PEGASYSTEMS INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
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x
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended March 31, 2019
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OR
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¨
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number: 1-11859
____________________
PEGASYSTEMS INC.
(Exact name of registrant as specified in its charter)
____________________
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Massachusetts
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04-2787865
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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One Rogers Street, Cambridge, MA
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02142-1209
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(Address of principal executive offices)
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(Zip Code)
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(617) 374-9600
(Registrant’s telephone number, including area code)
____________________
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.
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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Emerging growth company
¨
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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
x
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, $.01 par value per share
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PEGA
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NASDAQ Global Select Market
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There were
78,908,093
shares of the Registrant’s common stock, $0.01 par value per share, outstanding on
May 1, 2019
.
PEGASYSTEMS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
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Item 1. Unaudited Condensed Consolidated Financial Statements
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Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
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Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
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Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2019 and 2018
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Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018
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Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
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Notes to Unaudited Condensed Consolidated Financial Statements
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4. Controls and Procedures
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PART II - OTHER INFORMATION
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Item 1A. Risk Factors
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6. Exhibits
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Signature
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2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31, 2019
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December 31, 2018
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||||||
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Assets
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|||||||
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Current assets:
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|||||||
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Cash and cash equivalents
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$
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110,367
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$
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114,422
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Marketable securities
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91,804
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93,001
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||
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Total cash, cash equivalents, and marketable securities
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202,171
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207,423
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|||
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Accounts receivable
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135,352
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180,872
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Unbilled receivables
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161,480
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172,656
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Other current assets
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63,731
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49,684
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||
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Total current assets
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562,734
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610,635
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|||
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Long-term unbilled receivables
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130,494
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151,237
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Goodwill
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72,898
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72,858
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Other long-term assets
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190,433
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147,823
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Total assets
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$
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956,559
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$
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982,553
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Liabilities and stockholders’ equity
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|||||||
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Current liabilities:
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|||||||
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Accounts payable
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$
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11,559
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$
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16,487
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Accrued expenses
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40,947
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45,506
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||
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Accrued compensation and related expenses
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56,349
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84,671
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Deferred revenue
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180,845
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185,145
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||
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Other current liabilities
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12,447
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—
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|||
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Total current liabilities
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302,147
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331,809
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|||
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Operating lease liabilities
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45,325
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—
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|||
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Deferred income tax liabilities
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8,319
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6,939
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Other long-term liabilities
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12,339
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22,274
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Total liabilities
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368,130
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361,022
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Stockholders’ equity:
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|||||||
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Preferred stock, 1,000 shares authorized; none issued
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—
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—
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|||
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Common stock, 200,000 shares authorized; 78,896 and 78,526 shares issued and outstanding at
March 31, 2019 and December 31, 2018, respectively
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789
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785
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Additional paid-in capital
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119,182
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123,205
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Retained earnings
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479,779
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510,863
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Accumulated other comprehensive loss
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(11,321
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)
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(13,322
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)
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Total stockholders’ equity
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588,429
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621,531
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|||
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Total liabilities and stockholders’ equity
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$
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956,559
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$
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982,553
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See notes to unaudited condensed consolidated financial statements.
3
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three Months Ended
March 31, |
|||||||
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2019
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2018
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||||||
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Revenue
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|||||||
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Software license
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$
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63,264
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$
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87,773
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Maintenance
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67,706
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64,525
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|||
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Services
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81,576
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82,884
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|||
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Total revenue
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212,546
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235,182
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|||
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Cost of revenue
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|||||||
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Software license
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1,378
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1,255
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|||
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Maintenance
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6,335
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6,082
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|||
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Services
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66,724
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68,277
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|||
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Total cost of revenue
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74,437
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75,614
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|||
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Gross profit
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138,109
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159,568
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|||
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Operating expenses
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|||||||
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Selling and marketing
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108,865
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88,383
|
|
|||
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Research and development
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50,596
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46,785
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|||
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General and administrative
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12,676
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16,464
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|||
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Total operating expenses
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172,137
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151,632
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|
|||
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(Loss) income from operations
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(34,028
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)
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7,936
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|||
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Foreign currency transaction loss
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(3,712
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)
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(1,085
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)
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|||
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Interest income, net
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723
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764
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|||
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Other income, net
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—
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363
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|||
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(Loss) income before benefit from income taxes
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(37,017
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)
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7,978
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|||
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Benefit from income taxes
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(8,300
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)
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(4,222
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)
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Net (loss) income
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$
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(28,717
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)
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$
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12,200
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(Loss) earnings per share
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|||||||
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Basic
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$
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(0.37
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)
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$
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0.16
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Diluted
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$
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(0.37
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)
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$
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0.15
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Weighted-average number of common shares outstanding
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|||||||
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Basic
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78,584
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78,236
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|||
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Diluted
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78,584
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83,102
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|||
See notes to unaudited condensed consolidated financial statements.
4
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
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Three Months Ended
March 31, |
|||||||
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2019
|
2018
|
||||||
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Net (loss) income
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$
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(28,717
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)
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$
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12,200
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Other comprehensive income, net of tax
|
|||||||
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Unrealized gain (loss) on available-for-sale marketable securities, net of tax
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374
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(188
|
)
|
|||
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Foreign currency translation adjustments
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1,627
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|
4,450
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|
|||
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Total other comprehensive income, net of tax
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2,001
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|
4,262
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|
|||
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Comprehensive (loss) income
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$
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(26,716
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)
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$
|
16,462
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|
|
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) Income
|
Total
Stockholders’ Equity
|
||||||||||||||||||
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Number
of Shares |
Amount
|
|||||||||||||||||||||
|
December 31, 2017
|
78,081
|
|
$
|
781
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|
$
|
152,097
|
|
$
|
509,697
|
|
$
|
(6,705
|
)
|
$
|
655,870
|
|
|||||
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Repurchase of common stock
|
(101
|
)
|
(1
|
)
|
(5,688
|
)
|
—
|
|
—
|
|
(5,689
|
)
|
||||||||||
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Issuance of common stock for share-based compensation plans
|
566
|
|
5
|
|
(15,556
|
)
|
—
|
|
—
|
|
(15,551
|
)
|
||||||||||
|
Stock-based compensation
|
—
|
|
—
|
|
15,109
|
|
—
|
|
—
|
|
15,109
|
|
||||||||||
|
Cash dividends declared ($0.12 per share)
|
—
|
|
—
|
|
—
|
|
(2,355
|
)
|
—
|
|
(2,355
|
)
|
||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
4,262
|
|
4,262
|
|
||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
12,200
|
|
—
|
|
12,200
|
|
||||||||||
|
March 31, 2018
|
78,546
|
|
$
|
785
|
|
$
|
145,962
|
|
$
|
519,542
|
|
$
|
(2,443
|
)
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$
|
663,846
|
|
|||||
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December 31, 2018
|
78,526
|
|
785
|
|
123,205
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|
510,863
|
|
(13,322
|
)
|
621,531
|
|
||||||||||
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Repurchase of common stock
|
(144
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)
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(1
|
)
|
(7,586
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)
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—
|
|
—
|
|
(7,587
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)
|
||||||||||
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Issuance of common stock for share-based compensation plans
|
514
|
|
5
|
|
(14,843
|
)
|
—
|
|
—
|
|
(14,838
|
)
|
||||||||||
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Stock-based compensation
|
—
|
|
—
|
|
18,406
|
|
—
|
|
—
|
|
18,406
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|
||||||||||
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Cash dividends declared ($0.12 per share)
|
—
|
|
—
|
|
—
|
|
(2,367
|
)
|
—
|
|
(2,367
|
)
|
||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
2,001
|
|
2,001
|
|
||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(28,717
|
)
|
|
|
(28,717
|
)
|
||||||||||
|
March 31, 2019
|
78,896
|
|
$
|
789
|
|
$
|
119,182
|
|
$
|
479,779
|
|
$
|
(11,321
|
)
|
$
|
588,429
|
|
|||||
See notes to unaudited condensed consolidated financial statements.
