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Carbonite IncPEGASYSTEMS INC FORM 10-K (Annual Report) Filed 02/15/23 for the Period Ending 12/31/22 Address ONE MAIN STREET Telephone CIK Symbol SIC Code Industry Sector Fiscal Year CAMBRIDGE, MA, 02142-1531 6173749600 0001013857 PEGA 7374 - Services-Computer Processing and Data Preparation Software Technology 12/31 https://www.edgar-online.com © Copyright 2024, EDGAR Online LLC, a subsidiary of OTC Markets Group. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online LLC, a subsidiary of OTC Markets Group, Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549____________________________FORM 10-K____________________________☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934For the fiscal year ended December 31, 2022OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934Commission File No. 1-11859 ____________________PEGASYSTEMS INC.(Exact name of Registrant as specified in its charter)____________________Massachusetts04-2787865(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)One Main Street, Cambridge, MA 02142(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 classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $.01 par value per sharePEGANASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None____________________Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒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 suchshorter 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 ☒ 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 12months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ 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 emerging growth company. See the definitions of“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging company,” in Rule 12b-2 of the Exchange Act.Large accelerated filer☒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 standardsprovided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error topreviously issued financial statements. □Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officersduring the relevant recovery period pursuant to §240.10D-1(b). □Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the Registrant’s common stock held by non-affiliates, based upon the closing price of the Registrant’s common stock on the NASDAQ Global Select Market of $47.84,on June 30, 2022 was approximately $2.0 billion.There were 82,469,714 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on February 6, 2023.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement related to its 2023 annual meeting of stockholders to be filed subsequently are incorporated by reference into Part III of this report. PEGASYSTEMS INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTSItemPagePART I1Business41ARisk Factors101BUnresolved Staff Comments222Properties223Legal Proceedings224Mine Safety Disclosures23PART II5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities246[Reserved]257Management’s Discussion and Analysis of Financial Condition and Results of Operations257AQuantitative and Qualitative Disclosures about Market Risk348Financial Statements and Supplementary Data359Changes in and Disagreements with Accountants on Accounting and Financial Disclosure649AControls and Procedures649BOther Information649CDisclosure Regarding Foreign Jurisdictions that Prevent Inspections64PART III10Directors, Executive Officers and Corporate Governance6511Executive Compensation6512Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters6513Certain Relationships and Related Transactions, and Director Independence6514Principal Accountant Fees and Services65PART IV15Exhibits and Financial Statement Schedules6616Form 10-K Summary68Signatures692 PART IFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (“Annual Report”), including without limitation, “Item 1. Business,” “Item 1A. Risk Factors,” “Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” and “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” along with other reports that we have filed with the Securities and Exchange Commission (“SEC”), externaldocuments, and oral presentations, contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of1995.Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, andusually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations andassumptions.Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:•our future financial performance and business plans;•the adequacy of our liquidity and capital resources;•the continued payment of our 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;•reliance on key personnel;•global economic and political conditions and uncertainty, including impacts from public health emergencies and the war in Ukraine;•reliance on third-party service providers, including hosting providers;•compliance with our debt obligations and covenants;•the potential impact of our convertible senior notes and Capped Call Transactions;•foreign currency exchange rates;•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;•security breaches and security flaws;•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other relatedclaims by third parties against us, including related costs, damages, and other relief that may be granted against us;•our ongoing litigation with Appian Corp.;•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 “Item1A. Risk Factors” of this Annual Report and other filings we make with the SEC.Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly,whether due to new information, future events, or otherwise. The forward-looking statements in this Annual Report represent our views as of February 15,2023.3 ITEM 1. BUSINESSOur BusinessWe develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change. Ourpowerful low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and governmentagencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega,our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams,world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.To grow our business, we intend to:•increase market share by developing and delivering a low-code platform for workflow automation and AI-powered decisioning for buyers in marketing,sales, service, operations, and IT that can work together seamlessly with maximum competitive differentiation;•deepen and expand our relationships with existing clients;•establish relationships with new clients; and•continue to scale our marketing efforts to support how today’s buyers discover, evaluate, and choose products and services.Whether we are successful depends, in part, on our ability to:•execute our marketing and sales strategies;•appropriately manage our expenses as we grow our organization;•effectively develop new products and enhance our existing products; and•incorporate acquired technologies into our solutions and unified Pega Platform™.Subscription transitionWe are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which weexpect will occur in 2023, our operating results may be impacted. Operating performance, revenue mix, and new arrangements in each period can fluctuatebased on client preferences for our perpetual and subscription offerings.See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows couldbe negatively impacted" in Item 1A of this Annual Report for additional information.Our ProductsPega Infinity™, the latest version of our software portfolio, helps build agility into our clients organizations so they can work smarter, unify experiences, andadapt to meet changing requirements.4 Our applications and low-code platform intersect with and encompass several software markets, including:•Customer Engagement, including Customer Relationship Management (“CRM”);•Digital Process Automation (“DPA”), including Business Process Management (“BPM”), Workflow, and Dynamic Case Management (“DCM”);•Low-code application development platforms (“LCAP”), including Multi-experience Development Platforms (“MXDP”);•Robotic Process Automation (“RPA”);•Business Rules Management Systems (“BRMS”);•Decision Management, including predictive and adaptive analytics; and•the Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications.1:1 Customer EngagementOur omnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customerswhile ensuring a consistent, unified, and personalized customer experience. At the center of our customer engagement applications is the Pega CustomerDecision Hub™, our real-time, AI-powered decision engine, which can predict a customer’s behavior and recommend the “next best action” to take acrosschannels in real-time. It is designed to enable enterprises to improve customer acquisition and experience across inbound, outbound, and paid media channels.It incorporates Artificial Intelligence (“AI”) in the form of predictive and machine-learning analytics and business rules, and executes these decisions in real-time to evaluate the context of each customer interaction and dynamically deliver the most relevant action, offer, content, and channel.Customer ServiceThe Pega Customer Service™ application simplifies customer service. It is designed to anticipate customer needs, connect customers to the right people andsystems, automate or intelligently guide customer interactions, rapidly and continuously evolve the customer service experience, and allow enterprises todeliver consistent interactions across channels and improve employee productivity. The application consists of a contact center desktop, case management forcustomer service, chat, knowledge management, mobile field service, omnichannel self-service, AI-powered virtual assistants, and industry-specific processes(“Microjourney”) and data models. For clients who want to extend intelligence and automation into the early stages of the customer journey, Pega SalesAutomation™ automates and manages the entire sales process, from prospecting to product fulfillment. It allows enterprises to capture best practices andleverage AI to guide sales teams through the sales and customer onboarding processes.Intelligent AutomationPega Platform, our software for Intelligent Automation, boosts the efficiency of our clients’ processes and workflows. This technology allows organizations totake an end-to-end approach to transformation by using intelligence and design thinking to streamline processes and create better customer and employeeexperiences. Intelligent automation goes beyond traditional Business Process Management (BPM) to unify technologies such as Robotic Process Automation(“RPA”) and AI and enable organization-wide digital transformation. With its Intelligent Automation capabilities, the Pega Platform allows clients to breakdown silos, improve customer-centricity, add agility to legacy technology, and provide end-to-end automation to support the needs of customers andemployees.Our CapabilitiesWe drive better business outcomes for our clients in three ways:•1:1 Customer Engagement: we enable clients to hyper-personalize interactions with their customers using our AI-powered decision engine, resulting inhigher customer lifetime value.•Customer Service: we enable clients to streamline customer service and deliver better service experiences for their customers and employees, resulting inhigher customer satisfaction and loyalty with reduced costs.•Intelligent Automation: we enable clients to automate mission-critical workflows, resulting in improved operational efficiency, faster time to value, andlower cost.We deliver our solution through our Center-out Business™ Architecture, enabling clients to transcend channels and internal data silos to achieve quick winsand long-term transformation. This approach insulates business logic from back-end and front-end complexity, delivering consistent customer experiences andagility to the business.The key aspects of this architecture are:Centrally-managed AI-powered decisioningPega’s centrally-managed AI-powered decisioning ensures AI and business rules operate across all channels. Applications built on Pega’s low-code Platformleverage predictive and adaptive analytics to deliver personalized customer experiences and maximize business objectives. For example, Pega CustomerDecision Hub, a centralized, always-on “customer brain,” unleashes the power of predictive analytics, machine learning, and real-time decisioning across ourclients’ data, systems, and touchpoints - orchestrating engagement across customer interaction channels and optimizing processes for better efficiency.®5 End-to-end workflow automation aligned with business outcomesWe combine human-assisted robotic desktop automation and unattended robotic process automation with our unified workflow automation and casemanagement capabilities. This combination provides our platform and applications the differentiated ability to automate customer-facing and back-officeoperational processes from “end to end,” connecting across organizational and system silos to connect customers and employees to outcomes seamlessly andeasily.Consistent omnichannel experiencesWith centrally defined business and process logic, Pega provides dynamic, open APIs to keep front-end channels and business logic aligned for consistentcustomer experiences. By leveraging innovative user interface (UI) technology, Pega-powered processes and decisions can be easily embedded into existingfront-ends or used as the basis for new employee-facing applications.Insulation of back-end complexityPega’s architecture insulates case and decision logic from the complexity of back-end systems. Our data virtualization automatically pulls in needed data in acommon structure, regardless of source. This capability allows clients the agility to build new experiences on existing systems, modernizing legacy systemswithout breaking existing processes.A layered approach to managing variationPega’s Situational Layer Cake™ organizes logic into layers that map to the unique dimensions of a client’s business – customer types, lines of business,geographies, etc. This layered approach lets organizations manage variations of their businesses without duplicating logic. This capability allows initialdeployments into a single department or region to seamlessly scale to manage the complexity of a global, multi-line enterprise.In addition to our Center-out Business Architecture, Pega technology has been designed to be deployed rapidly, be easily changed, and scale across changingarchitecture needs.Pega Express™ Methodology and low-codeOur solutions are designed to quickly improve targeted customer outcomes with out-of-the-box functionality that connects enterprise data and systems tocustomer experience channels. From there, organizations can scale one customer experience at a time to realize greater value while delivering increasinglyconsistent and personalized customer experiences. We prescribe a “Microjourney” approach to delivery that breaks customer journeys into discrete processesthat drive meaningful outcomes, such as “inquiring about a bill” or “updating an insurance policy,” allowing us to combine design-thinking and out-of-the-boxfunctionality to deliver rapid results and ensure the ability to enhance applications in the future.Our approach leverages low-code to improve business and IT collaboration and bypass the error-prone and time-consuming process of manually translatingrequirements into code. Users design software in low-code visual models that reflect the needs of the business. The software application is created andoptimized automatically and directly from the model, helping to close the costly gap between vision and execution. Changes to the code are made by alteringthe model, and application documentation is generated directly from the model.Cloud choicePega Cloud allows clients to develop, test, and deploy, on an accelerated basis, our applications and the Pega Platform using a secure, flexible internet-basedinfrastructure, minimizing cost while focusing on core revenue-generating competencies.Clients can also manage the Pega deployment themselves using the cloud architecture they prefer. This multi-cloud approach of both Pega Cloud and client-managed cloud gives our clients the ability to select and change, as needed, the best cloud architecture for the security, data access, speed-to-market, andbudget requirements of each application they deploy.Our Services and SupportWe offer services and support through our Global Client Success, Global Service Assurance, Global Client Support, and PegaAcademy groups. We also usethird-party contractors to assist us in providing these services.•Global Client Success – Global Client Success guides our clients to maximize their investment in our technology and realize the business outcomes theyare targeting. Within Global Client Success, our Client Innovation team helps clients transform and prototype their customer journeys through our PegaCatalyst™ offering, our Success team ensures our clients receive the maximum business value from their Pega investments, and our Pega Consulting teamprovides planning, design, implementation, and advisory and assurance services.•Global Service Assurance – Global Service Assurance addresses risks to client success because of technical concerns. By providing technical staffdedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and increaseclients’ confidence in our technology and client service.•Global Client Support – Global Client Support provides technical support for our products and Pega Cloud services. Support services include cloud servicereliability management, online support community management, self-service knowledge, proactive problem prevention through information andknowledge sharing, problem tracking, prioritization, escalation, diagnosis, and resolution.® 6 •Pega Academy – The success of our sales strategy for repeat sales to target clients depends on enablement and ecosystem engagement. We have increasedour ability to train partners and clients to implement our technology and made it easier for individuals to stay current as it evolves. We offer instructor-ledand online training to our employees, clients, and partners. We have also partnered with universities to provide our courseware as part of studentcurriculum to expand our ecosystem. Engagement is an important part of our strategy to create a broad ecosystem passionate about Pega technology.Our PartnersWe collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients, as well as Independent SoftwareVendors (“ISVs”) and technology partners that extend clients’ investments with integrated solutions. In addition, Authorized Training Partners (“ATPs”)support Pega customers in local languages, while our Workforce Development Partners let clients outsource their recruiting. Strategic partnerships with thesefirms are important to our sales efforts because they influence buying decisions, identify sales opportunities, and complement our software with their domainexpertise, solutions, and service capabilities. These partners may deliver strategic business planning, consulting, project management, training, andimplementation services to our clients.Our partners include well-respected major firms, such as Accenture PLC, Amazon.com, Inc., Areteans, Capgemini SA, Coforge, Cognizant TechnologySolutions Corporation, EY, Google, HCL Infosys, Merkle, PwC, Tata Consultancy Services Limited, Tech Mahindra Limited, Virtusa Corporation, and WiproLimited.Our MarketsTarget ClientsOur target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Oursolutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, andreducing risk. Along with our partners, we deliver solutions tailored to the specific industry needs of our clients.Our clients represent many industries, including:•Financial services – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by financial services organizations forCustomer Engagement, Onboarding and KYC, Lending, Customer Service, Payment Exceptions, Bank Operations and Managing Financial Crime. Ourplatform enables clients to increase loyalty and wallet share, reduce time and effort to close loans and open accounts, address compliance more effectivelywhile simplifying customer experiences, resolve service requests across channels more quickly with less effort, and boost the efficiency of various back-office processes with fewer human touches.•Communications and media – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by communications and mediaorganizations for Customer Engagement, Order Management, Customer Service, Service Assurance, Network Operations and Shared Services. Ourplatform enables clients to increase loyalty and wallet share, simplify experiences while accelerating revenues and processes, resolve service requestsacross channels more quickly with less effort, drive a faster, simpler repair experience, and boost efficiency of 5G, fiber and cloud processes.•Government – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by government agencies for EnterpriseModernization, Licensing, Investigative Case Management, Grants and Financial Management, Acquisition and Supply Chain Modernization, and CitizenService. Our platform enables clients to modernize legacy systems and processes to meet the growing demands for improved constituent service, lowercosts, reduced fraud, and greater transparency.•Healthcare – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by healthcare organizations for ConsumerEngagement, Onboarding and Enrollment, Customer Service, Care Management Services and Core Admin. Our platform enables clients to improvemember and patient outcomes, loyalty and retention, simplify experiences with reduced time and effort, resolve service requests faster and easier acrosschannels, advance efficient flexible healthcare coordination, and deliver streamlined, modern experiences for members, providers and employees.•Insurance – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by insurance companies for Customer Engagement,Sales, Distribution, Underwriting, Policy Holder Service and Claims. Our platform enables clients to nurture and grow their book of business, increaseagent sales effectiveness, power better partner performance and loyalty, automate application intake and processing with intelligence, personalize seamlesspolicy lifecycle experiences, and improve claims handling efficiencies with more modern customer and employee experiences.