10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

_____________________________________

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

For the quarterly period ended September 30, 2020

OR

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

Commission File Number: 1-11859 

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter) 

____________________________

Massachusetts	04-2787865
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

One Rogers Street, Cambridge, MA 02142-1209

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

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

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

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

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

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

Large accelerated filer x Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

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

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

There were 80,697,696 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on October 19, 2020.

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three and nine months ended September 30, 2020 and 2019	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2020 and 2019	6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	8
Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II - OTHER INFORMATION
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6. Exhibits	29
Signature	30

2

PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	281,218	$	68,363
Marketable securities	186,810		—
Total cash, cash equivalents, and marketable securities	468,028		68,363
Accounts receivable	137,953		199,720
Unbilled receivables	208,823		180,219
Other current assets	89,406		57,308
Total current assets	904,210		505,610
Unbilled receivables	108,456		121,736
Goodwill	78,864		79,039
Other long-term assets	395,797		278,427
Total assets	$	1,487,327	$	984,812
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	20,443	$	17,475
Accrued expenses	43,447		48,001
Accrued compensation and related expenses	90,836		104,126
Deferred revenue	181,680		190,080
Other current liabilities	19,916		18,273
Total current liabilities	356,322		377,955
Convertible senior notes, net	513,794		—
Operating lease liabilities	62,544		52,610
Other long-term liabilities	25,345		15,237
Total liabilities	958,005		445,802
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 80,697 and 79,599 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	807		796
Additional paid-in capital	201,882		140,523
Retained earnings	338,300		410,919
Accumulated other comprehensive (loss)	(11,667)		(13,228)
Total stockholders’ equity	529,322		539,010
Total liabilities and stockholders’ equity	$	1,487,327	$	984,812

See notes to unaudited condensed consolidated financial statements.

3

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Software license	$	39,784	$	58,005	$	187,023	$	165,543
Maintenance	74,670		70,371		220,587		207,406
Pega Cloud	54,776		35,153		147,080		94,610
Consulting	56,721		53,174		164,227		167,282
Total revenue	225,951		216,703		718,917		634,841
Cost of revenue
Software license	691		676		2,354		2,982
Maintenance	5,478		6,688		16,645		19,315
Pega Cloud	19,717		17,824		56,238		47,769
Consulting	51,913		55,710		158,781		162,349
Total cost of revenue	77,799		80,898		234,018		232,415
Gross profit	148,152		135,805		484,899		402,426
Operating expenses
Selling and marketing	132,053		115,237		395,684		341,064
Research and development	60,024		52,492		177,620		152,802
General and administrative	17,907		14,843		49,192		41,693
Total operating expenses	209,984		182,572		622,496		535,559
(Loss) from operations	(61,832)		(46,767)		(137,597)		(133,133)
Foreign currency transaction gain (loss)	4,236		(1,970)		2,545		(3,577)
Interest income	243		598		1,092		1,865
Interest expense	(5,956)		(42)		(13,791)		(42)
Gain on capped call transactions	18,989		—		19,816		—
Other income, net	—		323		1,374		378
(Loss) before (benefit from) income taxes	(44,320)		(47,858)		(126,561)		(134,509)
(Benefit from) income taxes	(25,053)		(17,520)		(61,182)		(43,158)
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
(Loss) per share
Basic	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Diluted	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Weighted-average number of common shares outstanding
Basic	80,537		79,200		80,191		78,928
Diluted	80,537		79,200		80,191		78,928

See notes to unaudited condensed consolidated financial statements.

4

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities	(166)		(216)		(66)		396
Foreign currency translation adjustments	113		(2,201)		1,627		(983)
Total other comprehensive (loss) income, net of tax	$	(53)	$	(2,417)	$	1,561	$	(587)
Comprehensive (loss)	$	(19,320)	$	(32,755)	$	(63,818)	$	(91,938)

See notes to unaudited condensed consolidated financial statements.

5

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
	Number of Shares	Amount
December 31, 2018	78,526	$	785	$	123,205	$	510,863	$	(13,322)	$	621,531
Repurchase of common stock	(144)	(1)		(7,586)		—		—		(7,587)
Issuance of common stock for share-based compensation plans	514	5		(14,843)		—		—		(14,838)
Stock-based compensation	—	—		18,406		—		—		18,406
Cash dividends declared ($0.03 per share)	—	—		—		(2,367)		—		(2,367)
Other comprehensive income	—	—		—		—		2,001		2,001
Net (loss)	—	—		—		(28,717)		—		(28,717)
March 31, 2019	78,896	$	789	$	119,182	$	479,779	$	(11,321)	$	588,429
Repurchase of common stock	(88)	(1)		(6,301)		—		—		(6,302)
Issuance of common stock for share-based compensation plans	320	3		(11,217)		—		—		(11,214)
Issuance of common stock under the employee stock purchase plan	16	—		1,103		—		—		1,103
Stock-based compensation	—	—		20,113		—		—		20,113
Cash dividends declared ($0.03 per share)	—	—		—		(2,375)		—		(2,375)
Other comprehensive (loss)	—	—		—		—		(171)		(171)
Net (loss)	—	—		—		(32,296)		—		(32,296)
June 30, 2019	79,144	$	791	$	122,880	$	445,108	$	(11,492)	$	557,287
Repurchase of common stock	(88)	(1)		(6,396)		—		—		(6,397)
Issuance of common stock for share-based compensation plans	268	3		(8,804)		—		—		(8,801)
Stock-based compensation	—	—		21,879		—		—		21,879
Cash dividends declared ($0.03 per share)	—	—		—		(2,381)		—		(2,381)
Other comprehensive (loss)	—	—		—		—		(2,417)		(2,417)
Net (loss)	—	—		—		(30,338)		—		(30,338)
September 30, 2019	79,324	$	793	$	129,559	$	412,389	$	(13,909)	$	528,832
See notes to unaudited condensed consolidated financial statements.

6

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
	Number of Shares	Amount
December 31, 2019	79,599	$	796	$	140,523	$	410,919	$	(13,228)	$	539,010
Equity component of convertible senior notes, net	—	—		61,604		—		—		61,604
Repurchase of common stock	(87)	(1)		(5,999)		—		—		(6,000)
Issuance of common stock for share-based compensation plans	564	6		(23,017)		—		—		(23,011)
Stock-based compensation	—	—		23,199		—		—		23,199
Cash dividends declared ($0.03 per share)	—	—		—		(2,405)		—		(2,405)
Other comprehensive (loss)	—	—		—		—		(414)		(414)
Net (loss)	—	—		—		(25,372)		—		(25,372)
March 31, 2020	80,076	$	801	$	196,310	$	383,142	$	(13,642)	$	566,611
Repurchase of common stock	(23)	—		(2,199)		—		—		(2,199)
Issuance of common stock for share-based compensation plans	349	3		(14,085)		—		—		(14,082)
Issuance of common stock under the employee stock purchase plan	18	—		1,403		—		—		1,403
Stock-based compensation	—	—		25,674		—		—		25,674
Cash dividends declared ($0.03 per share)	—	—		—		(2,413)		—		(2,413)
Other comprehensive income	—	—		—		—		2,028		2,028
Net (loss)	—	—		—		(20,740)		—		(20,740)
June 30, 2020	80,420	$	804	$	207,103	$	359,989	$	(11,614)	$	556,282
Repurchase of common stock	(94)	(1)		(10,628)		—		—		(10,629)
Issuance of common stock for share-based compensation plans	371	4		(22,524)		—		—		(22,520)
Stock-based compensation	—	—		27,931		—		—		27,931
Cash dividends declared ($0.03 per share)	—	—		—		(2,422)		—		(2,422)
Other comprehensive (loss)	—	—		—		—		(53)		(53)
Net (loss)	—	—		—		(19,267)		—		(19,267)
September 30, 2020	80,697	$	807	$	201,882	$	338,300	$	(11,667)	$	529,322

See notes to unaudited condensed consolidated financial statements.

7

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended September 30,
	2020		2019
Operating activities
Net (loss)	$	(65,379)	$	(91,351)
Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation	76,755		60,242
(Gain) on capped call transactions	(19,816)		—
Deferred income taxes	(43,476)		(40,531)
Amortization of deferred commissions	24,922		22,372
Lease expense	11,997		10,454
Amortization of debt discount and issuance costs	10,405		—
Amortization of intangible assets and depreciation	15,677		16,998
Amortization of investments	252		798
Foreign currency transaction (gain) loss	(2,545)		3,577
Other non-cash	(1,374)		(363)
Change in operating assets and liabilities, net	(33,675)		4,342
Cash (used in) operating activities	(26,257)		(13,462)
Investing activities
Purchases of investments	(190,319)		(11,182)
Proceeds from maturities and called investments	—		13,066
Sales of investments	1,424		68,937
Payments for acquisitions, net of cash acquired	—		(10,934)
Investment in property and equipment	(21,806)		(6,439)
Cash (used in) provided by investing activities	(210,701)		53,448
Financing activities
Proceeds from issuance of convertible senior notes	600,000		—
Purchase of capped calls related to convertible senior notes	(51,900)		—
Payment of debt issuance costs	(14,527)		—
Dividend payments to shareholders	(7,206)		(7,105)
Common stock repurchases	(76,737)		(54,836)
Cash provided by (used in) financing activities	449,630		(61,941)
Effect of exchange rate changes on cash and cash equivalents	183		(363)
Net increase (decrease) in cash and cash equivalents	212,855		(22,318)
Cash and cash equivalents, beginning of period	68,363		114,422
Cash and cash equivalents, end of period	$	281,218	$	92,104

See notes to unaudited condensed consolidated financial statements.

8

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances have been eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.

2. NEW ACCOUNTING PRONOUNCEMENTS

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Additionally, the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, the standard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”). The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures. The Company expects to early adopt the new standard on January 1, 2021.

Financial instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the asset’s amortized cost, removing the concept of “other-than-temporary” impairments. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

3. MARKETABLE SECURITIES

	September 30, 2020
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	50,987	$	—	$	(11)	$	50,976
Corporate debt	136,045		1		(212)		135,834
	$	187,032	$	1	$	(223)	$	186,810

As of September 30, 2020, maturities of marketable securities ranged from October 2020 to September 2023, with a weighted-average remaining maturity of approximately 1.3 years.

As of December 31, 2019, the Company did not hold any marketable securities.

9

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

(in thousands)	September 30, 2020		December 31, 2019
Accounts receivable	$	137,953	$	199,720
Unbilled receivables	208,823		180,219
Long-term unbilled receivables	108,456		121,736
	$	455,232	$	501,675

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.

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

(Dollars in thousands)	September 30, 2020
1 year or less	$	208,823	66	%
1-2 years	91,325		29	%
2-5 years	17,131		5	%
	$	317,279	100	%

Unbilled receivables based upon contract effective date:

(Dollars in thousands)	September 30, 2020
2020	$	105,380	33	%
2019	99,875		32	%
2018	39,281		12	%
2017	37,824		12	%
2016 and prior	34,919		11	%
	$	317,279	100	%

Major clients

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

	September 30, 2020		December 31, 2019
Client A	11	%	*

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

Contract assets and deferred revenue

(in thousands)	September 30, 2020		December 31, 2019
Contract assets (1)	$	8,104	$	5,558
Long-term contract assets (2)	5,579		5,420
	13,683		10,978
Deferred revenue	181,680		190,080
Long-term deferred revenue (3)	6,673		5,407
	$	188,353	$	195,487

(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.

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

The change in deferred revenue in the nine months ended September 30, 2020 was primarily due to new billings in advance of revenue recognition, and $170.5 million of revenue recognized during the period that was included in deferred revenue at December 31, 2019.

5. DEFERRED COMMISSIONS

(in thousands)	September 30, 2020		December 31, 2019
Deferred commissions (1)	$	87,992	$	85,314

(1) Included in other long-term assets.

10

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Amortization of deferred commissions (1)	$	8,861	$	8,193	$	24,922	$	22,372

(1) Included in selling and marketing expense.

6. DEBT

Convertible senior notes and capped calls

Convertible senior notes

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

Proceeds from the Notes and Capped Call Transactions:

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

Conversion rights

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

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

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

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

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

As of September 30, 2020, no Notes were eligible for conversion at the noteholders’ election.

Repurchase rights

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

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

11

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Impact of the Notes

In accounting for the transaction, the Notes have been separated into liability and equity components.

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

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

The Company incurred issuance costs of $14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components.

•Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes.

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

Net carrying amount of the liability component:

(in thousands)	September 30, 2020
Principal	$	600,000
Unamortized debt discount	(75,061)
Unamortized issuance costs	(11,145)
	$	513,794

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

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

(1) Net of issuance costs and taxes.

Interest expense related to the Notes:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Contractual interest expense (0.75% coupon)	$	1,125	$	—	$	2,700	$	—
Amortization of debt discount (1)	3,807		—		9,060		—
Amortization of issuance costs (1)	565		—		1,345		—
	$	5,497	$	—	$	13,105	$	—

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

Future payments of principal and contractual interest:

	September 30, 2020
(in thousands)	Principal		Interest		Total
2020	$	—	$	—	$	—
2021	—		4,500		4,500
2022	—		4,500		4,500
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	19,488	$	619,488

Capped call transactions

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

12

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Change in value of Capped Call Transactions:

(in thousands)	Nine Months Ended September 30, 2020
Value at issuance	$	51,900
Fair value adjustment	19,816
Balance as of September 30,	$	71,716

Credit facility

In November 2019, and as amended in February 2020, July 2020, and October 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants, including:

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

•Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of September 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Credit Facility.

7. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and minimize unobservable inputs when determining fair value.

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

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

	September 30, 2020								December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents (1)	$	212,917	$	—	$	—	$	212,917	$	—	$	—	$	—	$	—
Marketable securities	$	—	$	186,810	$	—	$	186,810	$	—	$	—	$	—	$	—
Capped Call Transactions (2) (3)	$	—	$	71,716	$	—	$	71,716	$	—	$	—	$	—	$	—
Venture investments (2) (4)	$	—	$	—	$	7,927	$	7,927	$	—	$	—	$	4,871	$	4,871

(1) Investments in money market funds. (2) Included in other long-term assets. (3) See "6. Debt" for additional information. (4) Investments in privately-held companies.

13

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in venture investments:

(in thousands)	Nine Months Ended September 30, 2020
December 31, 2019	$	4,871
New investments	3,006
Sales of investments	(1,424)
Fair value adjustment	1,474
September 30, 2020	$	7,927

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

Fair value of the Notes

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

The Notes’ fair value (inclusive of the conversion feature, which is embedded in the Notes) was $680 million as of September 30, 2020. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy. See "6. Debt" for additional information.

8. REVENUE

Geographic revenue

	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2020				2019				2020				2019
U.S.	$	120,971	53	%	$	123,447	57	%	$	436,199	61	%	$	347,120	55	%
Other Americas	10,737		5	%	11,748		5	%	35,009		5	%	49,450		8	%
United Kingdom (“U.K.”)	25,150		11	%	23,034		11	%	68,246		9	%	64,269		10	%
Europe (excluding U.K.), Middle East, and Africa	39,656		18	%	34,761		16	%	106,472		15	%	102,342		16	%
Asia-Pacific	29,437		13	%	23,713		11	%	72,991		10	%	71,660		11	%
	$	225,951	100	%	$	216,703	100	%	$	718,917	100	%	$	634,841	100	%

Revenue streams

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Perpetual license	$	3,852	$	9,016	$	16,568	$	43,286
Term license	35,932		48,989		170,455		122,257
Revenue recognized at a point in time	39,784		58,005		187,023		165,543
Maintenance	74,670		70,371		220,587		207,406
Pega Cloud	54,776		35,153		147,080		94,610
Consulting	56,721		53,174		164,227		167,282
Revenue recognized over time	186,167		158,698		531,894		469,298
	$	225,951	$	216,703	$	718,917	$	634,841

14

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Pega Cloud	$	54,776	$	35,153	$	147,080	$	94,610
Maintenance	74,670		70,371		220,587		207,406
Term license	35,932		48,989		170,455		122,257
Subscription (1)	165,378		154,513		538,122		424,273
Perpetual license	3,852		9,016		16,568		43,286
Consulting	56,721		53,174		164,227		167,282
	$	225,951	$	216,703	$	718,917	$	634,841

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

Remaining performance obligations ("Backlog")

Expected future revenue on existing contracts:

	September 30, 2020
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	8,708	$	50,788	$	170,643	$	211,661	$	14,977	$	456,777	54	%
1-2 years	1,700		5,341		40,631		157,500		2,042		207,214		25	%
2-3 years	—		7,052		18,277		93,283		770		119,382		14	%
Greater than 3 years	—		4		9,597		44,363		653		54,617		7	%
	$	10,408	$	63,185	$	239,148	$	506,807	$	18,442	$	837,990	100	%

	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56	%
1-2 years	853		3,798		18,590		105,081		863		129,185		21	%
2-3 years	1,306		591		8,323		72,915		841		83,976		14	%
Greater than 3 years	—		85		4,959		51,591		—		56,635		9	%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100	%

9. STOCK-BASED COMPENSATION

Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Cost of revenue	$	5,100	$	4,787	$	15,636	$	14,216
Selling and marketing	12,658		8,317		33,968		24,055
Research and development	5,765		4,858		17,066		13,990
General and administrative	4,402		3,884		10,085		7,981
	$	27,925	$	21,846	$	76,755	$	60,242
Income tax benefit	$	(5,604)	$	(4,430)	$	(15,293)	$	(12,226)

As of September 30, 2020, the Company had $115.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

Grants

The Company granted the following stock-based compensation awards:

	Nine Months Ended September 30, 2020
(in thousands)	Shares	Total Fair Value
RSUs	1,026	$	92,456
Non-qualified stock options	1,886	$	44,505
Common stock	6	$	701

15

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. INCOME TAXES

Effective income tax rate

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020			2019
(Benefit from) income taxes	$	(25,053)	$	(17,520)	$	(61,182)		$	(43,158)
Effective income tax rate					48		%	32		%

During the nine months ended September 30, 2020, the Company’s effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

11. (LOSS) PER SHARE

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

Calculation of the basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2020		2019		2020		2019
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding	80,537		79,200		80,191		78,928
(Loss) per share, basic	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding, assuming dilution (1) (2)	80,537		79,200		80,191		78,928
(Loss) per share, diluted	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Outstanding anti-dilutive stock options and RSUs (3)	6,622		5,953		6,166		5,923

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

These forward-looking statements deal with future events, and are subject to various risks and uncertainties that are difficult to predict, including, but not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, the timing of revenue recognition, management of our transition to a more subscription-based business model, variation in demand for our products and services, including among clients in the public sector, the impact of actual or threatened public health emergencies, such as the Coronavirus (COVID-19), reliance on third-party service providers, compliance with our debt obligations and debt covenants, the potential impact of our convertible senior notes and related Capped Call Transactions, reliance on key personnel, the continued uncertainties in the global economy, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks, security breaches and security flaws, our ability to protect our intellectual property rights and costs associated with defending such rights, maintenance of our client retention rate, and management of our growth. These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

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

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software applications that help organizations transform how they engage with their customers and process work across their enterprise. We also license our low-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, and robotic automation technology, built on our unified low-code Pega Platform, empowering businesses to quickly design, extend, and scale their enterprise applications to meet strategic business needs.

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

Cloud Transition

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud (“Cloud Transition”). Until we substantially complete our Cloud Transition, which we expect to occur in early 2023, we expect to continue to experience lower revenue growth and lower operating cash flow growth or negative cash flow. The actual mix of perpetual license, term license, and Pega Cloud in a given period can fluctuate based on client preferences.

Additional information on the transition’s impact can be found below and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19

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

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

17

Performance metrics

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

Annual contract value (“ACV”) | Increased 21% since September 30, 2019

•ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts. We believe the presentation of ACV on a constant currency basis enhances the understanding of our results, as it provides visibility into the impact of changes in foreign currency exchange rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of September 30, 2020.

Remaining performance obligations (“Backlog”) | Increased 38% since September 30, 2019

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

Year to date Pega Cloud revenue | Increased 55% since September 30, 2019

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

18

CRITICAL ACCOUNTING POLICIES

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

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

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

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

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 other than those listed below.

Capped Call Transactions

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

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

See "6. Debt" and “7. Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.

19

RESULTS OF OPERATIONS

Revenue

Our Pega Cloud revenue is derived from our hosted Pega Platform and software applications. Our license revenue is derived from sales of our applications and the Pega Platform.

Cloud Transition

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud. As revenue from Pega Cloud arrangements is generally recognized over the contract term while revenue from perpetual and term licenses is generally recognized when the license rights become effective, the shift has and is expected to continue to result in slower revenue growth during the transition.

(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2020				2019								2020				2019
Pega Cloud	$	54,776	24	%	$	35,153	16	%	$	19,623	56	%	$	147,080	20	%	$	94,610	15	%	$	52,470	55	%
Maintenance	74,670		33	%	70,371		32	%	4,299		6	%	220,587		31	%	207,406		33	%	13,181		6	%
Term license	35,932		16	%	48,989		23	%	(13,057)		(27)	%	170,455		24	%	122,257		19	%	48,198		39	%
Subscription (1)	$	165,378	73	%	$	154,513	71	%	10,865		7	%	$	538,122	75	%	$	424,273	67	%	113,849		27	%
Perpetual license	3,852		2	%	9,016		4	%	(5,164)		(57)	%	16,568		2	%	43,286		7	%	(26,718)		(62)	%
Consulting	56,721		25	%	53,174		25	%	3,547		7	%	164,227		23	%	167,282		26	%	(3,055)		(2)	%
	$	225,951	100	%	$	216,703	100	%	$	9,248	4	%	$	718,917	100	%	$	634,841	100	%	$	84,076	13	%

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

The changes in total revenue in the three and nine months ended September 30, 2020 generally reflect our Cloud Transition. Other factors impacting our revenue included:

•Term license revenue was higher in the three months ended September 30, 2019 primarily due to a greater number of large deals than in the three months ended September 30, 2020.

•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance. Under such arrangements, a greater portion of the total contract value is recorded as maintenance revenue, which is recognized over the contract term, rather than as term revenue, as the license rights become effective which is usually shortly after contract execution. In the three and nine months ended September 30, 2020 multi-year committed maintenance contributed $2.9 million and $7.7 million to maintenance revenue growth. In the nine months ended September 30, 2020 multi-year committed maintenance reduced term revenue growth by $10.2 million.

•Maintenance renewal rates remained over 90% in the nine months ended September 30, 2020.

•The decrease in consulting revenue in the nine months ended September 30, 2020 was primarily due to lower billable travel expenses as a result of COVID-19. The increase in consulting revenue in the three months ended September 30, 2020 was primarily due to increased billable hours which more than offset the impact of reduced billable travel expenses due to COVID-19.

Gross profit

	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
(Dollars in thousands)	2020				2019								2020				2019
Software license	$	39,093	98	%	$	57,329	99	%	$	(18,236)	(32)	%	$	184,669	99	%	$	162,561	98	%	$	22,108	14	%
Maintenance	69,192		93	%	63,683		90	%	5,509		9	%	203,942		92	%	188,091		91	%	15,851		8	%
Pega Cloud	35,059		64	%	17,329		49	%	17,730		102	%	90,842		62	%	46,841		50	%	44,001		94	%
Consulting	4,808		8	%	(2,536)		(5)	%	7,344		*		5,446		3	%	4,933		3	%	513		10	%
	$	148,152	66	%	$	135,805	63	%	$	12,347	9	%	$	484,899	67	%	$	402,426	63	%	$	82,473	20	%

* not meaningful

•The changes in gross profit in the three and nine months ended September 30, 2020 were primarily due to our Cloud Transition, revenue growth, and cost efficiency gains as Pega Cloud grows and scales.

•The increase in consulting gross profit in the three months ended September 30, 2020 was primarily due to an increase in consultant utilization. Consultant utilization is impacted by several factors, including the scope and timing of new implementation projects and our level of involvement in implementation projects compared to our consulting partners and enabled clients. To support our long-term strategy, we intend to grow and increasingly leverage our partners and enabled clients for future implementation projects, which may reduce the future growth rate.

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Operating expenses

(Dollars in thousands)	Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
	2020				2019								2020				2019
			% of Revenue				% of Revenue								% of Revenue				% of Revenue
Selling and marketing	$	132,053	58	%	$	115,237	53	%	$	16,816	15	%	$	395,684	55	%	$	341,064	54	%	$	54,620	16	%
Research and development	$	60,024	27	%	$	52,492	24	%	$	7,532	14	%	$	177,620	25	%	$	152,802	24	%	$	24,818	16	%
General and administrative	$	17,907	8	%	$	14,843	7	%	$	3,064	21	%	$	49,192	7	%	$	41,693	7	%	$	7,499	18	%

•The increases in selling and marketing in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $24.4 million and $76.0 million, attributable to increases in headcount and equity compensation. The increases in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts. These increases were partially offset by decreases in travel and entertainment of $8.5 million and $17.4 million as a result of COVID-19.

•The increases in research and development in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $7.8 million and $23.6 million, attributable to increases in headcount and equity compensation.

•The increases in general and administrative in the three and nine months ended September 30, 2020 were primarily due to increases in compensation and benefits of $0.8 million and $3.0 million, attributed to increases in headcount and equity compensation, and increases in professional services fees of $1.5 million and $4.2 million.

Other income (expense), net

(Dollars in thousands)	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2020		2019						2020		2019
Foreign currency transaction gain (loss)	$	4,236	$	(1,970)	$	6,206	*		$	2,545	$	(3,577)	$	6,122	*
Interest income	243		598		(355)		(59)	%	1,092		1,865		(773)		(41)	%
Interest expense	(5,956)		(42)		(5,914)		(14,081)	%	(13,791)		(42)		(13,749)		(32,736)	%
Gain on capped call transactions	18,989		—		18,989		*		19,816		—		19,816		*
Other income, net	—		323		(323)		(100)	%	1,374		378		996		263	%
	$	17,512	$	(1,091)	$	18,603	*		$	11,036	$	(1,376)	$	12,412	*

* not meaningful

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

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

•The increases in interest expense in the three and nine months ended September 30, 2020 were due to our issuance of $600 million in aggregate principal amount of the Notes on February 24, 2020. See "6. Debt" in Item 1 of this Quarterly Report for additional information.

Interest expense related to the Notes:

	Three Months Ended September 30,				Change		Nine Months Ended September 30,				Change
(in thousands)	2020		2019				2020		2019
Contractual interest expense (0.75% coupon)	$	1,125	$	—	$	1,125	$	2,700	$	—	$	2,700
Amortization of debt discount	3,807		—		3,807		9,060		—		9,060
Amortization of issuance costs	565		—		565		1,345		—		1,345
	$	5,497	$	—	$	5,497	$	13,105	$	—	$	13,105

•The increases in the gain on capped call transactions in the three and nine months ended September 30, 2020 were due to fair value adjustments on the Capped Call Transactions entered into in connection with our issuance of the Notes. See "6. Debt" in Item 1 of this Quarterly Report for additional information.