6
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Three Months Ended
March 31, |
|||||||
|
2019
|
2018
|
||||||
|
Operating activities:
|
|||||||
|
Net (loss) income
|
$
|
(28,717
|
)
|
$
|
12,200
|
|
|
|
Adjustments to reconcile net (loss) income to cash provided by operating activities:
|
|||||||
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Stock-based compensation
|
18,350
|
|
15,109
|
|
|||
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Amortization and depreciation
|
18,774
|
|
10,322
|
|
|||
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Foreign currency transaction loss
|
3,712
|
|
1,085
|
|
|||
|
Other non-cash
|
1,471
|
|
1,137
|
|
|||
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Change in operating assets and liabilities, net
|
9,113
|
|
15,802
|
|
|||
|
Cash provided by operating activities
|
22,703
|
|
55,655
|
|
|||
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Investing activities:
|
|
|
|||||
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Purchases of investments
|
(7,224
|
)
|
(35,204
|
)
|
|||
|
Proceeds from maturities and called investments
|
8,548
|
|
5,995
|
|
|||
|
Other
|
(2,790
|
)
|
(2,069
|
)
|
|||
|
Cash used in investing activities
|
(1,466
|
)
|
(31,278
|
)
|
|||
|
Financing activities:
|
|||||||
|
Dividend payments to shareholders
|
(2,363
|
)
|
(2,344
|
)
|
|||
|
Common stock repurchases
|
(23,224
|
)
|
(20,708
|
)
|
|||
|
Cash used in financing activities
|
(25,587
|
)
|
(23,052
|
)
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
295
|
|
2,186
|
|
|||
|
Net (decrease) increase in cash and cash equivalents
|
(4,055
|
)
|
3,511
|
|
|||
|
Cash and cash equivalents, beginning of period
|
114,422
|
|
162,279
|
|
|||
|
Cash and cash equivalents, end of period
|
$
|
110,367
|
|
$
|
165,790
|
|
|
See notes to unaudited condensed consolidated financial statements.
7
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 and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended
December 31, 2018
.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year
2019
.
2. NEW ACCOUNTING PRONOUNCEMENTS
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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 amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codifications 842 “Leases” (“ASC 842”) using the modified retrospective method, reflecting any cumulative effect as an adjustment to equity. Results for reporting periods beginning on or after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840 “Leases”.
The Company elected the permitted practical expedients to not reassess the following related to leases that commenced before the effective date of ASC 842: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Upon adoption, the Company recorded right of use assets of
$41.8 million
and lease liabilities of
$54.2 million
. The difference between the value of the right of use assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of January 1, 2019.
See Note 9. “Leases” for additional information.
3. MARKETABLE SECURITIES
|
March 31, 2019
|
|||||||||||||||
|
(in thousands)
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
|||||||||||
|
Municipal bonds
|
$
|
42,693
|
|
$
|
86
|
|
$
|
(20
|
)
|
$
|
42,759
|
|
|||
|
Corporate bonds
|
48,966
|
|
142
|
|
(63
|
)
|
49,045
|
|
|||||||
|
$
|
91,659
|
|
$
|
228
|
|
$
|
(83
|
)
|
$
|
91,804
|
|
||||
|
December 31, 2018
|
|||||||||||||||
|
(in thousands)
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
|||||||||||
|
Municipal bonds
|
$
|
44,802
|
|
$
|
13
|
|
$
|
(110
|
)
|
$
|
44,705
|
|
|||
|
Corporate bonds
|
48,499
|
|
23
|
|
(226
|
)
|
48,296
|
|
|||||||
|
$
|
93,301
|
|
$
|
36
|
|
$
|
(336
|
)
|
$
|
93,001
|
|
||||
As of
March 31, 2019
, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.
As of
March 31, 2019
, maturities of marketable securities ranged from
April 2019
to
August 2022
, with a weighted-average remaining maturity of approximately
1.4 years
.
8
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
|||||
|
Accounts receivable
|
$
|
135,352
|
|
$
|
180,872
|
|
|
|
Unbilled receivables
|
161,480
|
|
172,656
|
|
|||
|
Long-term unbilled receivables
|
130,494
|
|
151,237
|
|
|||
|
|
$
|
427,326
|
|
$
|
504,765
|
|
|
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
As of
March 31, 2019
and
December 31, 2018
, the allowance for doubtful accounts was not material.
Unbilled receivables are expected to be billed in the future as follows
:
|
(Dollars in thousands)
|
March 31, 2019
|
||||
|
1 year or less
|
$
|
161,480
|
|
55
|
%
|
|
1-2 years
|
86,496
|
|
30
|
%
|
|
|
2-5 years
|
43,998
|
|
15
|
%
|
|
|
$
|
291,974
|
|
100
|
%
|
|
Contract assets and deferred revenue
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
|||||
|
Contract assets
(1)
|
$
|
3,380
|
|
$
|
3,711
|
|
|
|
Long-term contract assets
(2)
|
1,818
|
|
2,543
|
|
|||
|
$
|
5,198
|
|
$
|
6,254
|
|
||
|
Deferred revenue
|
$
|
180,845
|
|
$
|
185,145
|
|
|
|
Long-term deferred revenue
(3)
|
5,866
|
|
5,344
|
|
|||
|
$
|
186,711
|
|
$
|
190,489
|
|
||
(1)
Included in other current assets.