•Consumer services – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by consumer services organizations forCustomer Engagement, Supplier Onboarding, Customer Service, and Enterprise Operations in industries such as transportation, utilities, internet providers,retail, hospitality, and entertainment. Our platform enables clients to enable more personalized real-time next best action, accelerate onboarding withsimplified experiences, automate resolution of customer requests across channels with increased digital self-servicing, and streamline operations to rapidlyreduce cost, time, and risks while increasing customer satisfaction.7 •Manufacturing and high tech – Pega’s low-code platform for AI-powered decisioning and workflow automation is used by manufacturers to streamlinetheir complex global operations and create more value for their customers, dealers, distributors, and suppliers while directly managing the performance,uptime, and impact of their connected products, equipment, and experiences. Our platform enables clients to reduce the complexity of enterpriseoperations in domains like supply chain, order management, quality management, shared services, customer service, and aftermarket services, includingwarranty management and captive finance, while minimizing the constraints on digital transformation caused by legacy systems.CompetitionThe markets for our offerings are intensely competitive, rapidly changing, and highly fragmented as current competitors expand their product offerings andnew companies enter the market.We compete in the CRM, including marketing, sales, and customer service, and DPA, including BPM, case management, decision management, roboticautomation, co-browsing, social engagement, low-code application development, and mobile application development platform software markets, as well as inmarkets for the vertical applications we provide (e.g., Pega Know Your Customer for Financial Services, Pega Care Management™).We also compete with clients’ internal information systems departments that seek to modify their existing systems or develop their own proprietary systemsand professional service organizations that develop their own products or create custom software in conjunction with rendering consulting services.Competitors vary in size, scope, and breadth of the products and services they offer and include some of the world’s largest companies, includingSalesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”).We have been most successful in competing for clients whose businesses are characterized by a high degree of change, complexity, or regulation.We believe we are competitively differentiated because our unified Pega Platform is designed to allow client business and IT staff, using a single, intuitive userinterface, to build and evolve enterprise applications in a fraction of the time it would take with disjointed architectures and tools offered by many of ourcompetitors. In addition, our applications, built on the Pega Platform, provide the same flexibility and ability to adapt to our clients’ needs as the Pega Platform.We believe we compete favorably due to our expertise in our target industries and our long-standing client relationships. We believe we compete less favorablyon some of the above factors against our larger competitors, many of which have greater sales, marketing, and financial resources, a more extensivegeographical presence, and greater name recognition. In addition, we may be at a competitive disadvantage against our larger competitors with respect to ourability to provide expertise outside our target industries.See risk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented" in Item 1A of this Annual Report foradditional information.Intellectual PropertyWe rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality procedures and contractual provisions toprotect our intellectual property rights and our brand. We have obtained patents relating to our system architecture and products in strategic global markets. Weenter into confidentiality, intellectual property ownership, and license agreements with our employees, partners, clients, and other third parties. To protect ourproprietary rights, we also control access to and ownership of software, services, documentation, and other information. We also purchase or license technologythat we incorporate into our services.Sales and MarketingWe encourage our direct sales force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping usgrow our business more efficiently and focus our resources on continued innovation and enhancement of our solutions. In addition, strategic partnerships withmanagement consulting firms and major systems integrators are important to our sales efforts because they influence buying decisions, help us identify salesopportunities, and complement our software and services with their domain expertise and consulting capabilities. We also partner with technology providersand application developers.To support our sales efforts, we conduct a broad range of marketing programs, including awareness advertising, client and industry-targeted solutioncampaigns, trade shows, including our PegaWorld iNspire user conference, solution seminars and webinars, industry analyst and press relations, web anddigital marketing, community development, social media presence, and other direct and indirect marketing efforts. In addition, our consulting employees,business partners, and other third parties also conduct joint and separate marketing campaigns that generate sales leads. Our sales and marketing efforts arepremised on the strength of our products, both as they exist currently and as they will continue to develop in the future through our research and developmentefforts.TM®8 Research and DevelopmentOur research and development organization is responsible for product architecture, core technology development, product testing, and quality assurance. Ourproduct development priority is to continue expanding our technology’s capabilities and ensure we deliver superior cloud-native solutions. We intend tomaintain and extend the support of our existing applications, and we may choose to invest in additional strategic applications that incorporate the latestbusiness innovations. We also intend to maintain and extend the support for popular public and private cloud platforms, and integration options to facilitateeasy and rapid deployment in diverse IT infrastructures. Our goal with all products is to enhance product capabilities, implementation ease, long-termflexibility, and improve client service.BacklogAs of December 31, 2022, we expected to recognize approximately $1.4 billion in revenue from backlog on existing contracts in future periods. See"Remaining performance obligations ("Backlog")" in Item 7 of this Annual Report for additional information.Our PeopleAs of January 31, 2023, we had 6,145 employees, of which 2,385 were based in the Americas, 1,457 were based in Europe, 1,953 were based in India, and 350were based elsewhere in Asia-Pacific.As a high-technology company, our people are critical to our success. We strive to be a place where people come to build a career in an equitable, inclusive,and diverse culture. We believe that cultivating our talent is at the heart of engaging, motivating, and retaining our workforce to support our clients and ourbusiness.We evolve our corporate culture through various initiatives, including global equity, inclusion and belonging, employee engagement, pay equity, and employeedevelopment.Diversity, Equity, Inclusion and Belonging (“DEIB”)We celebrate, welcome and foster diverse perspectives at Pega because we believe this will accelerate our ability to deliver innovative products and services toour clients. It is critical to strive for representation of diverse backgrounds, but it is even more critical to create an environment where all individuals arerespected, valued and supported, have access to opportunities, and feel that they belong. Our commitment to DEIB begins with a highly skilled and diverseboard, and includes inclusion and allyship programs amongst other investments. We are continuously expanding our sponsorship of formal employee resourcegroups and are proud to share our support for the following communities: women, veterans, Black, LGBTQIA+, Asian, Latinx, and persons with disabilities.Employee Engagement, Health, and Well-BeingOur efforts to retain and attract diverse and passionate employees include providing competitive rewards packages and encouraging active two-waycommunication throughout the Company. We promote a culture of transparency, regularly seeking feedback to better understand and improve our employeeexperience, and are committed to fostering an environment where every team member feels connected at Pega.We share the responsibility to preserve, strengthen, and evolve our culture while continuously reviewing the way we do things to propel us forward together. Inaddition to our employee survey and continuous feedback tools, we host regular sessions led by executive leadership team where any employee can ask anyquestion.We are committed to fostering an environment that supports our employees’ health and overall well-being, with emphasis on physical, emotional, financial, andpersonal wellness. PegaUp!, our employee wellness program, includes awareness campaigns, fitness classes, guided meditation, as well as health, wellness, andin 2022, we implemented quarterly global Wellness Days when our entire company takes a break for a day to recharge.Pay EquityWe compensate our employees for what they do and how they do it, regardless of their gender, race, or other characteristics. To deliver on that commitment, webenchmark and set pay ranges based on market data and consider individual factors, such as an employee’s role and experience, job location, and jobperformance. We regularly review our compensation practices, in terms of our overall workforce and individual employees, to ensure our pay is fair andequitable against local markets.Talent CultivationTalent Cultivation is at the foundation of our people strategy and enables us to provide innovative products and services to our clients. It is an ongoing,dynamic process that enables our employees to focus on both performance and development goals, receive continuous feedback, and drive their future path forgrowth. We invest in our employees’ career growth and progression by providing a wide range of opportunities, including formal and informal development,mentoring, and coaching. Pega Academy helps employees, clients, and partners gain and rapidly advance Pega software skills. A series of leadership andmanagement development programs equip our managers with the skills and knowledge to successfully build a culture of engagement and high performance.Additionally, we provide educational resources and classes, career training, and education reimbursement programs.Corporate InformationPegasystems Inc. was incorporated in Massachusetts in 1983. Our stock is traded on the NASDAQ Global Select Market under the symbol “PEGA.” Ourwebsite is located at www.pega.com, and our investor relations website is located at www.pega.com/about/investors.9 Available InformationWe make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, freeof charge, through our website as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC. We alsomake available on our website reports filed by our executive officers and directors on Forms 3, 4, and 5 regarding their ownership of our securities. Our Codeof Conduct is available on our website in the “Governance” section.The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC at www.sec.gov.ITEM 1A. RISK FACTORSThe risks and uncertainties described below are not the only ones we face. Events that we do not currently anticipate, or expect to be immaterial, may alsomaterially adversely affect our results of operations, cash flows, and financial condition.Risks Related to Our Business and IndustryIf we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could benegatively impacted.We are transitioning to a more subscription-based business model, which impacts our revenue and cash flow. The subscription model prices and delivers oursoftware differently than a perpetual license model. These changes reflect a significant shift from perpetual license sales in favor of providing our clients theright to access our software in a hosted environment or use downloaded software for a specified subscription period. The shift of our clients’ preference tosubscription-based offerings requires a scalable organization and a considerable investment of technical, financial, legal, managerial, and sales resources. Untilwe fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted. Operating performance, revenuemix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.Market acceptance of our subscription-based offerings will depend on our ability to continue to:•innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements; and•optimally price our products considering marketplace conditions, competition, our costs, and client demand.Our cloud-based subscription model also requires that we rely on third parties to host our software for our clients. We incur significant recurring third-partyhosting expenses to deliver our Pega Cloud offering that we do not incur for our perpetual and term license products. These expenses may cause the grossmargin we realize from our Pega Cloud sales to be lower than the gross margin we realize from our perpetual and term license products. If we are unable tomeet these challenges effectively, our operating results and financial condition could be materially adversely affected.The transition to a subscription-based business model gives rise to several risks, including:•our revenues and cash flows may fluctuate more than anticipated in the near term;•if the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flowbecause of our continued significant investments in our Pega Cloud offering;•if new or current clients desire only perpetual licenses, our subscription sales may trail our expectations;•we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption, and projected renewal rates, or wemay select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;•a failure to achieve the anticipated level of subscriptions may cause our revenue to decline and our business to be materially adversely affected on anongoing basis due to lower-than-expected recurring revenue; and•we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated.The metrics our investors and we use to monitor our business model transition may evolve during the transition as significant trends emerge. Therefore, it maybe difficult to accurately determine the impact of this transition on our business on a contemporaneous basis or to communicate the appropriate metrics to ourinvestors clearly.10 We may not achieve the key elements of our strategy and grow our business as anticipated.We currently intend to grow our business by pursuing strategic initiatives consistent with becoming a Rule of 40 company, meaning a company with combinedAnnual Contract Value (“ACV”) growth rate and free cash flow margin of at least 40%. Key elements of our strategy include increasing our market share bydeveloping and delivering robust solutions that can work together seamlessly with maximum differentiation and minimal customization, offering versatility inthe Pega Platform and application deployment and licensing options to meet the specific needs of our clients, growing our network of partner alliances, anddeveloping the talent and organizational structure capable of supporting our revenue and earnings growth targets. We may not achieve one or more of our keyinitiatives. Our success depends on our ability to manage our expenses as we appropriately grow our organization, successfully execute our marketing and salesstrategies, successfully incorporate acquired technologies into our unified Pega Platform, and develop new products or product enhancements. If we are notable to execute these actions, our business may not grow as we anticipate, and our operating results and financial condition could be materially adverselyaffected.We depend on key personnel, including our Chief Executive Officer, and must attract and retain qualified personnel in the future.Our business is dependent on key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer, whois also our founder and largest stockholder.The loss of key personnel could be disruptive to our operations and materially adversely affect our financial performance. We do not carry, nor do we currentlyintend to obtain, significant key-person life insurance on officers or other employees. Our success will depend on attracting and retaining qualified personneland, as needed, rapidly replacing and developing new management. The number of potential employees who have the extensive knowledge needed to develop,sell, and maintain our offerings is limited, and competition for their services is intense. There can be no guarantee that we will be able to attract and retain suchpersonnel. If we are unable to do so, our business, operating results, and financial condition could be materially adversely affected. We have from time to timein the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees withappropriate qualifications.In addition, we believe our corporate culture has been a key contributor to our success. Shifting workforce priorities, including an increase in remote workers,may make it more difficult to maintain important aspects of our corporate culture, negatively affecting our ability to retain and recruit personnel essential to oursuccess.The timing of our license and Pega Cloud revenue is difficult to predict, which may cause our operating results to vary considerably.A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloudarrangements, can cause our revenues and cash flows to fluctuate materially between periods. Revenue from subscription service arrangements, which includesPega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights becomeeffective, typically upfront. Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements aregenerally billed and collected upfront when the license rights become effective.Factors that may influence the predictability of our license and Pega Cloud revenue include:•changes in clients’ budgets and decision-making processes that could affect both the timing and size of transactions;•the timing of the execution of an agreement or our ability to deliver the products or services;•changes in our business model; and•our ability to execute our marketing and sales strategies.We budget for our selling and marketing, product development, and other expenses based upon anticipated future bookings and revenue. If the timing oramount of revenue fails to meet our expectations, our financial performance is likely to be materially adversely affected because only a small portion of ourexpenses vary with revenue. Other factors that may cause our operating results to vary include changes in foreign currency exchange rates, income tax effects,and the impact of new accounting pronouncements.As a result, period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon to predict future performance. Ifour revenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, ordue to other factors discussed elsewhere in this section, the price of our common stock may decline.11 The number and value of license and Pega Cloud arrangements has been increasing, and we may not be able to sustain this growth unless our partnersand we can provide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value fromour software.Our clients typically request consulting and training to assist them in implementing our license and Pega Cloud offerings. Our clients also usually purchasemaintenance on our perpetual and term licenses. As a result, an increase in the number and value of license and Pega Cloud arrangements is likely to increasedemand for consulting, training, and maintenance related to our offerings. Given that the number and value of our license and Pega Cloud arrangements hasbeen growing, we will need to provide our clients with more consulting, training, and maintenance to enable them to realize significant business value from oursoftware. We have been increasing our partner and client enablement through training to create an expanded ecosystem of people that are skilled in theimplementation of our solutions. However, if our partners and we are unable to provide sufficient high-quality consulting, training, and maintenance resources,our clients may not realize sufficient business value from our offerings to justify follow-on sales, which could impact our future financial performance.Further, some of our client engagements have high public visibility. If our partners or we encounter problems in helping these clients implement our license andPega Cloud offerings or if there is negative publicity regarding these engagements (even if unrelated to our services or offerings), our reputation could beharmed and our future financial performance could be negatively impacted. Finally, the investments required to meet the increased demand for our consultingservices could strain our ability to deliver our consulting engagements at desired profitability, thereby impacting our overall profitability and financial results.We may not be able to maintain our retention rate for our subscription clients.An increasing percentage of our revenue has been derived from our subscription offerings. Our clients have no obligation to renew their subscriptions, althoughhistorically, most have elected to do so. If our retention rate for those clients decreases, our business, operating results, and financial condition could bematerially affected.We are investing heavily in our business in anticipation of continued growth in license and Pega Cloud arrangements, and we may experience decreasedprofitability or losses and reduced or negative cash flow if we do not continue to increase the value of our license and Pega Cloud arrangements to balanceour growth in expenses.We expect to provide our clients with more cloud and maintenance support as our business grows and have been investing significantly in research anddevelopment to expand and improve the Pega Platform and applications. These investments have resulted in increased fixed costs that do not vary with thelevel of revenue. If the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negativecash flow because of these increased fixed costs. Conversely, if we are unable to achieve an appropriate balance of sales and marketing personnel to meetfuture demand or research and development personnel to enhance our current products or develop new products, we may not be able to achieve our sales andprofitability targets.We rely on third-party relationships.We have a number of relationships with third parties that are significant to our sales, marketing, support, and product development efforts, including hostingfacilities for our Pega Cloud offering. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supplymarketing and sales opportunities for our direct sales force and to strengthen our offerings using industry-standard tools and utilities. We also haverelationships with third parties that distribute our products. There can be no assurance that these companies, many of which have far greater financial andmarketing resources than us, will not develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships withus. Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their datasecurity, which despite our due diligence, may be or become inadequate, as further discussed below under the risk factor “We rely on third-party hostingproviders to deliver our offerings, and any disruption or interference with our use of these services could adversely affect our business.”We face risks from operations and clients based outside of the United States.We market our products and services to clients based outside of the U.S., representing 42% of our revenue over the last three years. We have established officesin the Americas, Europe, Asia, and Australia. We anticipate hiring additional personnel to accommodate increased international demand, and we may also enterinto agreements with local distributors, representatives, or resellers. If we are unable to do one or more of these things in a timely and effective manner, thegrowth, if any, of our international operations may be restricted, and our business, operating results, and financial condition could be materially adverselyaffected. Additional risks inherent in our international business activities include:•laws and business practices favoring local competitors;•compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy, and data privacy andprotection;•increased tariffs and other trade barriers;•the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses;•longer payment cycles and credit and collectability risk on our foreign trade receivables;•difficulties in enforcing contractual and intellectual property rights;12 •heightened fraud and bribery risks;•treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding,income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions on repatriating earnings and the threatof “double taxation”);•management of our international operations, including increased administrative and compliance expenses;•heightened risks of political and economic instability; and•foreign currency exchange rate fluctuations and controls.There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on ourbusiness, operating results, and financial condition.We are exposed to fluctuations in foreign currency exchange rates that could negatively impact our financial results and cash flows.Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates. Ourinternational sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreigncurrencies, which partially offset our foreign currency exposure on our international sales. Our results of operations and cash flows are subject to fluctuationsdue to changes in foreign currency exchange rates, particularly changes in the U.S. dollar, the Euro, and the Australian dollar relative to the British Pound.These exposures may change over time as business practices evolve.We have historically used but do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange rates. Wemay enter into hedging contracts again in the future if we believe it is appropriate. Our realized gain or loss for foreign currency fluctuations will depend on the size and type of cross-currency exposures that we enter into, the currencyexchange rates associated with these exposures and changes in those rates, whether we have entered forward contracts to offset these exposures, and otherfactors. All these factors could materially impact our operating results, financial condition, and cash flows.Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.We derive a substantial portion of our consulting revenue from implementations of new license and Pega Cloud arrangements managed by our consultingpersonnel and consulting for partner and client-led implementation efforts. Our strategy is to support and encourage partner-led and client-led implementationsto increase the breadth, capability, and depth of market capacity to deliver implementation services to our clients. Accordingly, if our consulting personnel’sinvolvement in future implementations decreases, this could materially adversely affect our consulting revenue.We frequently enter into a series of license or Pega Cloud arrangements that each focus on a specific purpose or area of operations. If we are notsuccessful in obtaining follow-on business from these clients, our financial performance could be materially adversely affected.Once a client has realized the value of our software, we work with the client to identify opportunities for follow-on sales. However, we may not be successfulin demonstrating this value for several reasons, including the performance of our products, the quality of the services and support provided by our partners andus, or external factors. Also, some of our smaller clients may have limited additional sales opportunities available. We may not obtain follow-on sales, or thefollow-on sales may be delayed, and our future revenue could be limited.We will need to acquire or develop new products, evolve existing ones, address defects or errors, and adapt to technology changes.Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets inwhich we operate. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existingand future software solutions obsolete and unmarketable. As a result, our success will depend upon our ability to enhance current products, address any productdefects or errors, acquire or develop and introduce new products that meet client needs, keep pace with technology and regulatory changes, respond tocompetitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement, and testing. We may nothave sufficient resources to make the necessary product development investments. We may experience technical or other difficulties that will delay or preventthe successful development, introduction, or implementation of new or enhanced products. We may also experience technical or other challenges integratingacquired technologies into our existing platform and applications. Inability to introduce or implement new or enhanced products in a timely manner couldresult in loss of market share if competitors are able to provide solutions to meet client needs before we do, give rise to unanticipated expenses related tofurther development or modification of acquired technologies, and materially adversely affect our financial performance. We may also fail to anticipateadequately and prepare for the development of new markets and applications for our technology and the commercialization of emerging technologies such asblockchain and thereby fail to take advantage of new market opportunities or fall behind early movers in those markets.13 The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.We encounter significant competition from:•customer engagement vendors, including Customer Relationship Management application vendors;•Digital Process Automation vendors and platforms, including Business Process Management vendors, low-code application development platforms, andservice-oriented architecture middleware vendors;•case management vendors;•decision management, data science, and Artificial Intelligence vendors, as well as vendors of solutions that leverage decision making and data science inmanaging customer relationships and marketing;•robotic automation and workforce intelligence software providers;•companies that provide application-specific software for financial services, healthcare, insurance, and other specific markets;•mobile application platform vendors;•co-browsing software providers;•social listening, text analytics, and natural language processing vendors;•commercialized open-source vendors;•professional services organizations that develop their own products or create custom software in conjunction with rendering consulting services; and•clients’ in-house information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.Many of our competitors, such as Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business MachinesCorporation (“IBM”), have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies,programming languages or standards, or changes in client requirements or preferences. Competitors may also be able to devote greater managerial andfinancial resources to develop, promote, and distribute products and to provide related consulting and training services.We believe the principal competitive factors within our market include:•product adaptability, scalability, functionality, and performance;•proven success in delivering cost-savings and efficiency improvements;•proven success in enabling improved customer interactions;•ease-of-use for developers, business units, and end-users;•timely development and introduction of new products and product enhancements;•establishment of a significant base of reference clients;•ability to integrate with other products and technologies;•customer service and support;•product price;•vendor reputation; and•relationships with systems integrators.Competition for market share and pressure to reduce prices and make sales concessions is likely to increase. There can be no assurance that we will be able tocompete successfully against current or future competitors or that the competitive pressures we face will not materially adversely affect our business, operatingresults, and financial condition.See "Competition" in Item 1 of this Annual Report for additional information.Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which couldmaterially adversely affect our other stockholders.As of December 31, 2022, our Chief Executive Officer beneficially owned approximately 48 percent of our outstanding common stock. As a result, he has theability to exert significant influence over all matters submitted to our stockholders for approval, including the election and removal of directors and any merger,consolidation, or sale of our assets. This concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, orother business combination involving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result inactions that may be opposed by other stockholders.14 If we are unsuccessful in the appeal of the trial court judgment in our litigation with Appian Corp., our operating results and financial condition would beadversely impacted.We are currently party to litigation with Appian Corp. - see Part I, Item 3 “Legal Proceedings” and "Note 20. Commitments And Contingencies" in the “Notesto Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report. On September 15, 2022, the circuit court of Fairfax County enteredjudgment for Appian in the amount of $2,060,479,287 and awarding post-judgment interest. The Company filed a notice of appeal from the judgment the sameday. On September 29, 2022, the court approved the $25,000,000 letter of credit obtained by the Company to secure the judgment and suspended the judgmentduring the pendency of the Company’s appeal. Appellate briefing is currently in process. Although it is not possible to predict timing, this appeals processcould potentially take years to complete.We believe we have strong grounds to overturn the result in the trial court. But if we are ultimately unsuccessful in prevailing in the matter in its entirety or insubstantially reducing any judgment, we may be required to incur additional debt or otherwise engage in capital markets transactions, which may include apublic offering or private placement of our equity securities or a sale or license of assets. See below under the risk factor, “We may require additional capital inthe future.” In addition, if we do not satisfy the judgment within 60 days following the expiration of the right to appeal, there may be an acceleration ofliabilities under our Convertible Senior Notes due 2025 (the “Notes”) and our Credit Facility. We believe that we have the financial strength to pay theseamounts if it ever becomes necessary, but it is possible that we may not be able to engage in financing activities on desirable terms, which could have amaterial adverse effect on our business, financial condition, and operating results. Further discussion of these risks is contained below under the heading “RisksRelated to Our Financial Obligations and Indebtedness.”Risks Related to Information Technology Resilience and SecurityWe face risks related to outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure.The increasing user traffic for our Pega Cloud offering demands more computing power. It requires that we maintain an internet connectivity infrastructure thatis robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary orpermanent loss of client data, power outages, or telecommunications infrastructure outages, by our third-party service providers or us, could diminish thequality of our user experience resulting in contractual liability, claims by clients and others, damage to our reputation, loss of current and potential clients, andnegatively impact our operating results and financial condition.Security of our systems and global client data is a growing challenge. Cyber-attacks and security breaches may expose us to significant legal and financialliabilities.High-profile security breaches at other companies have increased in recent years. Security industry experts and government officials have warned about therisks of hackers and cyber-attackers targeting information technology products and businesses. Threats to IT security can take a variety of forms. Individualhackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threatenour clients and us.Although we are not aware of having experienced any prior material data breaches, regulatory non-compliance incidents or cyber security incidents, we may inthe future be impacted by such an event, exposing our clients and us to a risk of someone obtaining access to our information, to information of our clients ortheir customers, or to our intellectual property, disabling or degrading service, or sabotaging systems or information. Any such security breach could result in aloss of confidence in the security of our services, damage our reputation, disrupt our business, require us to incur significant costs of investigation, remediationand/or payment of a ransom, lead to legal liability, negatively impact our future sales, and result in a substantial financial loss. Additionally, our Pega Cloudoffering provides provisioned, monitored, and maintained environments for individual clients to create and deploy Pega-based applications using an Internet-based infrastructure. These services involve storing and transmitting client data and other confidential information.Our security measures and those of our clients may be breached because of third-party actions or that of employees, consultants, or others, including intentionalmisconduct by computer hackers, system errors, human errors, technical flaws in our products, or otherwise. Because we do not control the configuration ofPega applications by our clients, the transmissions between our clients and our third-party technology providers, the processing of data on the servers at third-party technology providers, or the internal controls maintained by our clients and third-party technology providers that could prevent unauthorized access orprovide appropriate data encryption, we cannot fully ensure the complete integrity or security of such transmissions processing or controls. In addition, privacy,security, and data transmission concerns in some parts of the world may inhibit demand for our Pega Cloud offering or lead to requirements to provide ourproducts or services in configurations that may increase the cost of serving such markets. The techniques used to obtain unauthorized access or sabotagesystems change frequently and are generally only recognized once launched against a target. While we have invested in protecting our data and systems andclients' data to reduce these risks, there can be no assurance that our efforts will prevent breaches. We deal with security issues regularly and have experiencedsecurity incidents from time to time. Accordingly, there is a risk that a security breach will be successful, and such an event will be material. We carry databreach insurance coverage to mitigate the financial impact of a security breach, though this may prove insufficient in the event of a breach.15 Our Pega Cloud offering involves hosting client applications on the servers of third-party technology providers. We also rely on third-party systems andtechnology, including encryption, virtualized infrastructure, and support, and employ a shared security model with our clients and third-party technologyproviders.To defend against security threats, we need to continuously engineer products and services with enhanced security and reliability features, improve thedeployment of software updates to address security vulnerabilities, apply technologies that mitigate the risk of attacks, and maintain a digital securityinfrastructure that protects the integrity of our network, products, and services. The cost of these steps could negatively impact our operating results.We rely on third-party hosting providers to deliver our offerings, and any disruption or interference with our use of these services could adversely affect ourbusiness.Our use of third-party hosting facilities requires us to rely on the functionality and availability of the third-party services and their data security, which, despiteour due diligence, may be or become inadequate. Our continued growth depends in part on the ability of our existing and potential customers to use and accessour cloud services or our website to download our software within an acceptable amount of time. We use third-party service providers for key infrastructurecomponents, particularly when developing and delivering our cloud-based products. These service providers give us greater flexibility in efficiently deliveringa more tailored, scalable customer experience and expose us to additional risks and vulnerabilities. Third-party service providers operate platforms we accessand which are vulnerable to service interruptions. We may experience interruptions, delays, and outages in service and availability due to problems with ourthird-party service providers’ infrastructure. This infrastructure’s lack of availability could be due to many potential causes, including technical failures, powershortages, natural disasters, fraud, terrorism, or security attacks that we cannot predict or prevent. Such outages could trigger our service level agreements andthe issuance of credits to our clients, which may impact our business and consolidated financial statements.If we are unable to renew our agreements with our cloud service providers on commercially reasonable terms, an agreement is prematurely terminated, or weneed to add new cloud services providers to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expensesrelated to transferring to and providing support for these new platforms. Any of the above circumstances or events may harm our reputation and brand, reduceour platforms’ availability or usage, and impair our ability to attract new users, which could adversely affect our business, financial condition, and results ofoperations.We may experience significant errors or security flaws in our products and services and could face privacy, product liability, and warranty claims.Despite quality testing each release, our software frequently contains errors or security flaws, especially when first introduced or when new versions arereleased. Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or newversions of our software. Additionally, detecting and correcting any security flaws can be time-consuming and costly. Errors or security flaws in our softwarecould result in the inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties. Software errors andsecurity flaws in our products or services could expose us to privacy, product liability, or warranty claims and harm our reputation, which could impact ourfuture sales of products and services. Typically, we enter into license agreements that contain provisions intended to limit the nature and extent of our risk ofproduct liability and warranty claims. A court might interpret these terms in a limited way or hold part or all of them unenforceable. Also, there is a risk thatthese contract terms might not bind a party other than the direct client. Furthermore, some of our licenses with our clients are governed by non-U.S. law, andthere is a risk that foreign law might give us less or different protection. Although we have not experienced any material product liability claims to date, aproduct liability suit or action claiming a breach of warranty, whether meritorious, could result in substantial costs and a diversion of management’s attentionand our resources.Risks Related to Our Financial Obligations and IndebtednessWe have significant debt which may limit our business flexibility, access to capital, and/or increase our borrowing costs, which may adversely affect ouroperations and financial results.As of December 31, 2022, we had $600 million in aggregate principal indebtedness under our Notes and have outstanding letters of credit under our creditfacility, including a $25 million letter of credit obtained to secure the judgment in our litigation with Appian.Our indebtedness may:•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other general business purposes;•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general businesspurposes;•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 less leveraged competitors;•dilute existing stockholders from the issuance of common stock if the Notes are converted; and•increase our vulnerability to the impact of adverse economic and industry conditions.16 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 sufficient cash flow from operations to service our debt and makenecessary investments in our business. Our ability to refinance our indebtedness will depend on the capital market conditions and our financial condition atsuch 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 debtobligations. In turn, this could result in that and our other indebtedness becoming immediately payable in full which could materially adversely affect ourfinancial condition, results of operation or cost of borrowing.We may require additional capital in the future.We may require additional capital in the future to finance our operations. If we raise funds through future issuance of equity or convertible debt securities, ourexisting stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those ofholders of our common stock. Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial andoperations matters, which may increase the risks related to our business and our ability to service and repay our indebtedness.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 maturity at the current conversion rate of 7.4045shares of common stock per each $1,000 principal amount of Notes or an effective conversion price of $135.05 per share. Upon conversion of the Notes, unlesswe 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 Noteswill 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 amountof the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is ourintention 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 wemay 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 Notesbeing converted. In addition, our ability to make payments may be limited by law, regulatory authority, or agreements governing our future indebtedness. Ourfailure to repurchase Notes when the Indenture requires the repurchase or to pay any cash payable on the Notes’ future conversions as required by the Indenturewould constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreementsgoverning our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may nothave sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders ofNotes 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 theNotes as a current rather than long-term liability, which would result in a material reduction of our net working capital.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 CallTransactions are generally expected to reduce the potential dilution of our common stock upon any conversion of the Notes and/or offset any cash payments weare required to make in excess of the principal amount of converted Notes, with such reduction and/or offset subject to a cap. From time to time, the optioncounterparties or their respective affiliates may modify their hedge positions by entering into or unwinding derivative transactions with respect to our commonstock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions before the maturity of the Notes. This activitycould cause a decrease in the market price of our common stock.We are exposed to counterparty risk for 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 toperform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the optioncounterparties is not secured by any collateral. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditorwith 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 themarket price or the volatility of our common stock increases. In addition, upon default or other failures to perform, or termination of obligations, by an optioncounterparty, we may suffer more dilution in our common stock than we currently anticipate. We can provide no guarantee as to the financial stability orviability 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 aportion 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 casesbe 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.17 Furthermore, the Indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes ourobligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition maybe favorable to our stockholders.Conversion of the Notes may dilute the ownership interest of existing stockholders.If the Notes were converted, there would be dilution of the ownership interests of existing stockholders to the extent we deliver shares of our common stockupon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect our commonstock’s prevailing market prices. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notescould 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.We are required to comply with certain financial and operating covenants under our revolving credit facility. Failure to comply with these covenants couldcause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.We must comply with specified financial and operating covenants under our credit facility and make payments, limiting our ability to operate our business aswe otherwise might. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if notcured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. Wemight not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if weare not in compliance with the financial and operating covenants under the credit facility at the time we wish to borrow funds, we will be unable to borrowfunds. The financial and operating covenants under the credit facility may limit our ability to borrow funds or capital, including for strategic acquisitions, sharerepurchases, and other general corporate purposes.Risks Related to Intellectual Property and Government RegulationWe face risks related to intellectual property claims or appropriation of our intellectual property rights.We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements toprotect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patentsin strategically important global markets relating to the architecture of our systems. We cannot be certain that such patents will not be challenged, invalidated,or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts toprotect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard asproprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our effortsour former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature ofour proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do inthe U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently developsimilar technology.Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may inthe future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part I, Item3 “Legal Proceedings”, "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of thisAnnual Report and the preceding risk factor captioned “If we are unsuccessful in the appeal of the trial court judgment in our litigation with Appian Corp., ouroperating results and financial condition would be adversely impacted.”Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties andassert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable andenforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be materialgiven the size of certain of our transactions. We expect that software product developers, including us, will increasingly be subject to infringement and otherintellectual property violation claims as the number of products and competitors in our industry segment grows and the functionality of products in differentindustry segments overlaps. As evidenced by our previously mentioned litigation with Appian Corp., depending on when and how asserted, these claims, withor without merit, are often time-consuming, result in costly litigation and subject us to significant liability for damages. It is also possible that these claimsresult in treble damages if we are found to have willfully infringed patents or copyrights, cause product shipment and delivery delays, require us to enter intoroyalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty orlicensing agreements, if required, may not be available on terms acceptable to us or at all. Even if a license were available, we could be required to paysignificant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, whichcould require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit orstop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financialcondition.18 Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability touse certain technologies.Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights,trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. Inaddition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought againstthem. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which ourpatents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, orinfringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectualproperty claims.Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel fromour business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and theestimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and inestimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimablein one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations andfinancial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements onunfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which wecompete or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business. We are currently party tolitigation with Appian Corp. - see Part I, Item 3 “Legal Proceedings”, "Note 20. Commitments And Contingencies" in the “Notes to Consolidated FinancialStatements” included in Part II, Item 8 of this Annual Report and the preceding risk factor captioned “If we are unsuccessful in the appeal of the trial courtjudgment in our litigation with Appian Corp., our operating results and financial condition would be adversely impacted.” While we continue to believe that wehave the financial strength to pay these amounts if it ever becomes necessary, it is possible that we may not be able to engage in these activities on desirableterms, which could have a material adverse effect on our business, financial condition, and operating results.Our success depends in part on maintaining and increasing our sales to clients in the public sector.We derive a portion of our revenues from contracts with domestic and foreign governments and related agencies. We believe that our business’s success andgrowth will continue to depend on our successful procurement of government contracts. Selling to government entities can be highly competitive, expensive,and time-consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales.Factors that could impede our ability to maintain or increase the revenue derived from government contracts include:•changes in fiscal or contracting policies;•decreases in available government funding;•changes in government programs or applicable requirements;•the adoption of new laws or regulations or changes to existing laws or regulations;•potential delays or changes in the government appropriations or other funding authorization processes;•governments and governmental agencies requiring contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and•delays in the payment of our invoices by government payment offices.The occurrence of any of those factors could cause governments and governmental agencies to delay or refrain from purchasing our software in the future orotherwise harm our business, results of operations, financial condition, and cash flows.Further, to increase our sales to clients in the public sector, we must comply with laws and regulations relating to the formation, administration, performance,and pricing of contracts with the public sector, including U.S. federal, state, and local governmental bodies, which affect how our channel partners and we dobusiness in connection with governmental agencies. These laws and regulations may impose added costs on our business, and failure to comply with these lawsand regulations or other applicable requirements, including non-compliance in the past, could lead to claims for damages from our channel partners orgovernment clients, penalties, termination of contracts, loss of intellectual property rights, and temporary suspension or permanent debarment from governmentcontracting. Any such damages, penalties, disruptions, or limitations in our ability to do business with the public sector could have a material adverse effect onour business, results of operations, financial condition, and cash flows.19 We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures. Any failure to comply with these lawsand regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or otherwise have a material adverseeffect on our business, financial condition, and results of operations.We are subject to extensive federal, state, and foreign laws and regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K.Bribery Act, data privacy and security laws, and similar laws and regulations. The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similarforeign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to obtain or retain business. Similar laws andregulations exist in many other countries where we do or intend to do business.Within recent years, there has been an increase in the scope and enforcement of data privacy laws in the jurisdictions in which we do business. The EuropeanParliament adopted the General Data Protection Regulation (“GDPR”), effective May 2018, that extended the scope of European privacy laws to any entity thatcontrols or processes personal data of European Union residents in connection with the offer of goods or services or the monitoring of behavior and imposesnew compliance obligations concerning the handling of personal data. The California Consumer Privacy Act (“CCPA”), effective January 2020, requires,among other things, covered companies to provide new disclosure to consumers about such companies’ data collection, use and sharing practices, provide suchconsumers new ways to opt-out of certain sales or transfers of personal information, and provide consumers with additional causes of action. The CCPA wasmodified as of January 1, 2023 by the California Privacy Rights Act (“CPRA”) which expands California consumers’ rights with respect to sensitive personalinformation and which created a new state agency that is vested with authority to implement and enforce the CCPA and CPRA. Compliance with these varyingregimes has caused and will cause us to incur additional costs, including as may result from any non-compliance or asserted non-compliance.We have developed and implemented a compliance program based on what we believe are reasonable practices, including the background checking of ourcurrent partners and prospective clients and partners. We cannot guarantee, however, that we, our employees, our consultants, our partners, or our contractorsare or will be compliant with all federal, state, and foreign regulations, particularly as we expand our operations outside of the U.S. If our representatives or wefail to comply with any of these laws or regulations, a range of fines, penalties, and/or other sanctions could be imposed on us, which could have a materialadverse effect on our business, financial condition, and results of operations. Even if we are determined not to have violated these laws, government inquiriesinto these issues typically require the expenditure of significant resources and generate negative publicity, which could also harm our business. In addition,regulation of data privacy and security laws is increasing worldwide, including various restrictions on cross-border access or transfer of data, includingpersonal data of our employees, our clients, and customers of our clients. Compliance with such regulations may increase our costs, and there is a risk ofenforcement of such laws resulting in damage to our brand, as well as financial penalties and the potential loss of business, which could be significant.Our tax exposures could be greater than anticipated.The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment and there are manytransactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multipleU.S. and foreign jurisdictions. The determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities.We are undergoing inquiries, audits, and reviews by various taxing authorities. Any adverse outcome of any such audit or review could harm our business, andthe ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period orperiods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to coversuch eventualities, these reserves may prove insufficient.In addition, our future income taxes could be materially adversely affected by a shift in our jurisdictional income mix, by changes in the valuation of ourdeferred tax assets and liabilities, because of changes in tax laws, regulations, or accounting principles, as well as by certain discrete items. In the UnitedStates, such tax law changes will include the impact of the currently enacted mandatory capitalization of research and experimentation expenses, effective fortax years beginning after December 31, 2021 unless the effective date is retroactively postponed by the United States Congress. Globally, the Organization forEconomic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting is advancing fundamental changes to the internationalcorporate tax system creating new rules for allocating rights to tax global income and a global minimum tax.Considering fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative actions toincrease tax revenue, including corporate income taxes. Several U.S. states have attempted to increase corporate tax revenues by taking an expansive view ofcorporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, andtaxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount oftaxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe and elsewhere globally, various tax reform effortsunderway are designed to increase the taxes paid by corporate entities.20 If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions,and limitations.As of December 31, 2022, $48.8 million of our cash and cash equivalents were held in our foreign subsidiaries. If it becomes necessary or desirable torepatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation. We consider the earnings ofour foreign subsidiaries to be permanently reinvested. As a result, domestic and foreign taxes on such earnings have not been provided in our financialstatements. It is not practical to estimate the amount of tax we would have to pay upon repatriation due to the complexity of the tax laws and other factors.General Risk FactorsThe provision in our amended and restated bylaws, requiring exclusive forum in certain courts in The Commonwealth of Massachusetts or the federaldistrict court for the District of Massachusetts for certain types of lawsuits, may discourage lawsuits against us and our directors, officers, and employees.Our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the Business Litigation Section of theSuperior Court of Suffolk County, Massachusetts (the “BLS”) or, if the BLS lacks jurisdiction, the federal district court for the District of Massachusetts,Eastern Division, shall be the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of afiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to theMassachusetts Business Corporation Act (the “MBCA”), our articles of organization, or our bylaws (as each may be amended from time to time), or (iv) anyaction asserting a claim governed by the internal affairs doctrine.The choice of forum provision may increase costs to bring a claim, discourage claims, or limit a stockholder’s ability to bring a claim in a judicial forum that itfinds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us or our directors, officers, andother employees. Alternatively, if a court were to find the choice of forum provision in our amended and restated bylaws to be inapplicable or unenforceable inan action, we may incur additional costs associated with resolving such action in other jurisdictions. The exclusive forum provision in our amended andrestated bylaws will not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws,including the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or the respective rules and regulations promulgatedthereunder.Material adverse developments in global economic conditions, or the occurrence of certain other world events, could affect demand for our products,increase our costs of operation and harm our business.Global economic uncertainty has produced, and continues to produce, substantial stress, volatility, illiquidity and disruption of global credit and other financialmarkets. Various factors contribute to the uncertain economic environment, including the level and volatility of interest rates, high inflation, the conflictbetween Russia and Ukraine, the continuing effects of the COVID-19 pandemic, an actual recession or fears of a recession, trade policies and tariffs, andgeopolitical tensions. Economic uncertainty has and could continue to negatively affect the business and purchasing decisions of companies in industries inwhich our customers operate. As global economic conditions experience stress and negative volatility, or if there is an escalation in regional or global conflicts,the ability and willingness of our customers to make investments in technology may be impacted, which in turn may delay or reduce the purchases of oursoftware and services and also impact the ability and willingness of our customers to pay amounts due to us or otherwise honor their contractual commitments.These clients may also become subject to increasingly restrictive regulatory requirements, which could limit or delay their ability to proceed with technologypurchases and may result in longer sales cycles, increased price competition, and reductions in sales of our products and services. At the same time, factorssuch as inflation may increase our costs of operation. The combination of these factors could negatively impact our business, operating results, and financialcondition.Actual or threatened public health emergencies could harm our business.Our business and operations could be adversely affected by health epidemics, including the current COVID-19 pandemic, impacting the markets andcommunities in which we, our partners and clients operate. The COVID-19 pandemic has caused significant disruption to the business and financial markets,and there remains uncertainty about the duration of this disruption on both a nationwide and global level, as well as the ongoing effect on our business. The fullextent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on futuredevelopments that are uncertain and unpredictable. We continue to monitor the COVID-19 situation and potential effects on our business and operations. Whilethe spread and impact of COVID-19 has stabilized, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur.21 The market price of our common stock has been and is likely to continue to be volatile.The market price of our common stock may be highly volatile and fluctuate due to a variety of factors, some of which are related in complex ways.Factors that may affect the market price of our common stock include:•actual or anticipated fluctuations in our financial condition and operating results;•variance in our financial performance from expectations of securities analysts;•changes in our projected operating and financial results;•changes in the prices of our products and professional services;•changes in laws or regulations applicable to our products or services;•announcements by our competitors or us of significant business developments, acquisitions, or new offerings;•our involvement in any litigation or investigations by regulators, including litigation judgments, settlements, or other litigation-related costs;•our sale of our common stock or other securities;•changes in our Board of Directors, senior management, or key personnel;•the trading volume of our common stock;•price and volume fluctuations in the overall stock market;•changes in the anticipated future size and growth rate of our market; and•general economic, regulatory, political, and market conditions.Broad market and industry fluctuations, as well as general economic, regulatory, political, and market conditions, may negatively impact the market price ofour common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class actionlitigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stockprice to decline.We have provided and may continue to give guidance on our business, future operating results, and other business metrics. In developing this guidance, ourmanagement must make certain assumptions and judgments about our future performance. Furthermore, analysts and investors may develop and publish theirown projections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance orthat consensus due to a number of factors, many of which are outside of our control and which could materially adversely affect our operations and operatingresults. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating resultsfails to meet expectations of securities analysts, investors, or other interested parties, our common stock price may decline.If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price andtrading volume could decline.The trading market for our common stock depends partly on the research and reports that securities and industry analysts publish about us or our business. Wedo not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgradeour shares or change their opinion of our shares, our stock price will likely decline. If one or more of these analysts cease coverage of us or fail to publishreports on us regularly, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal administrative, sales, marketing, support, and research and development operations are in Cambridge, Massachusetts, Waltham, Massachusetts,and Hyderabad, India. We also maintain offices elsewhere in the Americas, Europe, and the Asia-Pacific regions. All of our properties are leased. We believewe will be able to obtain future space as needed on acceptable and commercially reasonable terms.See "Note 11. Leases" in Item 8 of this Annual Report for additional information.ITEM 3. LEGAL PROCEEDINGSThe information set forth in "Note 20. Commitments And Contingencies" in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of thisAnnual Report is incorporated herein by reference.22 ITEM 4. MINE SAFETY DISCLOSURESNot applicable.23 PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESMarket informationOur common stock is quoted on the NASDAQ Global Select Market under the symbol “PEGA.”HoldersAs of February 6, 2023, we had 51 stockholders of record.DividendsDuring 2022, 2021, and 2020, we paid a quarterly cash dividend of $0.03 per share of common stock. We currently expect to pay a quarterly cash dividend of$0.03 per share, however, the Board of Directors may terminate or modify this dividend program without prior notice.Issuer purchases of equity securities Common stock repurchased in the three months ended December 31, 2022:(in thousands, except per share amounts)Total Numberof SharesPurchasedAverage PricePaid perShare Total Numberof Shares Purchased as Part ofPublicly Announced ShareRepurchase ProgramApproximate DollarValue of Shares ThatMay Yet Be Purchased at PeriodEnd Under Publicly AnnouncedShare Repurchased ProgramsOctober 1, 2022 - October 31, 202243 $32.48 — $58,075 November 1, 2022 - November 30, 202244 $35.55 — $58,075 December 1, 2022 - December 31, 202282 $36.28 — $58,075 Total169 $35.13 (1) See "Stock repurchase program" in Item 7 of this Annual Report for additional information.(2) 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.(1) (2)(2)24 Stock performance graph and cumulative total stockholder return The following performance graph represents a comparison of the cumulative total stockholder return, assuming the reinvestment of dividends, for a $100investment on December 31, 2017 in our common stock, the Total Return Index for the NASDAQ Composite, a broad market index, and the Standard & Poor’s(“S&P”) North American Technology Sector - Software Index™ (“S&P NA Tech Software”), a published industry index.December 31,201720182019202020212022Pegasystems Inc.$100.00 $101.65 $169.54 $283.95 $238.47 $73.22 NASDAQ Composite$100.00 $97.16 $132.81 $192.47 $235.15 $158.65 S&P NA Tech Software$100.00 $112.64 $151.60 $230.28 $265.50 $169.86 (1) The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.ITEM 6. [RESERVED]ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSBUSINESS OVERVIEWWe develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change. Ourpowerful low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and governmentagencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega,our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams,world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Oursolutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, andreducing risk. Along with our partners, we deliver solutions tailored to the specific industry needs of our clients.(1)25 Subscription transitionWe are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which weexpect will occur in 2023, our operating results may be impacted. Operating performance, revenue mix, and new arrangements in each period can fluctuatebased on client preferences for our perpetual and subscription offerings. See risk factor "If we fail to manage our transition to a more subscription-basedbusiness model successfully, our results of operations and/or cash flows could be negatively impacted" in Item 1A of this Annual Report for additionalinformation.UkraineOur direct financial exposure to Ukraine, Russia, and Belarus is not material. In 2021, before Russia's invasion of Ukraine, we made a business decision to stoppursuing new clients in Russia and closed our local office. However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on futuredevelopments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries andglobally, all of which are uncertain and unpredictable.Performance metricsWe use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:Annual contract value (“ACV”)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 tocalculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV formaintenance. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscriptiontransition.26 Remaining performance obligations (“Backlog”)Reconciliation of GAAP Backlog and Constant Currency Backlog(in millions, except percentages)Q4 20221 Year Growth RateBacklog$1,356 1 %Impact of changes in foreign exchange rates39 3 %Backlog - Constant Currency$1,395 4 %Note: Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchangerates applicable as of Q4 2021. We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures andforecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to besuperior to or a substitute for financial measures prepared under U.S. GAAP.Free Cash Flow(in thousands, except percentages)Year EndedDecember 31,20222021ChangeCash provided by operating activities$22,336 $39,118 (43)%Investment in property and equipment(35,379)(10,456)Legal fees41,789 11,390 Interest on convertible senior notes4,500 4,500 Facilities— (18,000)Other6,805 115 Free cash flow$40,051 $26,667 50 %Total Revenue$1,317,845 $1,211,653 Free cash flow margin3 %2 %* not meaningful (1)27 (1) Our non-GAAP free cash flow measures reflect the following adjustments:•Investment in property and equipment: Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in ourfacilities. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.•Legal Fees: Includes legal and related fees arising from proceedings outside of the ordinary course of business. We believe excluding these expenses from our non-GAAP financial measures isuseful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.•Interest on convertible senior notes: In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. Webelieve excluding the interest payments provides a useful comparison of our operational performance in different periods.•Facilities: In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of$18 million, which was received in October 2021. We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 millionpayment, is not representative of our core business operations and ongoing operating performance.•Other: We have excluded capital advisory fees and fees incurred due to the cancellation of in-person sales and marketing events. We believe excluding these amounts from our non-GAAPfinancial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.RESULTS OF OPERATIONSRevenueSubscription transitionWe are transitioning our business to sell software primarily through subscription arrangements.This transition has impacted revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typicallyrecognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.(Dollars in thousands)20222021ChangePega Cloud$384,271 29 %$300,966 25 %$83,305 28 %Maintenance317,564 24 %320,257 26 %(2,693)(1)%Subscription services701,835 53 %621,223 51 %80,612 13 %Subscription license366,063 28 %336,248 28 %29,815 9 %Subscription1,067,898 81 %957,471 79 %110,427 12 %Perpetual license19,293 1 %32,172 3 %(12,879)(40)%Consulting230,654 18 %222,010 18 %8,644 4 %$1,317,845 100 %$1,211,653 100 %$106,192 9 %The revenue change in 2022 generally reflects the impact of our subscription transition.Other factors impacting our revenue include:•The U.S. dollar has strengthened against foreign currencies in our operating markets, which reduced total revenue growth by approximately 4 percent.•The decrease in maintenance revenue was primarily due to the continuing shift to Pega Cloud.•The increase in consulting revenue was primarily due to an increase in consultant billable hours in North America.Gross profit(Dollars in thousands)20222021ChangePega Cloud$267,523 70 %$202,171 67 %$65,352 32 %Maintenance295,576 93 %298,606 93 %(3,030)(1)%Subscription services563,099 80 %500,777 81 %62,322 12 %Subscription license363,421 99 %333,859 99 %29,562 9 %Subscription926,520 87 %834,636 87 %91,884 11 %Perpetual license19,118 99 %31,943 99 %(12,825)(40)%Consulting3,572 2 %8,711 4 %(5,139)(59)%$949,210 72 %$875,290 72 %$73,920 8 %The gross profit change in 2022 was primarily due to a shift in the revenue mix.•The increase in Pega Cloud gross profit percent was primarily due to cost-efficiency gains as Pega Cloud grows and scales.