•The increase in other income, net in the nine months ended September 30, 2020 was due to a gain from our venture investments portfolio.

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(Benefit from) income taxes

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020			2019
(Benefit from) income taxes	$	(25,053)	$	(17,520)	$	(61,182)		$	(43,158)
Effective income tax rate					48		%	32		%

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

During the nine months ended September 30, 2020, our effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

LIQUIDITY AND CAPITAL RESOURCES

	Nine Months Ended September 30,
(in thousands)	2020		2019
Cash provided by (used in):
Operating activities	$	(26,257)	$	(13,462)
Investing activities	(210,701)		53,448
Financing activities	449,630		(61,941)
Effect of exchange rates on cash and cash equivalents	183		(363)
Net increase (decrease) in cash and cash equivalents	$	212,855	$	(22,318)

(in thousands)	September 30, 2020		December 31, 2019
Held by U.S. entities	$	415,358	$	23,437
Held by foreign entities	52,670		44,926
Total cash, cash equivalents, and marketable securities	$	468,028	$	68,363

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

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

Cash (used in) operating activities

We are in the process of transitioning our business to primarily sell software through subscription arrangements, particularly Pega Cloud. As cash from Pega Cloud and term arrangements is generally collected over the contract term while cash from perpetual licenses is generally collected when the license rights become effective, the shift has and is expected to continue to impact our cash collections. As client preferences continue to shift in favor of Pega Cloud arrangements, we could continue to experience slower operating cash flow growth, or negative cash flow, in the near term.

In the nine months ended September 30, 2020, COVID-19 did not have a material impact on our cash flows from operations. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.

The change in cash (used in) operating activities in the nine months ended September 30, 2020 was primarily due to our Cloud Transition and increased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.

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Cash (used in) provided by investing activities

The change in cash (used in) provided by investing activities in the nine months ended September 30, 2020 was primarily driven by purchases of financial instruments and investments in property and equipment at several of our office locations.

Cash provided by (used in) financing activities

Convertible senior notes

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

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

A portion of the proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes. See "6. Debt" in Item 1 of this Quarterly Report for additional information.

Credit facility

In November 2019, and as amended in February 2020, July 2020, and October 2020, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of September 30, 2020, we had no outstanding borrowings under the Credit Facility. See "6. Debt" in Item 1 of this Quarterly Report for additional information.

Stock repurchase program (1)

Changes in the remaining stock repurchase authority:

(in thousands)	Nine Months Ended September 30, 2020
December 31, 2019	$	45,484
Authorizations (2)	20,516
Repurchases	(18,828)
September 30, 2020	$	47,172

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

Common stock repurchases

	Nine Months Ended September 30,
	2020			2019
(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	599	$	59,613	514	$	34,871
Stock repurchase program	204	18,828		321	20,286
	803	$	78,441	835	$	55,157

During the nine months ended September 30, 2020 and 2019, instead of receiving cash from the equity holders, we withheld shares with a value of $49.5 million and $31.6 million, respectively, for the exercise price of options. These amounts have been excluded from the table above.

Dividends

	Nine Months Ended September 30,
(in thousands)	2020		2019
Dividend payments to shareholders	$	7,206	$	7,105

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

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Contractual obligations

As of September 30, 2020, our contractual obligations were:

	Payments due by period
(in thousands)	2020		2021		2022-2023		2024-2025		2026 and thereafter		Other		Total
Purchase obligations (1)	$	21,627	$	56,689	$	61,117	$	173	$	—	$	—	$	139,606
Investment commitments (2)	300		500		—		—		—		—		800
Liability for uncertain tax positions (3)	—		—		—		—		—		5,441		5,441
Operating lease obligations	5,490		22,887		43,888		13,187		9,959		—		95,411
	$	27,417	$	80,076	$	105,005	$	13,360	$	9,959	$	5,441	$	241,258

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

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

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

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign currency exposure

Translation risk

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

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

	Nine Months Ended September 30,
	2020		2019
(Decrease) increase in revenue	(4)	%	(4)	%
(Decrease) increase in net (loss)	(13)	%	(6)	%

Remeasurement risk

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

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

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

	Nine Months Ended September 30,
(in thousands)	2020		2019
Foreign currency gain (loss)	$	(6,326)	$	1,099

ITEM 4.     CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2020. 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, 2020.

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(b) Changes in internal control over financial reporting

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

COVID-19

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

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PART II - OTHER INFORMATION

ITEM 1A.     RISK FACTORS

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

Coronavirus (“COVID-19”)

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

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

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

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

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

•the duration and scope of the pandemic;

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

•the actions taken in response to economic disruption;

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

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

Risks related to our Convertible Senior Notes

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

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

Our indebtedness may:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Provisions in the Notes’ Indenture may deter or prevent a business combination that may be favorable to our stockholders.

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

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

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

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

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

Issuer purchases of equity securities

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

(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average  Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2020 - July 31, 2020	135	$	109.36	42	$	53,470
August 1, 2020 - August 31, 2020	162	$	120.08	26	$	50,321
September 1, 2020 - September 30, 2020	138	$	124.88	26	$	47,172
	435	$	118.29	94

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

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

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ITEM 6.     EXHIBITS

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

+ Filed herewith.

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

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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:	October 28, 2020	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Financial Officer and Chief Administrative Officer
			(Principal Financial Officer)

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EX-10.1

EXHIBIT 10.1

[Insert Dealer letterhead]

To:	Pegasystems Inc. One Rogers Street Cambridge, Massachusetts 02142 Attention: Matthew Cushing, General Counsel Telephone No.:      Email:
From:	[Dealer Name]
Re:	Base Call Option Transaction
Date:	February 19, 2020

Dear Ladies and Gentlemen:

Reference is made to the Confirmation, dated as of February 19, 2020 confirming the terms and conditions of that certain Base Call Option Transaction (the “Transaction”) entered into between [Dealer Name] (“Dealer”)[, through its agent [Agent Name] (“Agent”)] and Pegasystems Inc. (“Counterparty”) as of the “Trade Date” specified therein (as amended and supplemented from time to time, the “Confirmation”). Any capitalized term used herein and not expressly defined herein has the meaning assigned to it in the Confirmation.

Each of Dealer and Counterparty, intending to be legally bound, hereby acknowledges and agrees that:

1.Each of Dealer and Counterparty hereby agrees with respect to the Transaction that upon the occurrence of (i) any Early Conversion to which Section 9(j)(iii) is applicable or (ii) a Repayment Event, in each case under the terms of the Confirmation, then, notwithstanding anything in the Confirmation to the contrary, the volatility input to be used by the Calculation Agent in its option pricing model to determine the amount payable by Dealer pursuant to Section 6 of the Agreement for valuations of Options with a strike price equal to the Strike Price shall be equal to the volatility input to be used for valuations of Options with a strike price equal to the Cap Price.

2.Section 9(j)(iii)(C) of the Confirmation shall be replaced in its entirety by the immediately following paragraph:

“(C) any payment hereunder with respect to such termination shall be calculated pursuant to Section 6 of the Agreement as if (x) an Early Termination Date had been designated in respect of a Transaction having terms identical to the Transaction and a Number of Options equal to the Affected Number of Options, (y) Counterparty were the sole Affected Party with respect to such Additional Termination Event and (z) the terminated portion of the Transaction were the sole Affected Transaction; provided that the amount payable with respect to such termination shall not be greater than (1) the Applicable Percentage, multiplied by (2) the Affected Number of Options, multiplied by (3) (x) the sum of (i) the amount of cash paid (if any) and (ii) the number of Shares delivered (if any) to the Holder (as such term is defined in the Indenture) of an Affected Convertible Note upon conversion of such Affected Convertible Note, multiplied by the Applicable Limit Price, minus (y) the Synthetic Instrument Adjusted Issue Price per Affected Convertible Note. “Synthetic Instrument Adjusted Issue Price” shall mean the amount determined by the Calculation Agent by reference to the table set forth below based on the date of payment of the amount due with respect to the relevant Affected Number of Options (the “Affected Unwind Date”). If the relevant Affected Unwind Date is not listed below, the amount in the preceding sentence shall be determined by the Calculation Agent by reference to the table below using a linear interpolation between the lower and higher Synthetic Instrument Adjusted Issue Prices for the Unwind Dates immediately preceding and immediately following the relevant Affected Unwind Date. For the avoidance of doubt, any payment pursuant to this paragraph shall be subject to Section 9(j) of the Confirmation.

1

Unwind Date	Synthetic Instrument Adjusted Issue Price
February 24, 2020	$913.50
September 1, 2020	$921.94
March 1, 2021	$930.17
September 1, 2021	$938.51
March 1, 2022	$946.96
September 1, 2022	$955.52
March 1, 2023	$964.19
September 1, 2023	$972.97
March 1, 2024	$981.86
September 1, 2024	$990.87
March 1, 2025	$1,000.00

3.Notwithstanding anything to the contrary in the Confirmation, Dealer shall not transfer or assign all or any part of its rights or obligations under the Transaction to any other party unless such other party also expressly assumes, and confirms to Counterparty in writing its agreement to be bound by, the obligations of Dealer under this letter agreement; provided that, notwithstanding any partial transfer or assignment, for so long as the Transaction remains in effect and to the extent Dealer is a party to the Transaction, Dealer will continue to be subject to its obligations under this letter agreement except to the extent Counterparty otherwise agrees.

4.Each of Counterparty and Dealer hereby confirms that the Confirmation, as modified herein, and the terms of the Transaction shall continue in full force and effect. All references to the “Confirmation” and the “Transaction” in the Confirmation or any document related thereto shall for all purposes constitute references to the Confirmation as modified hereby. In the event of any inconsistency between provisions of the Confirmation and this letter agreement, this letter agreement will prevail.

5.The Confirmation and this letter agreement constitute the entire agreement and understanding of the parties with respect to the matters set forth therein and above and supersede all oral communications and prior writings with respect thereto.

6.THIS LETTER AGREEMENT AND ALL MATTERS ARISING IN CONNECTION WITH THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS CHOICE OF LAW DOCTRINE).

7.For the avoidance of doubt, Section 13(b) of the Agreement (as defined in the Confirmation) is incorporated by reference in this letter agreement, provided that references therein to “Agreement” shall be replaced by references to “letter agreement”.

8.Each party waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any suit, action or proceeding relating to the Transaction. Each party (i) certifies that no representative, agent or attorney of either party has represented, expressly or otherwise, that such other party would not, in the event of such a suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter into the Transaction, as applicable, by, among other things, the mutual waivers and certifications provided herein.

9.No amendment, modification or waiver in respect of this letter agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties. This letter agreement (and any amendment, modification and waiver in respect of it) may be executed in several counterparts (including by facsimile transmission), each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

10.Counterparty (A) is capable of evaluating investment risks independently, both in general and with regard to all transactions and investment strategies involving a security or securities; (B) will exercise independent judgment in evaluating the recommendations of any broker-dealer or its associated persons, unless it has otherwise notified the broker-dealer in writing; and (C) has total assets of at least USD 50 million.

[Remainder of page left blank intentionally.]

2

Please confirm that the foregoing correctly sets forth the terms of our agreement by executing this letter agreement and returning it to Dealer.

Very truly yours,

[DEALER]

By:

Name:

Title:

[Signature Page to Base Capped Call Side Letter]

Accepted and confirmed

as of the date first written above:

PEGASYSTEMS, INC.

By:

Name:

Title:

[Signature Page to Base Capped Call Side Letter]

EX-10.2

EXHIBIT 10.2

[Insert Dealer letterhead]

To:	Pegasystems Inc. One Rogers Street Cambridge, Massachusetts 02142 Attention: Matthew Cushing, General Counsel Telephone No.:      Email:
From:	[Dealer Name]
Re:	Additional Call Option Transaction
Date:	February 20, 2020

Dear Ladies and Gentlemen:

Reference is made to the Confirmation, dated as of February 20, 2020 confirming the terms and conditions of that certain Additional Call Option Transaction (the “Transaction”) entered into between [Dealer Name] (“Dealer”)[, through its agent [Agent Name] (“Agent”)] and Pegasystems Inc. (“Counterparty”) as of the “Trade Date” specified therein (as amended and supplemented from time to time, the “Confirmation”). Any capitalized term used herein and not expressly defined herein has the meaning assigned to it in the Confirmation.

Each of Dealer and Counterparty, intending to be legally bound, hereby acknowledges and agrees that:

1.Each of Dealer and Counterparty hereby agrees with respect to the Transaction that upon the occurrence of (i) any Early Conversion to which Section 9(j)(iii) is applicable or (ii) a Repayment Event, in each case under the terms of the Confirmation, then, notwithstanding anything in the Confirmation to the contrary, the volatility input to be used by the Calculation Agent in its option pricing model to determine the amount payable by Dealer pursuant to Section 6 of the Agreement for valuations of Options with a strike price equal to the Strike Price shall be equal to the volatility input to be used for valuations of Options with a strike price equal to the Cap Price.