(2)
Included in other long-term assets.
(3)
Included in other long-term liabilities.
Contract assets are amounts under client contracts where revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.
The change in deferred revenue in the
three months ended March 31, 2019
was primarily due to
$89.4 million
of revenue recognized, excluding the impact of netting contract assets and deferred revenue at the contract level, during the period that was included in deferred revenue at
December 31, 2018
, partially offset by new billings in advance of revenue recognition.
5. DEFERRED CONTRACT COSTS
The Company recognizes an asset for the incremental costs of obtaining a client contract, which primarily relate to sales commissions, if the Company expects to benefit from those costs for more than one year. Deferred costs are amortized on a straight-line basis over the benefit period, which is on average
5 years
.
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
|||||
|
Deferred contract costs
(1)
|
$
|
64,869
|
|
$
|
64,367
|
|
|
(1)
Included in other long-term assets.
|
Three Months Ended
March 31, |
|||||||
|
(in thousands)
|
2019
|
2018
|
|||||
|
Amortization of deferred contract costs
(1)
|
$
|
8,301
|
|
$
|
3,789
|
|
|
(1)
Included in selling and marketing expenses
.
9
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill was:
|
(in thousands)
|
Three Months Ended
March 31, |
||
|
2019
|
|||
|
Balance as of January 1,
|
$
|
72,858
|
|
|
Currency translation adjustments
|
40
|
|
|
|
Balance as of March 31,
|
$
|
72,898
|
|
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:
|
March 31, 2019
|
|||||||||||||
|
(in thousands)
|
Useful Lives
|
Cost
|
Accumulated
Amortization |
Net Book Value
(1)
|
|||||||||
|
Client-related intangibles
|
4-10 years
|
$
|
63,136
|
|
$
|
(52,839
|
)
|
$
|
10,297
|
|
|||
|
Technology
|
2-10 years
|
59,742
|
|
(51,730
|
)
|
8,012
|
|
||||||
|
Other
|
1 - 5 years
|
5,361
|
|
(5,361
|
)
|
—
|
|
||||||
|
$
|
128,239
|
|
$
|
(109,930
|
)
|
$
|
18,309
|
|
|||||
(1)
Included in other long-term assets.
|
December 31, 2018
|
|||||||||||||
|
(in thousands)
|
Useful Lives
|
Cost
|
Accumulated Amortization
|
Net Book Value
(1)
|
|||||||||
|
Client-related intangibles
|
4-10 years
|
$
|
63,115
|
|
$
|
(51,224
|
)
|
$
|
11,891
|
|
|||
|
Technology
|
2-10 years
|
59,742
|
|
(50,398
|
)
|
9,344
|
|
||||||
|
Other
|
1 - 5 years
|
5,361
|
|
(5,361
|
)
|
—
|
|
||||||
|
$
|
128,218
|
|
$
|
(106,983
|
)
|
$
|
21,235
|
|
|||||
(1)
Included in other long-term assets.
Amortization of intangible assets was:
|
(in thousands)
|
Three Months Ended
March 31, |
||||||
|
2019
|
2018
|
||||||
|
Cost of revenue
|
$
|
1,332
|
|
$
|
1,232
|
|
|
|
Selling and marketing
|
1,603
|
|
1,605
|
|
|||
|
$
|
2,935
|
|
$
|
2,837
|
|
||
7. ACCRUED EXPENSES
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
|||||
|
Outside professional services expenses
|
$
|
8,815
|
|
$
|
10,367
|
|
|
|
Income and other taxes
|
7,954
|
|
10,387
|
|
|||
|
Marketing and sales program expenses
|
8,318
|
|
5,860
|
|
|||
|
Dividends payable
|
2,367
|
|
2,363
|
|
|||
|
Employee-related expenses
|
5,432
|
|
3,536
|
|
|||
|
Other
|
8,061
|
|
12,993
|
|
|||
|
$
|
40,947
|
|
$
|
45,506
|
|
||
8. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, and investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
10
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 to minimize the use of unobservable inputs when determining fair value.
|
The Company’s cash equivalents are composed of money market funds and time deposits, which are classified within Level 1 and Level 2, respectively, in the fair value hierarchy. The Company’s marketable securities, which are classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s investments in privately-held companies are classified within Level 3 of the fair value hierarchy.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. There were no transfers between levels during the
three months ended March 31, 2019
.
The Company’s assets and liabilities measured at fair value on a recurring basis were:
|
March 31, 2019
|
|||||||||||||||
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||
|
Cash equivalents
|
$
|
12,401
|
|
$
|
10,062
|
|
$
|
—
|
|
$
|
22,463
|
|
|||
|
Marketable securities:
|
|||||||||||||||
|
Municipal bonds
|
$
|
—
|
|
$
|
42,759
|
|
$
|
—
|
|
$
|
42,759
|
|
|||
|
Corporate bonds
|
—
|
|
49,045
|
|
—
|
|
49,045
|
|
|||||||
|
Total marketable securities
|
$
|
—
|
|
$
|
91,804
|
|
$
|
—
|
|
$
|
91,804
|
|
|||
|
Investments in privately-held companies
(1)
|
$
|
—
|
|
$
|
—
|
|
$
|
3,390
|
|
$
|
3,390
|
|
|||
(1)
Included in other long-term assets.
|
December 31, 2018
|
|||||||||||||||
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||
|
Cash equivalents
|
$
|
10,155
|
|
$
|
10,000
|
|
$
|
—
|
|
$
|
20,155
|
|
|||
|
Marketable securities:
|
|||||||||||||||
|
Municipal bonds
|
$
|
—
|
|
$
|
44,705
|
|
$
|
—
|
|
$
|
44,705
|
|
|||
|
Corporate bonds
|
—
|
|
48,296
|
|
—
|
|
48,296
|
|
|||||||
|
Total marketable securities
|
$
|
—
|
|
$
|
93,001
|
|
$
|
—
|
|
$
|
93,001
|
|
|||
|
Investments in privately-held companies
(1)
|
$
|
—
|
|
$
|
—
|
|
$
|
3,390
|
|
$
|
3,390
|
|
|||
(1)
Included in other long-term assets.
For certain other financial instruments, including accounts receivable and accounts payable, the carrying value approximates fair value due to the relatively short maturity of these items.
