8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

____________________

 FORM 8-K

____________________

Current Report

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 7, 2019

____________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________

Massachusetts	1-11859	04-2787865
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

One Rogers Street, Cambridge, MA 02142-1209

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).                         

Emerging growth company ☐

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

Item 2.02     Results of Operations and Financial Condition

On August 7, 2019, Pegasystems Inc. issued a press release announcing its financial results for the second quarter of 2019. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

The information in this Form 8-K and the Exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01     Financial Statements and Exhibits

Exhibit No.	Description
99.1	Press release issued by Pegasystems Inc.

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 7, 2019	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Financial Officer and Chief Administrative Officer
			(Principal Financial Officer)

EX-99.1

EXHIBIT 99.1

Pega Cloud ACV Grows 65% in the First Half of 2019

• Total ACV of $613 million, powered by Pega Cloud Choice™

• Pega Cloud RPO (“backlog”) up 69% to $362 million

• Pega Cloud and Client Cloud RPO (“backlog”) up 45% to $600 million

CAMBRIDGE, Mass. —August 7, 2019 — Pegasystems Inc. (NASDAQ: PEGA), the software company empowering digital transformation at the world’s leading enterprises, released its financial results for the second quarter of 2019.

"At mid-year, I’m excited with the strong progress we’re making in our business and in our transition to cloud,” said Alan Trefler, founder and CEO, Pegasystems. “I’m pleased with how our strategy is working, and we continue to gain traction in seizing the huge opportunity in front of us."

“Pega Cloud ACV increased 65% year over year, reaching $136 million,” said Ken Stillwell, CFO, Pegasystems. “This strong ACV growth reflects solid demand worldwide for digital transformation solutions.”

Financial metrics⁽¹⁾ 

(Dollars in thousands, except per share amounts)	Three Months Ended   June 30,								Six Months Ended   June 30,
	2019			2018			Change		2019			2018		Change
Total revenue	$	205,592		$	196,779		4	%	$	418,138		$	431,961	(3	)%
Subscription revenue (2)	$	125,982		$	117,416		7	%	$	269,760		$	262,218	3	%
Net (loss) income - GAAP	$	(32,296	)	$	(10,409	)	(210	)%	$	(61,013	)	$	1,791	*
Net (loss) income - Non-GAAP	$	(23,427	)	$	(2,732	)	(758	)%	$	(32,803	)	$	17,525	*
Diluted (loss) earnings per share - GAAP	$	(0.41	)	$	(0.13	)	(215	)%	$	(0.77	)	$	0.02	*
Diluted (loss) earnings per share - Non-GAAP	$	(0.30	)	$	(0.03	)	(900	)%	$	(0.42	)	$	0.21	*

* not meaningful

⁽¹⁾ A reconciliation of the GAAP measures to our Non-GAAP measures is contained in the financial schedules at the end of this release.

⁽²⁾ Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.

(Dollars in thousands)	Three Months Ended   June 30,													Six Months Ended   June 30,
	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	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	)%
Total revenue	$	205,592	100	%	$	196,779	100	%	$	8,813		4	%	$	418,138	100	%	$	431,961	100	%	$	(13,823	)	(3	)%

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Annual contract value (“ACV”) ^{(1) (2)} 

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

	June 30,				Change				Constant Currency Change
(Dollars in thousands)	2019		2018
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 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 percent change in constant currency is calculated by applying the applicable current period exchange rates to prior period ACV.

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Remaining performance obligations (“RPO”)

Expected future revenue 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	%
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	%

Quarterly conference call

A conference call and audio-only webcast will be conducted at 5:00 p.m. EDT on August 7, 2019.

Members of the public and investors are invited to join the call and participate in the question and answer session by dialing 1-800-289-0438 (domestic), 1-323-794-2423 (international), or via webcast by logging onto www.pega.com at least five minutes prior to the event's broadcast and clicking on the webcast icon in the Investors section.

A replay of the call will also be available on www.pega.com/about/investors by clicking the earnings calls link in the investors section.

Discussion of non-GAAP financial measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company provides non-GAAP measures, including in this release. Pegasystems’ management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions, and for forecasting and planning for future periods. The Company’s annual financial plan is prepared on both a GAAP and non-GAAP basis, and both are approved by our board of directors. In addition, because of the importance of these measures in managing the business, the Company uses non-GAAP measures and financial performance results in the evaluation process to establish management’s compensation.

The non-GAAP measures exclude the effects of stock-based compensation expense, amortization of intangible assets, and foreign currency transaction gains and losses. The Company believes these non-GAAP measures are helpful in understanding its past financial performance and its anticipated future results.