2.Section 9(j)(iii)(C) of the Confirmation shall be replaced in its entirety by the immediately following paragraph:

“(C) any payment hereunder with respect to such termination shall be calculated pursuant to Section 6 of the Agreement as if (x) an Early Termination Date had been designated in respect of a Transaction having terms identical to the Transaction and a Number of Options equal to the Affected Number of Options, (y) Counterparty were the sole Affected Party with respect to such Additional Termination Event and (z) the terminated portion of the Transaction were the sole Affected Transaction; provided that the amount payable with respect to such termination shall not be greater than (1) the Applicable Percentage, multiplied by (2) the Affected Number of Options, multiplied by (3) (x) the sum of (i) the amount of cash paid (if any) and (ii) the number of Shares delivered (if any) to the Holder (as such term is defined in the Indenture) of an Affected Convertible Note upon conversion of such Affected Convertible Note, multiplied by the Applicable Limit Price, minus (y) the Synthetic Instrument Adjusted Issue Price per Affected Convertible Note. “Synthetic Instrument Adjusted Issue Price” shall mean the amount determined by the Calculation Agent by reference to the table set forth below based on the date of payment of the amount due with respect to the relevant Affected Number of Options (the “Affected Unwind Date”). If the relevant Affected Unwind Date is not listed below, the amount in the preceding sentence shall be determined by the Calculation Agent by reference to the table below using a linear interpolation between the lower and higher Synthetic Instrument Adjusted Issue Prices for the Unwind Dates immediately preceding and immediately following the relevant Affected Unwind Date. For the avoidance of doubt, any payment pursuant to this paragraph shall be subject to Section 9(j) of the Confirmation.

1

Unwind Date	Synthetic Instrument Adjusted Issue Price
February 24, 2020	$913.50
September 1, 2020	$921.94
March 1, 2021	$930.17
September 1, 2021	$938.51
March 1, 2022	$946.96
September 1, 2022	$955.52
March 1, 2023	$964.19
September 1, 2023	$972.97
March 1, 2024	$981.86
September 1, 2024	$990.87
March 1, 2025	$1,000.00

3.Notwithstanding anything to the contrary in the Confirmation, Dealer shall not transfer or assign all or any part of its rights or obligations under the Transaction to any other party unless such other party also expressly assumes, and confirms to Counterparty in writing its agreement to be bound by, the obligations of Dealer under this letter agreement; provided that, notwithstanding any partial transfer or assignment, for so long as the Transaction remains in effect and to the extent Dealer is a party to the Transaction, Dealer will continue to be subject to its obligations under this letter agreement except to the extent Counterparty otherwise agrees.

4.Each of Counterparty and Dealer hereby confirms that the Confirmation, as modified herein, and the terms of the Transaction shall continue in full force and effect. All references to the “Confirmation” and the “Transaction” in the Confirmation or any document related thereto shall for all purposes constitute references to the Confirmation as modified hereby. In the event of any inconsistency between provisions of the Confirmation and this letter agreement, this letter agreement will prevail.

5.The Confirmation and this letter agreement constitute the entire agreement and understanding of the parties with respect to the matters set forth therein and above and supersede all oral communications and prior writings with respect thereto.

6.THIS LETTER AGREEMENT AND ALL MATTERS ARISING IN CONNECTION WITH THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS CHOICE OF LAW DOCTRINE).

7.For the avoidance of doubt, Section 13(b) of the Agreement (as defined in the Confirmation) is incorporated by reference in this letter agreement, provided that references therein to “Agreement” shall be replaced by references to “letter agreement”.

8.Each party waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any suit, action or proceeding relating to the Transaction. Each party (i) certifies that no representative, agent or attorney of either party has represented, expressly or otherwise, that such other party would not, in the event of such a suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter into the Transaction, as applicable, by, among other things, the mutual waivers and certifications provided herein.

9.No amendment, modification or waiver in respect of this letter agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties. This letter agreement (and any amendment, modification and waiver in respect of it) may be executed in several counterparts (including by facsimile transmission), each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

10.Counterparty (A) is capable of evaluating investment risks independently, both in general and with regard to all transactions and investment strategies involving a security or securities; (B) will exercise independent judgment in evaluating the recommendations of any broker-dealer or its associated persons, unless it has otherwise notified the broker-dealer in writing; and (C) has total assets of at least USD 50 million.

[Remainder of page left blank intentionally.]

2

Please confirm that the foregoing correctly sets forth the terms of our agreement by executing this letter agreement and returning it to Dealer.

Very truly yours,

[DEALER]

By:

Name:

Title:

[Signature Page to Additional Capped Call Side Letter]

Accepted and confirmed

as of the date first written above:

PEGASYSTEMS, INC.

By:

Name:

Title:

[Signature Page to Additional Capped Call Side Letter]

EX-10.3

EXHIBIT 10.3

Third Amendment to Loan Documents

    THIS THIRD AMENDMENT TO LOAN DOCUMENTS (this “Amendment”) is made as of September 30, 2020, by and among PEGASYSTEMS INC. (the “Borrower”), the Guarantors (as such term is defined in the Credit Agreement defined in Exhibit A attached hereto and made a part hereof (the “Agreement”)) party hereto (the “Guarantors” and each, individually, a “Guarantor”; the Borrower and the Guarantors are collectively referred to herein as the “Loan Parties” and each, individually, a “Loan Party”), the Lenders (as such term is defined in the Agreement) party hereto (the “Lenders”) and PNC BANK, NATIONAL ASSOCIATION (the “Agent”), in its capacity as “Agent” (as such term is defined in the Agreement) for the Lenders.

BACKGROUND

    A.    The Loan Parties have executed and delivered to the Agent and/or the Lenders one or more promissory notes, letter agreements, loan agreements, security agreements, pledge agreements, collateral assignments, and other agreements, instruments, certificates and documents, some or all of which are more fully described on Exhibit A attached hereto, which is made a part of this Amendment (collectively, as amended from time to time, the “Loan Documents”) which evidence or secure some or all of the Borrower’s Obligations.

    B.    The Loan Parties, the Lenders and the Agent desire to amend the Loan Documents as provided for in this Amendment.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows:

    1.    Certain of the Loan Documents are amended as set forth in Exhibit A attached hereto and made a part hereof. Any and all references to any Loan Document which is amended hereby in any other Loan Document shall be deemed to refer to such Loan Document as amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents being amended hereby. Any initially capitalized terms used in this Amendment without definition shall have the meanings assigned to those terms in the Agreement. To the extent that any term or provision of this Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and provisions of this Amendment shall control.

    2.    The Borrower hereby certifies that (a) all of its representations and warranties in the Loan Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment, (i) true and correct in all material respects (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date) as of the date of this Amendment, (ii) ratified and confirmed without condition as if made anew (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty shall be ratified and confirmed as of such earlier date), and (iii) incorporated into this Amendment by reference; (b) no Event of Default or event which, with the passage of time or the giving of notice or both, would constitute an Event of Default, exists under any Loan Document which will not be cured by the execution and effectiveness of this Amendment; (c) no consent, approval, order or authorization of, or registration or filing with, any third party is required in connection with the execution, delivery and carrying out of this Amendment or, if required, has been obtained; and (d) this Amendment has been duly authorized, executed and delivered so that it constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The Borrower confirms that the Obligations remain outstanding without defense, set off, counterclaim, discount or charge of any kind as of the date of this Amendment.

    3.    The Borrower hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s existing and future Obligations to the Lenders, as modified by this Amendment.

    4.    As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with the terms and conditions specified in Exhibit A attached hereto and made a part hereof.

    5.    To induce the Agent and the Lenders to enter into this Amendment, each Loan Party reaffirms all of its indemnification obligations contained in the Loan Documents, including, without limitation, pursuant to Section 11.3.2 of the Agreement.

    6.    This Amendment may be signed in any number of counterpart copies and by the parties to this Amendment on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by electronic or facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Amendment by electronic or facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by electronic or facsimile transmission, as applicable.

    7.    Notwithstanding any other provision herein or in the other Loan Documents, each Loan Party agrees that this Amendment, the Note, the other Loan Documents, any other amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Agent’s option, be in the form of an electronic record. Any Communication may, at the Agent’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. Each Loan Party, each Lender and the Agent acknowledge and agree that the methods for delivering Communications, including notices, under the Loan Documents include electronic transmittal to any electronic address provided by either party to the other party from time to time.

    8.    This Amendment will be binding upon and inure to the benefit of each Loan Party, the Agent, and the Lenders and their respective heirs, executors, administrators, successors and assigns.

    9.    This Amendment has been delivered to and accepted by the Agent and the Lenders and will be deemed to be made in the State of New York. This Amendment will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of New York, excluding its conflict of laws rules, including without limitation the Electronic Signatures and Records Act (or equivalent) in such State (or, to the extent controlling, the laws of the United States of America, including without limitation the Electronic Signatures in Global and National Commerce Act).

    10.    Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified, reaffirmed and confirmed. Except as expressly provided herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default under any Loan Document, or a waiver or release of any of the Agent’s or Lenders’ rights and remedies (all of which are hereby reserved). Each Loan Party, the Agent and the Lenders mutually expressly ratify and confirm the waiver of jury trial or arbitration provisions contained in the Loan Documents, all of which are incorporated herein by reference.

[signatures appear on following page]

2

    WITNESS the due execution of this Amendment as of the date first written above, with the intent to be legally bound hereby.

WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	BORROWER: PEGASYSTEMS INC. By:     /s/ Kenneth Stillwell             Name:    Kenneth Stillwell     Title:    Chief Financial Officer, Chief      Administrative Officer and Senior         Vice President
WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	GUARANTORS: PEGASYSTEMS WORLDWIDE INC. By:     /s/ Efstathios Kouninis             Name:    Efstathios Kouninis,     Title:    Director
WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	ANTENNA SOFTWARE, LLC By: PEGASYSTEMS INC., its sole member By:     /s/ Kenneth Stillwell             Name:    Kenneth Stillwell     Title:    Chief Financial Officer, Chief      Administrative Officer and Senior         Vice President
WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	PEGA GOVERNMENT LLC. By:     /s/ Efstathios Kouninis             Name:    Efstathios Kouninis,     Title:    Manager

Signature Page – Loan Parties – Third Amendment to Loan Documents

PNC BANK, NATIONAL ASSOCIATION,

Individually and as Agent

By:     /s/ Robert Novak        

Name:     Robert Novak

Title:     Vice President

Signature Page – PNC Bank – Third Amendment to Loan Documents

EXHIBIT A

TO THIRD AMENDMENT TO LOAN DOCUMENTS

DATED AS OF SEPTEMBER 30, 2020

A.    The “Loan Documents” that are the subject of this Amendment include the following (as any of the foregoing have previously been amended, modified or otherwise supplemented):

1.Credit Agreement dated as of November 5, 2019 made by and among Pegasystems Inc., (the “Borrower”), each of the Guarantors, and the Agent (the “Agreement”).

2.Amendment to Loan Documents dated as of February 18, 2020 made by and among the Borrower, each of the Guarantors, and the Agent (the “FirstAmendment”).

3.Second Amendment to Loan Documents dated as of July 22, 2020 made by and among the Borrower, each of the Guarantors, and the Agent (the “Second Amendment”).

4.Guarantor Joinder and Assumption Agreement made as of August 24, 2020, by Pega Government LLC in favor of Agent and Lenders (the "Guarantor Joinder").

5.Revolving Credit Note in the principal amount of $100,000,000.00 dated as of November 5, 2019 executed by the Borrower in favor of the Agent (the “Note”).

6.Security Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower Security Agreement”).

7.Security Agreement dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc., Antenna Software, LLC and Agent (the “Guarantor Security Agreement”).

8.Continuing Agreement of Guaranty and Suretyship dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc., Antenna Software, LLC and Agent (the “Guaranty Agreement”).

9.Pledge Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower Pledge Agreement”).

10.First Amendment to Pledge Agreement dated as of August 24, 2020, by and between Borrower and Agent (the “First Amendment to Pledge Agreement”)

11.Pledge Agreement (Bank Deposits) dated as of November 5, 2019, by and among Borrower and Agent (the “Deposit Account Pledge Agreement”).

12.Deposit Account Control Agreement dated as of December 23, 2019, by and among Borrower, Agent and Bank of America, N.A. (as amended and in effect from time to time, the “Deposit Account Control Agreement”).

13.Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower PTC Agreement”).

14.Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between Antenna Software, LLC and Agent (the “Guarantor PTC Agreement”).

15.All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Section A.

Exhibit A - 1

B.    The Loan Documents are amended as follows:

1.Definitions. Reference is made to Section 1.1 of the Agreement. The definition of “Permitted Acquisition” contained in said Section 1.1 is hereby amended to clarify the requirement to meet certain financial covenants by amending subsection (i) thereof in its entirety as follows:

“(i) the financial covenants set forth in Section 8.2.16 and Section 8.2.17 of this Agreement (regardless of any commencement date referenced therein with respect to covenant compliance) have been satisfied prior to, and on a pro forma basis giving effect to, a Permitted Acquisition;”

2.Rate and Fees. Reference is made to Schedule 1.1(A) of the Agreement. Schedule 1.1(A) is hereby amended to apply Level IV rates and fees through a certain date by adding a new subsection (d) to the end of Schedule 1.1(A) as follows:

“(d) In addition, and anything in this Schedule 1.1(A) and the Agreement notwithstanding, the Applicable Margin, the Applicable Commitment Fee Rate and the Applicable Letter of Credit Fee Rate calculated for the period from October 28, 2020 to and including December 31, 2021, shall apply “Level IV” rates as set forth above.”

3.Incremental Loans. Reference is made to Section 2.11 of the Agreement. Said Section 2.11 is hereby amended to provide a commencement date for allowance of Incremental Loans by amending the first sentence of subsection (i) thereof in its entirety as follows:

“At any time after December 31, 2021, the Borrower may by written notice to the Administrative Agent elect to request the establishment of increases in the Revolving Credit Commitments (any such increase, an “Incremental Loan Commitment”) for the advancing of incremental Revolving Credit Loans under the Revolving Credit Facility (each such advance of Revolving Credit Loans under the Incremental Loan Commitment, an “Incremental Loan”); provided that (a) the total aggregate principal amount of all such Incremental Loan Commitments shall not (as of any date of incurrence thereof) exceed $100,000,000, and (b) the minimum principal amount of each such Incremental Loan Commitment shall not be less than $25,000,000 or, if less, the remaining amount permitted pursuant to the foregoing clause (a).”