9. LEASES
The Company’s leases are primarily for office space used in the ordinary course of business.
Accounting policy
All the Company’s leases are operating leases.
The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified.
Fixed lease costs are recognized on a straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. The Company combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease payments related to options to extend or renew the lease term, if the Company is reasonably certain it will exercise those options. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
11
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Expense
|
Three Months Ended
March 31, |
|||
|
(in thousands)
|
2019
|
||
|
Operating lease costs
|
$
|
4,300
|
|
|
Variable lease costs
(1)
|
1,321
|
|
|
|
$
|
5,621
|
|
|
(1)
Lease costs that are not fixed at lease commencement.
Right of use assets and lease liabilities
|
(in thousands)
|
March 31, 2019
|
||
|
Right of use assets
(1)
|
$
|
46,464
|
|
|
Lease liabilities
(2)
|
$
|
12,447
|
|
|
Long-term lease liabilities
|
$
|
45,325
|
|
(1)
An asset that represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.
(2)
Included in other current liabilities.
The weighted-average remaining lease term and discount rate for the Company’s leases were:
|
March 31, 2019
|
||
|
Weighted-average remaining lease term
|
4.3 years
|
|
|
Weighted-average discount rate
(1)
|
5.7
|
%
|
(1)
The rate implicit in the lease is not readily determinable in most of the Company’s leases, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Maturities of lease liabilities were:
|
(in thousands)
|
March 31, 2019
|
||
|
Remainder of 2019
|
$
|
11,324
|
|
|
2020
|
15,784
|
|
|
|
2021
|
13,764
|
|
|
|
2022
|
12,761
|
|
|
|
2023
|
11,604
|
|
|
|
Total lease payments
|
65,237
|
|
|
|
Less: imputed interest
(1)
|
(7,465
|
)
|
|
|
$
|
57,772
|
|
|
(1)
Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event.
As of
December 31, 2018
, the Company’s future minimum rental payments required under operating leases with noncancellable terms in excess of one year as determined prior to the adoption of ASC 842 were:
|
(in thousands)
|
Operating Leases
(1)
|
||
|
2019
|
$
|
15,993
|
|
|
2020
|
14,807
|
|
|
|
2021
|
13,262
|
|
|
|
2022
|
12,279
|
|
|
|
2023
|
11,084
|
|
|
|
$
|
67,425
|
|
|
(1)
Operating leases include future minimum rent payments, net of estimated sublease income for facilities that the Company has vacated pursuant to its restructuring activities.
12
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash flow information
|
Three Months Ended
March 31, |
||
|
(in thousands)
|
2019
|
|
|
Cash paid for leases
|
5,197
|
|
|
Right of use assets recognized for new leases (non-cash)
|
8,034
|
|
10. REVENUE
Geographic revenue
|
Three Months Ended
March 31, |
|||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||
|
U.S.
|
$
|
103,991
|
|
48
|
%
|
$
|
113,985
|
|
48
|
%
|
|
|
Other Americas
|
28,829
|
|
14
|
%
|
17,715
|
|
8
|
%
|
|||
|
United Kingdom (“U.K.”)
|
24,549
|
|
12
|
%
|
26,094
|
|
11
|
%
|
|||
|
Europe (excluding U.K.), Middle East, and Africa
|
34,186
|
|
16
|
%
|
31,826
|
|
14
|
%
|
|||
|
Asia-Pacific
|
20,991
|
|
10
|
%
|
45,562
|
|
19
|
%
|
|||
|
$
|
212,546
|
|
100
|
%
|
$
|
235,182
|
|
100
|
%
|
||
Revenue streams
|
Three Months Ended
March 31, |
|||||||
|
(in thousands)
|
2019
|
2018
|
|||||
|
Perpetual license
|
$
|
14,950
|
|
$
|
23,078
|
|
|
|
Term license
|
48,314
|
|
64,695
|
|
|||
|
Revenue recognized at a point in time
|
63,264
|
|
87,773
|
|
|||
|
Maintenance
|
67,706
|
|
64,525
|
|
|||
|
Cloud
|
27,758
|
|
15,582
|
|
|||
|
Consulting
|
53,818
|
|
67,302
|
|
|||
|
Revenue recognized over time
|
149,282
|
|
147,409
|
|
|||
|
$
|
212,546
|
|
$
|
235,182
|
|
||
|
(in thousands)
|
Three Months Ended
March 31, |
||||||
|
2019
|
2018
|
||||||
|
Term license
|
$
|
48,314
|
|
$
|
64,695
|
|
|
|
Cloud
|
27,758
|
|
15,582
|
|
|||
|
Maintenance
|
67,706
|
|
64,525
|
|
|||
|
Subscription
(1)
|
143,778
|
|
144,802
|
|
|||
|
Perpetual license
|
14,950
|
|
23,078
|
|
|||
|
Consulting
|
53,818
|
|
67,302
|
|
|||
|
$
|
212,546
|
|
$
|
235,182
|
|
||
(1)
Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
13
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Remaining performance obligations
Revenue recognition timing on existing contracts:
|
March 31, 2019
|
|||||||||||||||||||||||||
|
(Dollars in thousands)
|
Perpetual license
|
Term License
|
Maintenance
|
Cloud
|
Consulting
|
Total
|
|||||||||||||||||||
|
1 year or less
|
$
|
10,263
|
|
$
|
44,404
|
|
$
|
187,324
|
|
$
|
115,548
|
|
$
|
13,251
|
|
$
|
370,790
|
|
58
|
%
|
|||||
|
1-2 years
|
998
|
|
4,274
|
|
9,350
|
|
91,539
|
|
1,363
|
|
107,524
|
|
17
|
%
|
|||||||||||
|
2-3 years
|
2,180
|
|
756
|
|
4,438
|
|
71,509
|
|
473
|
|
79,356
|
|
13
|
%
|
|||||||||||
|
Greater than 3 years
|
—
|
|
135
|
|
2,008
|
|
72,742
|
|
27
|
|
74,912
|
|
12
|
%
|
|||||||||||
|
$
|
13,441
|
|
$
|
49,569
|
|
$
|
203,120
|
|
$
|
351,338
|
|
$
|
15,114
|
|
$
|
632,582
|
|
100
|
%
|
||||||
|
March 31, 2018
|
|||||||||||||||||||||||||
|
(Dollars in thousands)
|
Perpetual license
|
Term License
|
Maintenance
|
Cloud
|
Consulting
|
Total
|
|||||||||||||||||||
|
1 year or less
|
$
|
33,859
|
|
$
|
21,087
|
|
$
|
156,702
|
|
$
|
47,764
|
|
$
|
9,403
|
|
$
|
268,815
|
|
59
|
%
|
|||||
|
1-2 years
|
14,106
|
|
7,877
|
|
21,381
|
|
52,849
|
|
1,098
|
|
97,311
|
|
21
|
%
|
|||||||||||
|
2-3 years
|
1,204
|
|
5,634
|
|
4,924
|
|
37,844
|
|
—
|
|
49,606
|
|
11
|
%
|
|||||||||||
|
Greater than 3 years
|
382
|
|
853
|
|
1,825
|
|
40,478
|
|
—
|
|
43,538
|
|
9
|
%
|
|||||||||||
|
$
|
49,551
|
|
$
|
35,451
|
|
$
|
184,832
|
|
$
|
178,935
|
|
$
|
10,501
|
|
$
|
459,270
|
|
100
|
%
|
||||||
The above amounts include contracts that have an original expected duration of one year or less.