•The decrease in consulting gross profit percent was due to an increase in consultant availability.28 Operating expenses20222021Change(Dollars in thousands)% of Revenue% of RevenueSelling and marketing$624,789 47 %$625,886 52 %$(1,097)— %Research and development$294,349 22 %$260,630 22 %$33,719 13 %General and administrative$117,734 9 %$83,506 7 %$34,228 41 %Restructuring$21,743 2 %$— — %$21,743 ** not meaningful•The decrease in selling and marketing was primarily due to a decrease in marketing programs of $12.1 million, partially offset by an increase inprofessional services of $4.9 million and an increase in facilities expense of $4.9 million.•The increase in research and development was primarily due to an increase in compensation and benefits of $24.2 million, attributable to an increase inheadcount and incentive compensation, and an increase in facilities expense of $4.2 million. The increase in headcount reflects additional investments indeveloping our solutions.•The increase in general and administrative was primarily due to an increase in compensation and benefits of $8.4 million, an increase in facilities expenseof $2.9 million, and an increase in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $16.4million. We have incurred and expect to continue to incur additional costs for these proceedings in 2023. See "Note 20. Commitments And Contingencies"in Item 8 and Item 1A. “Risk Factors” in this Annual Report for additional information.•During the fourth quarter of 2022, management committed to a restructuring plan aligned with our target organization go-to-market strategy andcommitment to be a Rule of 40 managed company. The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated withseverance and benefits for impacted employees and expenses incurred as a result of the closure of our Salem, New Hampshire office.Other income and expenses(Dollars in thousands)20222021ChangeForeign currency transaction gain (loss)$4,560 $(6,459)$11,019 *Interest income1,643 704 939 133 %Interest expense(7,792)(7,956)164 2 %(Loss) gain on capped call transactions(57,382)(23,633)(33,749)(143)%Other income, net6,579 89 6,490 7,292 %$(52,392)$(37,255)$(15,137)(41)%* not meaningful•The increase in foreign currency transaction gain (loss) was primarily due to the impact of fluctuations in foreign currency exchange rates associated withforeign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.•The increase in interest income was primarily due to increases in market interest rates.•The increase in (loss) gain on capped call transactions was due to fair value adjustments for our capped call transactions. See "Note 14. Fair ValueMeasurements" in Item 8 of this Annual Report for additional information.•The increase in other income, net was due to gains on our venture investments.Provision for (benefit from) income taxes(Dollars in thousands)20222021Provision for (benefit from) income taxes$183,785 $(68,947)Effective income tax rate (benefit rate)114 %(52)%The change in the effective income tax rate (benefit rate) in 2022 was primarily due to the recognition of a full valuation allowance of $188.3 million on ourU.S. and U.K. deferred tax assets.29 LIQUIDITY AND CAPITAL RESOURCES(in thousands)20222021Cash (used in) provided byOperating activities$22,336 $39,118 Investing activities13,075 72,503 Financing activities(46,989)(121,843)Effect of exchange rate on cash and cash equivalents(3,333)(1,712)Net (decrease) in cash and cash equivalents$(14,911)$(11,934)December 31,(in thousands)20222021Held in U.S. entities$248,389 $274,813 Held in foreign entities48,832 87,966 Total cash, cash equivalents, and marketable securities$297,221 $362,779 We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fundour operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whetherthese resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed tosupport our operations. We may utilize available funds or seek external financing if we require additional capital resources.If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes uponrepatriation. However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay. Seerisk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, otherrestrictions, and limitations" in Item 1A of this Annual Report for additional information.Cash provided by operating activitiesWe are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continueaffecting our billings and cash collections. Subscription licenses and services are typically billed and collected over the contract term, while perpetual licensearrangements are generally billed and collected upfront when the license rights become effective.The change in cash provided by operating activities in 2022 was primarily due to our subscription transition and increased costs as we invested in research anddevelopment to support the development of our offerings, partially offset by strong client collections. In addition, in 2022 and 2021, we incurred $34.6 millionand $18.2 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business. We expect to continueto incur additional costs for these proceedings. See "Note 20. Commitments And Contingencies" in Item 8 and Item 1A. “Risk Factors” in this Annual Reportfor additional informationInvesting activitiesThe change in cash provided by investing activities in 2022 was primarily driven by our investments in financial instruments and capital expenditures for ourrecently completed office in Waltham, Massachusetts. See "Note 11. Leases" in Item 8 of this Annual Report for additional information.Financing activitiesDebt financingIn February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025.In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNCBank, National Association. As of December 31, 2022, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstandingletters of credit which reduce the available borrowing capacity. See "Note 12. Debt" in Item 8 of this Annual Report for additional information.30 Stock repurchase programChanges in the remaining stock repurchase authority:(in thousands)2022December 31, 2021$22,583 Authorizations 60,000 Repurchases (24,508)December 31, 2022$58,075 (1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.(2) Purchases under this program have been made on the open market.Common stock repurchases20222021(in thousands)SharesAmountSharesAmountRepurchases paid280 $24,508 422 $52,411 Repurchases unpaid at period end— — 10 1,199 Stock repurchase program280 24,508 432 53,610 Tax withholdings for net settlement of equity awards342 20,620 550 69,925 622 $45,128 982 $123,535 During 2022 and 2021, instead of receiving cash from the equity holders for the exercise price of options, we withheld shares with a value of $14.3 million and$56.1 million, respectively. These amounts have been excluded from the table above.Dividends(in thousands)20222021Dividend payments to stockholders$9,834 $9,761 We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without priornotice.Contractual obligationsAs of December 31, 2022, our contractual obligations were:Payments due by period(in thousands)20232024202520262027 andthereafterOtherTotalConvertible senior notes $4,500 $4,500 $602,250 $— $— $— $611,250 Purchase obligations 21,708 18,525 20,471 14,646 14 — 75,364 Operating lease obligations18,476 17,101 14,444 10,860 49,079 — 109,960 Investment commitments1,000 — — — — — 1,000 Liability for uncertain tax positions — — — — — 3,207 3,207 $45,684 $40,126 $637,165 $25,506 $49,093 $3,207 $800,781 (1) Includes principal and interest.(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services, software subscriptions, and sales and marketing programs.(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.A detailed discussion and analysis of the 2021 year-over-year changes can be found in "Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2021.CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTSManagement’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which havebeen prepared following accounting principles generally accepted in the U.S. and the rules and regulations of the U.S. Securities and ExchangeCommission for annual financial reporting. Preparing these financial statements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments onhistorical experience, knowledge of current conditions, and beliefs about what could occur in the future, given the available information.We believe that of our significant accounting policies, described in “Note 2. Significant Accounting Policies” in Item 8 of this Annual Report, thefollowing accounting policies are most important to the portrayal of our financial condition and require the most subjective judgment. Accordingly, theseare the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.(1)(2)(1)(2)(3)31 Revenue recognitionOur client contracts typically contain promises by us to provide multiple products and services. Specifically, contracts associated with Pega Platform sales andother software applications, sold as licenses to use functional intellectual property or as a cloud-based solution, typically include consulting services.Determining whether such products and services within a client contract are considered distinct performance obligations that should be accounted forseparately requires significant judgment. Accordingly, we review client contracts to identify all separate promises to transfer goods and services that would beconsidered performance obligations. Judgment is also required in determining whether an option to acquire additional products and services within a clientcontract represents a material right that the client would not receive without entering into that contract.A contract modification is a legally binding change to an existing contract’s scope, price, or both. Contract modifications are reviewed to determine whetherthey should be accounted for as part of the original contract or as a separate contract. This determination requires significant judgment, which could impact thetiming of revenue recognition. We typically account for contract modifications prospectively as a separate contract. The additional performance obligation(s) inour contract modifications are generally distinct and priced at their stand-alone selling price.We allocate the transaction price to the distinct performance obligations, including options in contracts determined to represent a material right, based on eachperformance obligation's relative stand-alone selling price. Judgment is required in estimating stand-alone selling prices. We maximize the use of observableinputs by maintaining pricing analyses that consider our pricing policies, historical stand-alone sales when they exist, and historical renewal prices charged toclients. We have concluded that the stand-alone selling prices of certain performance obligations, specifically software licenses and Pega Cloud arrangements,are highly variable. In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on the total transaction priceminus the stand-alone selling price of other performance obligations promised in the contract. We update our stand-alone selling price analysis periodically,including a re-assessment of whether the residual approach used to determine the stand-alone selling prices for software licenses and Pega Cloud arrangementsremains appropriate.Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantlyimpact the timing and amount of revenue we report in a particular period.See "Note 2. Significant Accounting Policies", "Note 4. Receivables, Contract Assets, And Deferred Revenue", and "Note 15. Revenue" in Item 8 of thisAnnual Report for additional information.Goodwill and intangible assets impairmentOur goodwill and intangible assets arise from our previous business acquisitions.•Goodwill is tested for impairment at least annually or as circumstances indicate its value may no longer be recoverable.•We do not have any intangible assets with indefinite useful lives other than goodwill.•We perform our annual goodwill impairment test as of November 30th. To assess if goodwill is impaired, we first perform a qualitative assessment todetermine whether further impairment testing is necessary. If, based on the qualitative assessment, we consider it more-likely-than-not that our reportingunit's fair value is less than its carrying amount, we perform a quantitative impairment test. An excess of carrying value over fair value would indicate thatgoodwill may be impaired.•We periodically reevaluate our business and have determined that we have one operating segment and one reporting unit. If our assumptions change in thefuture, we may be required to record impairment charges to reduce our goodwill's carrying value. Changes in the valuation of goodwill could materiallyimpact our operating results and financial position.We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that such assets' carrying amount may not berecoverable. In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, butnot limited to:•whether there has been a significant adverse change in the business climate that affects the value of an asset;•whether there has been a significant change in the extent or way an asset is used; and•whether it is expected that the asset will be sold or disposed of before the end of its originally estimated useful life.If indicators of impairment are present, we compare the estimated undiscounted cash flows that the asset is expected to generate to the carrying value. Thekey assumptions of the cash flow model involve significant subjectivity. If such assets are impaired, an impairment is measured by the amount the asset’scarrying value exceeds its fair value.As of December 31, 2022, we had $81.4 million of goodwill and $10.9 million of intangible assets. Changes in the valuation of long-lived assets couldmaterially impact our operating results and financial position. To date, there have been no impairments of goodwill or intangible assets.See "Note 2. Significant Accounting Policies" and "Note 7. Goodwill And Other Intangible Assets" in Item 8 of this Annual Report for additionalinformation.32 Accounting for income taxesSignificant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties inapplying accounting principles and complex tax laws. Accordingly, changes in tax laws or our interpretation of tax laws and the resolution of any tax auditscould significantly impact our financial statements.We regularly assess the need for a valuation allowance against our deferred tax assets. The future realization of our deferred tax assets ultimately depends onsufficient taxable income within the available carryback or carryforward periods. Changes in our valuation allowance impact income tax expense in the periodof adjustment. Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income basedon historical and projected information.We recognize deferred tax assets to the extent that we believe that they are more likely than not to be realized. In making such a determination, we consider allavailable objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, our firm contractualbacklog, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations. In 2022, wedetermined that the objectively and verifiable negative evidence outweighed the positive evidence, and we recorded a full valuation allowance of $188.3million on our U.S. and U.K. deferred tax assets.We assess our income tax positions and record tax benefits based on management’s evaluation of the facts, circumstances, and information available at thereporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit witha greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financialstatements.As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In theordinary course of our business, transactions and calculations occur whose ultimate tax outcome cannot be certain. Some of these uncertainties arise due totransfer pricing for transactions with our subsidiaries, the determination of tax nexus, and tax credit estimates. In addition, the calculation of acquired taxattributes and the associated limitations are complex. We estimate our exposure to unfavorable outcomes related to these uncertainties and the probabilityof such outcomes.Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not be different from what is reflected in ourhistorical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a materialimpact on our income tax provision and operating results in the period in which such a determination is made.See "Note 2. Significant Accounting Policies" and "Note 18. Income Taxes" in Item 8 of this Annual Report for additional information.Capped call transactionsIn February 2020, we issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a privateplacement. We also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped CallTransactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generallyexpected to reduce potential dilution of our common stock upon any conversion of the Notes.The Capped Call Transactions are accounted for as derivative instruments and 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 following the governing documents, may not represent a fairvalue measurement. Applying the accounting framework for the Capped Call Transactions requires the exercise of judgment and the determination of the fairvalue of the Capped Call Transactions requires us to make significant estimates and assumptions.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 valuationmodel uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividendyield. Management applies judgment when determining expected volatility. We consider the underlying equity security’s historical and implied volatility levels.As of December 31, 2022, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $3.6 million, while ahypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $1.7 million.See "Note 2. Significant Accounting Policies", "Note 12. Debt", and "Note 14. Fair Value Measurements" in Item 8 of this Annual Report for additionalinformation.33 Loss ContingenciesWe are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating togovernmental laws and regulations, and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonablyestimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particularcontingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the informationavailable and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it iscommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterlyto determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonablypossible or probable, but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as incurred when the legalservices are provided.We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of thepotential loss or range of the loss can be made.See "Note 2. Significant Accounting Policies" and "Note 20. Commitments And Contingencies" in Item 8 of this Annual Report for additional information.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket risk represents the risk of loss that may affect us due to adverse financial market price and rate changes.Foreign currency exposureTranslation riskOur foreign operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated inforeign 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:202220212020(Decrease) in revenue(3)%(4)%(4)%Increase (decrease) in net income2 %1 %12 %Remeasurement riskWe experience fluctuations in transaction gains or losses from the remeasurement of monetary assets and liabilities denominated in currencies other than thefunctional 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 cashequivalents, accounts receivable, unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functionalentity.A hypothetical 10% strengthening in the British pound exchange rate against the Australian dollar, Euro, and U.S. dollar would result in the following impact:(in thousands)December 31, 2022December 31, 2021December 31, 2020Foreign currency (loss) gain$(10,164)$(8,352)$(7,782)34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm (PCAOB ID No. 34)36Consolidated Balance Sheets as of December 31, 2022 and 202138Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 202039Consolidated Statements of Comprehensive (Loss) for the years ended December 31, 2022, 2021, and 202040Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022, 2021, and 202041Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 202042Notes to Consolidated Financial Statements4335 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the stockholders and the Board of Directors of Pegasystems Inc.Cambridge, MassachusettsOpinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements ofoperations, comprehensive (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the“financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, inour opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control —Integrated Framework (2013) issued by COSO.Basis for OpinionsThe Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s report on and changes in internal control over financial reporting. Our responsibility is to express an opinion on thesefinancial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulationsof the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing proceduresto respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the auditcommittee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. Thecommunication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providinga separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Revenue Recognition - Software License Arrangements — Refer to Note 2 to the financial statementsCritical Audit Matter DescriptionThe Company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the Company’s Pega Platform and other software applications,maintenance revenue from client support, and services revenue primarily derived from cloud sales of the Company’s hosted Pega Platform and other software applications and consulting services.The Company’s license and cloud contracts with clients (“arrangements”) often contain multiple performance obligations. These performance obligations may be included in the same contract ornegotiated separately. Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications. Certain complex arrangements require thatmanagement performs a detailed analysis of the contractual terms and the application of more complex accounting guidance. Factors with potentially significant judgements include:•Identification of the complete client arrangement•Accounting treatment of contract modifications•Valuation and allocation of identified material rights•Allocation of arrangement consideration to bundled fixed price work ordersGiven the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved a high degree ofauditor judgment when performing audit procedures and evaluating the license and cloud revenue arrangements.36 How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to license and cloud revenue arrangements included the following, among others:•We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment ofcontract modifications, valuation and allocation of identified material rights, and allocation of arrangement consideration.•We selected a sample of client arrangements, and performed the following:◦Evaluated whether the Company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.◦Evaluated whether the Company appropriately identified all performance obligations in the arrangement and whether the methodology to allocate the transaction price to theindividual performance obligations was appropriately applied.◦Tested the accuracy of management’s calculation of revenue for each performance obligation by developing an expectation for the revenue to be recorded in the current periodand comparing it to the Company’s recorded balances.◦Evaluated management’s assessment of any ongoing negotiations with clients and bundling with statements of work.◦Analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products and services inthe original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products andservices.◦Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represent material rights included in the contractand whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.◦For contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each project willrequire and independently recalculated the stand-alone selling price for each bundled fixed price service.