4.Minimum Liquidity. Reference is made to Section 8.2.15 of the Agreement. Said section, currently “Reserved”, is hereby deleted in its entirety and replaced with the following:

        “8.2.15 To and including December 31, 2021, the Loan Parties shall not, at any time, permit the aggregate amount of cash and Permitted Investments held by the Borrower to be less than Two Hundred Million Dollars ($200,000,000).”

5.Maximum Net Leverage Ratio. Reference is made to Section 8.2.16 of the Agreement. Said section is hereby deleted in its entirety and replaced with the following to provide for a calculation commencement date:

Exhibit A - 2

        “8.2.16 Maximum Net Leverage Ratio. Commencing with the calculation date of March 31, 2022, the Loan Parties shall not permit the Net Leverage Ratio, calculated as of the end of each fiscal quarter for the four (4) fiscal quarters then ended, to be more than 3.50 to 1.00; provided, that at the Borrower’s option, the maximum Net Leverage Ratio may increase to 4.00:1.00 for four (4) consecutive fiscal quarters immediately following the consummation by the Borrower, any other Loan Party or any Subsidiary thereof, of a Permitted Acquisition with a purchase price in excess of $50,000,000 (a “Material Acquisition”); provided, furtherthat (i) the Borrower’s ability to increase the Net Leverage Ratio as described in this Section 8.2.16 shall be limited to two (2) requests during the term of this Agreement, (ii) no more than one such increase shall be in effect at any time and (iii) the Net Leverage Ratio shall revert to the then permitted ratio (without giving effect to such increase) for at least two fiscal quarters before another increase may be invoked.”

6.Minimum Interest Coverage Ratio. Reference is made to Section 8.2.17 of the Agreement. Said section is hereby deleted in its entirety and replaced with the following to provide for a calculation commencement date:

        “8.2.17 Minimum Interest Coverage Ratio. Commencing with the calculation date of March 31, 2022, the Loan Parties shall not permit the ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, calculated as of the end of each fiscal quarter for the four (4) fiscal quarters then ended, to be less than 3.50 to 1.00.”

C.    Conditions to Effectiveness of Amendment: The Agent’s willingness to agree to the amendments set forth in this Amendment is subject to the prior satisfaction of the following conditions:

1.Execution by all applicable parties and delivery to the Agent of this Amendment (including the attached Consent).

2.Reimbursement by the Borrower to the Agent of the fees and expenses of the Agent's outside counsel in connection with this Amendment.

3.All representations and warranties contained in the Loan Documents are true and correct in all material respects on the date hereof (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date).

4.Immediately after giving effect to this Amendment, no default or Event of Default shall have occurred and be continuing under the Agreement or any of the other Loan Documents.

Exhibit A - 3

CONSENT OF GUARANTOR

    Each of the undersigned guarantors (jointly and severally if more than one, the “Guarantors”) consent to the provisions of the foregoing Amendment, any and all documents executed in connection therewith, and all prior amendments (if any) and confirms and agrees that (a) the Guarantors’ obligations under the Guaranty shall be unimpaired by the Amendment; (b) as of the date hereof, the Guarantors have no defenses, set offs, counterclaims, discounts or charges of any kind against the Agent and/or the Lenders, their respective officers, directors, employees, agents or attorneys with respect to the Guaranty; (c) except as expressly modified by the foregoing Amendment, all of the terms, conditions and covenants in the Guaranty remain unaltered and in full force and effect and are hereby ratified and confirmed and apply to the Obligations, as modified by the Amendment; and (d) the Guarantors are bound by the terms and provisions of paragraph 5 of the Amendment. The Guarantors certify that all representations and warranties made in the Guaranty are true and correct in all material respects (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date).

    By signing below, the Guarantors agree that this Consent, the Guaranty, the other Loan Documents, any amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Agent’s option, be in the form of an electronic record. Any Communication may, at the Agent’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. The Guarantor acknowledges and agrees that the methods for delivering Communications, including notices, under the Guaranty and the other Loan Documents include electronic transmittal to any electronic address provided by any party to the other party from time to time.

    The Guarantors hereby confirm that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Guarantors, shall continue unimpaired and in full force and effect, shall cover and secure all of the Guarantors’ existing and future Obligations to the Lenders, as modified by this Amendment.

    The Guarantor ratifies and confirms the indemnification (if any) and waiver of jury trial provisions contained in the Guaranty.

[signatures appear on following page]

    WITNESS the due execution of this Consent as of the date of the Amendment, intending to be legally bound hereby.

WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	GUARANTORS: PEGASYSTEMS WORLDWIDE INC. By:     /s/ Efstathios Kouninis             Name:    Efstathios Kouninis,     Title:    Director
WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	ANTENNA SOFTWARE, LLC By: PEGASYSTEMS INC., its sole member By:     /s/ Kenneth Stillwell             Name:    Kenneth Stillwell     Title:    Chief Financial Officer, Chief      Administrative Officer and Senior         Vice President
WITNESS: By: /s/ Jeffrey Lee     Name: Jeffrey Lee     Title: Treasury Manager	PEGA GOVERNMENT LLC. By:     /s/ Efstathios Kouninis             Name:    Efstathios Kouninis,     Title:    Manager

Signature Page – Guarantors – Third Amendment to Loan Documents

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Alan Trefler, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 28, 2020

/s/ ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Kenneth Stillwell, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 28, 2020

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief Financial Officer and Chief Administrative Officer

(Principal Financial Officer)

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pegasystems Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell, Chief Financial Officer and Chief Administrative Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 28, 2020

/s/ ALAN TREFLER

Alan Trefler

Chairman and Chief Executive Officer

(Principal Executive Officer)

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief Financial Officer and Chief Administrative Officer

(Principal Financial Officer)

XML

COVER PAGE - shares	9 Months Ended
	Sep. 30, 2020	Oct. 19, 2020
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2020
Document Transition Report	false
Entity File Number	1-11859
Entity Registrant Name	PEGASYSTEMS INC.
Amendment Flag	false
Entity Central Index Key	0001013857
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Incorporation, State or Country Code	MA
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
Title of 12(b) Security	Common Stock, $.01 par value per share
Trading Symbol	PEGA
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		80,697,696

XML

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 281,218	$ 68,363
Marketable securities	186,810	0
Total cash, cash equivalents, and marketable securities	468,028	68,363
Accounts receivable	137,953	199,720
Unbilled receivables	208,823	180,219
Other current assets	89,406	57,308
Total current assets	904,210	505,610
Unbilled receivables	108,456	121,736
Goodwill	78,864	79,039
Other long-term assets	395,797	278,427
Total assets	1,487,327	984,812
Current liabilities:
Accounts payable	20,443	17,475
Accrued expenses	43,447	48,001
Accrued compensation and related expenses	90,836	104,126
Deferred revenue	181,680	190,080
Other current liabilities	19,916	18,273
Total current liabilities	356,322	377,955
Convertible senior notes, net	513,794	0
Operating lease liabilities	62,544	52,610
Other long-term liabilities	25,345	15,237
Total liabilities	958,005	445,802
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	0	0
Common stock, 200,000 shares authorized; 80,697 and 79,599 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	807	796
Additional paid-in capital	201,882	140,523
Retained earnings	338,300	410,919
Accumulated other comprehensive (loss)	(11,667)	(13,228)
Total stockholders’ equity	529,322	539,010
Total liabilities and stockholders’ equity	$ 1,487,327	$ 984,812

XML

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - shares	Sep. 30, 2020	Dec. 31, 2019
Stockholders’ equity:
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	0	0
Common stock, shares authorized (in shares)	200,000,000	200,000,000
Common stock, shares issued (in shares)	80,697,000	79,599,000
Common stock, shares outstanding (in shares)	80,697,000	79,599,000

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Revenue
Total revenue	$ 225,951	$ 216,703	$ 718,917	$ 634,841
Cost of revenue
Total cost of revenue	77,799	80,898	234,018	232,415
Gross profit	148,152	135,805	484,899	402,426
Operating expenses
Selling and marketing	132,053	115,237	395,684	341,064
Research and development	60,024	52,492	177,620	152,802
General and administrative	17,907	14,843	49,192	41,693
Total operating expenses	209,984	182,572	622,496	535,559
(Loss) from operations	(61,832)	(46,767)	(137,597)	(133,133)
Foreign currency transaction gain (loss)	4,236	(1,970)	2,545	(3,577)
Interest income	243	598	1,092	1,865
Interest expense	(5,956)	(42)	(13,791)	(42)
Gain on capped call transactions	18,989	0	19,816	0
Other income, net	0	323	1,374	378
(Loss) before (benefit from) income taxes	(44,320)	(47,858)	(126,561)	(134,509)
(Benefit from) income taxes	(25,053)	(17,520)	(61,182)	(43,158)
Net (loss)	$ (19,267)	$ (30,338)	$ (65,379)	$ (91,351)
(Loss) per share
Basic (in dollars per share)	$ (0.24)	$ (0.38)	$ (0.82)	$ (1.16)
Diluted (in dollars per share)	$ (0.24)	$ (0.38)	$ (0.82)	$ (1.16)
Weighted-average number of common shares outstanding
Basic (in shares)	80,537	79,200	80,191	78,928
Diluted (in shares)	80,537	79,200	80,191	78,928
Software license
Revenue
Total revenue	$ 39,784	$ 58,005	$ 187,023	$ 165,543
Cost of revenue
Total cost of revenue	691	676	2,354	2,982
Maintenance
Revenue
Total revenue	74,670	70,371	220,587	207,406
Cost of revenue
Total cost of revenue	5,478	6,688	16,645	19,315
Pega Cloud
Revenue
Total revenue	54,776	35,153	147,080	94,610
Cost of revenue
Total cost of revenue	19,717	17,824	56,238	47,769
Consulting
Revenue
Total revenue	56,721	53,174	164,227	167,282
Cost of revenue
Total cost of revenue	$ 51,913	$ 55,710	$ 158,781	$ 162,349

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Statement of Comprehensive Income [Abstract]
Net (loss)	$ (19,267)	$ (30,338)	$ (65,379)	$ (91,351)
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities	(166)	(216)	(66)	396
Foreign currency translation adjustments	113	(2,201)	1,627	(983)
Total other comprehensive (loss) income, net of tax	(53)	(2,417)	1,561	(587)
Comprehensive (loss)	$ (19,320)	$ (32,755)	$ (63,818)	$ (91,938)