11. STOCK-BASED COMPENSATION
Expense
|
Three Months Ended
March 31, |
|||||||
|
(in thousands)
|
2019
|
2018
|
|||||
|
Cost of revenues
|
$
|
4,519
|
|
|
$
|
3,701
|
|
|
Selling and marketing
|
7,374
|
|
|
4,658
|
|
||
|
Research and development
|
4,560
|
|
|
3,637
|
|
||
|
General and administrative
|
1,897
|
|
|
3,113
|
|
||
|
$
|
18,350
|
|
|
$
|
15,109
|
|
|
|
Income tax benefit
|
$
|
(3,740
|
)
|
|
$
|
(3,141
|
)
|
The Company recognizes stock-based compensation using the accelerated recognition method, treating each vesting tranche as if it were an individual grant. As of
March 31, 2019
, the Company had
$114.1 million
of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested restricted stock units (“RSUs”) and stock options. These amounts are expected to be recognized over a weighted-average period of
2.3
years.
Grants
The Company granted the following stock-based compensation awards:
|
Three Months Ended
March 31, |
||||||
|
2019
|
||||||
|
(in thousands)
|
Shares
|
Total Fair Value
|
||||
|
RSUs
|
839
|
|
$
|
53,184
|
|
|
|
Non-qualified stock options
|
1,770
|
|
$
|
33,344
|
|
|
RSU vestings and stock option exercises
During the
three months ended March 31, 2019
,
0.5 million
shares of common stock were issued due to stock option exercises and RSU vestings under the Company’s stock-based compensation plans.
14
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. INCOME TAXES
Effective income tax rate
|
Three Months Ended
March 31, |
|||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||
|
Benefit from income taxes
|
$
|
(8,300
|
)
|
$
|
(4,222
|
)
|
|
|
Effective income tax rate
|
22
|
%
|
(53
|
)%
|
|||
During the
three months ended March 31, 2019
, the Company’s effective income tax rate changed primarily due to the
Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.
13. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method.
In periods of loss, all stock options and RSUs are excluded, as their inclusion would be anti-dilutive.
The calculation of the basic and diluted earnings per share was:
|
Three Months Ended
March 31, |
|||||||
|
(in thousands, except per share amounts)
|
2019
|
2018
|
|||||
|
Basic
|
|||||||
|
Net (loss) income
|
$
|
(28,717
|
)
|
$
|
12,200
|
|
|
|
Weighted-average common shares outstanding
|
78,584
|
|
|
78,236
|
|
||
|
(Loss) earnings per share, basic
|
$
|
(0.37
|
)
|
$
|
0.16
|
|
|
|
Diluted
|
|||||||
|
Net (loss) income
|
$
|
(28,717
|
)
|
$
|
12,200
|
|
|
|
Weighted-average effect of dilutive securities:
|
|||||||
|
Stock options
|
—
|
|
3,119
|
|
|||
|
RSUs
|
—
|
|
1,747
|
|
|||
|
Effect of dilutive securities
|
—
|
|
4,866
|
|
|||
|
Weighted-average common shares outstanding, assuming dilution
|
78,584
|
|
83,102
|
|
|||
|
(Loss) earnings per share, diluted
|
$
|
(0.37
|
)
|
$
|
0.15
|
|
|
|
Outstanding anti-dilutive stock options and RSUs
(1)
|
5,563
|
|
397
|
|
|||
(1)
Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards may be dilutive in the future.
15
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. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of quarterly dividends, the timing of revenue recognition, and are described more completely in Part I of our Annual Report on Form 10-K for the year ended
December 31, 2018
.
These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intended to,” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.
Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, variation in demand for our products and services, reliance on third party relationships, reliance on key personnel, the inherent risks associated with international operations and the continued uncertainties in the global economy, our continued effort to market and sell both domestically and internationally, foreign currency exchange rates, the potential legal and financial liabilities and reputation damage due to cyber-attacks and security breaches, and management of our growth. These risks and other factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described more completely in Part I of our Annual Report on Form 10-K for the year ended
December 31, 2018
as well as other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the results contained in such statements will be achieved. Although new information, future events, or risks may cause actual results to differ materially from future results expressed or implied by such forward-looking statements, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.
BUSINESS OVERVIEW
We develop, market, license, and support enterprise software applications that help organizations transform the way they engage with their customers and process and complete work across their enterprise. We license our no-code Pega Platform™ for rapid application development to clients that wish to build and extend their own 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 no-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.
Performance metrics
We utilize a number of different performance measures in analyzing and assessing our overall performance, making operating decisions, and forecasting and planning for future periods.
|
(Dollars in thousands,
except per share amounts)
|
Three Months Ended
March 31, |
Change
|
|||||||||||
|
2019
|
2018
|
||||||||||||
|
Total revenue
|
$
|
212,546
|
|
$
|
235,182
|
|
$
|
(22,636
|
)
|
(10
|
)%
|
||
|
Subscription revenue
(1)
|
$
|
143,778
|
|
$
|
144,802
|
|
$
|
(1,024
|
)
|
(1
|
)%
|
||
|
Net (loss) income
|
$
|
(28,717
|
)
|
$
|
12,200
|
|
$
|
(40,917
|
)
|
*
|
|
||
|
(Loss) earnings per share, diluted
|
$
|
(0.37
|
)
|
$
|
0.15
|
|
$
|
(0.52
|
)
|
*
|
|
||
* not meaningful
(1)
Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
16
Annual Contract Value (“ACV”)
(1)
The change in ACV measures the growth and predictability of future cash flows from Pega cloud and client cloud committed arrangements as of the end of the particular reporting period.
