease in total gross profit in the nine months ended September 30, 2018 was primarily due to $35.3 million of revenue recognized in the three months ended March 31, 2017 from a large term license renewal and the decrease in perpetual license revenue reflecting the shift in client preferences toward our cloud offerings, partially offsetofferings.
Maintenance and cloud gross profit percent
The increases in maintenance gross profit percent in the three and nine months ended September 30, 2018 were driven by decreases of $0.3 million and $1.5 million in compensation and benefits due to decreased headcount and a decrease in client support expenses as we transferred resources to provide dedicated support to our growing cloud business.
The increases in cloud gross profit percent in the three and nine months ended September 30, 2018 were primarily due to continued growth and scale in our cloud business, partially offset by an increase in client support expenses as we expanded our cloud client support function to sustain our growing cloud business.
Consulting gross profit percent
The decreases in consulting gross profit percent was driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project which began in the threesecond half of 2016 and nine months ended September 30, 2018 were driven primarily by increasesan increase in compensationconsulting resource availability in Europe as we continue growing and benefits, lower utilization rates, and the impact ofleveraging 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 nine months ended September 30, 2018.
partner network.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||
Selling and marketing | $ | 87,490 | $ | 69,363 | $ | 18,127 | 26% | $ | 269,845 | $ | 214,244 | $ | 55,601 | 26% | ||||||||||||||||||
As a percent of total revenue | 43% | 36% | 42% | 34% | ||||||||||||||||||||||||||||
Selling and marketing headcount, end of period | 1,194 | 934 | 260 | 28% |
Three Months Ended March 31, | Change | ||||||||||||
(Dollars in thousands) | 2019 | 2018 | |||||||||||
Selling and marketing (1) | $ | 108,865 | $ | 88,383 | $ | 20,482 | 23 | % | |||||
As a percent of total revenue | 51 | % | 38 | % | |||||||||
Selling and marketing headcount, end of period | 1,282 | 1,082 | 200 | 18 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||
Research and development | $ | 46,504 | $ | 41,031 | $ | 5,473 | 13% | $ | 135,261 | $ | 121,089 | $ | 14,172 | 12% | ||||||||||||||||||
As a percent of total revenue | 23% | 21% | 21% | 19% | ||||||||||||||||||||||||||||
Research and development headcount, end of period | 1,595 | 1,474 | 121 | 8% |
Three Months Ended March 31, | Change | ||||||||||||
(Dollars in thousands) | 2019 | 2018 | |||||||||||
Research and development (1) | $ | 50,596 | $ | 46,785 | $ | 3,811 | 8 | % | |||||
As a percent of total revenue | 24 | % | 20 | % | |||||||||
Research and development headcount, end of period | 1,638 | 1,602 | 36 | 2 | % |
activities.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||
General and administrative | $ | 12,104 | $ | 13,133 | $ | (1,029) | (8)% | $ | 38,749 | $ | 38,174 | $ | 575 | 2 % | ||||||||||||||||||
As a percent of total revenue | 6% | 7% | 6% | 6% | ||||||||||||||||||||||||||||
General and administrative headcount, end of period | 326 | 407 | (81) | (20)% |
Three Months Ended March 31, | Change | ||||||||||||
(Dollars in thousands) | 2019 | 2018 | |||||||||||
General and administrative (1) | $ | 12,676 | $ | 16,464 | $ | (3,788 | ) | (23 | )% | ||||
As a percent of total revenue | 6 | % | 7 | % | |||||||||
General and administrative headcount, end of period (2) | 373 | 299 | 74 | 25 | % |
The increase in the nine months ended September 30, 2018 was primarily due to an increase of $2.1$1.9 million in legal and tax fees partially offset by a decrease of $1.7 million inother professional services fees. Despite the headcount increase, associated compensation and benefits duedid not increase because these costs are primarily allocated to decreased headcount reflecting the realignment of contract negotiation and product development resources to augment our selling and marketing and research and development functions.