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive (Loss)
Balance, beginning of period (in shares) at Dec. 31, 2018		78,526
Balance, beginning of period at Dec. 31, 2018	$ 621,531	$ 785	$ 123,205	$ 510,863	$ (13,322)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Repurchase of common stock (in shares)		(144)
Repurchase of common stock	(7,587)	$ (1)	(7,586)
Issuance of common stock for share-based compensation plans (in shares)		514
Issuance of common stock for share-based compensation plans	(14,838)	$ 5	(14,843)
Stock-based compensation	18,406		18,406
Cash dividends declared ($0.03 per share)	(2,367)			(2,367)
Other comprehensive income (loss)	2,001				2,001
Net (loss)	(28,717)			(28,717)
Balance, end of period (in shares) at Mar. 31, 2019		78,896
Balance, end of period at Mar. 31, 2019	$ 588,429	$ 789	119,182	479,779	(11,321)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03
Balance, beginning of period (in shares) at Dec. 31, 2018		78,526
Balance, beginning of period at Dec. 31, 2018	$ 621,531	$ 785	123,205	510,863	(13,322)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Other comprehensive income (loss)	(587)
Net (loss)	(91,351)
Balance, end of period (in shares) at Sep. 30, 2019		79,324
Balance, end of period at Sep. 30, 2019	528,832	$ 793	129,559	412,389	(13,909)
Balance, beginning of period (in shares) at Mar. 31, 2019		78,896
Balance, beginning of period at Mar. 31, 2019	588,429	$ 789	119,182	479,779	(11,321)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Repurchase of common stock (in shares)		(88)
Repurchase of common stock	(6,302)	$ (1)	(6,301)
Issuance of common stock for share-based compensation plans (in shares)		320
Issuance of common stock for share-based compensation plans	(11,214)	$ 3	(11,217)
Issuance of common stock under the employee stock purchase plan (in shares)		16
Issuance of common stock under the employee stock purchase plan	1,103		1,103
Stock-based compensation	20,113		20,113
Cash dividends declared ($0.03 per share)	(2,375)			(2,375)
Other comprehensive income (loss)	(171)				(171)
Net (loss)	(32,296)			(32,296)
Balance, end of period (in shares) at Jun. 30, 2019		79,144
Balance, end of period at Jun. 30, 2019	$ 557,287	$ 791	122,880	445,108	(11,492)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03
Repurchase of common stock (in shares)		(88)
Repurchase of common stock	$ (6,397)	$ (1)	(6,396)
Issuance of common stock for share-based compensation plans (in shares)		268
Issuance of common stock for share-based compensation plans	(8,801)	$ 3	(8,804)
Stock-based compensation	21,879		21,879
Cash dividends declared ($0.03 per share)	(2,381)			(2,381)
Other comprehensive income (loss)	(2,417)				(2,417)
Net (loss)	(30,338)			(30,338)
Balance, end of period (in shares) at Sep. 30, 2019		79,324
Balance, end of period at Sep. 30, 2019	$ 528,832	$ 793	129,559	412,389	(13,909)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03
Balance, beginning of period (in shares) at Dec. 31, 2019	79,599	79,599
Balance, beginning of period at Dec. 31, 2019	$ 539,010	$ 796	140,523	410,919	(13,228)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Equity component of convertible senior notes, net	61,604		61,604
Repurchase of common stock (in shares)		(87)
Repurchase of common stock	(6,000)	$ (1)	(5,999)
Issuance of common stock for share-based compensation plans (in shares)		564
Issuance of common stock for share-based compensation plans	(23,011)	$ 6	(23,017)
Stock-based compensation	23,199		23,199
Cash dividends declared ($0.03 per share)	(2,405)			(2,405)
Other comprehensive income (loss)	(414)				(414)
Net (loss)	(25,372)			(25,372)
Balance, end of period (in shares) at Mar. 31, 2020		80,076
Balance, end of period at Mar. 31, 2020	$ 566,611	$ 801	196,310	383,142	(13,642)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03
Balance, beginning of period (in shares) at Dec. 31, 2019	79,599	79,599
Balance, beginning of period at Dec. 31, 2019	$ 539,010	$ 796	140,523	410,919	(13,228)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Other comprehensive income (loss)	1,561
Net (loss)	$ (65,379)
Balance, end of period (in shares) at Sep. 30, 2020	80,697	80,697
Balance, end of period at Sep. 30, 2020	$ 529,322	$ 807	201,882	338,300	(11,667)
Balance, beginning of period (in shares) at Mar. 31, 2020		80,076
Balance, beginning of period at Mar. 31, 2020	566,611	$ 801	196,310	383,142	(13,642)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Repurchase of common stock (in shares)		(23)
Repurchase of common stock	(2,199)	$ 0	(2,199)
Issuance of common stock for share-based compensation plans (in shares)		349
Issuance of common stock for share-based compensation plans	(14,082)	$ 3	(14,085)
Issuance of common stock under the employee stock purchase plan (in shares)		18
Issuance of common stock under the employee stock purchase plan	1,403		1,403
Stock-based compensation	25,674		25,674
Cash dividends declared ($0.03 per share)	(2,413)			(2,413)
Other comprehensive income (loss)	2,028				2,028
Net (loss)	(20,740)			(20,740)
Balance, end of period (in shares) at Jun. 30, 2020		80,420
Balance, end of period at Jun. 30, 2020	$ 556,282	$ 804	207,103	359,989	(11,614)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03
Repurchase of common stock (in shares)		(94)
Repurchase of common stock	$ (10,629)	$ (1)	(10,628)
Issuance of common stock for share-based compensation plans (in shares)		371
Issuance of common stock for share-based compensation plans	(22,520)	$ 4	(22,524)
Stock-based compensation	27,931		27,931
Cash dividends declared ($0.03 per share)	(2,422)			(2,422)
Other comprehensive income (loss)	(53)				(53)
Net (loss)	$ (19,267)			(19,267)
Balance, end of period (in shares) at Sep. 30, 2020	80,697	80,697
Balance, end of period at Sep. 30, 2020	$ 529,322	$ 807	$ 201,882	$ 338,300	$ (11,667)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend declared (in dollars per share)	$ 0.03

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019
Statement of Stockholders' Equity [Abstract]
Cash dividend declared (in dollars per share)	$ 0.03	$ 0.03	$ 0.03	$ 0.03	$ 0.03	$ 0.03

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Operating activities
Net (loss)	$ (65,379)	$ (91,351)
Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation	76,755	60,242
(Gain) on capped call transactions	(19,816)	0
Deferred income taxes	(43,476)	(40,531)
Amortization of deferred commissions	24,922	22,372
Lease expense	11,997	10,454
Amortization of debt discount and issuance costs	10,405	0
Amortization of intangible assets and depreciation	15,677	16,998
Amortization of investments	252	798
Foreign currency transaction (gain) loss	(2,545)	3,577
Other non-cash	(1,374)	(363)
Change in operating assets and liabilities, net	(33,675)	4,342
Cash (used in) operating activities	(26,257)	(13,462)
Investing activities
Purchases of investments	(190,319)	(11,182)
Proceeds from maturities and called investments	0	13,066
Sales of investments	1,424	68,937
Payments for acquisitions, net of cash acquired	0	(10,934)
Investment in property and equipment	(21,806)	(6,439)
Cash (used in) provided by investing activities	(210,701)	53,448
Financing activities
Proceeds from issuance of convertible senior notes	600,000	0
Purchase of capped calls related to convertible senior notes	(51,900)	0
Payment of debt issuance costs	(14,527)	0
Dividend payments to shareholders	(7,206)	(7,105)
Common stock repurchases	(76,737)	(54,836)
Cash provided by (used in) financing activities	449,630	(61,941)
Effect of exchange rate changes on cash and cash equivalents	183	(363)
Net increase (decrease) in cash and cash equivalents	212,855	(22,318)
Cash and cash equivalents, beginning of period	68,363	114,422
Cash and cash equivalents, end of period	$ 281,218	$ 92,104

XML

BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances have been eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.

XML

NEW ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

NEW ACCOUNTING PRONOUNCEMENTS

2. NEW ACCOUNTING PRONOUNCEMENTS

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Additionally, the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, the standard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”). The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures. The Company expects to early adopt the new standard on January 1, 2021.

Financial instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the asset’s amortized cost, removing the concept of “other-than-temporary” impairments. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

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MARKETABLE SECURITIES

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

MARKETABLE SECURITIES

3. MARKETABLE SECURITIES

	September 30, 2020
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	50,987	$	—	$	(11)	$	50,976
Corporate debt	136,045		1		(212)		135,834
	$	187,032	$	1	$	(223)	$	186,810

As of September 30, 2020, maturities of marketable securities ranged from October 2020 to September 2023, with a weighted-average remaining maturity of approximately 1.3 years.

As of December 31, 2019, the Company did not hold any marketable securities.

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

9 Months Ended

Sep. 30, 2020

Receivables [Abstract]

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

(in thousands)	September 30, 2020		December 31, 2019
Accounts receivable	$	137,953	$	199,720
Unbilled receivables	208,823		180,219
Long-term unbilled receivables	108,456		121,736
	$	455,232	$	501,675

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.

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

(Dollars in thousands)	September 30, 2020
1 year or less	$	208,823	66	%
1-2 years	91,325		29	%
2-5 years	17,131		5	%
	$	317,279	100	%

Unbilled receivables based upon contract effective date:

(Dollars in thousands)	September 30, 2020
2020	$	105,380	33	%
2019	99,875		32	%
2018	39,281		12	%
2017	37,824		12	%
2016 and prior	34,919		11	%
	$	317,279	100	%

Major clients

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

	September 30, 2020		December 31, 2019
Client A	11	%	*

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

Contract assets and deferred revenue

(in thousands)	September 30, 2020		December 31, 2019
Contract assets (1)	$	8,104	$	5,558
Long-term contract assets (2)	5,579		5,420
	13,683		10,978
Deferred revenue	181,680		190,080
Long-term deferred revenue (3)	6,673		5,407
	$	188,353	$	195,487

(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.

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

The change in deferred revenue in the nine months ended September 30, 2020 was primarily due to new billings in advance of revenue recognition, and $170.5 million of revenue recognized during the period that was included in deferred revenue at December 31, 2019.

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DEFERRED COMMISSIONS

9 Months Ended

Sep. 30, 2020

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

DEFERRED COMMISSIONS

5. DEFERRED COMMISSIONS

(in thousands)	September 30, 2020		December 31, 2019
Deferred commissions (1)	$	87,992	$	85,314

(1) Included in other long-term assets.

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Amortization of deferred commissions (1)	$	8,861	$	8,193	$	24,922	$	22,372

(1) Included in selling and marketing expense.

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DEBT

9 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

DEBT

6. DEBT

Convertible senior notes and capped calls

Convertible senior notes

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

Proceeds from the Notes and Capped Call Transactions:

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

Conversion rights

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

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

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

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

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

As of September 30, 2020, no Notes were eligible for conversion at the noteholders’ election.

Repurchase rights

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

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

Impact of the Notes

In accounting for the transaction, the Notes have been separated into liability and equity components.

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

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

The Company incurred issuance costs of $14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components.

•Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes.

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

Net carrying amount of the liability component:

(in thousands)	September 30, 2020
Principal	$	600,000
Unamortized debt discount	(75,061)
Unamortized issuance costs	(11,145)
	$	513,794

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

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

(1) Net of issuance costs and taxes.

Interest expense related to the Notes:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Contractual interest expense (0.75% coupon)	$	1,125	$	—	$	2,700	$	—
Amortization of debt discount (1)	3,807		—		9,060		—
Amortization of issuance costs (1)	565		—		1,345		—
	$	5,497	$	—	$	13,105	$	—

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

Future payments of principal and contractual interest:

	September 30, 2020
(in thousands)	Principal		Interest		Total
2020	$	—	$	—	$	—
2021	—		4,500		4,500
2022	—		4,500		4,500
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	19,488	$	619,488

Capped call transactions

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

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

Change in value of Capped Call Transactions:

(in thousands)	Nine Months Ended September 30, 2020
Value at issuance	$	51,900
Fair value adjustment	19,816
Balance as of September 30,	$	71,716

Credit facility

In November 2019, and as amended in February 2020, July 2020, and October 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants, including:

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

•Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of September 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Credit Facility.

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

7. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and minimize unobservable inputs when determining fair value.

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

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

	September 30, 2020								December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents (1)	$	212,917	$	—	$	—	$	212,917	$	—	$	—	$	—	$	—
Marketable securities	$	—	$	186,810	$	—	$	186,810	$	—	$	—	$	—	$	—
Capped Call Transactions (2) (3)	$	—	$	71,716	$	—	$	71,716	$	—	$	—	$	—	$	—
Venture investments (2) (4)	$	—	$	—	$	7,927	$	7,927	$	—	$	—	$	4,871	$	4,871

(1) Investments in money market funds. (2) Included in other long-term assets. (3) See "6. Debt" for additional information. (4) Investments in privately-held companies.

Change in venture investments:

(in thousands)	Nine Months Ended September 30, 2020
December 31, 2019	$	4,871
New investments	3,006
Sales of investments	(1,424)
Fair value adjustment	1,474
September 30, 2020	$	7,927

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

Fair value of the Notes

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

The Notes’ fair value (inclusive of the conversion feature, which is embedded in the Notes) was $680 million as of September 30, 2020. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy. See "6. Debt" for additional information.

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REVENUE

9 Months Ended

Sep. 30, 2020

Revenue from Contract with Customer [Abstract]

REVENUE

8. REVENUE

Geographic revenue

	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2020				2019				2020				2019
U.S.	$	120,971	53	%	$	123,447	57	%	$	436,199	61	%	$	347,120	55	%
Other Americas	10,737		5	%	11,748		5	%	35,009		5	%	49,450		8	%
United Kingdom (“U.K.”)	25,150		11	%	23,034		11	%	68,246		9	%	64,269		10	%
Europe (excluding U.K.), Middle East, and Africa	39,656		18	%	34,761		16	%	106,472		15	%	102,342		16	%
Asia-Pacific	29,437		13	%	23,713		11	%	72,991		10	%	71,660		11	%
	$	225,951	100	%	$	216,703	100	%	$	718,917	100	%	$	634,841	100	%

Revenue streams

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Perpetual license	$	3,852	$	9,016	$	16,568	$	43,286
Term license	35,932		48,989		170,455		122,257
Revenue recognized at a point in time	39,784		58,005		187,023		165,543
Maintenance	74,670		70,371		220,587		207,406
Pega Cloud	54,776		35,153		147,080		94,610
Consulting	56,721		53,174		164,227		167,282
Revenue recognized over time	186,167		158,698		531,894		469,298
	$	225,951	$	216,703	$	718,917	$	634,841

(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Pega Cloud	$	54,776	$	35,153	$	147,080	$	94,610
Maintenance	74,670		70,371		220,587		207,406
Term license	35,932		48,989		170,455		122,257
Subscription (1)	165,378		154,513		538,122		424,273
Perpetual license	3,852		9,016		16,568		43,286
Consulting	56,721		53,174		164,227		167,282
	$	225,951	$	216,703	$	718,917	$	634,841

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

Remaining performance obligations ("Backlog")

Expected future revenue on existing contracts:

	September 30, 2020
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	8,708	$	50,788	$	170,643	$	211,661	$	14,977	$	456,777	54	%
1-2 years	1,700		5,341		40,631		157,500		2,042		207,214		25	%
2-3 years	—		7,052		18,277		93,283		770		119,382		14	%
Greater than 3 years	—		4		9,597		44,363		653		54,617		7	%
	$	10,408	$	63,185	$	239,148	$	506,807	$	18,442	$	837,990	100	%

	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56	%
1-2 years	853		3,798		18,590		105,081		863		129,185		21	%
2-3 years	1,306		591		8,323		72,915		841		83,976		14	%
Greater than 3 years	—		85		4,959		51,591		—		56,635		9	%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100	%

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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION

9. STOCK-BASED COMPENSATION

Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Cost of revenue	$	5,100	$	4,787	$	15,636	$	14,216
Selling and marketing	12,658		8,317		33,968		24,055
Research and development	5,765		4,858		17,066		13,990
General and administrative	4,402		3,884		10,085		7,981
	$	27,925	$	21,846	$	76,755	$	60,242
Income tax benefit	$	(5,604)	$	(4,430)	$	(15,293)	$	(12,226)

As of September 30, 2020, the Company had $115.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

Grants

The Company granted the following stock-based compensation awards:

	Nine Months Ended September 30, 2020
(in thousands)	Shares	Total Fair Value
RSUs	1,026	$	92,456
Non-qualified stock options	1,886	$	44,505
Common stock	6	$	701

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INCOME TAXES

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

10. INCOME TAXES

Effective income tax rate

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020			2019
(Benefit from) income taxes	$	(25,053)	$	(17,520)	$	(61,182)		$	(43,158)
Effective income tax rate					48		%	32		%

During the nine months ended September 30, 2020, the Company’s effective income tax rate benefit increased primarily due to the excess tax benefits from stock-based compensation and a carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

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(LOSS) PER SHARE

9 Months Ended

Sep. 30, 2020

Earnings Per Share [Abstract]

(LOSS) PER SHARE

11. (LOSS) PER SHARE

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

Calculation of the basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2020		2019		2020		2019
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding	80,537		79,200		80,191		78,928
(Loss) per share, basic	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding, assuming dilution (1) (2)	80,537		79,200		80,191		78,928
(Loss) per share, diluted	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Outstanding anti-dilutive stock options and RSUs (3)	6,622		5,953		6,166		5,923

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

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

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

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NEW ACCOUNTING PRONOUNCEMENTS (Policies)

9 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Basis of presentation

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances have been eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.