|
March 31,
|
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Pega Cloud ACV
|
$
|
128,636
|
|
$
|
72,966
|
|
$
|
55,670
|
|
76
|
%
|
||
|
Client Cloud ACV
|
462,130
|
|
421,159
|
|
40,971
|
|
10
|
%
|
|||||
|
Total ACV
|
$
|
590,766
|
|
$
|
494,125
|
|
$
|
96,641
|
|
20
|
%
|
||
(1)
ACV, as of a given date, is the sum of the following two components:
|
•
|
Client Cloud: the sum of (1) the annual value of each term license contract in effect on such date, which is equal to its total value divided by the total number of years and (2) maintenance revenue reported for the quarter ended on such date, multiplied by four. We do not provide hosting for Client Cloud arrangements
|
|
•
|
Pega Cloud: the total of the annual value of each cloud contract in effect on such date, which is equal to its total value divided by the total number of years.
|
Remaining performance obligations
Revenue recognition timing on existing contracts:
|
March 31, 2019
|
|||||||||||||||||||||||||
|
(Dollars in thousands)
|
Perpetual license
|
Term license
|
Maintenance
|
Cloud
|
Consulting
|
Total
|
|||||||||||||||||||
|
1 year or less
|
$
|
10,263
|
|
$
|
44,404
|
|
$
|
187,324
|
|
$
|
115,548
|
|
$
|
13,251
|
|
$
|
370,790
|
|
58
|
%
|
|||||
|
1-2 years
|
998
|
|
4,274
|
|
9,350
|
|
91,539
|
|
1,363
|
|
107,524
|
|
17
|
%
|
|||||||||||
|
2-3 years
|
2,180
|
|
756
|
|
4,438
|
|
71,509
|
|
473
|
|
79,356
|
|
13
|
%
|
|||||||||||
|
Greater than 3 years
|
—
|
|
135
|
|
2,008
|
|
72,742
|
|
27
|
|
74,912
|
|
12
|
%
|
|||||||||||
|
$
|
13,441
|
|
$
|
49,569
|
|
$
|
203,120
|
|
$
|
351,338
|
|
$
|
15,114
|
|
$
|
632,582
|
|
100
|
%
|
||||||
|
March 31, 2018
|
|||||||||||||||||||||||||
|
(Dollars in thousands)
|
Perpetual license
|
Term license
|
Maintenance
|
Cloud
|
Consulting
|
Total
|
|||||||||||||||||||
|
1 year or less
|
$
|
33,859
|
|
$
|
21,087
|
|
$
|
156,702
|
|
$
|
47,764
|
|
$
|
9,403
|
|
$
|
268,815
|
|
59
|
%
|
|||||
|
1-2 years
|
14,106
|
|
7,877
|
|
21,381
|
|
52,849
|
|
1,098
|
|
97,311
|
|
21
|
%
|
|||||||||||
|
2-3 years
|
1,204
|
|
5,634
|
|
4,924
|
|
37,844
|
|
—
|
|
49,606
|
|
11
|
%
|
|||||||||||
|
Greater than 3 years
|
382
|
|
853
|
|
1,825
|
|
40,478
|
|
—
|
|
43,538
|
|
9
|
%
|
|||||||||||
|
$
|
49,551
|
|
$
|
35,451
|
|
$
|
184,832
|
|
$
|
178,935
|
|
$
|
10,501
|
|
$
|
459,270
|
|
100
|
%
|
||||||
The above amounts include contracts that have an original expected duration of one year or less.
CRITICAL ACCOUNTING POLICES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
17
(“U.S.”) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given available information.
For more information regarding our critical accounting policies, we encourage you to read the discussion contained in the following locations in our Annual Report on Form 10-K for the year ended
December 31, 2018
:
|
•
|
“Critical Accounting Estimates and Significant Judgments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
|
|
•
|
Note 2. “Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data”.
|
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, 2018
.
RESULTS OF OPERATIONS
Revenue
|
(Dollars in thousands)
|
Three Months Ended
March 31, |
Change
|
|||||||||||||||
|
2019
|
2018
|
||||||||||||||||
|
Term license
|
$
|
48,314
|
|
23
|
%
|
$
|
64,695
|
|
28
|
%
|
$
|
(16,381
|
)
|
(25
|
)%
|
||
|
Cloud
|
27,758
|
|
13
|
%
|
15,582
|
|
7
|
%
|
12,176
|
|
78
|
%
|
|||||
|
Maintenance
|
67,706
|
|
32
|
%
|
64,525
|
|
27
|
%
|
3,181
|
|
5
|
%
|
|||||
|
Subscription revenue
(1)
|
143,778
|
|
68
|
%
|
144,802
|
|
62
|
%
|
(1,024
|
)
|
(1
|
)%
|
|||||
|
Perpetual license
|
14,950
|
|
7
|
%
|
23,078
|
|
10
|
%
|
(8,128
|
)
|
(35
|
)%
|
|||||
|
Consulting
|
53,818
|
|
25
|
%
|
67,302
|
|
28
|
%
|
(13,484
|
)
|
(20
|
)%
|
|||||
|
$
|
212,546
|
|
100
|
%
|
$
|
235,182
|
|
100
|
%
|
$
|
(22,636
|
)
|
(10
|
)%
|
|||
(1)
Reflects client arrangements (term license, cloud, and maintenance) that are subject to renewal.
Our license revenue is derived from sales of our applications and Pega Platform. Our cloud revenue is derived from our hosted Pega Platform and software applications.
We expect our revenue mix to continue to shift in favor of our subscription offerings, particularly cloud arrangements, which could result in slower total revenue growth in the near term. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
Subscription revenue
The
decrease
in term license revenue in the
three months ended March 31, 2019
was primarily due to lower average revenue per arrangement. The increase in cloud revenue in the
three months ended March 31, 2019
reflects the shift in client preferences to cloud arrangements from other types of arrangements.
The
increase
in maintenance revenue was primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates in excess of 90%.
Perpetual license
The
decrease
in perpetual license revenue in the
three months ended March 31, 2019
reflects the shift in client preferences in favor of our cloud offerings and away from perpetual license arrangements.
Consulting
Our consulting revenue fluctuates depending upon the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.
The
decrease
in consulting revenue in the
three months ended March 31, 2019
was primarily due to a decrease in billable hours.