These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP.

A reconciliation of the Company’s GAAP measures to Non-GAAP measures is included in the financial schedules at the end of this release.

Forward-looking statements

Certain statements contained in this press release may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.

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,”

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“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.

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, reliance on third party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security 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 Form 10-K for the year ended December 31, 2018, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”). These documents are available on the Company’s website at www.pega.com/about/investors.

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 new information, future events, or risks may cause actual results to 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.

The forward-looking statements contained in this press release represent the Company’s views as of August 7, 2019.

About Pegasystems

Pegasystems Inc. is the leader in software for customer engagement and operational excellence. Pega’s adaptive, cloud-architected software - built on its unified Pega Platform™ - empowers people to rapidly deploy, and easily extend and change applications to meet strategic business needs. Over its 35-year history, Pega has delivered award-winning capabilities in CRM and digital process automation (DPA), powered by advanced artificial intelligence and robotic automation, to help the world’s leading brands achieve breakthrough business results.

For more information on Pegasystems (NASDAQ: PEGA) visit www.pega.com.

Press contact:

Lisa Pintchman

Pegasystems Inc.

lisa.pintchman@pega.com

(617) 866-6022            

Twitter: @pega

Investor contact:

Garo Toomajanian                

ICR for Pegasystems Inc.    

pegainvestorrelations@pega.com

(617) 866-6077

All trademarks are the property of their respective owners.

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PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2019			2018			2019			2018
Revenue
Software license	$	44,274		$	44,784		$	107,538		$	132,557
Maintenance	69,329			65,906			137,035			130,431
Services	91,989			86,089			173,565			168,973
Total revenue	205,592			196,779			418,138			431,961
Cost of revenue
Software license	928			1,262			2,306			2,517
Maintenance	6,292			5,874			12,627			11,956
Services	69,860			66,681			136,584			134,958
Total cost of revenue	77,080			73,817			151,517			149,431
Gross profit	128,512			122,962			266,621			282,530
Operating expenses
Selling and marketing	116,962			93,972			225,827			182,355
Research and development	49,714			41,972			100,310			88,757
General and administrative	14,174			10,181			26,850			26,645
Total operating expenses	180,850			146,125			352,987			297,757
(Loss) from operations	(52,338		)	(23,163		)	(86,366		)	(15,227		)
Foreign currency transaction gain (loss)	2,105			1,244			(1,607		)	159
Interest income, net	544			629			1,267			1,393
Other income, net	55			—			55			363
(Loss) before (benefit from) income taxes	(49,634		)	(21,290		)	(86,651		)	(13,312		)
(Benefit from) income taxes	(17,338		)	(10,881		)	(25,638		)	(15,103		)
Net (loss) income	$	(32,296	)	$	(10,409	)	$	(61,013	)	$	1,791
(Loss) earnings per share
Basic	$	(0.41	)	$	(0.13	)	$	(0.77	)	$	0.02
Diluted	$	(0.41	)	$	(0.13	)	$	(0.77	)	$	0.02
Weighted-average number of common shares outstanding
Basic	78,987			78,635			78,787			78,436
Diluted	78,987			78,635			78,787			83,247

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PEGASYSTEMS INC.

UNAUDITED RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES ⁽¹⁾ 

(in thousands, except percentages and per share amounts)

	Three Months Ended   June 30,								Six Months Ended   June 30,
	2019			2018			Change		2019			2018			Change
Total revenue - GAAP and Non-GAAP	$	205,592		$	196,779		4	%	$	418,138		$	431,961		(3	)%
Net (loss) income - GAAP	$	(32,296	)	$	(10,409	)	(210	)%	$	(61,013	)	$	1,791		*
Amortization of intangible assets	1,656			2,836					4,592			5,673
Stock-based compensation (2)	20,047			16,056					38,397			31,165
Foreign currency transaction gain (loss)	(2,105		)	(1,244		)			1,607			(159		)
Income tax effects (3)	(10,729		)	(9,971		)			(16,386		)	(20,945		)
Net (loss) income - Non-GAAP	$	(23,427	)	$	(2,732	)	(758	)%	$	(32,803	)	$	17,525		*
Diluted (loss) earnings per share - GAAP	$	(0.41	)	$	(0.13	)	(215	)%	$	(0.77	)	$	0.02		*
Non-GAAP adjustments	0.11			0.10					0.35			0.19
Diluted (loss) earnings per share - Non-GAAP	$	(0.30	)	$	(0.03	)	(900	)%	$	(0.42	)	$	0.21		*
Diluted weighted-average number of common shares outstanding - GAAP	78,987			78,635			—	%	78,787			83,247			(5	)%
Diluted weighted-average number of common shares outstanding - Non-GAAP	78,987			78,635			—	%	78,787			83,247			(5	)%

* not meaningful

⁽¹⁾ Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our non-GAAP financial measures reflect adjustments based on the following items:

• Amortization of intangible assets: We have excluded amortization of intangible assets from our non-GAAP operating expenses and profitability measures. Amortization of intangible assets fluctuates in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues as well. Amortization of intangible assets is likely to recur in future periods.