other operating expense areas. Cost of revenues Selling and marketing Research and development General and administrative Income tax benefit Foreign currency transaction gain (loss) Interest income, net Other income, net U.S. dollar. Benefit from income taxes Effective income tax rate Three Months Ended
September 30, Nine Months Ended
September 30, (Dollars in thousands) 2018 2017 Change 2018 2017 Change $ 4,319 $ 3,613 $ 706 20 % $ 12,277 $ 10,913 $ 1,364 12 % 6,198 3,976 2,222 56 % 16,895 11,482 5,413 47 % 3,917 3,420 497 15 % 11,356 10,306 1,050 10 % 1,974 2,480 (506) (20)% 7,045 7,228 (183) (3)% $ 16,408 $ 13,489 $ 2,919 22 % $ 47,573 $ 39,929 $ 7,644 19 % $ (3,555) $ (4,129) $ 574 (14)% $ (10,037) $ (12,231) $ 2,194 (18)% Three Months Ended
March 31, Change (Dollars in thousands) 2019 2018 Cost of revenues $ 4,519 $ 3,701 $ 818 22 % Selling and marketing 7,374 4,658 2,716 58 % Research and development 4,560 3,637 923 25 % General and administrative 1,897 3,113 (1,216 ) (39 )% $ 18,350 $ 15,109 $ 3,241 21 % Income tax benefit $ (3,740 ) $ (3,141 ) $ (599 ) 19 % and nine months ended September 30, 2018March 31, 2019 was primarily due to the increased value of our annual periodic equity awards granted in March 20182019 and 2017.2018. These awards generally have a five-year vesting schedule.(expense), net Three Months Ended
September 30, Nine Months Ended
September 30, (Dollars in thousands) 2018 2017 Change 2018 2017 Change $ 399 $ (5,052) $ 5,451 * $ 558 $ (6,549) $ 7,107 * 683 140 543 388 % 2,076 547 1,529 280 % — — — — % 363 287 76 26 % $ 1,082 $ (4,912) $ 5,994 * $ 2,997 $ (5,715) $ 8,712 * Three Months Ended
March 31, Change (Dollars in thousands) 2019 2018 Foreign currency transaction loss $ (3,712 ) $ (1,085 ) $ (2,627 ) 242 % Interest income, net 723 764 (41 ) (5 )% Other income, net — 363 (363 ) (100 )% $ (2,989 ) $ 42 $ (3,031 ) * gain (loss)loss was primarily due to unrealized gainslosses on foreign currency denominated cash and receivables.The change in interest income, net was primarilyreceivables of our U.K subsidiary due to an increasefluctuations in prevailing interestforeign currency exchange rates as the British Pound strengthened against the Euro and an increase in the size of our holdings in marketable securities. Three Months Ended
September 30, Nine Months Ended
September 30, (Dollars in thousands) 2018 2017 Change 2018 2017 Change $ (8,589) $ (8,501) $ (88) 1% $ (23,692) $ (9,009) $ (14,683) 163% 80% (18)% During the nine months ended September 30, 2018, our effective income tax rate changed primarily due to the following factors:excess tax benefits from stock-based compensation for the nine months ended September 30, 2018 and 2017 of $15.1 million and $22.4 million were disproportionately greater than (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; Three Months Ended
March 31, Change (Dollars in thousands) 2019 2018 Benefit from income taxes $ (8,300 ) $ (4,222 ) $ (4,078 ) 97 % Effective income tax rate 22 % (53 )%
an increase in utilization of U.S. research and development tax credits; and
a decrease in uncertain tax provisions as a result of the settlement of a foreign tax audit for 2012 through 2015.
The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, 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.
Nine Months Ended September 30, | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | 67,088 | $ | 113,926 | ||||
Investing activities | (49,595) | (11,966) | ||||||
Financing activities | (71,664) | (44,040) | ||||||
Effect of exchange rates on cash and cash equivalents | (1,913) | 2,054 | ||||||
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Net (decrease) increase in cash and cash equivalents | $ | (56,084) | $ | 59,974 | ||||
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(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Held by U.S. entities | $ | 134,634 | $ | 136,444 | ||||
Held by foreign entities | 71,343 | 87,304 | ||||||
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Total cash, cash equivalents, and marketable securities | $ | 205,977 | $ | 223,748 | ||||
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Three Months Ended March 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Cash provided by (used in): | |||||||
Operating activities | $ | 22,703 | $ | 55,655 | |||
Investing activities | (1,466 | ) | (31,278 | ) | |||
Financing activities | (25,587 | ) | (23,052 | ) | |||
Effect of exchange rates on cash and cash equivalents | 295 | 2,186 | |||||
Net (decrease) increase in cash and cash equivalents | $ | (4,055 | ) | $ | 3,511 |
(in thousands) | March 31, 2019 | December 31, 2018 | |||||
Held by U.S. entities | $ | 141,051 | $ | 143,533 | |||
Held by foreign entities | 61,120 | 63,890 | |||||
Total cash, cash equivalents, and marketable securities | $ | 202,171 | $ | 207,423 |
The primary driver during the nine months ended September 30, 2017 was net income of $58 million and $36.8 million in cash generated from receivables and contract assets, largely due to cash collections and the timing of billings.