18
Gross profit
|
Three Months Ended
March 31, |
Change
|
||||||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||||||
|
Software license
|
$
|
61,886
|
|
98
|
%
|
$
|
86,518
|
|
99
|
%
|
$
|
(24,632
|
)
|
(28
|
)%
|
||
|
Maintenance
|
61,371
|
|
91
|
%
|
58,443
|
|
91
|
%
|
2,928
|
|
5
|
%
|
|||||
|
Cloud
|
14,460
|
|
52
|
%
|
7,861
|
|
50
|
%
|
6,599
|
|
84
|
%
|
|||||
|
Consulting
|
392
|
|
1
|
%
|
6,746
|
|
10
|
%
|
(6,354
|
)
|
(94
|
)%
|
|||||
|
$
|
138,109
|
|
65
|
%
|
$
|
159,568
|
|
68
|
%
|
$
|
(21,459
|
)
|
(13
|
)%
|
|||
The recent shift in our revenue mix toward cloud arrangements has resulted in slower total gross profit growth as our cloud business continues to grow and scale. Revenue from cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.
The
decrease
in total gross profit in the
three months ended March 31, 2019
was primarily due to the decrease in term and perpetual license revenue reflecting the shift in client preferences toward our cloud offerings.
The
decrease
in total gross profit percent in the
three months ended March 31, 2019
was driven by a shift in favor of cloud arrangements, which are lower margin than our term and perpetual license revenue streams. The
increase
in cloud gross profit percent was driven by cost efficiency gains as our cloud business continues to grow and scale. The
decrease
in consulting gross profit percent was driven by a decrease in billable hours as consulting resources were transitioning to new projects after completing a large project which began in the second half of 2016
and an increase in consulting resource availability in Europe as we continue growing and leveraging our partner network.
Operating expenses
Selling and marketing
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Selling and marketing
(1)
|
$
|
108,865
|
|
$
|
88,383
|
|
$
|
20,482
|
|
23
|
%
|
||
|
As a percent of total revenue
|
51
|
%
|
38
|
%
|
|||||||||
|
Selling and marketing headcount,
end of period
|
1,282
|
|
1,082
|
|
200
|
|
18
|
%
|
|||||
(1)
Includes compensation, benefits, and other headcount-related expenses as well as advertising, promotions, trade shows, seminars, and the amortization of client-related intangibles.
The
increase
in the
three months ended March 31, 2019
was primarily due to an increase in compensation and benefits of
$17.7 million
, attributable to increased headcount, and an increase of
$4.5 million
in deferred contract commission amortization. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts
.
Research and development
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Research and development
(1)
|
$
|
50,596
|
|
$
|
46,785
|
|
$
|
3,811
|
|
8
|
%
|
||
|
As a percent of total revenue
|
24
|
%
|
20
|
%
|
|||||||||
|
Research and development headcount,
end of period
|
1,638
|
|
1,602
|
|
36
|
|
2
|
%
|
|||||
(1)
Includes compensation, benefits, contracted services, and other headcount-related expenses associated with the development of our products, as well as enhancements and design changes to existing products and the integration of acquired technologies.
The
increase
in the
three months ended March 31, 2019
was primarily due to an increase in compensation and benefits of
$2.1 million
, attributable to an increase in headcount, and an increase of $1.6 million in cloud hosting expenses as we expand our cloud-focused research and development activities.
19
General and administrative
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
General and administrative
(1)
|
$
|
12,676
|
|
$
|
16,464
|
|
$
|
(3,788
|
)
|
(23
|
)%
|
||
|
As a percent of total revenue
|
6
|
%
|
7
|
%
|
|||||||||
|
General and administrative headcount,
end of period
(2)
|
373
|
|
299
|
|
74
|
|
25
|
%
|
|||||
(1)
Includes compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. Also includes accounting, legal, and other professional consulting and administrative fees.
(2)
The headcount includes employees in information technology and corporate services departments, whose costs are partially allocated to other operating expense areas.
The
decrease
in the
three months ended March 31, 2019
was primarily due to a decrease in compensation and benefits of
$1.2 million
, due to a decrease in equity compensation, and a decrease of $1.9 million in legal and other professional services fees. Despite the headcount increase, associated compensation and benefits did not increase because these costs are primarily allocated to other operating expense areas.
Stock-based compensation
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Cost of revenues
|
$
|
4,519
|
|
$
|
3,701
|
|
$
|
818
|
|
22
|
%
|
||
|
Selling and marketing
|
7,374
|
|
4,658
|
|
2,716
|
|
58
|
%
|
|||||
|
Research and development
|
4,560
|
|
3,637
|
|
923
|
|
25
|
%
|
|||||
|
General and administrative
|
1,897
|
|
3,113
|
|
(1,216
|
)
|
(39
|
)%
|
|||||
|
$
|
18,350
|
|
$
|
15,109
|
|
$
|
3,241
|
|
21
|
%
|
|||
|
Income tax benefit
|
$
|
(3,740
|
)
|
$
|
(3,141
|
)
|
$
|
(599
|
)
|
19
|
%
|
||
The
increase
in the
three months ended March 31, 2019
was primarily due to the increased value of our annual periodic equity awards granted in March 2019 and 2018. These awards generally have a five-year vesting schedule.
Non-operating (expense) income, net
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Foreign currency transaction loss
|
$
|
(3,712
|
)
|
$
|
(1,085
|
)
|
$
|
(2,627
|
)
|
242
|
%
|
||
|
Interest income, net
|
723
|
|
764
|
|
(41
|
)
|
(5
|
)%
|
|||||
|
Other income, net
|
—
|
|
363
|
|
(363
|
)
|
(100
|
)%
|
|||||
|
|
$
|
(2,989
|
)
|
$
|
42
|
|
$
|
(3,031
|
)
|
*
|
|
||
* not meaningful
The change in foreign currency transaction loss was primarily due to unrealized losses on foreign currency denominated cash and receivables of our U.K subsidiary due to fluctuations in foreign currency exchange rates as the British Pound strengthened against the Euro and U.S. dollar.
Benefit from income taxes
|
Three Months Ended
March 31, |
Change
|
||||||||||||
|
(Dollars in thousands)
|
2019
|
2018
|
|||||||||||
|
Benefit from income taxes
|
$
|
(8,300
|
)
|
$
|
(4,222
|
)
|
$
|
(4,078
|
)
|
97
|
%
|
||
|
Effective income tax rate
|
22
|
%
|
(53
|
)%
|
|||||||||
The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, as the amount of excess tax benefits from stock-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU vestings, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.