◦Obtained evidence of delivery of the elements of the arrangement to the client./s/ Deloitte & Touche LLPBoston, MassachusettsFebruary 15, 2023We have served as the Company's auditor since 2000.37 PEGASYSTEMS INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)December 31, 2022December 31, 2021AssetsCurrent assets:Cash and cash equivalents$145,054 $159,965 Marketable securities152,167 202,814 Total cash, cash equivalents, and marketable securities297,221 362,779 Accounts receivable255,150 182,717 Unbilled receivables213,719 226,714 Other current assets80,388 68,008 Total current assets846,478 840,218 Unbilled receivables95,806 129,789 Goodwill81,399 81,923 Other long-term assets333,989 541,601 Total assets$1,357,672 $1,593,531 Liabilities and stockholders’ equityCurrent liabilities:Accounts payable$18,195 $15,281 Accrued expenses50,355 63,890 Accrued compensation and related expenses127,728 120,946 Deferred revenue325,212 275,844 Other current liabilities17,450 9,443 Total current liabilities538,940 485,404 Convertible senior notes, net593,609 590,722 Operating lease liabilities79,152 87,818 Other long-term liabilities15,128 13,499 Total liabilities1,226,829 1,177,443 Commitments and contingencies (Note 20)Stockholders’ equity:Preferred stock, $0.01 par value, 1,000 shares authorized; none issued— — Common stock, $0.01 par value, 200,000 shares authorized; 82,436 and 81,712 shares issued and outstanding as of December 31, 2022and 2021, respectively824 817 Additional paid-in capital229,602 145,810 (Accumulated deficit) retained earnings(76,513)276,449 Accumulated other comprehensive (loss)Net unrealized gain on available-for-sale securities, net of tax517 686 Foreign currency translation adjustments(23,587)(7,674)Total stockholders’ equity130,843 416,088 Total liabilities and stockholders’ equity$1,357,672 $1,593,531 See notes to consolidated financial statements.38 PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)Year Ended December 31,202220212020RevenueSubscription services$701,835 $621,223 $504,977 Subscription license366,063 336,248 266,352 Perpetual license19,293 32,172 28,558 Consulting230,654 222,010 217,630 Total revenue1,317,845 1,211,653 1,017,517 Cost of revenueSubscription services138,736 120,446 98,886 Subscription license2,642 2,389 2,644 Perpetual license175 229 284 Consulting227,082 213,299 209,099 Total cost of revenue368,635 336,363 310,913 Gross profit949,210 875,290 706,604 Operating expensesSelling and marketing624,789 625,886 545,693 Research and development294,349 260,630 236,986 General and administrative117,734 83,506 67,452 Restructuring21,743 — — Total operating expenses1,058,615 970,022 850,131 (Loss) from operations(109,405)(94,732)(143,527)Foreign currency transaction gain (loss)4,560 (6,459)3,704 Interest income1,643 704 1,223 Interest expense(7,792)(7,956)(19,356)(Loss) gain on capped call transactions(57,382)(23,633)31,697 Other income, net6,579 89 1,370 (Loss) before provision for (benefit from) income taxes(161,797)(131,987)(124,889)Provision for (benefit from) income taxes183,785 (68,947)(63,516)Net (loss)$(345,582)$(63,040)$(61,373)(Loss) per shareBasic$(4.22)$(0.77)$(0.76)Diluted$(4.22)$(0.77)$(0.76)Weighted-average number of common shares outstandingBasic81,947 81,387 80,336 Diluted81,947 81,387 80,336 See notes to consolidated financial statements.39 PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)(in thousands)Year Ended December 31,202220212020Net (loss)$(345,582)$(63,040)$(61,373)Other comprehensive (loss) income, net of taxUnrealized (loss) gain on available-for-sale securities(169)640 46 Foreign currency translation adjustments(15,913)(4,680)10,234 Total other comprehensive (loss) income, net of tax(16,082)(4,040)10,280 Comprehensive (loss)$(361,664)$(67,080)$(51,093)See notes to consolidated financial statements.40 PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except per share amounts)Common StockAdditionalpaid-incapitalRetainedearnings(accumulateddeficit)Accumulated othercomprehensive (loss)Totalstockholders’equityNumberof sharesAmountJanuary 1, 202079,599 $796 $140,523 $410,919 $(13,228)$539,010 Equity component of convertible senior notes, net— — 61,604 — — 61,604 Repurchase of common stock(278)(3)(28,271)— — (28,274)Issuance of common stock for stock compensation plans1,536 16 (75,578)— — (75,562)Issuance of common stock under the employee stock purchase plan33 — 3,039 — — 3,039 Stock-based compensation— — 103,115 — — 103,115 Cash dividends declared ($0.12 per share)— — — (9,667)— (9,667)Other comprehensive income— — — — 10,280 10,280 Net (loss)— — — (61,373)— (61,373)December 31, 202080,890 $809 $204,432 $339,879 $(2,948)$542,172 Cumulative-effect adjustment from adoption of ASU 2020-06, net— — (61,604)9,399 — (52,205)Repurchase of common stock(432)(5)(53,605)— — (53,610)Issuance of common stock for stock compensation plans1,153 12 (69,937)— — (69,925)Issuance of common stock under the employee stock purchase plan101 1 10,553 — — 10,554 Stock-based compensation— — 115,971 — — 115,971 Cash dividends declared ($0.12 per share)— — — (9,789)— (9,789)Other comprehensive (loss)— — — — (4,040)(4,040)Net (loss)— — — (63,040)— (63,040)December 31, 202181,712 $817 $145,810 $276,449 $(6,988)$416,088 Repurchase of common stock(280)(2)(24,506)— — (24,508)Issuance of common stock for stock compensation plans754 7 (20,627)— — (20,620)Issuance of common stock under the employee stock purchase plan250 2 9,170 — — 9,172 Stock-based compensation— — 122,229 — — 122,229 Cash dividends declared ($0.12 per share)— — (2,474)(7,380)— (9,854)Other comprehensive (loss)— — — — (16,082)(16,082)Net (loss)— — — (345,582)— (345,582)December 31, 202282,436 $824 $229,602 $(76,513)$(23,070)$130,843 See notes to consolidated financial statements.41 PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)Year Ended December 31,202220212020Operating activitiesNet (loss)$(345,582)$(63,040)$(61,373)Adjustments to reconcile net (loss) to cash provided by (used in) operating activitiesStock-based compensation122,210 115,947 103,068 Deferred income taxes168,890 (75,336)(59,777)Loss (gain) on capped call transactions57,382 23,633 (31,697)Amortization of deferred commissions53,471 41,387 33,302 Lease expense15,940 13,277 16,248 Amortization of intangible assets and depreciation18,780 28,593 21,348 Foreign currency transaction (gain) loss(4,560)6,459 (3,704)Other157 7,730 15,007 Change in operating assets and liabilities:Accounts receivable, unbilled receivables, and contract assets(51,157)(11,957)(32,321)Other current assets(9,133)17,209 (12,959)Other current liabilities529 (18,726)37,945 Deferred revenue62,578 41,279 43,661 Deferred commissions(53,857)(71,451)(55,175)Other long-term assets and liabilities(13,312)(15,886)(14,136)Cash provided by (used in) operating activities22,336 39,118 (563)Investing activitiesPurchases of investments(41,015)(79,121)(326,549)Proceeds from maturities and called investments66,583 105,977 28,811 Sales of investments23,808 61,096 1,424 Payments for acquisitions, net of cash acquired(922)(4,993)— Investment in property and equipment(35,379)(10,456)(25,369)Cash provided by (used in) investing activities13,075 72,503 (321,683)Financing activitiesProceeds 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)Proceeds from employee stock purchase plan9,172 10,554 3,039 Dividend payments to stockholders(9,834)(9,761)(9,628)Common stock repurchases for tax withholdings for net settlement of equity awards(20,620)(69,925)(75,562)Common stock repurchases under stock repurchase program(25,707)(52,711)(27,974)Cash (used in) provided by financing activities(46,989)(121,843)423,448 Effect of exchange rate changes on cash and cash equivalents(3,333)(1,712)2,334 Net (decrease) increase in cash and cash equivalents(14,911)(11,934)103,536 Cash and cash equivalents, beginning of period159,965 171,899 68,363 Cash and cash equivalents, end of period$145,054 $159,965 $171,899 Supplemental disclosuresInterest paid on convertible notes$4,500 $4,500 $2,338 Income taxes paid (refunded)$7,645 $(4,552)$3,377 Non-cash investing and financing activity:Investment in property and equipment included in accounts payable and accrued liabilities$9,914 $2,143 $825 Dividends payable$2,474 $2,454 $2,428 See notes to consolidated financial statements.42 PEGASYSTEMS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. BASIS OF PRESENTATIONBusinessThe Company develops, markets, licenses, hosts, and supports enterprise software that helps organizations build agility into their business. The Company’slow-code platform for workflow automation and artificial intelligence-powered decisioning enables clients to personalize customer experiences, streamlinecustomer service, and automate business processes and workflows. The Company provides consulting, training, support, and hosting services to facilitatethe use of its software.Management estimates and reportingThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requiresmanagement to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from thoseestimates. Accounts with reported amounts based on significant estimates and judgments include, but are not limited to, revenue, unbilled receivables,deferred revenue, deferred income taxes, deferred commissions, income taxes payable, convertible senior notes, capped call transactions, intangible assets,and goodwill.Principles of consolidationThe Company’s consolidated financial statements reflect Pegasystems Inc. and subsidiaries in which the Company holds a controlling financial interest.All intercompany accounts and transactions were eliminated in consolidation.ReclassificationsCertain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current yearpresentation. Such reclassifications did not affect total revenues, (loss) from operations, or net (loss).2. SIGNIFICANT ACCOUNTING POLICIESRevenueThe Company’s revenue is primarily derived from:•Subscription services, composed of revenue from Pega Cloud and maintenance. Pega Cloud is the Company’s hosted Pega Platform and softwareapplications. Maintenance revenue is earned from providing client support, software upgrades, and bug fixes or patches.•Subscription license, composed of revenue from term license arrangements for the Company’s Pega Platform and software applications. Term licensesrepresent functional intellectual property and are delivered separately from maintenance and services.•Perpetual license, composed of revenue from perpetual license arrangements for the Company’s Pega Platform and software applications. Perpetuallicenses represent functional intellectual property and are delivered separately from maintenance and services.•Consulting, primarily related to new software license implementations, training, and reimbursable costs.Performance obligationsThe Company’s software license and Pega Cloud arrangements often contain multiple performance obligations. If a contract contains multiple performanceobligations, the Company accounts for each distinct performance obligation separately. The transaction price is allocated to the separate performanceobligations on a relative stand-alone selling price basis. Any discounts or expected potential future price concessions are considered when determining the totaltransaction price. The Company’s policy is to exclude sales and similar taxes collected from clients from the determination of transaction price.43 The Company’s typical performance obligations are:PerformanceobligationHow stand-alone selling price is typicallydeterminedWhen performance obligation is typically satisfiedWhen payment is typically dueIncome statement lineitemPerpetual licenseResidual approachUpon transfer of control to the client, defined as whenthe client can use and benefit from the license (point intime)Effective date of the licensePerpetual licenseTerm licenseResidual approachUpon transfer of control to the client, defined as whenthe client can use and benefit from the license (point intime)Annually, or more frequently, overthe term of the licenseSubscription licenseMaintenanceConsistent pricing relationship as a percentage of therelated license and observable in stand-alone renewaltransactions Ratably over the term of the maintenance (over time)Annually, or more frequently, overthe term of the maintenanceSubscription servicesPega CloudResidual approachRatably over the term of the service (over time)Annually, or more frequently, overthe term of the serviceSubscription servicesConsulting- time andmaterialsObservable hourly rate for time and materials-basedservices in similar geographiesBased on hours incurred to date (over time)MonthlyConsultingConsulting- fixed priceObservable hourly rate for time and materials-basedservices in similar geographies multiplied byestimated hours for the projectBased on hours incurred as a percentage of totalestimated hours (over time)As contract milestones are achievedConsulting(1) Technical support and software updates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.The Company utilizes the residual approach for software license and Pega Cloud performance obligations since the selling price is highly variable and thestand-alone selling price is not discernible from past transactions or other observable evidence. Periodically, the Company reevaluates whether the residualapproach remains appropriate. As required, the Company evaluates its residual approach estimate compared to all available observable data before concludingthe estimate represents its stand-alone selling price.If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to theclient that the client would not receive without entering into that contract. Discounts on options to purchase additional products and services greater thandiscounts available to similar clients are accounted for as an additional performance obligation.During most of each client contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfercontrol of the performance obligation related to the software license at the inception of the contract term. A significant portion of the total contractconsideration is typically allocated to the license performance obligation. Therefore, the Company’s contracts often result in the recording of unbilledreceivables and contract assets throughout most of the contract term. The Company records an unbilled receivable or contract asset when revenue recognizedon a contract exceeds the billings. The Company recognizes an impairment on receivables and contract assets if, after contract inception, it becomes probablethat payment is not collectible. The Company reviews receivables and contract assets on an individual basis for impairment.Variable considerationThe Company’s arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license. TheCompany may also provide pricing concessions to clients, a business practice that gives rise to variable fees. For variable fees arising from the client’sacquisition of additional usage of a previously delivered software license, the Company applies the sales and usage-based royalties guidance related to a licenseof intellectual property and recognizes the revenue in the period the underlying sale or usage occurs. The Company includes variable fees in the determinationof total transaction price if it is not probable that a significant future reversal of revenue will occur. The Company uses the expected value or most likely valueamount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical priceconcessions offered to clients. The variable consideration related to pricing concessions and other forms of variable consideration, including usage-based fees,have not been material to the Company’s consolidated financial statements.Significant financing componentsThe Company generally does not intend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms ofcontracts between the Company and its clients. Although there may be an intervening period between the delivery of the license and the payment, typically interm license arrangements, the purpose of that timing difference is to align the client’s payment with the timing of the use of the software license or service.In certain circumstances, however, there are instances where revenue recognition timing differs from the timing of payment due to extended payment terms orfees that are non-proportional to the associated usage of software licenses. In these instances, the Company evaluates whether a significant financingcomponent exists. This evaluation includes determining the difference between the consideration the client would have paid when the performance obligationwas satisfied and the amount of consideration paid. Contracts that include a significant financing component are adjusted for the time value of money at therate inherent in the contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing.During 2022, 2021, and 2020, significant financing components were not material.(1)44 Contract modificationsThe Company assesses contract modifications to determine:•if the additional products and services are distinct from the products and services in the original arrangement; and•if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.A contract modification meeting both criteria is accounted for as a separate contract. If a contract modification does not meet both criteria, it is accounted for aseither:•a prospective basis as a termination of the existing contract and the creation of a new contract; or•a cumulative catch-up basis.Deferred commissionsThe Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions. The Company expects tobenefit from those costs for more than one year, as the Company primarily pays sales commissions on the initial contract. As a result, there are nocommensurate commissions paid on contract renewals. Deferred commissions are allocated to each performance obligation within the contract andamortized according to the transfer of underlying goods and services within those contracts and expected renewals. The expected benefit period isdetermined based on the length of the client contracts, client attrition rates, the underlying technology lifecycle, and the competitive marketplace’sinfluence on the products and services sold. Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over anaverage expected benefit period of 4.5 years. Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the4.5 years expected benefit period, are amortized at the point in time control of the software license is transferred. Deferred costs allocated to consulting areamortized over a period consistent with the pattern of transfer of control for the related services.Financial instrumentsThe principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, capped call transactions, andaccounts payable. The Company considers debt securities readily convertible to known amounts of cash with maturities of three months or less from thepurchase date to be cash equivalents. Interest is recorded when earned. The Company’s investments are classified as available-for-sale and are carried atfair value. Unrealized gains and losses considered temporary are recorded as a component of accumulated other comprehensive (loss), net of relatedincome taxes. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the investmentcost is adjusted to fair value by recording a loss on investments in the consolidated statements of operations. Gains and losses on investments arecalculated based on the specific investment.See "Note 4. Receivables, Contract Assets, And Deferred Revenue", "Note 12. Debt", and "Note 14. Fair Value Measurements" for additional information.Property and equipmentProperty and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life ofeach asset, which are three years for computer equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesserof the lease’s term or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.LeasesAll of the Company’s leases are operating leases, primarily composed of office space leases. The Company accounts for a contract as a lease when it has theright to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initialclassification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed leasecosts are recognized on a straight-line basis over the lease term. Variable lease costs are recognized in the period in which the obligation for those payments isincurred. The Company combines lease and non-lease components when determining lease costs for its office space leases. The lease liability includes leasepayments 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 notcontain material residual value guarantees or restrictive covenants.Loss contingencies and legal costsThe Company accrues loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.45 Significant judgments are required to determine the probability and the range of the outcomes, and the estimates are based only on the information available tous at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differfrom the Company’s estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses maybecome estimable in later periods which may have a material impact on the Company’s results of operations and financial position. As additional informationbecomes available, the Company reassesses the potential liability from pending claims and litigation and may revise its estimates. Regardless of the outcome,legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources and other factors. Legalcosts are expensed as incurred.Internal-use softwareThe Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during theapplication development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Companyamortizes capitalized software costs generally over three to five years, commencing on the date the software is placed into service.GoodwillGoodwill represents the residual purchase price paid in a business combination after the fair value of all identified assets and liabilities have been recorded.Goodwill is not amortized. The Company has a single reporting unit. The Company performed a qualitative assessment as of November 30, 2022, 2021,and 2020, and concluded that there was no impairment since it was not more-likely-than-not that the fair value of its reporting unit was less than itscarrying value.Intangible and long-lived assetsThe Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its long-livedtangible and intangible assets for impairment whenever events or changes in circumstances indicate that such assets’ carrying amount may not berecoverable. Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the long-lived tangible or intangible assets totheir carrying value. If impairment exists, the Company calculates the impairment by comparing the carrying value to its fair value as determined bydiscounted expected cash flows.Cash equivalentsCash equivalents include money market funds and other investments with original maturities of three months or less.Business combinationsThe Company uses its estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisitiondate. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from theacquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with thecorresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a businesscombination as of the acquisition date. The Company reevaluates these estimates and assumptions quarterly as new information arises and records anyadjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of themeasurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments arerecorded to the Company’s consolidated statements of operations.Research and development and software development costsResearch and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment oftechnological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not beenmaterial to date, as technological feasibility is established within a short time frame from the software’s general availability. As a result, no costs werecapitalized in 2022, 2021, or 2020.Stock-based compensationThe Company recognizes stock-based compensation expense associated with equity awards based on the award’s fair value at the grant date. Stock-basedcompensation is recognized over the requisite service period, which is generally the vesting period of the equity award and is adjusted each period foranticipated forfeitures. See "Note 16. Stock-Based Compensation" for a discussion of the Company’s key assumptions when determining the fair value ofits equity awards at the grant date.46 Foreign currency translation and remeasurementThe translation of assets and liabilities for the Company’s subsidiaries with functional currencies other than the U.S. dollar are made at period-endexchange rates. Revenue and expense accounts are translated at the average exchange rates during the period transactions occur. The resulting translationadjustments are reflected in accumulated other comprehensive (loss). Realized and unrealized exchange gains or losses from transactions andremeasurement adjustments are reflected in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations.Accounting for income taxesThe Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determinedbased on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in whichthe differences are expected to reverse. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. Futurerealization of the Company’s deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.Taxable income sources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, the Company’s firmcontractual backlog, tax planning strategies, and projected future taxable income. The Company records a valuation allowance to reduce its deferred taxassets to an amount it believes is more-likely-than-not to be realized. Changes in the valuation allowance impact income tax expense in the period ofadjustment. The Company recognizes excess tax benefits when realized, as a reduction of the provision for income taxes.The Company assesses its income tax positions and records tax benefits based on management’s evaluation of the facts, circumstances, and informationavailable at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largestamount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge ofall relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit isrecognized in the financial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty isexpected to be resolved within one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.As a global company, significant judgment must be used to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. Inthe ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some ofthese uncertainties arise because of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition, thecalculation of acquired tax attributes and the associated limitations are complex.For additional information, see "Note 18. Income Taxes".Advertising expenseAdvertising costs are expensed as incurred. Advertising expenses were $6.6 million, $11.8 million, and $8.7 million during 2022, 2021, and 2020,respectively.3. MARKETABLE SECURITIESDecember 31, 2022December 31, 2021(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair ValueGovernment debt$2,960 $— $(52)$2,908 $2,000 $— $(10)$1,990 Corporate debt151,906 — (2,647)149,259 201,659 2 (837)200,824 $154,866 $— $(2,699)$152,167 $203,659 $2 $(847)$202,814 As of December 31, 2022, marketable securities’ maturities ranged from January 2023 to November 2024, with a weighted-average remaining maturity of 0.5years.4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUEReceivables(in thousands)December 31, 2022December 31, 2021Accounts receivable$255,150 $182,717 Unbilled receivables213,719 226,714 Long-term unbilled receivables95,806 129,789 $564,675 $539,220 47 Unbilled receivablesUnbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.Unbilled receivables by expected billing date:(Dollars in thousands)December 31, 20221 year or less$213,719 69 %1-2 years81,280 26 %2-5 years14,526 5 %$309,525 100 %Unbilled receivables by contract effective date:(Dollars in thousands)December 31, 20222022$150,597 49 %2021109,024 35 %202030,763 10 %201911,621 4 %2018 and prior7,520 2 %$309,525 100 %Major clientsClients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:December 31, 2022December 31, 2021Client AAccounts receivable*1 %Unbilled receivables*15 %Total receivables*10 %* Client accounted for less than 10% of receivables.Contract assetsContract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions otherthan the passage of time, such as the completion of a related performance obligation.(in thousands)December 31, 2022December 31, 2021Contract assets $17,546 $12,530 Long-term contract assets 16,470 10,643 $34,016 $23,173 (1) Included in other current assets.(2) Included in other long-term assets.Deferred revenueDeferred revenue consists of billings and payments received in advance of revenue recognition.(in thousands)December 31, 2022December 31, 2021Deferred revenue$325,212 $275,844 Long-term deferred revenue 3,552 5,655 $328,764 $281,499 (1) Included in other long-term liabilities.The change in deferred revenue in 2022 was primarily due to new billings in advance of revenue recognition and $276.7 million of revenue recognized duringthe period included in deferred revenue as of December 31, 2021.5. DEFERRED COMMISSIONSDecember 31,(in thousands)20222021Deferred commissions $130,195 $135,911 (1) Included in other long-term assets.(1)(2)(1)(1)48 (in thousands)202220212020Amortization of deferred commissions $53,471 $41,387 $33,302 (1) Included in selling and marketing expenses.6. PROPERTY AND EQUIPMENT (in thousands)December 31,20222021Leasehold improvements$35,049 $31,203 Computer equipment27,292 26,115 Furniture and fixtures5,993 5,565 Computer software purchased9,724 8,566 Computer software developed for internal use19,869 19,463 Fixed assets in progress37,342 4,262 135,269 95,174 Less: accumulated depreciation(80,213)(68,337)$55,056 $26,837 (1) Included in other long-term assets.(in thousands)202220212020Depreciation expense$14,687 $24,606 $17,378 7. GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill(in thousands)20222021January 1,$81,923 $79,231 Acquisition— 2,701 Currency translation adjustments(524)(9)December 31,$81,399 $81,923 IntangiblesIntangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives:December 31, 2022(in thousands)Useful LivesCostAccumulated AmortizationNet Book Value Client-related4-10 years$63,076 $(58,623)$4,453 Technology2-10 years68,056 (61,621)6,435 Other1-5 years5,361 (5,361)— $136,493 $(125,605)$10,888 Included in other long-term assets.December 31, 2021(in thousands)Useful LivesCostAccumulated AmortizationNet Book Value Client-related4-10 years$63,165 $(57,342)$5,823 Technology2-10 years67,142 (58,902)8,240 Other1-5 years5,361 (5,361)— $135,668 $(121,605)$14,063 Included in other long-term assets.(1)(1)(1)(1)(1)(1) 49 Amortization of intangible assets was:(in thousands)202220212020Cost of revenue$2,723 $2,516 $2,487 Selling and marketing1,370 1,471 1,483 $4,093 $3,987 $3,970 Future estimated intangible assets amortization:(in thousands)December 31, 20222023$3,924 20243,153 20252,610 2026874 2027327 $10,888 8. SEGMENT INFORMATIONOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chiefoperating decision-maker (“CODM”) in deciding how to allocate resources and assess performance.The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides casemanagement, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in theenterprise applications market. To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on aconsolidated basis. Therefore, the Company determined it has one operating segment and one reporting unit.Long-lived assets related to the Company’s U.S. and international operations were:(Dollars in thousands)December 31, 2022December 31, 2021U.S.$50,445 92 %$20,548 77 %International4,611 8 %6,289 23 %$55,056 100 %$26,837 100 %9. OTHER ASSETS AND LIABILITIESOther current assets(in thousands)December 31, 2022December 31, 2021Income tax receivables$25,354 $25,691 Contract assets17,546 12,530 Other37,488 29,787 $80,388 $68,008 Other long-term assets(in thousands)December 31, 2022December 31, 2021Deferred income taxes$4,795 $180,656 Deferred commissions130,195 135,911 Right of use assets76,114 87,521 Capped call transactions2,582 59,964 Property and equipment55,056 26,837 Intangible assets10,888 14,063 Contract assets16,470 10,643 Other37,889 26,006 $333,989 $541,601 Other current liabilities(in thousands)December 31, 2022December 31, 2021Operating lease liabilities$14,976 $6,989 Dividends payable2,474 2,454 $17,450 $9,443 50 Other long-term liabilities(in thousands)December 31, 2022December 31, 2021Deferred revenue$3,552 $5,655 Other11,576 7,844 $15,128 $13,499 10. RESTRUCTURINGDuring the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s target organization go-to-market strategy andcommitment to be a Rule of 40 managed company. The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated with severanceand benefits for impacted employees and expenses incurred as a result of the closure of the Company’s Salem, New Hampshire office.As of December 31, 2022, the Company’s employee severance and related benefits restructuring accrual was $18.6 million and is included in accruedcompensation and related expenses.11. LEASESCorporate headquartersIn February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time paymentfrom its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvementsand reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021, the Company leased officespace at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.Waltham officeOn July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began onAugust 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first became payable on August 1,2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, the Company received an improvement allowancefrom the landlord of $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.Expense(in thousands)202220212020Fixed lease costs $20,186 $(1,694)$20,235 Short-term lease costs3,356 2,244 1,669 Variable lease costs3,894 4,480 4,470 $27,436 $5,030 $26,374 (1) The lower fixed lease costs in 2021 was due to the modification of the corporate headquarters lease.Right of use assets and lease liabilities(in thousands)December 31, 2022December 31, 2021Right of use assets $76,114 $87,521 Operating lease liabilities $14,976 $6,989 Long-term operating lease liabilities$79,152 $87,818 (1) 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:December 31, 2022December 31, 2021Weighted-average remaining lease term7.5 years7.7 yearsWeighted-average discount rate 4.1 %4.4 %(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating leaseliabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over thelease term in a similar economic environment.(1)(1)(2)(1)51 Maturities of lease liabilities:(in thousands)December 31, 20222023$18,476 202417,101 202514,444 202610,860 20279,814 Thereafter39,265 Total lease payments109,960 Less: imputed interest (15,832)$94,128 (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 due to a leasereassessment event.Cash flow information(in thousands)20222021Cash paid for operating leases, net of tenant improvement allowances$7,690 $18,428 Right of use assets recognized for new leases and amendments (non-cash)$4,733 $55,068 (1) In 2022 and 2021, the Company received tenant improvement allowances of $8.8 million and $3.0 million, respectively, as part of the lease of the Company’s new corporate headquarters inWaltham, Massachusetts.(2) In 2021, the Company received $18 million as a one-time payment for the Company’s accelerated exit from its then corporate headquarters in Cambridge, Massachusetts. This payment has beenexcluded from the above table.12. DEBTConvertible senior notes and capped callsConvertible senior notesIn February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a privateplacement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1and September 1, beginning on September 1, 2020.Conversion rightsThe conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per shareof common stock. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of itscommon stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.Before September 1, 2024, noteholders may convert their Notes in the following circumstances:•During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of theCompany’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30consecutive 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 shareof common stock on such trading day and the conversion rate on such trading day.•Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business onthe business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, untilthe Company pays the redemption price).Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.As of December 31, 2022, the Notes were not eligible for conversion.Repurchase rightsOn 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 partof 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’scommon stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive tradingday period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.(1) (1) (2)52 If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash allof such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of theprincipal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company,liquidation/dissolution of the Company, or the delisting of the Company’s common stock.Carrying value of the Notes:(in thousands)December 31, 2022December 31, 2021Principal$600,000 $600,000 Unamortized issuance costs(6,391)(9,278)Convertible senior notes, net$593,609 $590,722 Interest expense related to the Notes:(in thousands)20222021Contractual interest expense (0.75% coupon)$4,500 $4,500 Amortization of issuance costs2,888 2,977 $7,388 $7,477 The effective interest rate for the Notes:20222021Weighted-average effective interest rate1.2 %1.3 %Future payments of principal and contractual interest:December 31, 2022(in thousands)PrincipalInterestTotal2023$— $4,500 $4,500 2024— 4,500 4,500 2025600,000 2,250 602,250 $600,000 $11,250 $611,250 Capped call transactionsIn February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’scommon stock. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company mustmake, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of theCapped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.The Capped Call Transactions are accounted for as derivative instruments and 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 following the governing documents, may not represent a fairvalue 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 capped call transactions:(in thousands)20222021January 1,$59,964 $83,597 Fair value adjustment(57,382)(23,633)December 31,$2,582 $59,964 Credit facilityIn November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”)with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject tospecific 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 required to comply with financial covenants, including:•Beginning with the fiscal quarter that ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc. must maintainat least $200 million in cash, investments, and availability under the Revolving Credit Loan.53 •Beginning with the fiscal quarter ending March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions)and a minimum consolidated interest coverage ratio of 3.5 to 1.0.As of December 31, 2022 and December 31, 2021, the Company had no outstanding cash borrowings under the Credit Facility.As of December 31, 2022, the Company had $27.3 million in outstanding letters of credit which reduce the available borrowing capacity under the CreditFacility.13. STOCKHOLDERS’ EQUITYPreferred stockThe Company has 1 million authorized shares of preferred stock, $0.01 par value per share, of which none were issued and outstanding as of December 31,2022.The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included ineach series, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictionsthereof, without any further vote or action by the stockholders. The issuance of preferred stock could decrease the earnings and assets available fordistribution to holders of common stock and may have the effect of delaying, deferring, or defeating a change in control of the Company. The Companyhad not issued any shares of preferred stock through December 31, 2022.Common stockThe Company has 200 million authorized shares of common stock, $0.01 par value per share, of which 82.4 million were issued and outstanding as ofDecember 31, 2022.Dividends declared202220212020Dividends declared (per share)$0.12 $0.12 $0.12 Dividend payments to stockholders (in thousands)$9,834 $9,761 $9,628 The Company paid a quarterly cash dividend of $0.03 per share in 2022, 2021, and 2020. In the future, the Board of Directors may terminate or modify thedividend program without prior notice.Stock repurchases(in thousands)202220212020SharesAmountSharesAmountSharesAmountJanuary 1,$22,583 $37,726 $45,484 Authorizations 60,000 38,467 20,516 Repurchases (280)(24,508)(432)(53,610)(278)(28,274)December 31,$58,075 $22,583 $37,726 (1) On June 2, 2022, the Company announced that the Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023 and increased the remaining stockrepurchase authority to $60 million.(2) Purchases under this program have been made on the open market.14. FAIR VALUE MEASUREMENTSAssets and liabilities measured at fair value on a recurring basisThe Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fairvalue 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 betweenmarket 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 inmeasuring 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.(1)(2)54 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 valuationmodel uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividendyield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and impliedvolatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companiesand transaction prices and 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:December 31, 2022December 31, 2021(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3TotalCash equivalents$2,526 $— $— $2,526 $3,216 $— $— $3,216 Marketable securities$— $152,167 $— $152,167 $— $202,814 $— $202,814 Capped Call Transactions $— $2,582 $— $2,582 $— $59,964 $— $59,964 Venture investments $— $— $13,069 $13,069 $— $— $7,648 $7,648 (1) Included in other long-term assets.(2) For additional information, see "Note 12. Debt".(3) Investments in privately held companies.Change in venture investments:(in thousands)20222021January 1,$7,648 $8,345 New investments1,400 500 Sales of investments(4,020)(2,449)Changes in foreign exchange rates(450)(68)Changes in fair value:included in other income5,989 100 included in other comprehensive income2,502 1,220 December 31,$13,069 $7,648 The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ relativelyshort maturity.Fair value of the NotesThe Notes’ fair value (including the conversion feature embedded in the Notes) was $521.1 million as of December 31, 2022 and $642.0 million as ofDecember 31, 2021. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reportingperiod and classified within Level 2 in the fair value hierarchy. For additional information, see "Note 12. Debt".Credit riskIn addition to receivables, the Company is potentially subject to concentrations of credit risk from the Company’s cash, cash equivalents, and marketablesecurities. The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwide to reduce the Company’s credit riskexposure. Investment policies have been implemented that limit purchases of marketable debt securities to investment-grade securities.(1) (2)(1) (3)55 15. REVENUEGeographic revenue(Dollars in thousands)202220212020U.S.$763,558 57 %$690,133 57 %$613,844 61 %Other Americas102,980 8 %61,339 5 %49,441 5 %United Kingdom (“U.K.”)115,793 9 %117,580 10 %91,517 9 %Europe (excluding U.K.), Middle East, and Africa194,563 15 %198,080 16 %156,056 15 %Asia-Pacific140,951 11 %144,521 12 %106,659 10 %$1,317,845 100 %$1,211,653 100 %$1,017,517 100 %Revenue streams(in thousands)202220212020Perpetual license$19,293 $32,172 $28,558 Subscription license366,063 336,248 266,352 Revenue recognized at a point in time385,356 368,420 294,910 Maintenance317,564 320,257 296,709 Pega Cloud384,271 300,966 208,268 Consulting230,654 222,010 217,630 Revenue recognized over time932,489 843,233 722,607 $1,317,845 $1,211,653 $1,017,517 (in thousands)202220212020Pega Cloud$384,271 $300,966 $208,268 Maintenance317,564 320,257 296,709 Subscription services701,835 621,223 504,977 Subscription license366,063 336,248 266,352 Subscription1,067,898 957,471 771,329 Perpetual license19,293 32,172 28,558 Consulting230,654 222,010 217,630 $1,317,845 $1,211,653 $1,017,517 Remaining performance obligations ("Backlog")Expected future revenue from existing non-cancellable contracts:As of December 31, 2022:(Dollars in thousands)Subscription servicesSubscription licensePerpetual licenseConsultingTotalMaintenancePega Cloud1 year or less$242,073 $379,648 $60,668 $5,310 $32,374 $720,073 53 %1-2 years66,207 246,195 3,803 2,253 6,371 324,829 24 %2-3 years26,746 143,901 1,707 — 1,647 174,001 13 %Greater than 3 years15,602 115,944 5,283 — — 136,829 10 %$350,628 $885,688 $71,461 $7,563 $40,392 $1,355,732 100 %As of December 31, 2021:(Dollars in thousands)Subscription servicesSubscription licensePerpetual licenseConsultingTotalMaintenancePega Cloud1 year or less$234,917 $330,426 $153,467 $10,952 $41,411 $771,173 58 %1-2 years65,502 220,231 14,968 4,505 8,917 314,123 23 %2-3 years38,432 124,969 1,955 2,252 5,512 173,120 13 %Greater than 3 years28,157 55,937 1,765 — 619 86,478 6 %$367,008 $731,563 $172,155 $17,709 $56,459 $1,344,894 100 %56 16. STOCK-BASED COMPENSATION(in thousands)202220212020Cost of revenue$26,400 $21,822 $20,796 Selling and marketing46,769 54,182 46,283 Research and development29,266 25,413 22,885 General and administrative19,775 14,530 13,104 $122,210 $115,947 $103,068 Income tax benefit$(1,881)$(23,410)$(20,464)The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stockoptions.Most of the Company’s stock-based compensation arrangements vest over five years, with 20% vesting after one year and 80% vesting in equal quarterlyinstallments over the remaining four years. The Company’s stock options have a term of ten years. The Company recognizes stock-based compensationusing the accelerated attribution method, treating each vesting tranche as an individual grant. The stock-based compensation expense recognized during aperiod is based on the value of the awards that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the sharesthat vest.Employees may elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the“CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the grant date to 50% of the employee’starget incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s targetincentive opportunity by 85% of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends duringthe vesting period. If elected, the award vests 100% on the following year’s CICP payout date. Vesting is conditioned upon the performance conditions ofthe CICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company considers vesting probable on the grantdate and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on thevesting date.The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”). With net settledawards, the employee does not surrender any cash or shares upon exercise. Instead, the Company withholds the number of shares to cover the exerciseprice (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares thatwould otherwise be issued upon exercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer sharesbeing issued by the Company.Stock-based compensation plans2004 Long-Term Incentive Plan (as amended and restated)In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employeeDirectors, and consultants with opportunities to purchase stock through incentive and non-qualified stock options. Subsequent amendments to the planincreased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annualcompensation to any non-employee Director to $0.5 million.As of December 31, 2022, 17.3 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.2006 Employee Stock Purchase PlanIn 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which employees may purchase up to an aggregate of onemillion shares of common stock, at a price equal to at least 85% of the fair market value of the Company’s common stock on the lesser of the commencementdate or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time. In October2012, the Company’s Board of Directors amended the 2006 ESPP to continue until no shares remain. Before January 1, 2021, the 2006 ESPP was non-compensatory as the Company’s Board of Directors set the purchase price at 95% of the fair market value on the completion date of the offering period.Commencing on January 1, 2021, the Company’s Board of Directors set the purchase price at 85% of the fair market value on the completion date of theoffering period.(in thousands)2022Compensation expense from 2006 ESPP$1,614 As of December 31, 2022, 0.8 million shares had been issued under the plan.57 Shares issued and available for issuanceIn 2022, the Company issued 1.0 million shares to its employees and directors under the Company’s stock-based compensation plans.As of December 31, 2022, there were 1.4 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 1.2million shares under the 2004 Plan and 0.2 million shares under the 2006 ESPP.Grant activityStock optionsThe Company estimates the fair value of stock options using a Black-Scholes option-pricing model. Key inputs used to estimate the fair value of stockoptions include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’sexpected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stockoptions is greater than or equal to the shares’ fair market value at the grant date.The following table summarizes the Company’s fair value assumptions for stock options:202220212020Weighted-average grant-date fair value$17.49 $37.74 $24.16 Assumptions used in the Black-Scholes option-pricing model:Expected annual volatility 42 %35 %31 %Expected term in years 3.94.44.5Risk-free interest rate3.4 %0.6 %0.7 %Expected annual dividend yield 0.1 %0.2 %0.2 %(1) The expected annual volatility for each grant is determined based on the average of historic daily price changes of the Company’s common stock over a period, which approximates the expectedoption term.(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.(3) The risk-free interest rate is based on the yield of U.S. Treasury securities with a commensurate maturity with the expected option term at the time of grant.(4) The expected annual dividend yield is based on the weighted-average dividend yield assumptions used for options granted during the applicable period.The following table summarizes the combined stock option activity under the Company’s stock option plans for 2022:Shares(in thousands)Weighted-averageExercise PriceWeighted-average RemainingContractual Term (in years)Aggregate Intrinsic Value(in thousands)Options outstanding as of January 1, 20227,189 $74.94 Granted9,725 50.35 Exercised(572)25.17 Forfeited(1,153)87.71 Expired(278)$82.83 Options outstanding as of December 31, 202214,911 $59.67 Vested and expected to vest as of December 31, 202212,449 $59.06 8.1$9,476 Exercisable as of December 31, 20223,901 $64.76 5.3$8,056 The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee atexercise) in 2022, 2021, and 2020 was $15.6 million, $94.3 million, and $126.8 million, respectively. The aggregate intrinsic value of stock optionsoutstanding and exercisable as of December 31, 2022 is based on the difference between the closing price of the Company’s stock of $34.24 and theexercise price of the applicable stock options.As of December 31, 2022, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $101.6million that is expected to be recognized as expense over a weighted-average period of 2.0 years.RSUsRSUs provide the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs atthe fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expecteddividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.