Remaining
Three Months Ended March 31, | |||
(in thousands) | 2019 | ||
January 1 | $ | 6,620 | |
Authorizations (2) | 60,000 | ||
Repurchases | (7,586 | ) | |
March 31, | $ | 59,034 |
Nine Months Ended September 30, | ||||
(in thousands) | 2018 | |||
January 1 | $ | 34,892 | ||
Authorizations | 27,003 | |||
Repurchases | (30,149 | ) | ||
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September 30, | $ | 31,746 | ||
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Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | ||||||||||||
Tax withholdings for net settlement of equity awards | 591 | $ | 35,530 | 682 | $ | 34,791 | ||||||||||
Stock repurchase program(1) | ||||||||||||||||
Repurchases paid | 512 | 29,949 | 68 | 2,986 | ||||||||||||
Repurchases unsettled at period end | 3 | 200 | — | — | ||||||||||||
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Activity in period(2) | 1,106 | $ | 65,679 | 750 | $ | 37,777 | ||||||||||
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Three Months Ended March 31, | |||||||||||||
2019 | 2018 | ||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | |||||||||
Tax withholdings for net settlement of equity awards | 232 | $ | 14,838 | 270 | $ | 15,575 | |||||||
Stock repurchase program (1) | |||||||||||||
Repurchases paid | 141 | 7,387 | 89 | 4,998 | |||||||||
Repurchases unsettled at period end | 3 | 199 | 12 | 690 | |||||||||
Activity in period (2) | 376 | $ | 22,424 | 371 | $ | 21,263 |
Nine Months Ended | ||||
(in thousands) | 2018 | 2017 | ||
Dividend payments to shareholders | $ 7,067 | $ 6,941 |
Three Months Ended March 31, | |||||||
(in thousands) | 2019 | 2018 | |||||
Dividend payments to shareholders | $ | 2,363 | $ | 2,344 |
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Market risk represents
See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” and Item 1A. “Risk Factors—We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows” includeddisclosed 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:
Nine Months Ended | ||||
Increase (decrease) | 2018 | 2017 | ||
Total revenue | (4)% | (4)% | ||
Net (loss) income | 12% | (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 an incremental foreign currency transaction loss of $8 million and $6 million, at September 30, 2018 and December 31, 2017.
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procedures March 31, 2019. financial reportingDisclosure Controlsdisclosure controls and ProceduresSeptember 30, 2018.March 31, 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 September 30, 2018.Internal Controlinternal control over Financial ReportingSeptember 30, 2018March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 1A.RISK FACTORS
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(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) | |||||||||
January 1, 2019 - January 31, 2019 | 153 | $ | 51.30 | 129 | $ | 18 | |||||||
February 1, 2019 - February 28, 2019 | 129 | $ | 63.81 | — | $ | 18 | |||||||
March 1, 2019 - March 31, 2019 | 285 | $ | 64.97 | 15 | $ | 59,034 | |||||||
567 | $ | 61.03 |
(in thousands, except per share
amounts)
| Total Number | Average Price Paid | Total Number | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs(2) | ||||||||
July 1, 2018 - July 31, 2018 | 138 | $ 57.34 | 119 | $ | 39,189 | |||||||
August 1, 2018 - August 31, 2018 | 172 | $ 59.89 | 93 | $ | 33,645 | |||||||
September 1, 2018 - September 30, 2018 | 182 | $ 63.96 | 30 | $ | 31,746 | |||||||
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Total | 492 | $ 60.68 | ||||||||||
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Exhibit No. | Description | |
31.1 | ||
31.2 | ||
32+ | ||
101.INS | XBRL Instance 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. |
++Management contracts and compensatory plan or arrangements
Pegasystems Inc. Dated: November 7, 2018 Pegasystems Inc. By: Dated: May 7, 2019 By: /s/ KENNETH STILLWELL Kenneth Stillwell Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer) 29