During the
three months ended March 31, 2019
, the Company’s effective income tax rate changed primarily due to the
Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions of the Tax Reform Act. The Company’s effective income tax rate was also affected by excess tax benefits from stock-based compensation, an increase in U.S. research and development tax credits, and a decrease in uncertain tax positions as a result of the lapse of the statute of limitations on certain foreign reserves.
20
LIQUIDITY AND CAPITAL RESOURCES
|
Three Months Ended
March 31, |
|||||||
|
(in thousands)
|
2019
|
2018
|
|||||
|
Cash provided by (used in):
|
|||||||
|
Operating activities
|
$
|
22,703
|
|
$
|
55,655
|
|
|
|
Investing activities
|
(1,466
|
)
|
(31,278
|
)
|
|||
|
Financing activities
|
(25,587
|
)
|
(23,052
|
)
|
|||
|
Effect of exchange rates on cash and cash equivalents
|
295
|
|
2,186
|
|
|||
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(4,055
|
)
|
$
|
3,511
|
|
|
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
|||||
|
Held by U.S. entities
|
$
|
141,051
|
|
$
|
143,533
|
|
|
|
Held by foreign entities
|
61,120
|
|
63,890
|
|
|||
|
Total cash, cash equivalents, and marketable securities
|
$
|
202,171
|
|
$
|
207,423
|
|
|
We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations will be sufficient to fund our operations, quarterly cash dividends, and stock repurchases for at least the next 12 months.
If it became necessary to repatriate foreign funds, we may be required to pay U.S. state and local taxes, as well as foreign taxes, upon repatriation. Due to the complexity of income tax laws and regulations, and the effects of the Tax Reform Act, it is impracticable to estimate the amount of taxes we would have to pay.
Cash provided by operating activities
As client preferences continue to shift in favor of cloud arrangements, we could continue to experience slower operating cash flow growth in the near term. Cash from cloud arrangements is generally collected throughout the service period of three to five years, while cash from perpetual license arrangements is generally collected upfront, shortly after the license rights become effective
.
The primary driver during the
three months ended March 31, 2019
was
$78.1 million
in cash generated from client receivables, largely due to cash collections and the timing of billings.
Cash used in investing activities
Cash used in investing activities is primarily driven by the timing of investment maturities and purchases of new investments.
Cash used in financing activities
We used cash primarily for repurchases of our common stock under our publicly announced stock repurchase programs, stock repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.
Stock repurchase program
(1)
The changes in the remaining stock repurchase authority was:
|
Three Months Ended
March 31, |
|||
|
(in thousands)
|
2019
|
||
|
January 1
|
$
|
6,620
|
|
|
Authorizations
(2)
|
60,000
|
|
|
|
Repurchases
|
(7,586
|
)
|
|
|
March 31,
|
$
|
59,034
|
|
(1)
Purchases under these programs have been made on the open market.
(2)
On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020
.
21
Common stock repurchases
|
Three Months Ended
March 31, |
|||||||||||||
|
2019
|
2018
|
||||||||||||
|
(in thousands)
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||
|
Tax withholdings for net settlement of equity awards
|
232
|
|
$
|
14,838
|
|
270
|
|
$
|
15,575
|
|
|||
|
Stock repurchase program
(1)
|
|||||||||||||
|
Repurchases paid
|
141
|
|
7,387
|
|
89
|
|
4,998
|
|
|||||
|
Repurchases unsettled at period end
|
3
|
|
199
|
|
12
|
|
690
|
|
|||||
|
Activity in period
(2)
|
376
|
|
$
|
22,424
|
|
371
|
|
$
|
21,263
|
|
|||
(1)
Represents activity under our publicly announced stock repurchase programs.
(2)
During the
three months ended March 31, 2019 and 2018
, instead of receiving cash from the equity holders, we withheld shares with a value of
$12.2 million
and
$11.2 million
, respectively, for the exercise price of options. These amounts have been excluded from the table above.
Dividends
|
Three Months Ended
March 31, |
|||||||
|
(in thousands)
|
2019
|
2018
|
|||||
|
Dividend payments to shareholders
|
$
|
2,363
|
|
$
|
2,344
|
|
|
It is our current intention to pay a quarterly cash dividend of $0.03 per share, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes during the
three months ended March 31, 2019
to the market risk exposure disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
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
March 31, 2019
. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of
March 31, 2019
.
(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
March 31, 2019
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2018
. These risk factors could materially affect our business, financial condition, and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time.
There have been no material changes during the
three months ended March 31, 2019
to the risk factors disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES
AND USE OF PROCEEDS
The following table sets forth information regarding our repurchases of our common stock during the
three months ended March 31, 2019
.
|
(in thousands, except per share amounts)
|
Total Number of Shares Purchased
(1)
|
Average
Price Paid
per Share
(1)
|
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program
|
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs
(2)
|
|||||||||
|
January 1, 2019 - January 31, 2019
|
153
|
|
$
|
51.30
|
|
129
|
|
$
|
18
|
|
|||
|
February 1, 2019 - February 28, 2019
|
129
|
|
$
|
63.81
|
|
—
|
|
$
|
18
|
|
|||
|
March 1, 2019 - March 31, 2019
|
285
|
|
$
|
64.97
|
|
15
|
|
$
|
59,034
|
|
|||
|
|
567
|
|
$
|
61.03
|
|
||||||||
(1)
Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2)
On March 15, 2019, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2020 and increased the amount of common stock we are authorized to repurchase by $60 million between March 15, 2019 and June 30, 2020
(the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts as market conditions warrant, subject to regulatory and other considerations. We have established a pre-arranged stock repurchase plan, intended to comply with the requirements of Rule 10b5-1 under the Exchange Act, and Rule 10b-18 under the Exchange Act (the “10b5-1 Plan”). All stock repurchases under the Current Program during closed trading window periods will be made pursuant to the 10b5-1 Plan.
ITEM 6. EXHIBITS
|
Exhibit No.
|
Description
|
|
|
31.1
|
||
|
31.2
|
||
|
32+
|
||
|
101.INS
|
XBRL Instance document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase Document.
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
101.LAB
|
XBRL Taxonomy Label Linkbase Document.
|
|
|
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document.
|
|
+ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
23
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:
|
May 7, 2019
|
By:
|
/s/ KENNETH STILLWELL
|
|
Kenneth Stillwell
|
|||
|
Chief Financial Officer and Chief Administrative Officer
|
|||
|
(Principal Financial Officer)
|
|||
24
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Unaudited Condensed Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 2. Significant Accounting Policies in Item 8. Financial Statements and Supplementary DataItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 2. Unregistered Sales Of EquityItem 6. Exhibits