(1)(2) (3)(4)58 The weighted-average grant-date fair value for RSUs granted in 2022, 2021, and 2020 was $74.50, $129.03, and $93.68, respectively.The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2022:Shares(in thousands)Weighted- Average Grant-DateFair ValueAggregate Intrinsic Value(in thousands)Nonvested as of January 1, 20222,054 $99.36 Granted1,571 74.50 Vested(795)93.72 Forfeited(479)95.13 Nonvested as of December 31, 20222,351 $85.52 $80,497 Expected to vest as of December 31, 20221,716 $85.17 $58,772 The fair value of RSUs vested in 2022, 2021, and 2020 was $50.3 million, $122.5 million, and $108.4 million, respectively. The aggregate intrinsic valueof RSUs outstanding and expected to vest as of December 31, 2022 is based on the closing price of the Company’s stock of $34.24 as of December 31,2022.As of December 31, 2022, the Company had $65.5 million of unrecognized stock-based compensation expense related to all unvested RSUs that isexpected to be recognized as expense over a weighted-average period of 2.0 years.Common stockIn 2022, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $42.41 per share.17. EMPLOYEE BENEFIT PLANSThe Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makesdiscretionary matching contributions.Employee benefit plan expenses:(in thousands)202220212020U.S. 401(k) Plan$8,994 $8,879 $8,109 International plans21,141 20,780 16,132 $30,135 $29,659 $24,241 18. INCOME TAXESThe components of (loss) before provision for (benefit from) income taxes are:(in thousands)202220212020Domestic$(185,820)$(125,947)$(59,281)Foreign24,023 (6,040)(65,608)$(161,797)$(131,987)$(124,889)The components of provision for (benefit from) income taxes are:(in thousands)202220212020Current:Federal$3,920 $1,921 $(11,251)State775 363 399 Foreign10,200 4,105 7,113 Total current provision for (benefit from)14,895 6,389 (3,739)Deferred:Federal149,028 (42,214)(34,573)State20,704 (9,413)(8,119)Foreign(842)(23,709)(17,085)Total deferred provision (benefit)168,890 (75,336)(59,777)$183,785 $(68,947)$(63,516)59 A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate:(in thousands)202220212020U.S. federal income taxes at statutory rates$(33,977)$(27,717)$(26,227)Valuation allowance188,258 (469)(5,881)State income taxes, net of federal benefit and tax credits(2,433)(7,217)(6,994)Permanent differences11,561 541 1,773 Federal research and experimentation credits(5,012)(6,380)(5,716)Tax effects of foreign activities3,770 3,599 3,050 GILTI, FDII, and BEAT16,390 — — Provision to return adjustments(6,317)(2,016)3,416 Non-deductible compensation4,769 5,464 1,806 Expiration of statutes and changes in estimates5,673 (2,250)55 Excess tax benefits related to stock-based compensation1,563 (20,697)(25,797)CARES Act— — (10,576)Impact of change in tax law(793)(11,811)7,489 Other333 6 86 $183,785 $(68,947)$(63,516)Deferred income taxesSignificant components of net deferred tax assets and liabilities are:December 31,(in thousands)20222021Deferred tax assets:Net operating loss carryforwards$109,286 $133,164 Accruals and reserves32,467 38,526 Interest expense carryforward208 7,759 Software revenue1,828 336 Convertible senior notes5,794 8,362 Depreciation3,698 3,764 Tax credit carryforwards39,122 40,590 Research and development capitalization38,425 — Other622 1,015 Total deferred tax assets231,450 233,516 Valuation allowances(212,808)(25,855)Total net deferred tax assets18,642 207,661 Deferred tax liabilities:Capped call transactions(644)(14,961)Convertible senior notes— — Software revenue— — Intangibles(14,280)(12,044)Total deferred tax liabilities(14,924)(27,005)$3,718 $180,656 The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferredtax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuationallowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projectedinformation. On a quarterly basis, the Company reassesses the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction,weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers all available and objectivelyverifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”),projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations. The weight given to thepotential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover the Company’s net deferred tax assets. The Backlog balance and otherunsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficienttaxable income to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, andan uncertain global economic outlook.60 As of June 30, 2022, the combination of the above factors caused the Company to conclude there is not sufficient objectively verifiable positive evidence tosupport that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s U.S. and U.K. net deferred taxassets.The Company intends to maintain a full valuation allowance on its U.S and U.K deferred tax assets until there is sufficient evidence to support the realizationof these deferred tax assets. Accordingly, the Company recorded a valuation allowance of $188.3 million in income tax expense in 2022.As of December 31, 2022, the Company’s net operating losses and credit carryforwards are:(in thousands)FederalStateNet operating losses $147,294 $10,807 Net operating losses due to acquisitions $27,442 $2,849 Credit carryforwards$29,080 $1,686 Credit carryforwards due to acquisitions$640 $60 (1) Excludes federal and state net operating losses of $19.8 million and $0.8 million, respectively, from prior acquisitions that the Company expects will expire unutilized.(2) Excludes federal and state tax credits of $0.1 million and $9.2 million, respectively, that the Company expects will expire unutilized.Carryforward losses and credits expire between 2023 and 2040, except for the 2020 and 2021 federal net operating loss of $119.9 million and $1.2 million ofstate credits, which both have unlimited carryforward periods.The Company’s India subsidiary is primarily located in Special Economic Zones (“SEZs”) and is entitled to a tax holiday in India. The tax holiday reduces oreliminates income tax in India. The tax holiday in the Hyderabad SEZ is expected to expire in 2023. The tax holiday in the Bengaluru SEZ is expected toexpire in 2027.Uncertain tax benefitsA rollforward of the Company’s gross unrecognized tax benefits is:(in thousands)202220212020Balance as of January 1,$17,584 $23,801 $23,271 Additions for tax positions related to the current year1,706 653 653 Additions for tax positions of prior years728 — 962 Reductions for tax positions of prior years(272)(6,870)(1,085)Balance as of December 31,$19,746 $17,584 $23,801 As of December 31, 2022, the Company had $19.7 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate ifrecognized.Tax examinationsThe Company files federal and state income tax returns in the U.S. and various foreign jurisdictions. In the ordinary course of business, the Company and itssubsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S. As of December 31, 2022, the Company’s U.S. federaltax returns for the years 2015 through 2018 were under examination by the Internal Revenue Service. In addition, certain foreign jurisdictions are auditing theCompany’s income tax returns for periods ranging from 2013 through 2020. The Company does not expect the results of these audits to have a material effecton the Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions forall tax years since 2016 to the present.19. (LOSS) PER SHAREBasic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculatedusing the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, andconvertible senior notes.Calculation of (loss) per share:(in thousands, except per share amounts)202220212020Net (loss)$(345,582)$(63,040)$(61,373)Weighted-average common shares outstanding81,947 81,387 80,336 (Loss) per share, basic$(4.22)$(0.77)$(0.76)Net (loss)$(345,582)$(63,040)$(61,373)Weighted-average common shares outstanding, assuming dilution 81,947 81,387 80,336 (Loss) per share, diluted$(4.22)$(0.77)$(0.76)Outstanding anti-dilutive stock options and RSUs 3,367 5,862 6,278 (1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.(1)(1) (2)(1) (2) (3)(4)61 (2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fullyexercised, the Company would issue an additional approximately 4.4 million shares.(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notesare initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principaland interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common sharesoutstanding, assuming dilution, in all periods as their effect would be anti-dilutive.(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may bedilutive in the future.20. COMMITMENTS AND CONTINGENCIESCommitmentsFor additional information, see "Note 11. Leases".Legal ProceedingsIn addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise fromtime to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property,employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense andsettlement costs, diversion of management resources, and other factors.In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and theeffect may be material.The Company had no accrued losses for litigation as of December 31, 2022 and December 31, 2021.Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”)relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business ProcessManagement Inc., No. 1:19-cv-11461 (D. Mass). As previously indicated in the Company’s Current Report on Form 8-K filed on November 10, 2022 with theSEC, on November 9, 2022, the Company entered into a confidential settlement agreement with Appian resolving the litigation, and the parties filed aStipulation of Dismissal with Prejudice dismissing all claims and counterclaims in this litigation. The Company will not contain disclosure regarding thislitigation in future filings it makes with the SEC.Appian Corp. v. Pegasystems Inc. & Youyong ZouAs previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled AppianCorp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company hadmisappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secretmisappropriation was willful and malicious. The jury awarded damages of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the VirginiaComputer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previouslyawarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the dateof the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs.On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a$25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of theCompany’s appeal. Appellate briefing is currently in process. Although it is not possible to predict timing, this appeals process could potentially take years tocomplete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue werenot caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of,among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.62 City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., AlanTrefler, and Kenneth StillwellOn May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer inthe United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ RetirementSystem, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD).The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case byallegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business,operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf ofa class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States DistrictCourt for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund -Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—havebeen appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the samegeneral factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securitiesbetween June 16, 2020 and May 9, 2022. The Company believes the claims brought against the defendants are without merit and intends to defend againstthese claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of thelawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint.Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, SharonRowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendantOn November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer andthe Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendantPegasystems Inc. v. Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell,defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985). The complaint generally alleges the defendants sold shares of the Company whilein possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, describedabove, and (ii) alleged misconduct by Company employees alleged in that litigation. The Company believes the claims brought against the defendants arewithout merit and intends to defend against these claims vigorously. The Company is unable to reasonably estimate possible damages or a range of possibledamages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damagessought in the complaint.63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of disclosure controls and proceduresOur management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31, 2022. In designing andevaluating 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-benefitrelationship of possible controls and procedures.Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2022.Management’s report on and changes in internal control over financial reportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Securities Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, weconducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the framework in the updatedInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14,2013.Based on this evaluation, management has concluded that (i) our internal control over financial reporting was effective as of December 31, 2022 and (ii) nochange in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during thequarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Deloitte & Touche LLP, our independent registered public accounting firm which also audited our consolidated financial statements, has issued an attestationreport on our internal control over financial reporting, which is included in Item 8 “Financial Statements and Supplementary Data”.ITEM 9B. OTHER INFORMATIONNone.ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONSNot applicable.64 PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEExcept as set forth below, information required by this item is incorporated herein by reference from the information contained in our proxy statement for our2023 annual stockholders meeting (the “2023 proxy statement”) under the headings Executive Compensation, Election of Directors, Corporate Governance,Executive Officers, and Delinquent Section 16(a) Reports, which will be filed with the Securities and Exchange Commission within 120 days after the close ofthe fiscal year.We have adopted a written code of conduct that applies to our Board of Directors and employees, including our principal executive officer, principalfinancial officer, principal accounting officer, and persons performing similar functions. A copy of our code of conduct can be found on our website,www.pega.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and the applicable NASDAQ Global Select Market rules byposting such information on our website.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated herein by reference from the information contained in the 2023 proxy statement under the headings“Director Compensation”, “Compensation Discussion and Analysis”, and “Executive Compensation” and is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by this item is incorporated herein by reference from the information contained in the 2023 proxy statement under the headings“Executive Compensation”, “Equity Compensation Plan Information”, and “Security Ownership of Certain Beneficial Owners and Management”, and isincorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated herein by reference from the information contained in the 2023 proxy statement under the headings“Certain Relationships and Related Transactions” and “Determination of Independence” and is incorporated herein by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated herein by reference from the information contained in the 2023 proxy statement under the heading“Independent Registered Public Accounting Firm Fees and Services” and is incorporated herein by reference.65 PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following are filed as part of this Annual Report:(1) Financial StatementsThe following consolidated financial statements are included in Item 8:PageReport of Independent Registered Public Accounting Firm36Consolidated Balance Sheets as of December 31, 2022 and 202138Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 202039Consolidated Statements of Comprehensive (Loss) for the years ended December 31, 2022, 2021, and 202040Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022, 2021, and 202041Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 20204266 (b) ExhibitsExhibitNo.DescriptionIncorporation by ReferenceFiledHerewithFormLocationFiling Date3.1Restated Articles of Organization of the Registrant and Amendments thereto10-Q3.111/4/143.2Amended and Restated Bylaws of Pegasystems Inc8-K3.26/15/204.1Specimen Certificate Representing the Common StockS-14.16/19/964.2Indenture, dated as of February 24, 2020, between Pegasystems Inc. and U.S. Bank NationalAssociation, as trustee8-K4.12/24/204.3Form of certificate representing the 0.75% Convertible Senior Notes due 20258-KExhibit A to 4.12/24/204.4Description of Common Stock10-K4.22/12/2010.12004 Long-Term Incentive Plan (as amended and restated)++8-K10.16/24/2010.2Restricted Stock Unit Sub-Plan of the Registrant’s 2004 Long-Term Incentive Plan for FrenchParticipants++DEF 14AAppendix B to 2016Proxy Statement4/18/1610.32006 Employee Stock Purchase Plan, as amended on October 29, 2020++10-K10.32/17/2110.4Form of Employee Stock Option Agreement, as amended++10-Q10.35/10/1710.5Form of Global Stock Option Agreement++10-K10.52/17/2110.6Form of Restricted Stock Unit Agreement, as amended++10-Q10.45/10/1710.7Form of Global Restricted Stock Unit Agreement++10-K10.72/17/2110.8Form of Non-Employee Director Stock Option Agreement++10-Q10.210/29/0410.9Form of Director Indemnification Agreement++8-K99.14/11/0510.10Offer Letter between the Registrant and Douglas I. Kra dated October 19, 2004++10-K10.202/17/0410.11Offer Letter, dated April 27, 2020, between Pegasystems Inc. and Hayden Stafford++10-Q10.37/28/2010.12Offer Letter between the Registrant and Kenneth Stillwell dated June 1, 2016++8-K99.16/14/1610.13Compensation program for non-employee members of the Registrant’s Board of Directors, effectiveAugust 5, 2019++8-KItem 1.018/9/1910.142021 Section 16 Officers/FLT Member Corporate Incentive Compensation Plan++8-K99.12/8/2110.152022 Section 16 Officers/FLT Member Corporate Incentive Compensation Plan++8-K99.12/7/2210.16Credit Agreement dated as of November 5, 2019 with PNC Bank, National Association10-Q10.111/7/1910.17Amendment to Loan Documents, dated February 18, 2020, between Pegasystems Inc. and PNC Bank,National Association8-K10.32/24/2010.18Amendment 2 to Loan Documents, dated July 22, 2020, between Pegasystems Inc. and PNC Bank,National Association10-Q10.27/28/2010.19Amendment to Loan Documents, dated as of September 30, 2020, between Pegasystems Inc. and PNCBank, National Association10-Q10.310/28/2010.20Fourth Amendment to Loan Documents, dated as of March 31, 2022, between Pegasystems Inc. andPNC Bank, National Association10-Q10.13/31/2210.21Fifth Amendment to Loan Documents, dated as of July 25, 2022, between Pegasystems Inc. and PNCBank, National Association10-Q10.17/27/2210.22Form of Side Letter to Base Call Option Transaction10-Q10.110/28/2010.23Form of Side Letter to Additional Call Option Transaction10-Q10.210/28/2010.24Form of Confirmation of Base Call Option Transaction8-K10.12/24/2010.25Form of Confirmation of Additional Call Option Transaction8-K10.22/24/2010.26Sublease, dated March 31, 2021 for Office Space at One Main Street, Cambridge, MA10-Q10.17/28/2110.27Lease between Pegasystems Inc. and 275 Wyman LLC**8-K10.17/9/2121.1Subsidiaries of the Registrant.X23.1Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.X31.1Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.X31.2Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.X32Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief FinancialOfficer.X101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data Filebecause its XBRL tags are embedded within the Inline XBRL document.X101.SCHInline XBRL Taxonomy Extension Schema Document.X101.CALInline XBRL Taxonomy Calculation Linkbase Document.X101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.X101.LABInline XBRL Taxonomy Label Linkbase Document.X101.PREInline XBRL Taxonomy Presentation Linkbase Document.X104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X++ Management contracts and compensatory plan or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.67 ** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations(c) Financial Statement SchedulesAll financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission ofthe schedule or because the information is reflected in the consolidated financial statements or notes thereto. ITEM 16. FORM 10-K SUMMARYOmitted at Registrant’s option.68 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K tobe signed on its behalf by the undersigned, thereunto duly authorized.Pegasystems Inc.Date:February 15, 2023By:/s/ KENNETH STILLWELLKenneth StillwellChief Operating Officer and Chief Financial Officer(Principal Financial Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on February 15, 2023 by thefollowing persons on behalf of the Registrant and in the capacities indicated.SignatureTitle/s/ ALAN TREFLERChairman and Chief Executive Officer(Principal Executive Officer)Alan Trefler/s/ KENNETH STILLWELLChief Operating Officer and Chief Financial OfficerKenneth Stillwell(Principal Financial Officer)/s/ EFSTATHIOS KOUNINISChief Accounting Officer, Vice President of Finance, and Treasurer(Principal Accounting Officer)Efstathios Kouninis/s/ PETER GYENESDirectorPeter Gyenes/s/ RICHARD JONESDirectorRichard Jones/s/ CHRISTOPHER LAFONDDirectorChristopher Lafond/s/ DIANNE LEDINGHAMDirectorDianne Ledingham/s/ SHARON ROWLANDSDirectorSharon Rowlands/s/ LARRY WEBERDirector Larry Weber69 EXHIBIT 21.1SUBSIDIARIES OF PEGASYSTEMS INC*Name of SubsidiaryState or Jurisdiction of EntityPegasystems BVNetherlandsPegasystems FranceFrancePegasystems GmbHGermanyPegasystems LimitedUnited KingdomPegasystems PTY LimitedAustraliaPegasystems Software Limited sp. z.o.o.PolandPegasystems Worldwide India Private LimitedIndia* Omits subsidiaries, which, considered in the aggregate, would not constitute a significant subsidiary.1 EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statements Nos. 333-09305, 333-89707, 333-53746, 333-104788, 333-116660, 333-135596, 333-166287, 333-166544, 333-176810, 333-213953, and 333-239889 on Form S-8 of our report dated February 15, 2023, relating to the financial statements ofPegasystems Inc. and the effectiveness of Pegasystems Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K for theyear ended December 31, 2022./s/ Deloitte & Touche LLPBoston, MassachusettsFebruary 15, 20231 EXHIBIT 31.1CERTIFICATIONI, Alan Trefler, certify that:1.I have reviewed this Annual Report on Form 10-K 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 thestatements 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 financialcondition, 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 ExchangeAct 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 theregistrant and have:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 inaccordance 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Dated: February 15, 2023 /s/ ALAN TREFLERAlan TreflerChairman and Chief Executive Officer(Principal Executive Officer)1 EXHIBIT 31.2CERTIFICATIONI, Kenneth Stillwell, certify that:1.I have reviewed this Annual Report on Form 10-K 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 thestatements 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 financialcondition, 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 ExchangeAct 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 theregistrant and have:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 inaccordance 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Dated: February 15, 2023 /s/ KENNETH STILLWELLKenneth StillwellChief Operating Officer and Chief Financial Officer(Principal Financial Officer)1 EXHIBIT 32CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Pegasystems Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell,Chief Operating Officer and Chief Financial Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 15, 2023/s/ ALAN TREFLERAlan TreflerChairman and Chief Executive Officer(Principal Executive Officer)/s/ KENNETH STILLWELLKenneth StillwellChief Operating Officer and Chief Financial Officer(Principal Financial Officer)1
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