Convertible debt

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Additionally, the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, the standard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”). The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures. The Company expects to early adopt the new standard on January 1, 2021.

Financial instruments

Financial instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the asset’s amortized cost, removing the concept of “other-than-temporary” impairments. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

Assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and minimize unobservable inputs when determining fair value.

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

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MARKETABLE SECURITIES (Tables)

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Schedule of Marketable Securities

	September 30, 2020
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	50,987	$	—	$	(11)	$	50,976
Corporate debt	136,045		1		(212)		135,834
	$	187,032	$	1	$	(223)	$	186,810

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE (Tables)

9 Months Ended

Sep. 30, 2020

Receivables [Abstract]

Summary of receivable

Receivables

(in thousands)	September 30, 2020		December 31, 2019
Accounts receivable	$	137,953	$	199,720
Unbilled receivables	208,823		180,219
Long-term unbilled receivables	108,456		121,736
	$	455,232	$	501,675

Summary of unbilled receivables

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

(Dollars in thousands)	September 30, 2020
1 year or less	$	208,823	66	%
1-2 years	91,325		29	%
2-5 years	17,131		5	%
	$	317,279	100	%

Summary of unbilled receivables based upon contract effective date

Unbilled receivables based upon contract effective date:

(Dollars in thousands)	September 30, 2020
2020	$	105,380	33	%
2019	99,875		32	%
2018	39,281		12	%
2017	37,824		12	%
2016 and prior	34,919		11	%
	$	317,279	100	%

Schedules of concentration of risk, by risk factor

Major clients

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

	September 30, 2020		December 31, 2019
Client A	11	%	*

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

Summary of contract assets and deferred revenue

Contract assets and deferred revenue

(in thousands)	September 30, 2020		December 31, 2019
Contract assets (1)	$	8,104	$	5,558
Long-term contract assets (2)	5,579		5,420
	13,683		10,978
Deferred revenue	181,680		190,080
Long-term deferred revenue (3)	6,673		5,407
	$	188,353	$	195,487

(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.

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DEFERRED COMMISSIONS (Tables)

9 Months Ended

Sep. 30, 2020

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Schedule of impairment of deferred contract costs

(in thousands)	September 30, 2020		December 31, 2019
Deferred commissions (1)	$	87,992	$	85,314

(1) Included in other long-term assets.

Schedule of amortization of deferred contract costs

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Amortization of deferred commissions (1)	$	8,861	$	8,193	$	24,922	$	22,372

(1) Included in selling and marketing expense

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DEBT (Tables)

9 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

Schedule of debt

Proceeds from the Notes and Capped Call Transactions:

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

Contractual obligation, fiscal year maturity schedule

Net carrying amount of the liability component:

(in thousands)	September 30, 2020
Principal	$	600,000
Unamortized debt discount	(75,061)
Unamortized issuance costs	(11,145)
	$	513,794

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

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

(1) Net of issuance costs and taxes.

Interest expense related to the Notes:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Contractual interest expense (0.75% coupon)	$	1,125	$	—	$	2,700	$	—
Amortization of debt discount (1)	3,807		—		9,060		—
Amortization of issuance costs (1)	565		—		1,345		—
	$	5,497	$	—	$	13,105	$	—

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

Future payments of principal and contractual interest:

	September 30, 2020
(in thousands)	Principal		Interest		Total
2020	$	—	$	—	$	—
2021	—		4,500		4,500
2022	—		4,500		4,500
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	19,488	$	619,488

Schedule of derivative instruments

Change in value of Capped Call Transactions:

(in thousands)	Nine Months Ended September 30, 2020
Value at issuance	$	51,900
Fair value adjustment	19,816
Balance as of September 30,	$	71,716

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Assets and liabilities measured at fair value

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

	September 30, 2020								December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents (1)	$	212,917	$	—	$	—	$	212,917	$	—	$	—	$	—	$	—
Marketable securities	$	—	$	186,810	$	—	$	186,810	$	—	$	—	$	—	$	—
Capped Call Transactions (2) (3)	$	—	$	71,716	$	—	$	71,716	$	—	$	—	$	—	$	—
Venture investments (2) (4)	$	—	$	—	$	7,927	$	7,927	$	—	$	—	$	4,871	$	4,871

(1) Investments in money market funds. (2) Included in other long-term assets. (3) See "6. Debt" for additional information. (4) Investments in privately-held companies.

Fair value, assets measured on recurring basis, unobservable input reconciliation

Change in venture investments:

(in thousands)	Nine Months Ended September 30, 2020
December 31, 2019	$	4,871
New investments	3,006
Sales of investments	(1,424)
Fair value adjustment	1,474
September 30, 2020	$	7,927

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REVENUE (Tables)

9 Months Ended

Sep. 30, 2020

Revenue from Contract with Customer [Abstract]

Schedule of revenue by geographic location

Geographic revenue

	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)	2020				2019				2020				2019
U.S.	$	120,971	53	%	$	123,447	57	%	$	436,199	61	%	$	347,120	55	%
Other Americas	10,737		5	%	11,748		5	%	35,009		5	%	49,450		8	%
United Kingdom (“U.K.”)	25,150		11	%	23,034		11	%	68,246		9	%	64,269		10	%
Europe (excluding U.K.), Middle East, and Africa	39,656		18	%	34,761		16	%	106,472		15	%	102,342		16	%
Asia-Pacific	29,437		13	%	23,713		11	%	72,991		10	%	71,660		11	%
	$	225,951	100	%	$	216,703	100	%	$	718,917	100	%	$	634,841	100	%

Schedule of revenue streams

Revenue streams

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Perpetual license	$	3,852	$	9,016	$	16,568	$	43,286
Term license	35,932		48,989		170,455		122,257
Revenue recognized at a point in time	39,784		58,005		187,023		165,543
Maintenance	74,670		70,371		220,587		207,406
Pega Cloud	54,776		35,153		147,080		94,610
Consulting	56,721		53,174		164,227		167,282
Revenue recognized over time	186,167		158,698		531,894		469,298
	$	225,951	$	216,703	$	718,917	$	634,841

(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Pega Cloud	$	54,776	$	35,153	$	147,080	$	94,610
Maintenance	74,670		70,371		220,587		207,406
Term license	35,932		48,989		170,455		122,257
Subscription (1)	165,378		154,513		538,122		424,273
Perpetual license	3,852		9,016		16,568		43,286
Consulting	56,721		53,174		164,227		167,282
	$	225,951	$	216,703	$	718,917	$	634,841

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

Revenue for remaining performance obligations expected to be recognized

	September 30, 2020
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	8,708	$	50,788	$	170,643	$	211,661	$	14,977	$	456,777	54	%
1-2 years	1,700		5,341		40,631		157,500		2,042		207,214		25	%
2-3 years	—		7,052		18,277		93,283		770		119,382		14	%
Greater than 3 years	—		4		9,597		44,363		653		54,617		7	%
	$	10,408	$	63,185	$	239,148	$	506,807	$	18,442	$	837,990	100	%

	September 30, 2019
(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total
1 year or less	$	7,689	$	25,948	$	158,220	$	133,785	$	13,145	$	338,787	56	%
1-2 years	853		3,798		18,590		105,081		863		129,185		21	%
2-3 years	1,306		591		8,323		72,915		841		83,976		14	%
Greater than 3 years	—		85		4,959		51,591		—		56,635		9	%
	$	9,848	$	30,422	$	190,092	$	363,372	$	14,849	$	608,583	100	%

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STOCK-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

Summary of stock based compensation expense

Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Cost of revenue	$	5,100	$	4,787	$	15,636	$	14,216
Selling and marketing	12,658		8,317		33,968		24,055
Research and development	5,765		4,858		17,066		13,990
General and administrative	4,402		3,884		10,085		7,981
	$	27,925	$	21,846	$	76,755	$	60,242
Income tax benefit	$	(5,604)	$	(4,430)	$	(15,293)	$	(12,226)

Summary of stock based compensation award granted

Grants

The Company granted the following stock-based compensation awards:

	Nine Months Ended September 30, 2020
(in thousands)	Shares	Total Fair Value
RSUs	1,026	$	92,456
Non-qualified stock options	1,886	$	44,505
Common stock	6	$	701

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INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Summary of benefit from income taxes and discrete tax items

Effective income tax rate

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020			2019
(Benefit from) income taxes	$	(25,053)	$	(17,520)	$	(61,182)		$	(43,158)
Effective income tax rate					48		%	32		%

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(LOSS) PER SHARE (Tables)

9 Months Ended

Sep. 30, 2020

Earnings Per Share [Abstract]

Summary of basic and diluted earnings per share

Calculation of the basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2020		2019		2020		2019
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding	80,537		79,200		80,191		78,928
(Loss) per share, basic	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Net (loss)	$	(19,267)	$	(30,338)	$	(65,379)	$	(91,351)
Weighted-average common shares outstanding, assuming dilution (1) (2)	80,537		79,200		80,191		78,928
(Loss) per share, diluted	$	(0.24)	$	(0.38)	$	(0.82)	$	(1.16)
Outstanding anti-dilutive stock options and RSUs (3)	6,622		5,953		6,166		5,923

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

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

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

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MARKETABLE SECURITIES - Schedule of Marketable Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Marketable Securities [Line Items]
Amortized Cost	$ 187,032
Unrealized Gains	1
Unrealized Losses	(223)
Fair Value	186,810	$ 0
Government debt
Marketable Securities [Line Items]
Amortized Cost	50,987
Unrealized Gains	0
Unrealized Losses	(11)
Fair Value	50,976
Corporate debt
Marketable Securities [Line Items]
Amortized Cost	136,045
Unrealized Gains	1
Unrealized Losses	(212)
Fair Value	$ 135,834

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MARKETABLE SECURITIES - Additional Information (Details)	Sep. 30, 2020
Investments, Debt and Equity Securities [Abstract]
Marketable debt security weighted-average remaining maturity	1 year 3 months 18 days

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE - Summary of Receivable (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Receivables [Abstract]
Accounts receivable	$ 137,953	$ 199,720
Unbilled receivables	208,823	180,219
Long-term unbilled receivables	108,456	121,736
Total receivables	$ 455,232	$ 501,675

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE - Summary of Unbilled Receivables (Details) $ in Thousands	Sep. 30, 2020 USD ($)
Receivables [Abstract]
1 year or less	$ 208,823
1-2 years	91,325
2-5 years	17,131
Total	$ 317,279
Percentage of unbilled receivables, 1 year or less	66.00%
Percentage of unbilled receivables, 1-2 years	29.00%
Percentage of unbilled receivables, 2-5 years	5.00%
Total percentage of unbilled receivables	100.00%

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE- Contract Effective (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2020 USD ($)
Receivables [Abstract]
2020	$ 105,380
2019	99,875
2018	39,281
2017	37,824
2016 and prior	34,919
Unbilled revenue total	$ 317,279
2020	33.00%
2019	32.00%
2018	12.00%
2017	12.00%
2016 and prior	11.00%
Total percentage of unbilled revenue	100.00%
Revenue recognized during the period that was included in deferred revenue	$ 170,500

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE - Summary of Major Clients (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Concentration Risk [Line Items]
Percent of total revenue	100.00%	100.00%	100.00%	100.00%
Client A | Credit concentration risk | Accounts receivable
Concentration Risk [Line Items]
Percent of total revenue			11.00%

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RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE - Summary of Contract Assets and Deferred Revenue (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Receivables [Abstract]
Contract assets	$ 8,104	$ 5,558
Long-term contract assets	5,579	5,420
Total contract assets	13,683	10,978
Deferred revenue	181,680	190,080
Long-term deferred revenue	6,673	5,407
Total deferred revenue	$ 188,353	$ 195,487

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DEFERRED COMMISSIONS - Schedule of Impairment of Deferred Commissions (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Deferred commissions	$ 87,992	$ 85,314

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DEFERRED COMMISSIONS - Schedule of Amortization of Deferred Commissions (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Amortization of deferred commissions	$ 8,861	$ 8,193	$ 24,922	$ 22,372