• Stock-based compensation: We have excluded stock-based compensation from our non-GAAP operating expenses and profitability measures. Although stock-based compensation is a key incentive offered to our employees, and we believe such compensation contributed to our revenues recognized during the periods presented and is expected to contribute to our future period revenues, we continue to evaluate our business performance excluding stock-based compensation.

• Foreign currency transaction gain (loss): We have excluded foreign currency transaction gains and losses from our non-GAAP profitability measures. Foreign currency transaction gains and losses fluctuate in amount and frequency and are significantly affected by changes in foreign exchange market rates. Foreign currency transaction gains and losses will recur in future periods.

For additional information about our use of Non-GAAP measures, the reasons why management uses these measures, the usefulness of these measures, and the material limitations on the usefulness of these measures, see “Discussion of non-GAAP financial measures” included earlier in this release and below.

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⁽²⁾ Stock-based compensation was as follows:

	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	)

⁽³⁾ Effective income tax rates were as follows:

	Six Months Ended   June 30,
	2019		2018
GAAP	30	%	113	%
Non-GAAP	22	%	25	%

Our effective income tax rate under GAAP is subject to significant fluctuations due to a variety of factors, including excess tax benefits generated by our stock-based compensation plans, tax credits for stock-based compensation awards to research and development employees, and unfavorable foreign stock-based compensation adjustments. We determine our non-GAAP income tax rate by using applicable rates in taxing jurisdictions and assessing certain factors including our historical and forecast earnings by jurisdiction, discrete items, and our ability to realize tax assets. We believe it is beneficial for our management to review our non-GAAP effective income tax rate on a basis consistent with the effective income tax rate in our annual plan as established at the beginning of each year given this tax rate volatility.

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PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2019		December 31, 2018
Assets
Total cash, cash equivalents, and marketable securities	$	155,049	$	207,423
Total receivables (billed and unbilled)	422,408		504,765
Goodwill	79,037		72,858
Other assets	284,123		197,507
Total assets	$	940,617	$	982,553
Liabilities and stockholders’ equity
Accrued expenses, including compensation and related expenses	$	113,252	$	130,177
Deferred revenue, current	169,009		185,145
Deferred income tax liabilities	6,918		6,939
Other liabilities	94,151		38,761
Stockholders’ equity	557,287		621,531
Total liabilities and stockholders’ equity	$	940,617	$	982,553

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended   June 30,
	2019			2018
Operating activities:
Net (loss) income	$	(61,013	)	$	1,791
Adjustments to reconcile net (loss) income to cash provided by operating activities
Non-cash items	73,562			51,081
Change in operating assets and liabilities, net	(4,829		)	22,560
Cash provided by operating activities	7,720			75,432
Cash provided by (used in) investing activities	17,210			(46,369		)
Cash (used in) financing activities	(44,367		)	(45,825		)
Effect of exchange rate changes on cash and cash equivalents	515			(1,226		)
Net (decrease) in cash and cash equivalents	(18,922		)	(17,988		)
Cash and cash equivalents, beginning of period	114,422			162,279
Cash and cash equivalents, end of period	$	95,500		$	144,291

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XML

COVER PAGE	Aug. 07, 2019
Cover page.
Document Type	8-K
Document Period End Date	Aug. 07, 2019
Entity Registrant Name	PEGASYSTEMS INC.
Entity Incorporation, State or Country Code	MA
Entity File Number	1-11859
Entity Tax Identification Number	04-2787865
Entity Address, Address Line One	One Rogers Street
Entity Address, City or Town	Cambridge
Entity Address, State or Province	MA
Entity Address, Postal Zip Code	02142-1209
City Area Code	617
Local Phone Number	374-9600
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Common Stock, $.01 par value per share
Trading Symbol	PEGA
Security Exchange Name	NASDAQ
Entity Emerging Growth Company	false
Amendment Flag	false
Entity Central Index Key	0001013857