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DEBT - Convertible Senior Notes Narrative (Details)		1 Months Ended	9 Months Ended
	Mar. 01, 2020	Feb. 29, 2020 USD ($) $ / shares	Sep. 30, 2020 tradingDay
Debt Instrument [Line Items]
Redemption percentage	100.00%
On or after March 1, 2023
Debt Instrument [Line Items]
Redemption percentage			100.00%
Convertible debt
Debt Instrument [Line Items]
Face amount | $		$ 600,000,000
Interest rate		0.75%
Initial conversion rate		7.4045
Debt conversion amount | $		$ 1,000
Initial conversion price (in dollars per share) | $ / shares		$ 135.05
Debt issuance costs | $		$ (14,527,000)
Convertible debt | After the calendar quarter ending on June 30, 2020
Debt Instrument [Line Items]
Threshold percentage of stock price trigger			130.00%
Threshold trading days			20
Threshold consecutive trading days			30
Convertible debt | Measurement period
Debt Instrument [Line Items]
Threshold percentage of stock price trigger			98.00%
Threshold consecutive trading days			5
Threshold consecutive business days			5
Convertible debt | On or after March 1, 2023
Debt Instrument [Line Items]
Threshold percentage of stock price trigger			130.00%
Threshold trading days			20
Threshold consecutive trading days			30

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DEBT - Net Proceeds Amount (Details) - USD ($) $ in Thousands	1 Months Ended
	Feb. 29, 2020	Sep. 30, 2020	Dec. 31, 2019
Debt Instrument [Line Items]
Less: Capped Call Transactions		$ (71,716)	$ 0
Convertible debt
Debt Instrument [Line Items]
Principal	$ 600,000	$ 600,000
Less: issuance costs	(14,527)
Less: Capped Call Transactions	(51,900)
Net proceeds	$ 533,573

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DEBT - Net Carrying Amount (Details) - Convertible debt - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Feb. 29, 2020
Debt Instrument [Line Items]
Principal	$ 600,000	$ 600,000
Unamortized debt discount	(75,061)
Unamortized issuance costs	(11,145)
Principal, net	513,794
Conversion options	$ 61,604

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DEBT - Interest Expense (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended
	Feb. 29, 2020	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Debt Instrument [Line Items]
Effective interest rate		4.31%	4.31%	4.31%	4.31%
Convertible debt
Debt Instrument [Line Items]
Interest rate	0.75%
Contractual interest expense (0.75% coupon)		$ 1,125	$ 0	$ 2,700	$ 0
Amortization of debt discount		3,807	0	9,060	0
Amortization of issuance costs		565	0	1,345	0
Interest expense		$ 5,497	$ 0	$ 13,105	$ 0

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DEBT - Future Payments of Principal and Contractual Interest (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Feb. 29, 2020
Interest
Interest expense, total due	$ 19,488
Convertible debt
Principal
2020	0
2021	0
2022	0
2023	0
2024	0
2025	600,000
Principal, total due	600,000	$ 600,000
Interest
2020	0
2021	4,500
2022	4,500
2023	4,500
2024	4,500
2025	1,488
Total
2020	0
2021	4,500
2022	4,500
2023	4,500
2024	4,500
2025	601,488
Principal and interest, total due	$ 619,488

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DEBT - Capped Call Transactions (Details) $ in Thousands, shares in Millions	1 Months Ended	7 Months Ended
	Feb. 29, 2020 USD ($) $ / derivative shares	Sep. 30, 2020 USD ($)
Debt Disclosure [Abstract]
Number of shares issuable upon conversion | shares	4.4
Cap price | $ / derivative	196.44
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Value at issuance		$ 51,900
Fair value adjustment		19,816
Ending balance	$ 51,900	$ 71,716

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DEBT - Credit Facility (Details)	1 Months Ended
	Oct. 31, 2020 USD ($)	Dec. 31, 2019 USD ($)
Debt Instrument [Line Items]
Remaining borrowing capacity		$ 0
PNC bank, national association | Subsequent Event
Debt Instrument [Line Items]
Minimum consolidated coverage ratio	3.5
Credit agreement | PNC bank, national association | Subsequent Event
Debt Instrument [Line Items]
Minimum required cash and investments held	$ 200,000,000
Maximum consolidated net leverage ratio	3.5
Line of Credit | PNC bank, national association | Revolving credit facility | Subsequent Event
Debt Instrument [Line Items]
Revolving credit agreement term	5 years
Senior notes	$ 100,000,000
Increase in aggregate commitment amount	$ 200,000,000

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Fair Value Assets
Marketable securities	$ 186,810	$ 0
Capped call transactions	71,716	0
Cash equivalents
Fair Value Assets
Cash equivalents	212,917	0
Venture investments
Fair Value Assets
Venture investments	7,927	4,871
Level 1
Fair Value Assets
Marketable securities	0	0
Capped call transactions	0	0
Level 1 | Cash equivalents
Fair Value Assets
Cash equivalents	212,917	0
Level 1 | Venture investments
Fair Value Assets
Venture investments	0	0
Level 2
Fair Value Assets
Marketable securities	186,810	0
Capped call transactions	71,716	0
Level 2 | Cash equivalents
Fair Value Assets
Cash equivalents	0	0
Level 2 | Venture investments
Fair Value Assets
Venture investments	0	0
Level 3
Fair Value Assets
Marketable securities	0	0
Capped call transactions	0	0
Level 3 | Cash equivalents
Fair Value Assets
Cash equivalents	0	0
Level 3 | Venture investments
Fair Value Assets
Venture investments	$ 7,927	$ 4,871

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FAIR VALUE MEASUREMENTS - Change in Investment in Privately Held Companies (Details) - USD ($)	9 Months Ended
	Sep. 30, 2020	Feb. 29, 2020
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Convertible debt fair value	$ 680,000,000	$ 515,900,000
Convertible debt
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Face amount		$ 600,000,000
Privately held investment
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning balance	4,871,000
New investments	3,006,000
Sales of investments	(1,424,000)
Fair value adjustment	1,474,000
Ending balance	$ 7,927,000

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REVENUE - Geographic Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Disaggregation of Revenue [Line Items]
Revenue	$ 225,951	$ 216,703	$ 718,917	$ 634,841
Percent of total revenue	100.00%	100.00%	100.00%	100.00%
U.S.
Disaggregation of Revenue [Line Items]
Revenue	$ 120,971	$ 123,447	$ 436,199	$ 347,120
Other Americas
Disaggregation of Revenue [Line Items]
Revenue	10,737	11,748	35,009	49,450
United Kingdom (“U.K.”)
Disaggregation of Revenue [Line Items]
Revenue	25,150	23,034	68,246	64,269
Europe (excluding U.K.), Middle East, and Africa
Disaggregation of Revenue [Line Items]
Revenue	39,656	34,761	106,472	102,342
Asia-Pacific
Disaggregation of Revenue [Line Items]
Revenue	$ 29,437	$ 23,713	$ 72,991	$ 71,660
Total revenue | U.S.
Disaggregation of Revenue [Line Items]
Percent of total revenue	53.00%	57.00%	61.00%	55.00%
Total revenue | Other Americas
Disaggregation of Revenue [Line Items]
Percent of total revenue	5.00%	5.00%	5.00%	8.00%
Total revenue | United Kingdom (“U.K.”)
Disaggregation of Revenue [Line Items]
Percent of total revenue	11.00%	11.00%	9.00%	10.00%
Total revenue | Europe (excluding U.K.), Middle East, and Africa
Disaggregation of Revenue [Line Items]
Percent of total revenue	18.00%	16.00%	15.00%	16.00%
Total revenue | Asia-Pacific
Disaggregation of Revenue [Line Items]
Percent of total revenue	13.00%	11.00%	10.00%	11.00%

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REVENUE - Revenue Stream (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Disaggregation of Revenue [Line Items]
Revenue	$ 225,951	$ 216,703	$ 718,917	$ 634,841
Revenue recognized at a point in time
Disaggregation of Revenue [Line Items]
Revenue	39,784	58,005	187,023	165,543
Revenue recognized over time
Disaggregation of Revenue [Line Items]
Revenue	186,167	158,698	531,894	469,298
Perpetual license | Revenue recognized at a point in time
Disaggregation of Revenue [Line Items]
Revenue	3,852	9,016	16,568	43,286
Term license | Revenue recognized at a point in time
Disaggregation of Revenue [Line Items]
Revenue	35,932	48,989	170,455	122,257
Maintenance
Disaggregation of Revenue [Line Items]
Revenue	74,670	70,371	220,587	207,406
Maintenance | Revenue recognized over time
Disaggregation of Revenue [Line Items]
Revenue	74,670	70,371	220,587	207,406
Pega Cloud
Disaggregation of Revenue [Line Items]
Revenue	54,776	35,153	147,080	94,610
Pega Cloud | Revenue recognized over time
Disaggregation of Revenue [Line Items]
Revenue	54,776	35,153	147,080	94,610
Subscription
Disaggregation of Revenue [Line Items]
Revenue	165,378	154,513	538,122	424,273
Consulting
Disaggregation of Revenue [Line Items]
Revenue	56,721	53,174	164,227	167,282
Consulting | Revenue recognized over time
Disaggregation of Revenue [Line Items]
Revenue	$ 56,721	$ 53,174	$ 164,227	$ 167,282

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REVENUE - Performance Obligations (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Sep. 30, 2019
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 837,990	$ 608,583
Revenue remaining performance obligation, percentage	100.00%	100.00%
1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 456,777	$ 338,787
Revenue remaining performance obligation, percentage	54.00%	56.00%
1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 207,214	$ 129,185
Revenue remaining performance obligation, percentage	25.00%	21.00%
2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 119,382	$ 83,976
Revenue remaining performance obligation, percentage	14.00%	14.00%
Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 54,617	$ 56,635
Revenue remaining performance obligation, percentage	7.00%	9.00%
Perpetual license
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 10,408	$ 9,848
Perpetual license | 1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	8,708	7,689
Perpetual license | 1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	1,700	853
Perpetual license | 2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	0	1,306
Perpetual license | Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	0	0
Term license
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	63,185	30,422
Term license | 1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	50,788	25,948
Term license | 1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	5,341	3,798
Term license | 2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	7,052	591
Term license | Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	4	85
Maintenance
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	239,148	190,092
Maintenance | 1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	170,643	158,220
Maintenance | 1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	40,631	18,590
Maintenance | 2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	18,277	8,323
Maintenance | Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	9,597	4,959
Pega Cloud
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	506,807	363,372
Pega Cloud | 1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	211,661	133,785
Pega Cloud | 1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	157,500	105,081
Pega Cloud | 2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	93,283	72,915
Pega Cloud | Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	44,363	51,591
Consulting
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	18,442	14,849
Consulting | 1 year or less
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	14,977	13,145
Consulting | 1-2 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	2,042	863
Consulting | 2-3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	770	841
Consulting | Greater than 3 years
Disaggregation of Revenue [Line Items]
Revenue remaining performance obligation	$ 653	$ 0

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REVENUE - Performance Obligations - Expected Timing (Details)	Sep. 30, 2020	Sep. 30, 2019
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Expected timing of satisfaction		3 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Expected timing of satisfaction		1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Expected timing of satisfaction	3 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Expected timing of satisfaction	1 year	2 years
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Expected timing of satisfaction

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STOCK-BASED COMPENSATION - Summary of Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 27,925	$ 21,846	$ 76,755	$ 60,242
Income tax benefit	(5,604)	(4,430)	(15,293)	(12,226)
Cost of revenue
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	5,100	4,787	15,636	14,216
Selling and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	12,658	8,317	33,968	24,055
Research and development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	5,765	4,858	17,066	13,990
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation before tax	$ 4,402	$ 3,884	$ 10,085	$ 7,981

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STOCK-BASED COMPENSATION - Additional Information (Details) $ in Millions	9 Months Ended
	Sep. 30, 2020 USD ($)
Share-based Payment Arrangement [Abstract]
Unrecognized stock-based compensation expense	$ 115.0
Weighted-average period of recognition of unrecognized stock-based compensation expense (in years)	2 years 2 months 12 days

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STOCK-BASED COMPENSATION - Summary of Stock-Based Compensation Awards Granted (Details) - Employees $ in Thousands	9 Months Ended
	Sep. 30, 2020 USD ($) shares
RSUs
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
RSUs (in shares) | shares	1,026,000
Total Fair Value | $	$ 92,456
Non-qualified stock options
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Options granted (in shares) | shares	1,886,000
Total Fair Value | $	$ 44,505
Common Stock
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
RSUs (in shares) | shares	6,000
Total Fair Value | $	$ 701

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Income Tax Disclosure [Abstract]
(Benefit from) income taxes	$ (25,053)	$ (17,520)	$ (61,182)	$ (43,158)
Effective income tax rate			48.00%	32.00%

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(LOSS) PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2020	Sep. 30, 2019	Feb. 29, 2020
Earning per share reconciliation
Net (loss)	$ (19,267)	$ (20,740)	$ (25,372)	$ (30,338)	$ (32,296)	$ (28,717)	$ (65,379)	$ (91,351)
Weighted-average common shares outstanding (in shares)	80,537			79,200			80,191	78,928
(Loss) per share, basic (in dollars per share)	$ (0.24)			$ (0.38)			$ (0.82)	$ (1.16)
Weighted-average common shares outstanding, assuming dilution (in shares)	80,537			79,200			80,191	78,928
(Loss) per share, diluted (in dollars per share)	$ (0.24)			$ (0.38)			$ (0.82)	$ (1.16)
Outstanding anti-dilutive stock options and RSUs (in shares)	6,622			5,953			6,166	5,923
Convertible debt
Earning per share reconciliation
Initial conversion price (in dollars per share)									$ 135.05